Qualified Plan Loan Offsets
By Ethan Heck, QKA
What is a qualified plan loan offset, or QPLO?
A QPLO is a retirement plan loan offset that is eligible for an extended period of time to be rolled over to an IRA or to another eligible retirement plan. This extra time to complete the rollover may result in more tax-deferred savings retained until retirement. A QPLO is an offset that is treated as a distribution from a qualified retirement plan to a plan participant or beneficiary solely because
the qualified retirement plan was terminated or
the plan participant failed to meet the repayment terms of the loan from such plan because of the participant’s severance from employment.
The loan must meet all of the requirements under Internal Revenue Code Section 72(p)(2) immediately before the severance from employment or plan termination. In addition, if a severance from employment occurred, the distribution must take place within one year of the employment severance date to be considered a QPLO.
What is the QPLO extended rollover period?
The 2017 Tax Cuts and Jobs Act contained a provision that allows QPLOs to be rolled over to another eligible retirement plan or an IRA up until the plan participant’s tax return deadline, including extensions, for the taxable year in which the QPLO occurred. Final regulations implementing this provision were issued in December of 2020.This gives participants extra time beyond the 60 days generally allowed for loan offset rollovers. It is important to note that, because a plan loan offset is an eligible rollover distribution, if the participant fails to complete the rollover, he must include the plan loan offset as income for that tax year.
The final regulations apply to all plan loan offsets that are treated as distributed on or after January 1, 2021. But participants with QPLOs that occurred between August 20, 2020—the date the regulations were published in proposed form—and December 31, 2020, also qualify to indirectly roll over the offset amounts by their 2020 tax return due date including extensions, if applicable.
How should we report a QPLO?
The final regulations also require special reporting of QPLOs on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This will begin with the 2021 reporting year, essentially taking effect in 2022 when 2021 information returns will be provided to participants and to the IRS by January 31, 2022. Taxpayers and information return filers can, however, apply the regulations as of August 20, 2020, which would mean reporting in this manner on the 2020 Form 1099-R that is provided to participants and the IRS by January 31, 2021.
Report a QPLO on Form 1099-R as you would any other actual distribution. In addition, enter code M, Qualified plan loan offset, in Box 7. The distribution code M was recently added to the Instructions for Forms 1099-R and 5498 to specifically report this type of transaction. Note that, although the extended rollover period is optionally available for taxpayers with plan loan offsets on or after August 20, 2020, the IRS is not requiring preparers to report whether a distribution is a QPLO on the 2020 Form 1099-R, an exemption granted due to the timing of final regulations being issued. Therefore, you need not worry if you did not report a QPLO using code M on the 2020 form.
