New Law Allows More Time to Avoid Tax on Defaulted Plan Loans


A loan default occurs when a retirement plan participant with a defaulted plan loan, following severance from employment or the termination of the plan, was subject to an offset against his or her account balance. Prior to 2018, a participant had only 60 days to come up with funds equal to the defaulted loan balance, plus any tax withholding, and roll over those funds to an individual retirement account (IRA) or other qualified plan to avoid paying taxes and penalties on the distribution of the defaulted loan balance.

Beginning in 2018, The Tax Cuts and Jobs Act permits taxpayers to complete the rollover by their tax return due date in the year following the year of the plan loan offset. That means the participant must complete the rollover by April 15 (or October 15, if an extension was filed) of the year after the year the defaulted loan was offset against the participant’s plan account.

For questions or more information, please contact Richard Green at rgreen@windes.com or Therese Cheevers at tcheevers@windes.com, or by phone (844) 252-7337.

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