Case of the Week: Rollover of Loan Offset and 402(f) Notices

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans.

A recent call from an advisor in Illinois is representative of a common inquiry related to the special tax notices required for plan distributions under Internal Revenue Code 402(f). The advisor asked:

“Has the IRS issued an updated model plan distribution notice to reflect the changes related to rollovers of plan loan offset amounts?”

Highlights of Discussion

The IRS periodically issues model plan distribution notices, also referred to as a “special tax notice,” “rollover notice” or the “402(f) notice,” that incorporate any changes to the language as a result of law changes. As of this posting in May 2018, the IRS had not issued updates to its model 402(f) notice to reflect changes in the information as a result of the Tax Cuts and Jobs Act of 2017 (TCJA), effective Jan. 1, 2018. The last model notice was issued in 2014 (Notice 2014-74).

Plan sponsors are required to provide up-to-date 402(f) notices to convey important tax information to plan participants and beneficiaries who have hit a distribution trigger under a qualified plan and may receive a payout that would be eligible for rollover. A 402(f) notice, in part, explains the rollover rules and describes the effects of rolling — or not rolling — an eligible rollover distribution to an IRA or another plan, including the automatic 20% federal tax withholding that the plan administrator must apply to an eligible rollover distribution that is not directly rolled over.

Plan administrators must provide the 402(f) notice to plan participants no less than 30 days and no more than 180 days before the distribution is processed. A participant may waive the 30-day period and complete the rollover sooner.

A plan may provide that if a loan is not repaid (in default), the participant’s account balance is reduced, or “offset,” by the unpaid portion of the loan. The value of the loan offset is treated as an actual distribution for rollover purposes and, therefore, may be eligible for a rollover. In most cases, participants (or beneficiaries) who experience a loan offset can roll over an amount that equals the offset to an eligible retirement plan. Instead of the usual 60-day rollover deadline, effective Jan. 1, 2018, as a result of the TCJA, if the plan loan offset is due to plan termination or severance from employment, then participants have until the due date, including extensions, for filing their federal income tax returns for the year in which the offset occurs to complete a tax-free rollover.

Conclusion

Even though the IRS has not updated its model 402(f) notice to reflect the extended rollover period for certain loan offsets as a result of the TCJA, plan sponsors and administrators must ensure the distribution paperwork and 402(f) notices that they are currently using include language that reflects the new rollover timeframe. For those that rely on plan document providers, ask if the new 402(f) notice is available.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2018, Retirement Learning Center, LLC. Used with permission.

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