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Existing Loan & Plan Termination


metsfan026

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Question, Plan is terminating and there is a participant who has an existing loan.  In my experience they have two options:

1) Pay the loan back in full
2) Default on the loan

Someone is asking if they have the option to repay the loan back to their IRA, assuming they are rolling their balance into an IRA.  I know what my gut is telling me, but I just wanted to make sure this isn't a viable option.

Thanks in advance!

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See the rules for Qualified Plan Loan Offset (QPLO). Plan Termination generally qualifies.

Summary version - participant would then have until the extended due date of their tax return for the year in which the QPLO happened to rollover some or all of the QPLO to an IRA to avoid current year taxation. So for example if the Plan was terminating today and Joe has an outstanding loan balance of $10,000 for which the plan will issue a 2024, 1099-R for the QPLO, see instructions to Form 1099-R for proper distribution coding, then Joe would have until October 15, 2025 to come up with $10,000 from other sources to deposit to his IRA as a Rollover contribution.

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You can't have a loan in an IRA, so they would not be allowed to roll over the loan itself to the IRA and continue paying it back in installments.

However, a loan offset due to plan termination is a qualified plan loan offset (QPLO) so they could do a roll over by repaying the amount of the offset to the IRA before their tax filing deadline.

Of course, this requires them to have enough cash on hand to contribute the amount of the offset. Which would be functionally the same as repaying the loan, just with an extended deadline. So if they don't want to/can't repay the loan in full, then the option to roll over the QPLO probably may not interest them either.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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4 minutes ago, Lou S. said:

See the rules for Qualified Plan Loan Offset (QPLO). Plan Termination generally qualifies.

Summary version - participant would then have until the extended due date of their tax return for the year in which the QPLO happened to rollover some or all of the QPLO to an IRA to avoid current year taxation. So for example if the Plan was terminating today and Joe has an outstanding loan balance of $10,000 for which the plan will issue a 2024, 1099-R for the QPLO, see instructions to Form 1099-R for proper distribution coding, then Joe would have until October 15, 2025 to come up with $10,000 from other sources to deposit to his IRA as a Rollover contribution.

Thanks to both of you?  So would they still get a 1099 for the loan default, but the repayment would offset that?  I just want to make sure I understand.

 

Thanks!

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Yes. From a reporting perspective it works just like a 60-day rollover.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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8 minutes ago, metsfan026 said:

Thanks to both of you?  So would they still get a 1099 for the loan default, but the repayment would offset that?  I just want to make sure I understand.

 

Thanks!

Yes, you add Code M to whatever other code normally applies to the Offset.

Also know the difference between Loan Default and Loan Offset. They have different technical meaning when it comes to participant loans in qualified retirement plans.

A loan default is not eligible for rollover.

A loan offset is eligible for 60 rollover.

A qualified plan loan offset is eligible for a rollover for an extended period of 9.5 months to 17.5 months depending on when QPLO happens.

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