IRS snapshot focuses on plan loan offsets 

April 3, 2023

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.

A plan loan offset occurs when, pursuant to the loan terms, a participant’s benefit is reduced to repay an outstanding loan when the participant has a permissible distribution event. (This differs from a deemed distribution arising when a participant defaults on a plan loan before having a distribution event.) A plan loan offset is considered an actual distribution, including for purposes of the rollover rules. A participant can roll over the offset by paying the outstanding loan balance to the receiving plan or an individual retirement account (IRA) or by rolling over the note to another employer plan that accepts such rollovers (but IRAs can’t accept such notes).

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.

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.

• 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)

• IRS finalizes rule on ‘qualified plan loan offset' rollovers (Jan. 6, 2021)