Deemed Distributions from Retirement Plan Loans

Individual clients that are on extension for the 2018 personal income tax returns have until the extended due date, October 15, 2019, to roll over amounts related to outstanding loans from a retirement plan that were treated as deemed distributions if they left their employment during 2018.

As discussed in our post on March 28, 2019, the Tax Cuts and Jobs Act changed the rules for deemed distributions of loans from employer-sponsored retirement plans when an employee leaves employment.  (See page 57 of the M+O=CPE Individual Tax Year-End Workshop Reference Book Tax Year 2018 for a discussion of these provisions.)

The outstanding loan amount is treated as a deemed distribution, unless the former employee contributes the outstanding loan amount to a different qualified plan, including a traditional IRA.  Such a contribution is treated as a rollover of the deemed distribution to a different qualified plan.  If the employee does not make this rollover contribution of the loan amount to a different qualified plan or IRA, the deemed distribution is taxable, and it is often subject to the 10% early-distribution penalty.

Prior to the 2018 tax year, employees had 60 days from the date of the end of their employment to make the rollover contribution.  However, effective in 2018, the rollover contribution must occur by the due date, including extensions, for the tax return that covers the year in which the deemed distribution occurs.

Going forward, practitioners can also keep this new rule in mind for their clients that have deemed distributions in the future — advising them about the additional time that they now have to make a rollover of such amounts.