A qualified plan loan offset (QPLO) occurs when you have a 401(k) loan in good standing (there has not been a deemed distribution) and the loan has been offset because you either 1) left the employer sponsoring the plan or 2) the plan has terminated. Provided the offset occurs within 1 year of the termination date, you will have a QPLO.
When an offset is a QPLO you will have a longer timeframe to indirectly rollover the offset amount into an IRA or eligible retirement plan. Instead of the normal 60-day deadline, you will have until your tax return due date (plus any requested extension) to complete the rollover.
Please note that when completing a rollover of a QPLO, you will need to make up the money to repay the offset loan amount out of pocket. You will not have the ability to rollover the loan itself and continue to make loan payments.
Example of when a qualified plan loan offset would not apply
Graham is 52 years old and has an outstanding loan balance of $10,000 on which he defaulted. Therefore, the loan was deemed distributed 3 years ago and he received a 1099-R. Because Graham is not eligible to take a distribution from the plan, the loan is still open.
Graham’s employer has decided to terminate the 401(k) plan. As a result, Graham is now eligible to take a distribution from the plan and the loan that was previously deemed distributed will be immediately offset. Because the offset is following a deemed distribution, the amount will not be eligible for rollover. A 1099-R will not be issued for the offset of the loan amount, as an offset following a deemed distribution is not a reportable event. Because the offset is following a deemed distribution Graham does not have a QPLO.
Example of when a qualified plan loan offset would apply
Ryan is 28 years old and decides to leave his employer to take a job at a new company. He has an outstanding loan balance of $10,000, which is in good standing when he leaves employment. Ryan does not repay the loan before the 90 days pass, therefore, his loan is offset. The offset will result in a 1099-R.
Because the loan offset is due to Ryan leaving his employer and the offset occurred within 1 year of his termination date, this offset is a qualified plan loan offset. Ryan will have until his tax return due date (plus any requested extensions) to complete a rollover of up to $10,000 (the outstanding balance). Because the plan loan offset does not result in money being actually distributed from the plan, if Ryan wants to avoid taxation he will need to come up with the money out of pocket for the rollover.