Time Frame to pay off loan after participant terminates

[Pammie57]

Participant is terminating next week and has an unpaid loan from the plan.   How long does she have to pay it off now before it is considered taxable to her?  I though it was 60 days after date of term, but did the new tax law change that?  Thanks!

[Peter Gulia]

For a participant loan offset that otherwise would be taxed as a distribution, a participant whose employment ends (or plan terminates) with a loan outstanding will have until the due date, including extensions, for filing his or her tax return for the year to contribute the offset amount to an Individual Retirement Account or other eligible retirement plan to avoid the loan offset being taxed as a distribution.  This opportunity is available for offsets after 2017.

 

Read Internal Revenue Code § 402(c)(3)(C) http://uscode.house.gov/

 

 

[Belgarath]

Note, however, that such tax-free rollover treatment does not apply to any offset amount under a loan that has already been deemed to be taxed as a distribution under the Code (and reportable on Form 1099-R) either because its terms did not comply with the Code or because it remained in default past the plan’s default cure period.

It may seem ridiculous of me to mention this with all the cognoscente on these boards, but since I've received questions on it already, thought I'd toss it in.

[Peter Gulia]

That is an important point.

 

Among other conditions, the statute defines a “qualified plan loan offset amount” as “a plan loan offset amount [another specially defined term] which is treated as distributed from a qualified employer plan to a participant or beneficiary solely by reason of- (I) the termination of the qualified employer plan, or (II) the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the participant.”

 

[Madison71]

I have also received questions on 1099-R reporting - will this change now that a loan offset has an extended period to rollover?  I know it is obvious, but nothing changes with the 1099-R reporting on a loan offset just because there has been an extended period to rollover.  What will need to change is the 402(f) notice with the 60 day rollover language for loan offsets.

[Peter Gulia]

One wonders if those who rely on the Internal Revenue Service's write-up for a 402(f) notice might be waiting a while.

 

[Madison71]

What are the document providers doing for those who rely on their canned administrative forms.  Are they moving forward with updating the 402(f) notice or waiting for an updated model form from the IRS?

[Bird]

Fort William has a new notice out.