If a participant has outstanding loan taken from the Plan at the time of distribution, it is typical for their plan benefit to be offset by the amount of the loan. The loan offset amount is treated as a distribution to the participant at the time of the offset and will be taxed (including the 10% additional income tax on early distributions, unless an exception applies). In order to avoid this offset, and the related tax, once a distribution has occurred, a participant can roll over the amount of the loan offset to an IRA/Roth IRA or employer plan/designated Roth account in an employer account.
The tax bill passed earlier this year made a minor but important change to the loan offset provisions. Specifically, if a loan offset occurs due to a participant’s termination of employment (or due to the termination of the Plan), they now have until the due date of their Federal individual income tax return (including extensions) for the year in which the plan offsets the loan to rollover the loan offset. Prior to the passage of the bill, the participant would have had 60 days.
This change requires no action on your part. This change has been included in the Special Tax Notice and Notice of Withholding that is included in a terminated participant’s distribution package.