Don’t Let Participants Be Surprised by a Plan Loan Offset

It’s a common scenario—a participant takes a loan in a 401(k) plan, then leaves that employer, rolls the plan account to an IRA, and is subsequently surprised when their Form 1099-R arrives showing the plan loan as a taxable distribution. This is because a plan loan offset (PLO) occurred. A PLO occurs when a participant's benefit is reduced to repay an outstanding plan loan upon the participant’s permissible distribution event—like severance from employment. Can this be avoided? Sometimes plans permit former employees to continue loan repayments, often implementing electronic repayments. If not, and the participant rolls over their account to an IRA or receives a plan distribution, the participant generally has until the participant's tax filing due date (including extensions) for the taxable year in which the offset occurs to roll over cash (or other property) to the IRA up to the amount of the PLO, to avoid taxation on the PLO. Otherwise, taxation, maybe even imposition of the 10% penalty, can occur. The IRS recently issued a snapshot that addresses compliance concerns related to PLOs so participants (and plan sponsors) can see what to expect.

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Related Content

• Plan Loan Rules for Qualified Retirement Plans Learn more about the plan loan rules. Did you know that DOL rules provide that plan loans must be available to all participants on a “reasonably equivalent basis”? Plans can restrict the availability of loans to particular purposes, such as hardship. Few plans do. Where a restriction exists, it must be consistent with the interest of participants and cannot operate in a way that makes loans unavailable to large numbers of participants. Plan Loan Resource Kit Reference this resource kit for additional Practical Guidance resources regarding plan loans.

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