Overview

The deadline to complete a rollover of a qualified retirement plan (QRP) or individual retirement account (IRA) distribution is generally the 60th day after the date of distribution receipt. However, the 60-day rollover period is extended:

• When an automatic waiver applies because the financial organization receiving the rollover was 100 percent at fault for not completing the rollover (e.g., all necessary documentation was executed by the account owner; however, the deposit was posted to a non IRA in error)
• When the self-certification guidelines are met with the late rollover – subject to IRS scrutiny
• When a private letter ruling by the Internal Revenue Service (IRS) grants a waiver extension
• For qualified 2016 or 2017 disaster distributions
• For individuals affected by federally declared disaster declaration

Plan loan offsets extension

The Tax Cuts and Jobs Act passed in December 2017 includes a provision allowing an extension to the 60-day rollover requirement for QRP loan offsets, a provision that specifically applies to QRP participants.

What is a QRP loan offset?

A QRP loan offset is the amount by which the balance of a QRP is reduced, or offset, to repay a loan secured by a QRP participant’s balance in his/her plan. A plan loan offset occurs when a loan is in default because the plan is terminated, or the participant severed employment before the loan was repaid in full. If a loan balance is not repaid within the required time period, based on the plan document terms, that amount is treated as a taxable distribution to the participant. The amount treated as a distribution (i.e., the plan loan offset) is eligible for tax-free rollover to an IRA if the participant can repay the amount of the loan balance within the required time period. The Tax Cuts and Jobs Act extended the rollover period from the normal 60-day period to the due date of the participant’s federal income tax return, including extensions, for the year in which the plan treats the plan loan offset as being distributed.

Example: John has a $100,000 balance in his 401k plan which includes a $10,000 loan balance at termination of his employment in 2018. John is going to receive a check from the 401k plan for $90,000 but the plan is going to report distributions totaling $100,000. John has 60 days to roll over the $90,000 amount he received, and until his 2018 income tax filing due date, plus extensions, to roll over the $10,000 plan loan offset amount. Amounts not timely rolled over will be subject to federal income tax and an additional 10 percent penalty tax, if applicable.

Reporting distributions

In the case where a distribution of assets in a plan takes place, and a loan offset amount is considered distributed, a QRP administrator will generate two 1099-Rs; one reporting the distribution amount received by the plan participant based on his/her age at the time of distribution (i.e., IRS code 1 if younger than age 59½ or IRS code 7 if age 59½ or older), or as a code G if directly rolled over to an IRA. A second 1099-R will be issued for the loan offset amount using an IRS code M1 or M7, depending on the plan participant’s age. These new reporting codes are defined in the 2018 Instructions for Forms 1099-R and 5498.

Rollover contribution reporting

Any amounts directly rolled over or indirectly rolled over within the 60-day rollover period are reported by an IRA custodian or trustee on IRS Form 5498, IRA Contribution Information, in Box 2, Rollover contributions. A rollover of a plan loan offset amount after the 60-day rollover period is reported in Box 13a, Postponed/late contrib., and “PO” is entered in Box 13c, Code. The reporting requirements for rollover of plan loan offset amounts is also defined in the 2018 Instructions for Forms 1099-R and 5498.

Conclusion

With a variety of QRPs and the complexity of the rollover rules, it is critical that all parties involved be familiar with the characteristics of plan loan offset amounts and the reporting requirements of these amounts. Additionally, plan participants should be encouraged to discuss rollover eligibility of such amounts with their tax and/or legal counsel before proceeding.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or call us at 1-800-552-9408.