The Tax Cuts and Jobs Act of 2017 (the “Act”), which was enacted on December 22, 2017, extends the time for rolling over the plan offset amount (defined below) from an outstanding plan loan, thereby helping the borrowing participant to avoid adverse tax consequences.
Background. A qualified defined contribution retirement plan (such as a 401(k) plan) often allows a participant to take a loan from his or her individual account under the plan. The loans are repaid through installment payments made at least quarterly. The participant may terminate employment (or the plan may terminate) while there is an outstanding balance on the loan. In such case, the plan may provide the following: The outstanding balance will become immediately due and payable to the plan. Should the participant fail to make the payment, the plan will terminate the loan, and reduce the balance of the participant’s individual account by the amount of the outstanding loan balance. This reduction is called a “plan offset”, and the amount of the reduction is called a “plan offset amount”.
The plan offset amount is taxed to the participant as ordinary income. Further, if the participant is under age 59 and ½, the plan offset amount will be subject to the 10 percent excise tax on the early plan distributions. However, the tax as ordinary income and 10% excise tax can be avoided, if the plan offset amount is rolled over by the participant, within 60 days after the date of the offset by the plan, to an eligible retirement plan (generally a qualified retirement plan or an IRA).