Rollover Rules for Qualified Plan Loan Offset Amounts, 464-469 [2020-27151]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 86, Number 3 (Wednesday, January 6, 2021)]
[Rules and Regulations]
[Pages 464-469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27151]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9937]
RIN 1545-BP46


Rollover Rules for Qualified Plan Loan Offset Amounts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document sets forth final regulations relating to 
amendments made to section 402(c) of the Internal Revenue Code (Code) 
by section 13613 of the Tax Cuts and Jobs Act (TCJA). Section 13613 of 
TCJA provides an extended rollover period for a qualified plan loan 
offset, which is a type of plan loan offset. These regulations affect 
participants, beneficiaries, sponsors, and administrators of qualified 
employer plans.

DATES: 
    Effective Date: These regulations are effective on January 6, 2021.
    Applicability Date: For date of applicability, see Sec.  1.402(c)-
3(b)(2).

FOR FURTHER INFORMATION CONTACT: Naomi Lehr at (202) 317-4102, Vernon 
Carter at (202) 317-6799, or Pamela Kinard at (202) 317-6000 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document amends 26 CFR part 1, by adding Sec.  1.402(c)-3 to 
the Income Tax Regulations to reflect changes to section 402(c) of the 
Code, as amended by section 13613 of TCJA (Pub. L. 115-97 (131 Stat. 
2054)).

1. Plan Loans, Eligible Rollover Distributions, and Plan Loan Offset 
Amounts

    Section 72(p)(1) of the Code provides that if, during any taxable 
year, a participant or beneficiary receives (directly or indirectly) 
any amount as a loan from a qualified employer plan (as defined in 
section 72(p)(4)(A)),\1\ that amount shall be treated as having been 
received by the individual as a distribution from the plan. For certain 
plan loans, section 72(p)(2) provides an exception to the general 
treatment of loans as distributions under section 72(p)(1).
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    \1\ Under section 72(p)(4), a qualified employer plan means a 
qualified plan, a section 403(a) annuity plan, a section 403(b) 
plan, and any governmental plan.
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    For the exception under section 72(p)(2) to apply so that a plan 
loan is not treated as a distribution under section 72(p)(1) for the 
taxable year in which the loan is received, the loan generally must 
satisfy three requirements:
    (1) The loan, by its terms, must satisfy the limits on loan 
amounts, as described in section 72(p)(2)(A);
    (2) The loan, by its terms, generally must be repayable within 5 
years, as described in section 72(p)(2)(B); and
    (3) The loan must require substantially level amortization over the 
term of the loan, as described in section 72(p)(2)(C).
    Section 401(a)(31) requires that a plan qualified under section 
401(a) provide for the direct transfer of eligible rollover 
distributions. A similar rule applies to section 403(a) annuity plans, 
section 403(b) tax-sheltered annuities, and section 457 eligible 
governmental plans. See generally sections 403(a)(1), 403(b)(10), and 
457(d)(1)(C).
    Sections 402(c)(3) and 408(d)(3) provide that any amount 
distributed from a qualified plan or individual retirement account or 
annuity (IRA) will be excluded from income if it is transferred to an 
eligible retirement plan no later than the 60th day following the day 
the distribution is received. A similar rule applies to section 403(a) 
annuity plans, section 403(b) tax-sheltered annuities, and section 457 
eligible governmental plans. See generally sections 403(a)(4)(B), 
403(b)(8)(B), and 457(e)(16)(B).
    Sections 402(c)(3)(B) and 408(d)(3)(I) provide that the Secretary 
may waive the 60-day rollover requirement ``where the failure to waive 
such requirement would be against equity or good conscience, including 
casualty, disaster, or other events beyond the reasonable control of 
the individual subject to such requirement.'' See generally Rev. Proc. 
2020-46, 2020-45 I.R.B. 995, which sets forth a self-certification 
procedure that taxpayers may use in certain circumstances to claim a 
waiver of the 60-day deadline for completing a rollover under section 
402(c)(3)(B) or 408(d)(3)(I), and Rev. Proc. 2020-4, 2020-1 I.R.B. 148, 
which sets forth procedures that taxpayers may use to request a waiver 
of the 60-day rollover deadline by submitting a request for a private 
letter ruling.\2\
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    \2\ Note that the 60-day rollover deadline can also be extended 
to provide temporary relief during a disaster or an emergency 
response. For example, in response to the COVID-19 pandemic, Notice 
2020-23, 2020-18 I.R.B. 742, extended the 60-day rollover deadline 
to July 15, 2020, for distributions made between April 1, 2020, and 
July 14, 2020.
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    Section 1.402(c)-2, Q&A-3(a), provides that, unless specifically 
excluded, an eligible rollover distribution means any distribution to 
an employee (or to a spousal distributee described in Sec.  1.402(c)-2, 
Q&A-12(a)) of all or any portion of the balance to the credit of the 
employee in a qualified plan. Section 1.402(c)-2, Q&A-3(b), provides 
that certain distributions (for example, required minimum distributions 
under section 401(a)(9)) are not eligible rollover distributions.
    Section 1.402(c)-2, Q&A-9(a), provides that a distribution of a 
plan loan offset amount (as defined in Sec.  1.402(c)-2, Q&A-9(b)) is 
an eligible rollover distribution if it satisfies Sec.  1.402(c)-2, 
Q&A-3. Thus, an amount not exceeding the plan loan offset amount may be 
rolled over by the employee (or spousal distributee) to an eligible 
retirement plan within the 60-day period described in section 
402(c)(3), unless the plan loan offset amount fails to be an eligible 
rollover distribution for another reason.
    Section 1.402(c)-2, Q&A-9(b), provides that a distribution of a 
plan loan offset amount is a distribution that occurs when, under the 
plan terms governing the loan, the employee's

[[Page 465]]

accrued benefit is reduced (offset) in order to repay the loan. This 
may occur when, for example, the terms governing a plan loan require 
that, in the event of an employee's termination of employment or 
request for a distribution, the loan is to be repaid immediately or 
treated as in default. A plan loan offset may also occur when, under 
the terms of the plan loan, the loan is canceled, accelerated, or 
treated as if it is in default (for example, if the plan treats a loan 
as in default upon an employee's termination of employment or within a 
specified period thereafter). See also Sec.  1.72(p)-1, Q&A-13(a)(2). 
Because a plan loan offset is an actual distribution for purposes of 
the Code, not a deemed distribution under section 72(p), a plan loan 
offset cannot occur prior to a distributable event. See generally Sec.  
1.72(p)-1, Q&A-13(b).

2. Qualified Plan Loan Offset Amounts

    Section 13613 of TCJA amended section 402(c)(3) of the Code to 
provide an extended rollover deadline for qualified plan loan offset 
(QPLO) amounts (as defined in section 402(c)(3)(C)(ii)).\3\ Any portion 
of a QPLO amount (up to the entire QPLO amount) may be rolled over to 
an eligible retirement plan by the individual's tax filing due date 
(including extensions) for the taxable year in which the offset occurs.
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    \3\ In addition to TCJA, other statutory provisions may extend 
the period to roll over a plan loan offset. For example, section 
2202(a) of the Coronavirus Aid, Relief, and Economic Security Act, 
Public Law 116-136, 134 Stat. 281 (2020) (CARES Act), permits an 
individual to receive from an eligible retirement plan up to 
$100,000 for a coronavirus-related distribution (which may include a 
plan loan offset that otherwise meets the requirements to be a 
coronavirus-related distribution). A qualified individual with a 
coronavirus-related distribution (which may be included in gross 
income ratably over the 3-year period beginning with the taxable 
year of the distribution) may recontribute up to the amount of the 
distribution to an applicable eligible retirement plan in which the 
individual is a beneficiary and to which a rollover can be made. For 
further information relating to the interaction of section 2202 of 
the CARES Act and plan loan offsets, see Notice 2020-50, 2020-28 
I.R.B. 35.
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    A QPLO amount is defined in section 402(c)(3)(C)(ii) as a plan loan 
offset amount that is treated as distributed from a qualified employer 
plan to an employee or beneficiary solely by reason of:
    (1) The termination of the qualified employer plan, or
    (2) The failure to meet the repayment terms of the loan from such 
plan because of the severance from employment of the employee.
    In addition, section 402(c)(3)(C)(iv) provides that the extended 
rollover period will not apply ``to any plan loan offset amount unless 
such plan loan offset amount relates to a loan to which section 
72(p)(1) does not apply by reason of section 72(p)(2).''
    Section 301.9100-2(b) of the regulations provides rules for 
automatic six-month extensions to make regulatory or statutory 
elections. Under this rule, a taxpayer will receive an automatic 
extension of 6 months from the due date of a return, excluding 
extensions, to make elections that otherwise must be made by the due 
date of the return plus extensions, provided that:
    (1) The taxpayer's return was timely filed for the year the 
election should have been made; and
    (2) The taxpayer takes appropriate corrective action within the 
six-month period.
    Section 301.9100-2(b) further provides that paragraph (b) does not 
apply to regulatory or statutory elections that must be made by the due 
date of the return excluding extensions.

Notice of Proposed Rulemaking

1. In General

    On August 20, 2020, the Department of the Treasury (Treasury 
Department) and the IRS published a notice of proposed rulemaking (REG-
116475-19) in the Federal Register (85 FR 51369) setting forth rules in 
new Sec.  1.402(c)-3 for qualified plan loan offsets (QPLO proposed 
regulations). As described in the background of the preamble to the 
QPLO proposed regulations, the Treasury Department and IRS anticipate 
providing separate guidance with respect to Division O of the Further 
Consolidated Appropriations Act of 2020, Public Law 116-94 (133 Stat. 
2534), titled ``Setting Every Community Up for Retirement Enhancement 
Act of 2019'' (SECURE Act). As part of that guidance, the Treasury 
Department and IRS anticipate amending Sec.  1.402(c)-2 to reflect 
changes made by section 114 of the SECURE Act (relating to changes to 
section 401(a)(9) of the Code to the required beginning date applicable 
to section 401(a) plans and other eligible retirement plans described 
in section 402(c)(8)) and to add new level designations for each 
paragraph in the questions and answers to satisfy Federal Register 
requirements. It is anticipated that Sec.  1.402(c)-3, which includes 
both the new QPLO rules and already existing plan loan offset rules in 
Q&A-9 of Sec.  1.402(c)-2, will be combined with Sec.  1.402(c)-2 in 
connection with that project (including replacing Q&A-9 of Sec.  
1.402(c)-2 with paragraph (a) of Sec.  1.402(c)-3).
    As an initial matter, the QPLO proposed regulations confirm that a 
QPLO is a type of plan loan offset; accordingly, most of the general 
rules relating to plan loan offset amounts apply to QPLO amounts. For 
example, the rule that a plan loan offset amount is an eligible 
rollover distribution applies to a QPLO amount. In addition, the rules 
in Sec.  1.401(a)(31)-1, Q&A-16 (guidance concerning the offering of a 
direct rollover of a plan loan offset amount), and Sec.  31.3405(c)-1, 
Q&A-11 (guidance concerning special withholding rules with respect to 
plan loan offset amounts), applicable to plan loan offset amounts in 
general, apply to QPLO amounts. The QPLO proposed regulations provide 
examples to illustrate the interaction of the special rules for QPLOs 
with the general rules for plan loan offsets.

2. Rollover Period for Plan Loan Offset Amounts, Including QPLO Amounts

    Section 1.402(c)-3(a)(2)(ii)(A) of the QPLO proposed regulations 
provides that a distribution of a plan loan offset amount that is an 
eligible rollover distribution and not a QPLO amount may be rolled over 
by the employee (or spousal distributee) to an eligible retirement plan 
(as defined in section 402(c)(8)(B)) within the 60-day period set forth 
in section 402(c)(3)(A). While a plan loan offset generally is subject 
to this 60-day rollover period, there are special rules for the waiver 
of the 60-day rollover deadline.
    Section 1.402(c)-3(a)(2)(ii)(B) of the QPLO proposed regulations 
provides that a distribution of a plan loan offset amount that is an 
eligible rollover distribution and a QPLO amount may be rolled over by 
the employee (or spousal distributee) to an eligible retirement plan 
through the period ending on the individual's tax filing due date 
(including extensions) for the taxable year in which the offset is 
treated as distributed from a qualified employer plan. Thus, a taxpayer 
with an eligible rollover distribution that is a QPLO amount may roll 
over any portion of the distribution to an eligible retirement plan, 
including another qualified retirement plan (if that plan permits) or 
an IRA, by the taxpayer's deadline for filing income taxes for the year 
of the distribution, including extensions.\4\
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    \4\ For a detailed discussion of the application of Sec.  
301.9100-2(b) (which provides rules for automatic six-month 
extensions to make regulatory or statutory elections) to the 
extended rollover period for QPLO amounts, see the preamble 
discussion in the Explanation of Provisions section of the QPLO 
proposed regulations, under the heading, Rollover Period for Plan 
Loan Offset Amounts, Including QPLO Amounts.

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[[Page 466]]

3. Definitions of Plan Loan Offset Amount, QPLO Amount, and Qualified 
Employer Plan

    Section 1.402(c)-3(a)(2)(iii)(A) of the QPLO proposed regulations 
provides that a plan loan offset amount is the amount by which, under 
plan terms governing a plan loan, an employee's accrued benefit is 
reduced (offset) in order to repay the loan (including the enforcement 
of the plan's security interest in the employee's accrued benefit). A 
distribution of a plan loan offset amount is an actual distribution, 
not a deemed distribution under section 72(p).
    Section 1.402(c)-3(a)(2)(iii)(B) of the QPLO proposed regulations 
defines a QPLO amount as a plan loan offset amount that satisfies two 
requirements. First, the plan loan offset amount must be treated as 
distributed from a qualified employer plan to an employee or 
beneficiary solely by reason of the termination of the qualified 
employer plan, or the failure to meet the repayment terms of the loan 
from such plan because of the severance from employment of the 
employee. Second, the plan loan offset amount must relate to a plan 
loan that met the requirements of section 72(p)(2) immediately prior to 
the termination of the qualified employer plan or the severance from 
employment of the employee, as applicable.
    Section 1.402(c)-3(a)(2)(iii)(C) of the QPLO proposed regulations 
define a qualified employer plan, for purposes of the QPLO amount 
definition, as a qualified employer plan as defined in section 
72(p)(4).

4. Special Rules for QPLO Determinations

    Section 1.402(c)-3(a)(2)(iv) of the QPLO proposed regulations 
provides several special rules for purposes of determining whether a 
plan loan offset amount is a QPLO amount. First, the QPLO proposed 
regulations provide that whether an employee has a severance from 
employment with the employer that maintains the qualified employer plan 
is determined in the same manner as under Sec.  1.401(k)-1(d)(2). Thus, 
an employee has a severance from employment when the employee ceases to 
be an employee of the employer maintaining the plan.
    Second, the QPLO proposed regulations provide that a plan loan 
offset amount is treated as distributed from a qualified employer plan 
to an employee or beneficiary solely by reason of the failure to meet 
the plan loan repayment terms because of severance from employment if 
the plan loan offset:
    (1) Relates to a failure to meet the repayment terms of the plan 
loan, and
    (2) Occurs within the period beginning on the date of the 
employee's severance from employment and ending on the first 
anniversary of that date.
    Whether a plan loan offset amount is a QPLO amount is relevant to 
plan administrators because those administrators are responsible for 
reporting whether a distribution is a plan loan offset amount or a QPLO 
amount on Form 1099-R, Distributions From Pensions, Annuities, 
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., 
and furnishing that form to the taxpayer.\5\ In the QPLO proposed 
regulations, the Treasury Department and the IRS indicated that the 
proposed 12-month rule would assist plan administrators in identifying 
QPLO amounts by providing a bright-line rule for determining whether a 
plan loan offset amount following a severance from employment satisfies 
the first requirement in Sec.  1.402(c)-3(a)(2)(iii)(B) to be a QPLO 
amount.
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    \5\ The Instructions to the 2020 Form 1099-R provide that if an 
employee's accrued benefit is offset to repay a loan (a plan loan 
offset amount), the administrator should report the distribution as 
an actual distribution and not use Code L (for deemed distributions) 
in box 7. For a QPLO amount, the Instructions to the 2020 Form 1099-
R provide that the administrator should enter Code M (for QPLO 
amounts) in box 7.
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    The QPLO proposed regulations proposed to apply the subsequent 
final regulations to plan loan offset amounts, including qualified plan 
loan offset amounts, treated as distributed on or after the date of 
publication of a Treasury decision adopting the proposed rules as final 
regulations. The preamble to the QPLO proposed regulations also stated 
that taxpayers (including a filer of a Form 1099-R) may rely on the 
proposed regulations with respect to plan loan offset amounts, 
including qualified plan loan offset amounts, treated as distributed on 
or after August 20, 2020, and before the date the regulations are 
published as final regulations in the Federal Register.
    The Treasury Department and the IRS received one written comment 
relating to the QPLO proposed regulations. No request for a public 
hearing was made, and no public hearing was held. After consideration 
of the comment, this Treasury decision adopts the QPLO proposed 
regulations with one important modification relating to the 
applicability date.

Summary of Comments and Explanation of Revisions

    The commenter stated that the bright-line 12-month rule in the QPLO 
proposed regulations is a helpful approach in determining whether a 
plan loan offset amount is a QPLO amount, but expressed concern that 
recordkeepers may not currently have procedures to track a terminated 
employee's date of severance or the one-year anniversary of that date. 
To address this concern, the commenter recommended that the Treasury 
Department and the IRS (i) consider an alternative bright-line rule 
under which a plan loan offset amount is treated as satisfying the 
requirement in Sec.  1.402(c)-3(a)(2)(iv)(B) if the plan loan offset 
occurs by the end of the year following the calendar year in which the 
employee has a severance from employment, and (ii) delay by one year 
the effective date of the final regulations (or, alternatively, provide 
for a one-year period of time during which a person responsible for 
reporting a QPLO amount on Form 1099-R will not be viewed as improperly 
reporting it, provided that a reasonable, good faith effort is made to 
determine if a plan loan offset is a QPLO).
    With respect to the first recommendation, the Treasury Department 
and the IRS have considered the alternative bright-line rule suggested 
by the commenter, but have retained in the final regulations the 12-
month rule in Sec.  1.402(c)-3(a)(2)(iv)(B) of the QPLO proposed 
regulations. Although the 12-month rule is a bright-line rule that may 
assist plan administrators and recordkeepers in satisfying their 
reporting obligations, it is also an interpretation of a statutory 
requirement that should apply to all taxpayers in the same manner. The 
alternative rule recommended by the commenter could result in 
significantly different treatment of participants based solely on when 
during a calendar year each participant severs from employment. For 
example, Taxpayer A, who severs from employment on December 31, 2020, 
could experience a plan loan offset during a 366-day period following 
the severance and be treated as having a QPLO (and thus be eligible for 
the extended rollover rule), whereas Taxpayer B, who severs from 
employment one day later, on January 1, 2021, could experience a plan 
loan offset during a 729-day period and receive the same treatment.
    With respect to the commenter's second recommendation to delay the 
effective date of the final regulations, the Treasury Department and 
the IRS

[[Page 467]]

agree that additional time to implement Sec.  1.402(c)-3 is 
appropriate. Accordingly, the applicability date in these final 
regulations is revised from the QPLO proposed regulations, which had 
proposed to apply the regulations to plan loan offset amounts treated 
as distributed on or after the date of publication of final 
regulations. Under the revised applicability date, the final 
regulations will apply to plan loan offset amounts, including qualified 
plan loan offset amounts, treated as distributed on or after January 1, 
2021. Thus, for example, the rules in Sec.  1.402(c)-3 will first apply 
to 2021 Form 1099-Rs required to be filed and furnished in 2022 (more 
than one year after the date of publication of the final regulations). 
This delayed applicability date will give plan administrators and 
recordkeepers additional time to program systems and otherwise 
establish procedures for obtaining the exact date of severance from 
employment of a plan participant and tracking the one-year anniversary 
of that date.
    The applicability date in these final regulations is also revised 
to provide that taxpayers (including a filer of a Form 1099-R) may 
apply these regulations with respect to plan loan offset amounts, 
including qualified plan loan offset amounts, treated as distributed on 
or after August 20, 2020, which is the date of the publication of the 
QPLO proposed regulations.

Applicability Date

    These regulations apply to plan loan offset amounts, including 
qualified plan loan offset amounts, treated as distributed on or after 
January 1, 2021. Thus, for example, the rules in Sec.  1.402(c)-3 will 
first apply to 2021 Form 1099-Rs required to be filed and furnished in 
2022. However, taxpayers (including a filer of a Form 1099-R) may apply 
these regulations with respect to plan loan offset amounts, including 
qualified plan loan offset amounts, treated as distributed on or after 
August 20, 2020.

Statement of Availability for IRS Documents

    For copies of recently issued Revenue Procedures, Revenue Rulings, 
Notices, and other guidance published in the Internal Revenue Bulletin, 
please visit the IRS website at https://www.irs.gov.

Special Analyses

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.
    In addition, it is hereby certified that these regulations will not 
have a significant economic impact on a substantial number of small 
entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 
6). This certification is based on the fact that the regulations 
reflect the statutory changes to section 402(c) made by section 13613 
of TCJA. The regulations reflect the extended rollover period for QPLO 
amounts, as amended by TCJA. Specifically, the regulations reflect the 
statute in a manner that (i) is consistent with the statutory language, 
(ii) provides certain clarifications, and (iii) eases and facilitates 
plan administration. Although the regulations might affect a 
substantial number of individuals, the economic impact of the 
regulations is not expected to be significant. The regulations do not 
impose any new compliance burdens on taxpayers and are not expected to 
result in any economically meaningful changes in behavior.
    Pursuant to section 7805(f), the notice of proposed rulemaking 
preceding these regulations was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business, and no comments were received.

Drafting Information

    The principal authors of these regulations are Naomi Lehr and 
Pamela R Kinard of the Office of Associate Chief Counsel (Employee 
Benefits, Exempt Organizations, and Employment Taxes), although other 
persons in the IRS and the Treasury Department participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
1. The authority citation for part 1 continues to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *


0
2. Section 1.402(c)-3 is added to read as follows:


Sec.  1.402(c)-3   Eligible rollover distributions; Qualified plan loan 
offsets.

    (a)(1) Q-1. What special rollover rules apply to a plan loan offset 
amount (including a qualified plan loan offset amount)?
    (2) A-1--(i) In general--(A) Eligible rollover distribution. A 
distribution of a plan loan offset amount, as defined in paragraph 
(a)(2)(iii)(A) of this section (including a qualified plan loan offset 
amount, a type of plan loan offset amount defined in paragraph 
(a)(2)(iii)(B) of this section), is an eligible rollover distribution 
if it satisfies Sec.  1.402(c)-2, Q&A-3 and 4.
    (B) Other rules relating to plan loan offset amounts. See Sec.  
1.401(a)(31)-1, Q&A-16, for guidance concerning the offering of a 
direct rollover of a plan loan offset amount. See also Sec.  
31.3405(c)-1, Q&A-11, of this chapter for guidance concerning special 
withholding rules with respect to plan loan offset amounts.
    (ii) Rollover period for a plan loan offset amount--(A) Plan loan 
offset amount that is not a qualified plan loan offset amount. A 
distribution of a plan loan offset amount that is an eligible rollover 
distribution and not a qualified plan loan offset amount may be rolled 
over by the employee (or spousal distributee) to an eligible retirement 
plan (as defined in Sec.  1.402(c)-2, Q&A-2) within the 60-day period 
set forth in section 402(c)(3)(A).
    (B) Plan loan offset amount that is a qualified plan loan offset 
amount. A distribution of a plan loan offset amount that is an eligible 
rollover distribution and that is a qualified plan loan offset amount 
may be rolled over by the employee (or spousal distributee) to an 
eligible retirement plan within the period set forth in section 
402(c)(3)(C), which is the individual's tax filing due date (including 
extensions) for the taxable year in which the offset is treated as 
distributed from a qualified employer plan.
    (iii) Definitions--(A) Plan loan offset amount. For purposes of 
section 402(c), a plan loan offset amount is the amount by which, under 
the plan terms governing a plan loan, an employee's accrued benefit is 
reduced (offset) in order to repay the loan (including the enforcement 
of the plan's security interest in an employee's accrued benefit). A 
distribution of a plan loan offset amount can occur in a variety of 
circumstances, for example, when the terms governing a plan loan 
require that, in the event of the employee's termination of employment 
or request for a distribution, the loan be repaid immediately or 
treated as in default. A distribution of a plan loan offset amount also 
occurs when, under the terms governing the plan loan, the loan is 
cancelled, accelerated, or treated as if it were in default (for 
example, when the plan treats a loan as in default upon an employee's 
termination of employment

[[Page 468]]

or within a specified period thereafter). A distribution of a plan loan 
offset amount is an actual distribution, not a deemed distribution 
under section 72(p).
    (B) Qualified plan loan offset amount. For purposes of section 
402(c), a qualified plan loan offset amount is a plan loan offset 
amount that satisfies the following requirements:
    (1) The plan loan offset amount is treated as distributed from a 
qualified employer plan to an employee or beneficiary solely by reason 
of the termination of the qualified employer plan, or the failure to 
meet the repayment terms of the loan because of the severance from 
employment of the employee; and
    (2) The plan loan offset amount relates to a plan loan that met the 
requirements of section 72(p)(2) immediately prior to the termination 
of the qualified employer plan or the severance from employment of the 
employee, as applicable.
    (C) Qualified employer plan. For purposes of section 402(c) and 
this section, a qualified employer plan is a qualified employer plan as 
defined in section 72(p)(4).
    (iv) Special rules for qualified plan loan offset amounts--(A) 
Definition of severance from employment. For purposes of paragraph 
(a)(2)(iii)(B)(1) of this section, whether an employee has a severance 
from employment with the employer that maintains the qualified employer 
plan is determined in the same manner as under Sec.  1.401(k)-1(d)(2). 
Thus, an employee has a severance from employment when the employee 
ceases to be an employee of the employer maintaining the plan.
    (B) Offset because of severance from employment. A plan loan offset 
amount is treated as distributed from a qualified employer plan to an 
employee or beneficiary solely by reason of the failure to meet the 
repayment terms of a plan loan because of severance from employment of 
the employee if the plan loan offset:
    (1) Relates to a failure to meet the repayment terms of the plan 
loan; and
    (2) Occurs within the period beginning on the date of the 
employee's severance from employment and ending on the first 
anniversary of that date.
    (v) Examples. The following examples illustrate the rules with 
respect to plan loan offset amounts, including qualified plan loan 
offset amounts, in this paragraph (a) and in Sec. Sec.  1.401(a)(31)-1, 
Q&A-16, and 31.3405(c)-1, Q&A-11, of this chapter. For purposes of the 
examples in this paragraph (a)(2)(v), each reference to a plan refers 
to a qualified employer plan as described in section 72(p)(4).
    (A) Example 1. (1) In 2020, Employee A has an account balance of 
$10,000 in Plan Y, of which $3,000 is invested in a plan loan to 
Employee A that is secured by Employee A's account balance in Plan Y. 
Employee A has made no after-tax employee contributions to Plan Y. The 
plan loan meets the requirements of section 72(p)(2). Plan Y does not 
provide any direct rollover option with respect to plan loans. Employee 
A severs from employment on June 15, 2020. After severance from 
employment, Plan Y accelerates the plan loan and provides Employee A 90 
days to repay the remaining balance of the plan loan. Employee A, who 
is under the age set forth in section 401(a)(9)(C)(i)(II), does not 
repay the loan within the 90 days and instead elects a direct rollover 
of Employee A's entire account balance in Plan Y. On September 18, 2020 
(within the 12-month period beginning on the date that Employee A 
severed from employment), Employee A's outstanding loan is offset 
against the account balance.
    (2) In order to satisfy section 401(a)(31), Plan Y must make a 
direct rollover by paying $7,000 directly to the eligible retirement 
plan chosen by Employee A. When Employee A's account balance was offset 
by the amount of the $3,000 unpaid loan balance, Employee A received a 
plan loan offset amount (equivalent to $3,000) that is an eligible 
rollover distribution. However, under Sec.  1.401(a)(31)-1, Q&A-16, 
Plan Y satisfies section 401(a)(31), even though a direct rollover 
option was not provided with respect to the $3,000 plan loan offset 
amount.
    (3) No withholding is required under section 3405(c) on account of 
the distribution of the $3,000 plan loan offset amount because no cash 
or other property (other than the plan loan offset amount) is received 
by Employee A from which to satisfy the withholding.
    (4) The $3,000 plan loan offset amount is a qualified plan loan 
offset amount within the meaning of paragraph (a)(2)(iii)(B) of this 
section. Accordingly, Employee A may roll over up to the $3,000 
qualified plan loan offset amount to an eligible retirement plan within 
the period that ends on the employee's tax filing due date (including 
extensions) for the taxable year in which the offset occurs.
    (B) Example 2. (1) The facts are the same as in paragraph 
(a)(2)(v)(A) of this section (Example 1), except that, rather than 
accelerating the plan loan, Plan Y permits Employee A to continue 
making loan installment payments after severance from employment. 
Employee A continues making loan installment payments until January 1, 
2021, at which time Employee A does not make the loan installment 
payment due on January 1, 2021. In accordance with Sec.  1.72(p)-1, 
Q&A-10, Plan Y allows a cure period that continues until the last day 
of the calendar quarter following the quarter in which the required 
installment payment was due. Employee A does not make a plan loan 
installment payment during the cure period. Plan Y offsets the unpaid 
$3,000 loan balance against Employee A's account balance on July 1, 
2021 (which is after the 12-month period beginning on the date that 
Employee A severed from employment).
    (2) The conclusion is the same as in paragraph (a)(2)(v)(A) of this 
section (Example 1), except that the $3,000 plan loan offset amount is 
not a qualified plan loan offset amount (because the offset did not 
occur within the 12-month period beginning on the date that Employee A 
severed from employment). Accordingly, Employee A may roll over up to 
the $3,000 plan loan offset amount to an eligible retirement plan 
within the 60-day period provided in section 402(c)(3)(A) (rather than 
within the period that ends on Employee A's tax filing due date 
(including extensions) for the taxable year in which the offset 
occurs).
    (C) Example 3. (1) The facts are the same as in paragraph 
(a)(2)(v)(A) of this section (Example 1), except that the terms 
governing the plan loan to Employee A provide that, upon severance from 
employment, Employee A's account balance is automatically offset by the 
amount of any unpaid loan balance to repay the loan. Employee A severs 
from employment but does not request a distribution from Plan Y. 
Nevertheless, pursuant to the terms governing the plan loan, Employee 
A's account balance is automatically offset on June 15, 2020, by the 
amount of the $3,000 unpaid loan balance.
    (2) The $3,000 plan loan offset amount is a qualified plan loan 
offset amount within the meaning of paragraph (a)(2)(iii)(B) of this 
section. Accordingly, Employee A may roll over up to the $3,000 
qualified plan loan offset amount to an eligible retirement plan within 
the period that ends on Employee A's tax filing due date (including 
extensions) for the taxable year in which the offset occurs.
    (D) Example 4. (1) The facts are the same as in paragraph 
(a)(2)(v)(A) of this section (Example 1), except that Employee A elects 
to receive a cash distribution of the account balance that remains 
after the $3,000 plan loan offset

[[Page 469]]

amount, instead of electing a direct rollover of the remaining account 
balance.
    (2) The amount of the distribution received by Employee A is 
$10,000 ($3,000 relating to the plan loan offset and $7,000 relating to 
the cash distribution). Because the amount of the $3,000 plan loan 
offset amount attributable to the loan is included in determining the 
amount of the eligible rollover distribution to which withholding 
applies, withholding in the amount of $2,000 (20 percent of $10,000) is 
required under section 3405(c). The $2,000 is required to be withheld 
from the $7,000 to be distributed to Employee A in cash, so that 
Employee A actually receives a cash amount of $5,000.
    (3) The $3,000 plan loan offset amount is a qualified plan loan 
offset amount within the meaning of paragraph (a)(2)(iii)(B) of this 
section. Accordingly, Employee A may roll over up to the $3,000 
qualified plan loan offset to an eligible retirement plan within the 
period that ends on the Employee A's tax filing due date (including 
extensions) for the taxable year in which the offset occurs. In 
addition, Employee A may roll over up to $7,000 (the portion of the 
distribution that is not related to the offset) within the 60-day 
period provided in section 402(c)(3).
    (E) Example 5. (1) The facts are the same as in paragraph 
(a)(2)(v)(D) of this section (Example 4), except that the $7,000 
distribution to Employee A after the offset consists solely of employer 
securities within the meaning of section 402(e)(4)(E).
    (2) No withholding is required under section 3405(c) because the 
distribution consists solely of the $3,000 plan loan offset amount and 
the $7,000 distribution of employer securities. This is the result 
because the total amount required to be withheld does not exceed the 
sum of the cash and the fair market value of other property 
distributed, excluding plan loan offset amounts and employer 
securities.
    (3) Employee A may roll over up to the $7,000 of employer 
securities to an eligible retirement plan within the 60-day period 
provided in section 402(c)(3). The $3,000 plan loan offset amount is a 
qualified plan loan offset amount within the meaning of paragraph 
(a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over 
up to the $3,000 qualified plan loan offset amount to an eligible 
retirement plan within the period that ends on Employee A's tax filing 
due date (including extensions) for the taxable year in which the 
offset occurs.
    (F) Example 6. (1) Employee B, who is age 40, has an account 
balance in Plan Z. Plan Z provides for no after-tax employee 
contributions. In 2022, Employee B receives a loan from Plan Z, the 
terms of which satisfy section 72(p)(2), and which is secured by 
elective contributions subject to the distribution restrictions in 
section 401(k)(2)(B).
    (2) Employee B fails to make an installment payment due on April 1, 
2023, or any other monthly payments thereafter. In accordance with 
Sec.  1.72(p)-1, Q&A-10, Plan Z allows a cure period that continues 
until the last day of the calendar quarter following the quarter in 
which the required installment payment was due (September 30, 2023). 
Employee B does not make a plan loan installment payment during the 
cure period. On September 30, 2023, pursuant to section 72(p)(1), 
Employee B is taxed on a deemed distribution equal to the amount of the 
unpaid loan balance. Pursuant to Sec.  1.402(c)-2, Q&A-4(d), the deemed 
distribution is not an eligible rollover distribution.
    (3) Because Employee B has not severed from employment or 
experienced any other event that permits the distribution under section 
401(k)(2)(B) of the elective contributions that secure the loan, Plan Z 
is prohibited from executing on the loan. Accordingly, Employee B's 
account balance is not offset by the amount of the unpaid loan balance 
at the time of the deemed distribution. Thus, there is no distribution 
of an offset amount that is an eligible rollover distribution on 
September 30, 2023.
    (G) Example 7. (1) The facts are the same as in in paragraph 
(a)(2)(v)(F) of this section (Example 6), except that Employee B has a 
severance from employment on November 1, 2023. On that date, Employee 
B's unpaid loan balance is offset against the account balance on 
distribution.
    (2) The plan loan offset amount is not a qualified plan loan offset 
amount. Although the offset occurred within 12 months after Employee B 
severed from employment, the plan loan does not meet the requirement in 
paragraph (a)(2)(iii)(B) of this section (that the plan loan meet the 
requirements of section 72(p)(2) immediately prior to Employee B's 
severance from employment). Instead, the loan was taxable on September 
30, 2023 (prior to Employee B's severance from employment on November 
1, 2023), because of the failure to meet the level amortization 
requirement in section 72(p)(2)(C). Accordingly, Employee B may roll 
over the plan loan offset amount to an eligible retirement plan within 
the 60-day period provided in section 402(c)(3)(A) (rather than within 
the period that ends on Employee B's tax filing due date (including 
extensions) for the taxable year in which the offset occurs).
    (b)(1) Q-2. When are the rules in this section applicable to plan 
loan offset amounts, including qualified plan loan offset amounts?
    (2) A-2. The rules provided in paragraph (a) of this section are 
applicable to plan loan offset amounts, including qualified plan loan 
offset amounts, treated as distributed on or after January 1, 2021. 
However, taxpayers (including a filer of a Form 1099-R) may choose to 
apply the regulations in this section with respect to plan loan offset 
amounts, including qualified plan loan offset amounts, treated as 
distributed on or after August 20, 2020.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: December 1, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-27151 Filed 1-5-21; 8:45 am]
BILLING CODE 4830-01-P