[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Proposed Rules]
[Pages 66233-66237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30874]
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DEPARTMENT OF THE TREASURY
26 CFR Part 1
[EE-106-82]
RIN 1545-AE45
Loans to plan participants
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed Income Tax Regulations under
section 72(p) of the Internal Revenue Code relating to loans made from
a qualified employer plan to plan participants or beneficiaries.
Section 72(p) was added by section 236 of the Tax Equity and Fiscal
Responsibility Act of 1982, and amended by the Technical Corrections
Act of 1982, the Deficit Reduction Act of 1984, the Tax Reform Act of
1986 and the Technical and Miscellaneous Revenue Act of 1988. These
regulations provide guidance to the public with respect to this
provision, and affect any plan participant or beneficiary who receives
a loan from a qualified employer plan.
DATES: Written comments and requests for a public hearing must be
received by March 20, 1996.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (EE-106-82), Attention:
Plan Loans Guidance, room 5228, Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044. In the alternative, submissions
may be hand delivered between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (EE-106-82), Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Vernon S. Carter, of the Office of the
Associate Chief Counsel (Employee Benefits and Exempt Organizations),
IRS, at (202) 622-6070 (not a toll free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR Part 1) under section 72 of the Internal Revenue
Code of 1986 (Code). These amendments are proposed to conform the
regulations to section 236 of the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA), which added section 72(p) to the Code, and to the
amendments to section 72(p) made by the Technical Corrections Act of
1982, the Deficit Reduction Act of 1984, the Tax Reform Act of 1986 and
the Technical and Miscellaneous Revenue Act of 1988.
Explanation of Provisions
Section 72(p) of the Code generally provides that an amount
received as a loan from a qualified employer plan by a participant or
beneficiary is treated as received as a distribution from the plan for
purposes of section 72 (a deemed distribution), except to the extent
certain conditions are satisfied. For purposes of section 72, a
qualified employer plan includes a plan that qualifies under section
401 (relating to qualified trusts), 403(a) (relating to qualified
annuities) or 403(b) (relating to tax sheltered annuities), as well as
a plan (whether or not qualified) maintained by the United States, a
State or a political subdivision thereof, or an agency or
instrumentality thereof. A qualified employer plan also includes a plan
which was (or was determined to be) a qualified plan or a government
plan. A loan from a contract purchased under a qualified employer plan
is also treated as a loan from the plan. Section 72(p) also provides
that an assignment or pledge of (or an agreement to assign or pledge)
any portion of a participant's or beneficiary's interest in a qualified
employer plan is to be treated as a loan from the plan.
Under section 72(p), a loan from a qualified employer plan to a
participant or beneficiary is not treated as a distribution from the
plan if the loan satisfies certain requirements relating to the terms
of the loan and the repayment schedule, and to the extent the loan
satisfies certain limitations on the amount loaned. The proposed
regulations require that the loan be evidenced by an enforceable
agreement, set forth in writing or in another form that is approved by
the Commissioner of Internal Revenue, that includes terms that satisfy
the statutory requirements. Thus, the agreement must specify the amount
of the loan, the term of the loan, and the repayment schedule. The
agreement may be set forth in more than one document.
If a loan fails to satisfy the repayment requirements or the
enforceable agreement requirement, the proposed regulations provide for
the balance then due under the loan to be treated as a distribution
from the plan. This may occur at the time the loan is made or at a
later date if the loan is not repaid in accordance with the repayment
schedule. If the loan satisfies the repayment requirements and the
enforceable agreement requirement, but at the time the loan is made the
amount of the loan exceeds the statutory limitation on the amount that
is permitted to be loaned, the proposed regulations provide that only
the excess amount is a deemed distribution.
One of the repayment requirements is that the loan be repaid within
five years, unless the loan is used to acquire a dwelling unit which
within a reasonable time is used as the principal residence of the
participant. The proposed regulations provide that a principal
residence has the same meaning as under section 1034 (relating to the
taxation of a sale of a residence) and that tracing rules established
under section 163(h)(3)(B) (relating to interest deductions for
indebtedness incurred with respect to the acquisition of a principal
residence) will be used to determine whether the section
72(p)(2)(B)(ii) exception to the five-year repayment requirement
applies. (Notice 88-74 (1988-2 C.B. 385), sets forth certain standards
applicable under section 163(h)(3).)
The Tax Reform Act of 1986 amended section 72(p) to require that,
in order for a loan to not be treated as a distribution, the loan must
be repaid in substantially level installments (not less frequently than
quarterly) over the term of the loan. Section 72(p) authorizes
regulations to allow exceptions from this requirement. Pursuant to this
authorization, the proposed regulations permit loan repayments to be
suspended during a leave of absence of up to one year, if the
participant's pay from the employer is insufficient to service the
debt, but only if the loan is repaid by the latest date permitted under
section 72(p)(2)(B).
If the repayment terms of a loan are not satisfied after the loan
has been made due to a failure to make a scheduled loan repayment, the
proposed regulations provide for the balance then due under the loan to
be deemed to be distributed. The proposed regulations permit a grace
period, to the extent the grace period does not extend beyond the end
of the calendar quarter next following the calendar quarter in which
the repayment was scheduled to be made.
If a loan is treated as a distribution under section 72(p), the
proposed regulations state that the amount so distributed is to be
treated as a taxable distribution, subject to the normal rules of
section 72 if the participant's interest in the plan includes after-tax
contributions (or other tax basis). A deemed distribution would also be
a distribution for purposes of the 10
[[Page 66234]]
percent tax in section 72(t) and the excise tax on excess distributions
under section 4980A. However, a deemed distribution under section 72(p)
is not treated as an actual distribution for purposes of the
qualification requirements of section 401, the rollover and income
averaging provisions of section 402 and the distribution restrictions
of section 403(b).
By contrast, if a participant's accrued benefit is reduced (offset)
in order to repay a loan, an actual distribution occurs for purposes of
the provisions in sections 401, 402 and 403(b) referred to above. Thus,
for example, a plan is prohibited from enforcing its security interest
in a participant's account balance attributable to amounts contributed
pursuant to an election under section 401(k) until a date on which
distribution is permitted under section 401(k).
The proposed regulations do not address all issues arising under
section 72(p). Comments are requested on whether further guidance
should be provided on issues that are not addressed and how the issues
should be resolved, including the effect of a deemed distribution on
the tax treatment of subsequent distributions from the plan and the
application of the $50,000 limitation and the five year repayment
requirement to a refinancing and to multiple loan arrangements.
Taxpayers may rely on these proposed regulations for guidance
pending the issuance of final regulations. If, and to the extent,
future guidance is more restrictive than the guidance in these proposed
regulations, the future guidance will be applied without retroactive
effect.
Special Analysis
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f), this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Request for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the following
address: CC:DOM:CORP:R (EE-106-82), Attention: Plan Loans Guidance,
room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. All comments will be available for public
inspection and copying. A public hearing may be scheduled if requested
in writing by any person that timely submits written comments. If a
public hearing is scheduled, notice of the date, time, and place for
the hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Vernon S.
Carter, Office of the Associate Chief Counsel (Employee Benefits and
Exempt Organizations). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.72-17A is amended as follows:
1. Paragraphs (d)(1), (d)(2) and (d)(3) are redesignated as
paragraphs (d)(2), (d)(3) and (d)(4), respectively.
2. New paragraph (d)(1) is added to read as follows:
Sec. 1.72-17A Special rules applicable to employee annuities and
distributions under deferred compensation plans to self-employed
individuals and owner-employees.
* * * * *
(d) * * * (1) The references in this paragraph (d) to section
72(m)(4) are to that section as in effect on August 13, 1982. Section
236(b)(1) of the Tax Equity and Fiscal Responsibility Act of 1982
repealed section 72(m)(4), generally effective for assignments, pledges
and loans made after August 13, 1982, and added section 72(p). See
section 72(p) and Sec. 1.72(p)-1 for rules governing the income tax
treatment of certain assignments, pledges and loans from qualified
employer plans made after August 13, 1982.
* * * * *
Par. 3. Section 1.72(p)-1 is added to read as follows:
Sec. 1.72(p)-1 Loans treated as distributions.
The questions and answers in this section provide guidance under
section 72(p) pertaining to loans from qualified employer plans
(including government plans and tax-sheltered annuities and employer
plans that were formerly qualified). The examples included in the
questions and answers in this section are based on the assumption that
a bona fide loan is made to a participant from a qualified defined
contribution plan pursuant to an enforceable agreement (in accordance
with Q&A-3(b) of this section), with adequate security and with an
interest rate and repayment terms that are commercially reasonable.
(The particular interest rate used for illustration in this section is
8.75 percent compounded annually.) In addition, unless the contrary is
specified, it is assumed in the examples that the amount of the loan
does not exceed 50 percent of the participant's nonforfeitable account
balance, the participant has no other outstanding loan (and had no
prior loan) from the plan or any other plan maintained by the
participant's employer or any other person required to be aggregated
with the employer under section 414(b), (c) or (m), and the loan is not
excluded from section 72(p) as a loan made in the ordinary course of an
investment program as described in Q&A-18 of this section. No inference
should be drawn from these regulations or the examples therein that a
loan would not result in a prohibited transaction under section 4975 or
would be consistent with the fiduciary standards of Title I of the
Employee Retirement Income Security Act of 1974, as amended. See, for
example, 29 CFR Sec. 2550.408b-1 (interpreting the statutory prohibited
transaction exemption for loans to participants and beneficiaries).
Questions and Answers
Q-1: In general, what does section 72(p) provide with respect to
loans from a qualified employer plan?
A-1: (a) Loans. Under section 72(p), an amount received by a
participant or beneficiary as a loan from a qualified employer plan is
treated as having been received as a distribution from the plan (a
deemed distribution), unless the loan satisfies the requirements of
Q&A-3 of this section. For purposes of section 72(p), a loan made from
a contract that has been purchased under a qualified employer plan
(including a contract that
[[Page 66235]]
has been distributed to the participant or beneficiary) shall be
considered a loan made under a qualified employer plan.
(b) Pledges and assignments. Under section 72(p), if a participant
or beneficiary assigns or pledges (or agrees to assign or pledge) any
portion of his or her interest in a qualified employer plan as security
for a loan, the portion of the individual's interest assigned or
pledged (or subject to an agreement to assign or pledge) is treated as
a loan from the plan to the individual, with the result that such
portion is subject to the deemed distribution rule described in
paragraph (a) of this Q&A-1. For purposes of section 72(p), any
assignment or pledge of (or agreement to assign or to pledge) by a
participant or beneficiary of any portion of his or her interest in a
contract that has been purchased under a qualified employer plan
(including a contract that has been distributed) shall be considered an
assignment or pledge of (or agreement to assign or pledge) an interest
in a qualified employer plan. However, if all or a portion of a
participant's or beneficiary's interest in a qualified employer plan is
pledged or assigned as security for a loan from the plan to the
participant or the beneficiary, only the amount of the loan received by
the participant or the beneficiary, not the amount pledged or assigned,
is treated as a loan.
Q-2: What is a qualified employer plan for purposes of section
72(p)?
A-2: For purposes of section 72(p), a qualified employer plan
means--
(a) A plan described in section 401(a) which includes a trust
exempt from tax under section 501(a);
(b) An annuity plan described in section 403(a);
(c) A plan under which amounts are contributed by an individual's
employer for an annuity contract described in section 403(b);
(d) Any plan, whether or not qualified, established and maintained
for its employees by the United States, by a State or political
subdivision thereof, or by an agency or instrumentality of the United
States, a State or a political subdivision of a State; or
(e) Any plan which was (or was determined to be) described in
paragraph (a), (b), (c), or (d) of this Q&A-2.
Q-3: What requirements must be satisfied in order for a loan to a
participant or beneficiary from a qualified employer plan not to be a
deemed distribution?
A-3: (a) In general. A loan to a participant or beneficiary from a
qualified employer plan will not be a deemed distribution to the
participant or beneficiary if the loan satisfies the repayment term
requirement of section 72(p)(2)(B), the level amortization requirement
of section 72(p)(2)(C), and the enforceable agreement requirement of
paragraph (b) of this Q&A-3, but only to the extent the loan satisfies
the amount limitations of section 72(p)(2)(A).
(b) Enforceable agreement requirement. A loan does not satisfy the
requirements of this paragraph unless the loan is evidenced by a
legally enforceable agreement (which may include more than one
document) set forth in writing or in such other form as may be approved
by the Commissioner, and the terms of the agreement demonstrate
compliance with the requirements of section 72(p)(2) and this section.
Thus, the agreement must specify the amount of the loan, the term of
the loan, and the repayment schedule.
Q-4: If a loan from a qualified employer plan to a participant or
beneficiary fails to satisfy the requirements of Q&A-3 of this section,
when does a deemed distribution occur?
A-4: (a) Deemed distribution. For purposes of section 72, a deemed
distribution occurs at the first time that the requirements of Q&A-3 of
this section are not satisfied, in form or in operation, with respect
to that amount. This may occur at the time the loan is made or at a
later date. If the terms of the loan do not require repayments that
satisfy the repayment term requirement of section 72(p)(2)(B) or the
level amortization requirement of section 72(p)(2)(C), or the loan is
not evidenced by an enforceable agreement satisfying the requirements
of Q&A-3(b) of this section, the entire amount of the loan is a deemed
distribution under section 72(p) at the time the loan is made. If the
loan satisfies the requirements of Q&A-3 of this section except that
the amount loaned exceeds the limitations of 72(p)(2)(A), the amount of
the loan in excess of the applicable limitation is a deemed
distribution under section 72(p) at the time the loan is made. If the
loan initially satisfies the requirements of section 72(p)(2)(A), (B)
and (C) and the enforceable agreement requirement of Q&A-3(b) of this
section, but payments are not made in accordance with the terms
applicable to the loan, a deemed distribution occurs as a result of the
failure to make such payments. See Q&A-10 of this section regarding
when such a deemed distribution occurs and the amount thereof and Q&A-
11 of this section regarding the tax treatment of a deemed
distribution.
(b) Examples. The following examples illustrate the rules in
paragraph (a) of this Q&A-4 and are based upon the assumptions
described in ASSUMPTIONS FOR EXAMPLES:
Example 1. (a) A participant has a nonforfeitable account balance
of $200,000 and receives $70,000 as a loan repayable in level quarterly
installments over five years.
(b) Under section 72(p), the participant has a deemed distribution
of $20,000 (the excess of $70,000 over $50,000) at the time of the
loan, because the loan exceeds the $50,000 limit in section
72(p)(2)(A)(i). The remaining $50,000 is not a deemed distribution.
Example 2. (a) A participant with a nonforfeitable account balance
of $30,000 borrows $20,000 as a loan repayable in level monthly
installments over five years.
(b) Because the amount of the loan is $5,000 more than 50% of the
participant's nonforfeitable account balance, the participant has a
deemed distribution of $5,000 at the time of the loan. The remaining
$15,000 is not a deemed distribution. (Note also that, if the loan is
secured solely by the participant's account balance, the loan may be a
prohibited transaction under section 4975 because the loan may not
satisfy 29 CFR Sec. 2550.408b-1(f)(2)).
Example 3. (a) The nonforfeitable account balance of a participant
is $100,000 and a $50,000 loan is made to the participant repayable in
level quarterly installments over seven years. The loan is not eligible
for the section 72(p)(2)(B)(ii) exception for loans used to acquire
certain dwelling units.
(b) Because the repayment period exceeds the maximum five-year
period in section 72(p)(2)(B)(i), the participant has a deemed
distribution of $50,000 at the time the loan is made.
Example 4. (a) On August 1, 1998, a participant has a
nonforfeitable account balance of $45,000 and borrows $20,000 from a
plan to be repaid over five years in level monthly installments due at
the end of each month. After making monthly payments through July 1999,
the participant fails to make any of the payments due thereafter.
(b) As a result of the failure to satisfy the requirement that the
loan be repaid in level monthly installments, the participant has a
deemed distribution. See Q&A-10(c) Example of this section regarding
when such a deemed distribution occurs and the amount thereof.
Q-5: What is a principal residence for purposes of the exception in
section 72(p)(2)(B)(ii) from the requirement that a loan be repaid in
five years?
[[Page 66236]]
A-5: Section 72(p)(2)(B)(ii) provides that the requirement in
section 72(p)(2)(B)(i) that a plan loan be repaid within five years
does not apply to a loan used to acquire a dwelling unit which will
within a reasonable time be used as the principal residence of the
participant (a principal residence plan loan). For this purpose, a
principal residence has the same meaning as a principal residence under
section 1034.
Q-6: In order to satisfy the requirements for a principal residence
plan loan, is a loan required to be secured by the dwelling unit that
will within a reasonable time be used as the principal residence of the
participant?
A-6: A loan is not required to be secured by the dwelling unit that
will within a reasonable time be used as the participant's principal
residence in order to satisfy the requirements for a principal
residence plan loan.
Q-7: What tracing rules apply in determining whether a loan
qualifies as a principal residence plan loan?
A-7: The tracing rules established under section 163(h)(3)(B) apply
in determining whether a loan is treated as for the acquisition of a
principal residence in order to qualify as a principal residence plan
loan.
Q-8: Can a refinancing qualify as a principal residence plan loan?
A-8: (a) Refinancings. In general, no. However, a loan from a
qualified employer plan used to repay a loan from a third party will
qualify as a principal residence plan loan if the plan loan qualifies
as a principal residence plan loan without regard to the loan from the
third party.
(b) Example. The following example illustrates the rules in
paragraph (a) of this Q&A-8 and is based upon the assumptions described
in ASSUMPTIONS FOR EXAMPLES:
Example. (a) On July 1, 1999, a participant requests a $50,000 plan
loan to be repaid in level monthly installments over 15 years. On
August 1, 1999, the participant acquires a principal residence and pays
a portion of the purchase price with a $50,000 bank loan. On September
1, 1999, the plan loans $50,000 to the participant, which the
participant uses to pay the bank loan.
(b) Because the plan loan satisfies the requirements to qualify as
a principal residence plan loan (taking into account the tracing rules
of section 163(h)(3)(B)), such plan loan qualifies for the exception in
section 72(p)(2)(B)(ii).
Q-9: Does the level amortization requirement of section 72(p)(2)(C)
apply when a participant is on a leave of absence without pay?
A-9: (a) Leave of absence. The level amortization requirement of
section 72(p)(2)(C) does not apply for a period, not longer than one
year, that a participant is on a leave of absence, either without pay
from the employer or at a rate of pay (after income and employment tax
withholding) that is less than the amount of the installment payments
required under the terms of the loan. However, the loan must be repaid
by the latest date permitted under section 72(p)(2)(B) and the
installments due after the leave ends (or, if earlier, after the first
year of the leave) must not be less than those required under the terms
of the original loan.
(b) Example. The following example illustrates the rules of
paragraph (a) of this Q&A-9 and is based upon the assumptions described
in ASSUMPTIONS FOR EXAMPLES:
Example. (a) On July 1, 1997, a participant with a nonforfeitable
account balance of $80,000, borrows $40,000 to be repaid in level
monthly installments of $825 each over five years. The loan is not a
principal residence plan loan. The participant makes nine monthly
payments and commences an unpaid leave of absence that lasts for 12
months. Thereafter, the participant resumes active employment and
resumes making repayments on the loan until the loan is repaid. The
amount of each monthly installment is increased to $1,130 in order to
repay the loan by June 30, 2002.
(b) Because the loan satisfies the requirements of section
72(p)(2), the participant does not have a deemed distribution.
Alternatively, section 72(p)(2) would be satisfied if the participant
continued the monthly installments of $825 after resuming active
employment and on June 30, 2002 repaid the full balance remaining due.
Q-10: If a participant fails to make the installment payments
required under the terms of a loan that satisfied the requirements of
Q&A-3 of this section when made, when does a deemed distribution occur
and what is the amount of the deemed distribution?
A-10: (a) Timing of deemed distribution. Failure to make any
installment payment when due in accordance with the terms of the loan
violates section 72(p)(2)(C) and, accordingly, results in a deemed
distribution at the time of such failure. However, the plan
administrator may allow a grace period, and section 72(p)(2)(C) will
not be considered to have been violated until the last day of the grace
period. Any such grace period shall be given effect for purposes of
section 72(p)(2)(C) only to the extent it does not continue beyond the
last day of the calendar quarter following the calendar quarter in
which the required installment payment was due.
(b) Amount of deemed distribution. If a loan satisfies Q&A-3 of
this section when made, but there is a failure to pay the installment
payments required under the terms of the loan (taking into account any
grace period allowed under the preceding paragraph (a) of this Q&A-10),
then the amount of the deemed distribution equals the entire
outstanding balance of the loan at the time of such failure.
(c) Example. The following example illustrates the rules in Q&A-
10(a) and (b) of this section and is based upon the assumptions
described in ASSUMPTIONS FOR EXAMPLES:
Example. (1) On August 1, 1998, a participant has a nonforfeitable
account balance of $45,000 and borrows $20,000 from a plan to be repaid
over five years in level monthly installments due at the end of each
month. After making all monthly payments due through July 31, 1999, the
participant fails to make the payment due on August 31, 1999 or any
other monthly payments due thereafter. The plan administrator allows a
three-month grace period.
(2) As a result of the failure to satisfy the requirement that the
loan be repaid in level installments pursuant to section 72(p)(2)(C),
the participant has a deemed distribution on November 30, 1999, which
is the last day of the three-month grace period for the August 31, 1999
installment. The amount of the deemed distribution is $17,157, which is
the outstanding balance on the loan at November 30, 1999.
Alternatively, if the plan administrator had allowed a grace period
through the end of the next calendar quarter, there would be a deemed
distribution on December 31, 1999 equal to $17,282, which is the
outstanding balance of the loan at December 31, 1999.
Q-11: Do sections 72 and 4980A apply to a deemed distribution as if
it were an actual distribution?
A-11: (a) Tax Basis. If the employee's account includes after-tax
contributions or other investment in the contract under section 72(e),
section 72 applies to a deemed distribution as if it were an actual
distribution, with the result that all or a portion of the deemed
distribution may not be taxable.
(b) Sections 72(t) and (m). Section 72(t) (which imposes a 10
percent tax on certain early distributions) and section 72(m)(5) (which
imposes a separate 10 percent tax on certain amounts received by a 5-
percent owner) apply to a deemed distribution under section 72(p)
[[Page 66237]]
in the same manner as if the deemed distribution were an actual
distribution.
(c) Section 4980A. For purposes of section 4980A, a deemed
distribution under section 72(p) is taken into account in determining
an individual's excess distributions, as provided in Sec. 54.4981A-1T,
Q&A a-8.
Q-12: Is a deemed distribution under section 72(p) treated as an
actual distribution for purposes of the qualification requirements of
section 401, the distribution provisions of section 402, or the
distribution restrictions of section 401(k)(2)(B) or 403(b)(11)?
A-12: No. Thus, for example, if a participant in a money purchase
plan who is an active employee has a deemed distribution under section
72(p), the plan will not be considered to have made an in-service
distribution to the participant in violation of the qualification
requirements applicable to money purchase plans. Similarly, the deemed
distribution is not eligible to be rolled over to an eligible
retirement plan and the participant is not eligible to elect income
averaging with respect to the deemed distribution. See also
Secs. 1.402(c)-2, Q&A-4(d) and Sec. 1.401(k)-1(d)(6)(ii).
Q-13: How does a reduction (offset) of an account balance in order
to repay a plan loan differ from a deemed distribution?
A-13: (a) Difference between deemed distribution and plan loan
offset amount. (1) Loans to a participant from a qualified employer
plan can give rise to two types of taxable distributions--
(i) A deemed distribution pursuant to section 72(p); and
(ii) A distribution of an offset amount.
(2) As described in Q&A-4 of this section, a deemed distribution
occurs when the requirements of Q&A-3 of this section are not
satisfied, either when the loan is made or at a later time. A deemed
distribution is treated as a distribution to the participant or
beneficiary only for certain tax purposes and is not a distribution of
the accrued benefit. A distribution of a plan loan offset amount (as
defined in Sec. 1.402(c)-2, Q&A-9(b)) occurs when, under the terms
governing a plan loan, the accrued benefit of the participant or
beneficiary is reduced (offset) in order to repay the loan (including
the enforcement of the plan's security interest in the accrued
benefit). A distribution of a plan loan offset amount could occur in a
variety of circumstances, such as where the terms governing the plan
loan require that, in the event of the participant's request for a
distribution, a loan be repaid immediately or treated as in default.
(b) Plan loan offset. In the event of a plan loan offset, the
amount of the account balance that is offset against the loan is an
actual distribution for purposes of the Internal Revenue Code, not a
deemed distribution under section 72(p). Accordingly, a plan may be
prohibited from making such an offset under the provisions of section
401(a), 401(k)(2)(B) or 403(b)(11) prohibiting or limiting
distributions to an active employee. See Sec. 1.402(c)-2, Q&A-9(c)
Example 6.
Q-14: How is the amount includible in income as a result of a
deemed distribution under section 72(p) required to be reported?
A-14: The amount includible in income as a result of a deemed
distribution under section 72(p) is required to be reported on Form
1099-R (or any other form prescribed by the Commissioner).
Q-15: What withholding rules apply to plan loans?
A-15: To the extent that a loan, when made, is a deemed
distribution or an account balance is reduced (offset) to repay a loan,
the amount includible in income is subject to withholding. If a deemed
distribution of a loan or a loan repayment by benefit offset results in
income at a date after the date the loan is made, withholding is
required only if a transfer of cash or property (excluding employer
securities) is made to the participant or beneficiary from the plan at
the same time. See Secs. 35.3405-1(f)(4) and 31.3405(c)-1, Q&A-9 and
Q&A-11 of this chapter for further guidance on withholding rules.
Q-16: If a loan fails to satisfy the requirements of Q&A-3 of this
section and is a prohibited transaction under section 4975, is the
deemed distribution of the loan under section 72(p) a correction of the
prohibited transaction?
A-16: A deemed distribution is not a correction of a prohibited
transaction under section 4975. See Secs. 141.4975-13 and 53.4941(e)-
1(c)(1) of this chapter for guidance concerning correction of a
prohibited transaction.
Q-17: What are the income tax consequences if an amount is
transferred from a qualified employer plan to a participant or
beneficiary as a loan, but there is an express or tacit understanding
that the loan will not be repaid?
A-17: If there is an express or tacit understanding that the loan
will not be repaid, or, for any reason, the transaction does not create
a debtor-creditor relationship, then the amount transferred is treated
as an actual distribution from the plan for purposes of the Internal
Revenue Code, and is not treated as a loan or as a deemed distribution
under section 72(p).
Q-18: If a qualified employer plan maintains a program to invest in
residential mortgages, are loans made pursuant to the investment
program subject to section 72(p)?
A-18: Residential mortgage loans made by a plan in the ordinary
course of an investment program are not subject to section 72(p) if the
property acquired with the loans is the primary security for such loans
and the amount loaned does not exceed the fair market value of the
property. An investment program exists only if the plan has
established, in advance of a specific investment under the program,
that a certain percentage or amount of plan assets will be invested in
residential mortgages available to persons purchasing the property who
satisfy commercially customary financial criteria. Loans will not be
considered as made under an investment program if the loans are only
made available to, or any loan is earmarked for, any person or persons
who are participants or beneficiaries in the plan, or if such loans
mature upon a participant's termination from employment. In addition,
no loan that benefits an officer, director, or owner of the employer
maintaining the plan, or his or her beneficiaries, will be treated as
made under an investment program. No inference should be drawn that a
transaction under such an investment program is not a prohibited
transaction under section 503 or 4975 or is not a violation of the
applicable fiduciary standards for an employee benefit plan, so that
such a loan could be a prohibited transaction if it does not satisfy
the requirements of 29 CFR 2550.408b-1.
Q-19: When is the effective date of these regulations?
A-19: This section applies to assignments, pledges, and loans made
on or after the date that is three months after the date of publication
of the final regulations in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-30874 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U
