IRS’s recent issue snapshot addresses compliance concerns related to plan loan offsets, reflecting final 2021 regulations on qualified plan loan offsets (QPLOs). Although issue snapshots don’t provide new guidance or information, they highlight issues IRS auditors may review during plan audits.

Forfeitures in DC plans

Forfeitures can arise under a DC plan that includes a vesting schedule for certain employer contributions (e.g., an employer match under a 401(k) plan) when a participant terminates employment before fully vesting in those contributions. Forfeitures can also arise under other circumstances — for example, 401(k) plans can correct annual contribution percentage (ACP) testing failures by forfeiting highly compensated employees’ matching contributions. The proposed regulation would set a formal deadline for DC plans to use these forfeitures and require sponsors to specify in their plan documents how and when forfeited amounts must be used.

A participant typically has 60 days to roll over a plan loan offset. However, the Tax Cuts and Jobs Act (TCJA) of 2017 (Pub. L. No. 115-97) extended the rollover deadline for a QPLO until the participant’s tax filing due date (including extensions) for the taxable year in which the offset occurs. The TCJA defines a QPLO as a loan offset that’s distributed solely because of the plan’s termination or the participant’s failure to meet the plan’s loan repayment terms due to a severance from employment. The 2021 final regulations clarified that a QPLO is severance-related if the employee stops working for the employer maintaining the plan and the loan offset occurs within 12 months of the severance date.

The plan administrator is responsible for reporting plan loan offsets on Form 1099-R. The 1099-R instructions require reporting plan loan offsets in box 7 in the same manner as any other actual distribution (and not as a deemed distribution). For a QPLO, the administrator should also enter code M in box 7.

Audit concerns

The issue snapshot flags a few other issues of concern for IRS agents reviewing plan loan offsets, including QPLOs.

Permissible distribution events. Plan loan offsets, including QPLOs, are subject to the same permissible distribution event rules as all other distributions. The snapshot directs agents to confirm that participants have had a permissible distribution event. In particular, for in-service plan loan offsets, agents should confirm that the distributions were permissible under plan terms and complied with Internal Revenue Code requirements. (QPLOs cannot arise from in-service distributions unless the plan is terminated.)

QPLOs. IRS auditors will evaluate whether a distribution satisfied the QPLO rules and the participant was eligible for the extended QPLO deadline (e.g., whether the distribution was severance-related under the final regulation).

1099-R. Agents will confirm whether plan loan offsets were properly reported on the 1099-R.

Related resources

• Plan loan offsets (IRS, Feb. 24, 2023)
• Final rollover rules for QPLOs (Federal Register, Jan. 6, 2021)
• Pub. L. No. 115-97, Tax Cuts and Jobs Act (GPO, Dec. 22, 2017)