What Happens To A Loan Against A Qualified Retirement Plan When The Plan Or Employment Is Terminated?

This blog provides an overview of potential financial and tax options or consequences to a participant of a qualified retirement plan when the participant has an outstanding qualified plan loan from the account when the plan or employment terminates.

Plan Loan Offset, Generally. A plan loan offset occurs when, pursuant to the plan loan terms, a participant’s benefit is reduced to repay the qualified plan loan.  The terms governing the plan loan to a participating employee may provide that, upon termination of the plan, employee’s account balance is automatically offset by the amount of any unpaid loan balance to repay the outstanding loan. “[T]he term ‘plan loan offset amount’ means the amount by which the participant’s accrued benefit under the plan is reduced in order to repay a loan from the plan.” See 26 U.S.C. § 402(c)(2)(C)(iii).

Tax Cuts and Jobs Act of 2017 (eff. Jan. 6, 2021). These final regulations (26 C.F.R. § 1.402(c)-3) extended the deadline to repay a qualified plan loan offset when an employee’s employment is terminated or if the plan terminates. Previously, there was generally a 60-day window to pay the outstanding balance. The Treasury Regulations extend that time frame until the due date of the employee’s federal income tax return, including filing extensions, but a 60-day period still exists for plan offsets that is not a qualified plan loan offset amount.

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