United States: Tax Reform's Impact On 401(k) Plan Loan Offset Treatment

Last Updated: February 23 2018
Article by Victoria H. Zerjav

Victoria Zerjav is a Partner in the New York office and a Partner in the Stamford office

Actions for Plan Administrators and Human Resources Benefits Managers


  • The recent Tax Cuts and Jobs Act of 2017 (the Act), enacted on Dec. 22, 2017, contains a few rules that will impact benefit administrators.
  • This client alert focuses on changes made to the tax treatment of plan loan offset amounts.
  • Plan administrators and HR benefits managers need to address questions from plan participants (particularly those with current loans or those planning on taking loans in the future) and provide up-to-date materials on the tax impact of failing to timely repay loans.

Everyone is trying to comprehend just how the recent Tax Cuts and Jobs Act of 2017 (the Act), enacted on Dec. 22, 2017, will impact them. The Act contains a few rules that will impact benefit administrators (and many that impact executive compensation and payroll), but this client alert focuses on retirement plan administrators' and HR benefits managers' obligations relating to plan loan offset amounts.

The Background

Section 13613 of the Act revised Section 402(c) of the Internal Revenue Code (Code) to, in effect, extend the date by which an individual must repay funds to his or her account in a qualified plan to avoid the imposition of a 10 percent excise tax on the early distribution of plan funds. The new provision will generally have very limited application – only to the situation where an employee had a qualified plan loan that was outstanding at the time of termination of employment or plan termination and the employee rolled the value of his or her qualified plan account (including the loan) into an eligible retirement plan (generally another qualified plan or an IRA) and the plan loan was taxable as a loan offset.

Generally, should an employee terminate employment and request a distribution of his or her plan account at a time that a plan loan is outstanding (or otherwise be entitled to a distribution of his or her qualified plan account) and a loan remains outstanding at the time of distribution, then the loan will become immediately due and, if not repaid to the employee's plan account (that is, by the employee), then the loan is canceled and the account balance is "offset" by the unpaid portion of the loan. As a loan offset, the amount is treated as an actual distribution and may be eligible for a tax-free rollover if rolled over (in a direct rollover or in the form of a contribution during the "required timeframe") to an eligible retirement plan or IRA. The change made in the Act amends the "required timeframe" for the rollover from 60 days following the receipt of the plan distribution to the due date (including extensions) for filing the tax return of the employee for the year in which the loan is treated as distributed. This new rule applies to amounts treated as distributed in tax years starting after Dec. 31, 2017. Both deemed distributions and plan loan offsets must still be reported on a Form 1099-R.

There is a difference between a plan loan offset, as described above, and a deemed distribution under Section 72(b) of the Code. For example, if an employee as described in the preceding paragraph fails to repay his or her loan in accordance with the loan documents and Code requirements, then the loan may become a "deemed distribution" (which is not an actual distribution) and is subject to regular income tax and the 10 percent tax on early distributions. However, the deemed distribution will not be treated under the plan as a loan offset amount unless the employee is receiving a distribution of his account and the loan is still outstanding.

To the extent a qualified plan's terms allow for the repayment of a loan beyond termination (of the plan or an employee's employment, as applicable), the plan may be forcing a deemed distribution treatment of unpaid plan amounts earlier than would apply in the plan offset circumstance under the Act unless the plan terms also require a date by which the default and loan offset as repayment would occur (for example, when a plan allows loans to remain outstanding up to 120 days beyond such termination a deemed distribution could be triggered if loan payments are not made timely). It is important that the plan administrator, HR benefits manager and record keeper have an understanding of how these rules apply and that they are accurately and consistently implementing plan terms.

What Does This Mean for Internal Plan Administrators and HR Benefits Managers?

  1. Plan administrators and HR benefits managers should check their plan documents and loan policy and procedure documents to determine whether there are deadline dates that need to be amended to reflect the changes made by the Act. Amendment of these documents may be necessary to address the changes made by the Act.
  2. Plan administrators and HR benefits managers should contact the plan's record keeper to confirm that the actual practice relating to plan offsets and deemed distribution timing reflects the plan administrator's interpretation (and the applicable guiding language in plan documents and administration materials) and that those practices will not be impacted by the new rules. Plan administrators and HR benefits managers should follow up by making any necessary changes to reflect the plan sponsor's intent and the plan administrator's interpretation.
  3. Plan administrators and HR benefits managers should update employee communications (i.e., the tax notice provided in the distribution packet) to reflect the additional time that may be allowed for a participant to repay the loan and still have the repayment treated as a tax-free rollover following a distribution of an offset loan from the plan. If these communications are not managed by the plan administrator, the plan administrator or HR benefits manager should contact the plan's record keeper or other party sending employee communications to update necessary communications.
  4. Plan administrators and HR benefits managers should establish procedures for accepting rolled over amounts into their plans that include loan offset amounts. Because the rules prior to the Act required the timing of contribution amounts following a rollover to match for loan offsets and other amounts, this was not something that previously required independent analysis. Now plan administrators and HR benefits managers will need to have comfort that the amounts contributed in respect of plan loan offsets are eligible rollover contributions when deposited by the employee more than 60 days after receipt of the cash funds that satisfy the requirements of Section 402(c)(3)(C) of the Code.


In short, it is expected that there will be little change to governing plan documents. However, with all the discussions around tax reform, plan administrators and HR benefits managers need to address questions from plan participants (particularly those with current loans or those planning on taking loans in the future) and provide up-to-date materials on the tax impact of failing to timely repay loans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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