IRS released final settlement on the provisions of the Tax Cuts and Jobs Act (“TCJA”) which added Section 402 (c) (3) of the Internal Revenue Code, effective January 1, 2018, special relief for plan loan compensation qualified (“QPLO”) amounts.
According to our initial blog When changing TCJA, the distribution of plan loan compensation takes place under the terms of a plan when a member’s accrued benefit is reduced (or offset) to repay the loan. The distribution of a plan loan compensatory amount may occur, among other circumstances, when the terms of the plan require that, if the member’s request for a distribution occurs, a loan be repaid immediately or treated as in default. However, the TCJA provisions for QPLOs apply to outstanding accrued loan amounts that are deducted from the member’s plan account. upon termination of the plan or upon or after termination of employment if the plan provides that the accumulated amount of the unpaid loan is to be offset due to such events. Prior to this change in law, the deadline for postponing any plan loan set-off was the 60th day after the date on which the loan set-off occurred. But for QPLO amounts, as of January 1, 2018, the deadline is the deadline for filing (including extensions) of the participant’s tax return for the year in which the loan compensation amount occurs.
The main highlights of the final regulations are as follows:
- No changes have been made to the initially proposed settlement, except that the terms of the final settlement are only to be applied to OLQP amounts that are treated under the settlement as distributed on or after January 1, 2021. This means that form 1099R correctly coded for QPLOs, amounts treated as such under the regulations would not be due until 2022 and subsequent years. Note that this does not change the general effective date of 2018 of the TJCA amendment adding QPLO provisions to the Code.
- The regulations specifically define plan loan compensation arising due to termination of employment as compensation for failure to repay a loan in a timely manner that occurs. no later than the first anniversary of the employee’s termination date.
- Several useful examples are given to illustrate how QPLO rules work under various delivery and refund failure circumstances.