PLR 1224046: IRS waives the 60-day rollover deadline for a plan-loan offset

Plain-English summary

A retirement plan participant asked the IRS to waive the 60-day rollover deadline after a plan loan was treated as in default and offset against the participant's account. The participant relied on statements from the plan administrator indicating that loan payments could be reinstated and did not learn about the offset until after the rollover period had expired. The IRS waived the deadline under IRC § 402(c)(3)(B) and allowed 60 days from the ruling date to contribute the amount to an eligible retirement plan or rollover IRA. The relief was conditioned on satisfying the other rollover requirements.

Ruling snapshot

• Question: Could the participant receive a waiver of the 60-day rollover requirement for a plan-loan offset?
• Outcome: Approved
• Key authorities: IRC § 402; Treas. Reg. §§ 1.402(c)-2 and 1.401(a)(31)-1; Rev. Proc. 2003-16

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

MAR 26 2012
201224046

Uniform Issue List: 402.00-00

T:EP:RA:T1

Legend:
Taxpayer A =
Company B =

Plan C =

Financial Institution D =
Amount 1 =
Amount 2 =

Amount 3 =

Dear

This letter is in response to a request for a letter ruling dated May 27, 2011, as
modified and supplemented by additional correspondence dated September 26,
October 31, and November 3, 2011, from your authorized representative, in
which you request a waiver of the 60-day rollover requirement contained in
section 402(c)(3)(B) of the Internal Revenue Code ("Code"), regarding the
distribution of Amount 2 from Plan C.

The following facts and representations have been submitted under penalty of
perjury in support of the ruling requested.

Taxpayer A, age at the time of distribution of Amount 2 from Plan C, asserts
that his failure to accomplish a rollover within the 60-day period prescribed by
section 402(c)(3) of the Code was due to his reliance on misleading statements

201224046

by the Plan Administrator causing Taxpayer A to believe that his unpaid loan
balance was not in default.

Taxpayer A participated in Plan C, a cash or deferred arrangement under
sections 401(a) and 401(k) of the Code, maintained by Company B. Funds in
Plan C were held by Financial Institution D serving as Trustee and Plan
Administrator of Plan C. Taxpayer A represents that on September 23, , he
borrowed Amount 1 from Plan C. The loan was evidenced by a promissory note
which provided that if the payee should terminate employment and does not pay
his/her loan in full within 90 days, the outstanding balance will be declared in
default, offset against the payee’s Plan account balance, and considered a
distribution subject to applicable taxes and penalties, unless the payee chooses
to continue to have regularly scheduled loan payments automatically withdrawn
from his/her bank account.

On March 23, , Taxpayer A terminated employment with Company B.
Regarding actual default, the promissory note stated that the loan is in default if
the full amount of any payment is not paid by the end of the calendar quarter
immediately following the quarter in which payment was due. The loan default
provision applies to any payment which must include the payment in full within 90
days of termination. Therefore, Taxpayer A understood default could not occur
before September 30, 2009. Taxpayer A represents that the Plan Administrator
had assured him payments could be reinstated by that date.

Taxpayer A intended to continue to repay the loan via automatic withdrawal from
his bank account and had sufficient funds to pay off the loan in full. The Plan
Administrator attempted three times to mail Taxpayer A information about
repaying the loan but none of the mailings were ever received. In August of
2009, Taxpayer A contacted the Plan Administrator. Taxpayer A was informed
that because he did not receive by mail the information about loan repayment
terms, the 90-day period for setting up loan payments would be restarted. The
restart date was not expressly stated. Taxpayer A presumed the restart date
was the day of their conversation. By applying the loan terms regarding default
to the restart date, Taxpayer A understood his new default date was March 31,
2010.

Taxpayer A attempted to make the first loan payment, but the transaction failed
because of a missing account suffix number. He received no additional
instructions regarding how to proceed. Taxpayer A made another call to the Plan
Administrator and was told he still had six weeks to set up automatic monthly
payments between his checking account and the Plan. Beginning on October
15, 2009, automatic monthly withdrawals of Amount 3 from Taxpayer A’s
checking account began to be sent to the Administrator of Plan C as loan
repayments. Taxpayer A understood the loan terms had been modified and that
future monthly payments would continue. However, in 2010, when Taxpayer A
began to prepare his 2009 federal income tax return, he noticed he had received
a Form 1099-R for tax year 2009 showing a taxable distribution of Amount 2.

3 201224046

Taxpayer A immediately contacted the Plan Administrator but was told his 401(k)
Program had disallowed his loan repayment arrangement. In fact, Taxpayer A
was first advised by letter dated March 2, 2011, that on November 11, 2009, his
loan had been declared in default and distributed. A rollover of the loan payoff
balance (Amount 2) could have been made to an eligible retirement plan within
60 days of the date when the plan loan offset occurred. However, due to the
Plan Administrator's misleading statements, Taxpayer A was unaware until
March of 2011, that a plan loan offset had already occurred in his case in
November of 2009, and that the 60-day period to roll over a plan loan offset
amount had expired.

Based on the above facts and representations, you request that the Internal
Revenue Service (“Service”) waive the 60-day rollover requirement contained in
section 402(c)(3)(B) of the Code with respect to the distribution of Amount 2.

Section 402(c) of the Code provides that if any portion of the balance to the credit
of an employee in a qualified trust is paid to the employee in an eligible rollover
distribution, and the distributee transfers any portion of the property received in
such distribution to an eligible retirement plan, and in the case of a distribution of
property other than money, the amount so transferred consists of the property
distributed, then such distribution (to the extent transferred) shall not be
includible in gross income for the taxable year in which paid. Section
402(c)(3)(A) of the Code states that such rollover must be accomplished within
60 days following the day on which the distributee received the property. An
individual retirement account (IRA) constitutes one form of eligible retirement
plan.

Section 402(c)(3)(B) of the Code provides, in relevant part, that the Secretary
may waive the 60-day requirement under section 402(c) of the Code where the
failure to waive such requirement would be against equity or good conscience,
including casualty, disaster, or other events beyond the reasonable control of the
individual subject to such requirement. Only distributions that occurred after
December 31, 2001, are eligible for the waiver under section 402(c)(3)(B) of the
Code.

Section 1.402(c)-2, Question and Answer (Q&A)-9(a), of the Income Tax
Regulations (“Regulations”), provides that a distribution of a plan loan offset
amount, as defined in paragraph (b) of this Q&A, is an eligible rollover distribution
if it satisfies Q&A-3 of this section. Thus, an amount equal to the plan loan offset
amount can be rolled over by the employee (or spousal distributee) to an eligible
retirement plan within the 60-day period under section 402(c)(3), unless the plan
loan offset amount fails to be an eligible rollover distribution for another reason.
See section 1.401(a)(31)-1, Q&A-16 for guidance concerning the offering of a
direct rollover of a plan loan offset amount. See section 31.3405(c)-1, Q&A-11 of
this chapter for guidance concerning special withholding rules with respect to
plan loan offset amount.

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Q&A-9(b) of Regulation section 1.402(c)-2 provides that, for purposes of section
402(c), a distribution of a plan loan offset amount is a distribution that occurs
when, under the plan terms governing a plan loan, the participant's accrued
benefit is reduced (offset) in order to repay the loan (including the enforcement of
the plan's security interest in a participant's accrued benefit). A distribution of a
plan loan offset amount can occur in a variety of circumstances, e.g., where the
terms governing a plan loan require that, in the event of the employee’s
termination of employment or request for a distribution, the loan be repaid
immediately or treated as in default. A distribution of a plan loan offset amount
also occurs when, under the terms governing the plan loan, the loan is cancelled,
accelerated, or treated as if it were in default (e.g., where the plan treats a loan
as in default upon an employee's termination of employment or within a specified
period thereafter). A distribution of a plan loan offset amount is an actual
distribution, not a deemed distribution under section 72(p).

Section 401(a)(31) of the Code provides the rules for governing “direct transfers
of eligible rollover distributions’.

Section 1.401(a)(31) of the Regulations, Question and Answer-15, provides, in
relevant part, that an eligible rollover distribution that is paid to an eligible
retirement plan in a direct rollover is a distribution and rollover, and not a transfer
of assets and liabilities.

Rev. Proc. 2003-16, 2003-4 I.R.B. 359 (January 27, 2003) provides that in
determining whether to grant a waiver of the 60-day rollover requirement
pursuant to sections 408(d)(3)(I) and 402(c)(3)(B) of the Code, the Service will
consider all relevant facts and circumstances, including: (1) errors committed by
a financial institution; (2) inability to complete a rollover due to death, disability,
hospitalization, incarceration, restrictions imposed by a foreign country or postal
error; (3) the use of the amount distributed (for example, in the case of payment
by check, whether the check was cashed); and (4) the time elapsed since the
distribution occurred.

The information presented and the documentation submitted by Taxpayer A is
consistent with his assertion that his failure to accomplish a timely rollover of
Amount 2 was due to being misled by statements made by the Plan
Administrator that he would have an additional 90 days to reinstate his loan
repayments and thereby avoid having the Plan Administrator declare the unpaid
balance of his loan (Amount 2) to be in default, which triggered the exercise of
the plan loan offset provision with respect to Taxpayer A’s account balance in
Plan C.

Therefore, pursuant to section 402(c)(3)(B) of the Code, the Service hereby
waives the 60-day rollover requirement with respect to the distribution of
Amount 2 from Plan C. Taxpayer A is granted a period of 60 days from the
issuance of this letter ruling to contribute not more than Amount 2 into an eligible
retirement plan or rollover IRA. Provided all other requirements of section

201224046

402(c)(3) of the Code, except the 60-day requirement, are met with respect to
such contribution, the contribution will be considered a rollover contribution within
the meaning of section 402(c)(3) of the Code.

No opinion is expressed as to the tax treatment of the transaction described
herein under the provisions of any other section of either the Code or regulations
which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

A copy of this letter ruling has been sent to your authorized representative
pursuant to a power of attorney on file in this office. If you wish to inquire about
this ruling, please contact (I.D. # ) , at( )

Sincerely yours,

Carlder, A. Watkins

Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of this Letter
Notice of Intention to Disclose, Notice 437

ce: