Just a few weeks ago, the federal government avoided a potentially lengthy government shutdown when Congress passed and the President signed into law the Bipartisan Budget Act of 2018 (the “Act”). You may already know that the Act extends funding for the federal government until March 23, 2018. However, what you may not know is that hidden in the Act are provisions that will change some of the rules relating to hardship distributions from 401(k) plans.

Hardship Distributions from 401(k) Plans

The Internal Revenue Code (the “Code”) and associated regulations place restrictions on participants’ ability to withdraw their elective deferrals from 401(k) plans except in certain circumstances (e.g., reaching age 59 ½; termination of employment). One such exception is that a 401(k) plan is allowed to provide for “hardship distributions.” This means that in certain circumstances (and if the plan allows), an active employee participating in a 401(k) plan can withdraw his or her elective deferrals to pay for certain expenses.
Section 401(k) of the Code and the regulations thereunder place a number of rules and restrictions on hardship distributions. For instance, the distribution must be on account of hardship, meaning that it is pursuant to an immediate and heavy financial need and is necessary to satisfy that need. Immediate and heavy financial needs include things like certain medical care expenses, the cost to purchase a principal residence, certain tuition and educational expenses, the amount necessary to avoid eviction, certain burial or funeral expenses, and certain expenses to repair damage to a principal residence.

An employee that takes a hardship distribution is generally prohibited from making elective deferrals to the plan (or any other plan maintained by the employer) for at least 6 months following the hardship distribution. Also, hardship distributions are only permitted from certain accounts. Except for certain grandfathered amounts, they cannot be taken from the participant’s income on elective deferrals, qualified nonelective contributions (“QNECs”) or qualified matching contributions (“QNECs”). Furthermore, before a hardship distribution can occur, the employee must have taken all other available distributions from the plan (and other plans maintained by the employer), such as a loan (if available).

What Changes Does the Act Make to Hardship Distributions?

First, the Act will eliminate the 6-month suspension on elective deferrals following a hardship distribution. It requires the Secretary of Treasury to issue regulations removing the 6-month restriction on elective deferrals. The Secretary has up to one year to complete this task. Furthermore, the Act amends Section 401(k) of the Code to allow for hardship distributions to include QNECs, QMACs, and income on elective deferrals. Lastly, the Act removes the requirement to take available loans before taking hardship distributions. These changes are effective for plan years beginning after December 31, 2018.

What Should Plan Sponsors Do?

Be on the lookout for new regulations and guidance from the Secretary of Treasury, and contact the Jackson Lewis attorney of your choice for assistance. We can help you amend your plan document, and also work with you and your third-party administrators to implement the administrative changes needed for 2019. If your plan does not currently provide for hardship distributions, but you would like to add that option, we can help you with that too.


Under the Employee Retirement Income Security Act (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”), an employer that has assumed an obligation to contribute to collectively-bargained and jointly-administered defined benefit pension plans ( “multiemployer plans”) is liable for its allocable share of any underfunding upon the permanent cessation of that obligation. This “withdrawal liability” has become a significant issue since 2008 due to a confluence of factors, including the economic and investment impact of the recession, historically low interest rates, declining plan participation, and an increase in the number of retirees.

A report published in December 2017 by the U.S. Chamber of Commerce described the situation as “bleak.” 114 multiemployer plans (out of approximately 1,400 in total) are underfunded by $36.4 billion. The Pension Benefit Guaranty Corporation (“PBGC”), the Federal agency with regulatory and enforcement authority over MPPAA, and that backstops multiemployer plan benefits, is itself in financial distress. The PBGC is projected to be insolvent within 5 years, which could wipe out the retirement security of millions of Americans.

Congress has attempted to address this problem numerous times, first with the enactment of MPPAA (which created the concept of withdrawal liability) in 1980. Subsequent attempts have included the Pension Protection Act of 2006 (which attempted to stabilize and improve multiemployer plan funding) and the Multiemployer Plan Reform Act of 2014 (which created tools for multiemployer plans to stave off insolvency). None have been particularly successful, and the multiemployer crisis has worsened.

The most recent such attempt is the Bipartisan Budget Act of 2018, which became law on February 9, 2018. The Act establishes the “Joint Select Committee on Solvency of Multiemployer Pension Plans,” the goal of which is to improve the solvency of both multiemployer plans and the PBGC.

The Committee is tasked with generating a “detailed statement of the findings, conclusions and recommendations” of the joint committee, as well as drafting proposed legislation to carry out these recommendations. Its membership will be comprised of 16 members, appointed equally by the majority and minority leaders of both the Senate and the House of Representatives.

We will continue to monitor this evolving situation.

Changes to ERISA’s Disability Claims Regulations Coming April 1

Employers who offer short-term and long-term disability plans governed by the Employee Retirement Income Security Act (ERISA), and their plan administrators, need to prepare for the approaching April 1st deadline of the new claims handling regulations.  Employer action items can be found in our article posted here. The ERISA regulations were effective January 2017, but were delayed until April 1, 2018. The U.S. Department of Labor (DOL) has confirmed the ERISA disability claims administration regulations will not be delayed or revised further, according to the DOL’s recent announcement.

Jackson Lewis attorneys are available to assist employers, plan administrators, and TPAs to ensure compliance by April 1st.

2018 Tax Reform Series: Goodbye to the Individual Mandate

This is the seventh article in our series covering various tax and employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

Once significant change made by the Act, summarized below, is the elimination of the Affordable Care Act’s individual mandate, effective 2019.


Long an unpopular feature of the ACA, the individual mandate requires most Americans (other than those who qualify for a hardship exemption) to purchase a minimum level of health coverage. Those who fail to do so are liable for a penalty of $695 for an adult or 2.5 percent of household income, whichever is greater.

The Act accomplished the elimination of the individual mandated by reducing the penalty amounts to $0 and zero percent, respectively.

Although often cited as an egregious example of government over-reach, the individual mandate does not impact the majority of Americans, specifically those who receive their health coverage through their employers or through public programs such as Medicare and Medicaid.

Impact of Elimination

The nonpartisan Congressional Budget Office (“CBO”) projects that the elimination of the individual mandate will spare taxpayers $43 billion in penalties that they would otherwise have paid through 2027. The CBO also projects that the elimination will result in 4 million people dropping health insurance coverage in 2019, with 13 million more becoming uninsured by 2027.

The elimination is expected to save the government $300 billion over the next ten years, in the form of fewer people receiving insurance subsidies or Medicaid, according to the CBO.

The CBO estimates that marketplace premiums will rise 10 percent without the individual mandate.

Employer Mandate and Other ACA Features Still in Place

The Act leaves many aspects of the ACA intact, including the individual marketplace, premium subsidies for those earning between 100% and 400% of the federal poverty rate, the ban on insurers charging more or denying coverage based on health factors, and Medicaid expansion.

Most significantly for employers, however, is the employer mandate and reporting requirements, which remain in force. Accordingly, applicable large employers will need to plan around the Code section 4980H(a) (“A”) penalty — which can apply if an employer does not offer minimum essential coverage to at least 95% of its full-time employees and at least one full-time employee buys subsidized marketplace coverage — and the Code section 4980H(b) (“B”) penalty — which can apply if an employer offers full-time employees coverage that is not affordable or does not meet minimum value requirements.

In 2018, A penalty is $2,320 (or $193.33 per month) multiplied by the total number of full-time employees (minus 30). The B penalty is $3,480 (or $290 per month) for each full-time employee who buys subsidized marketplace coverage (capped by the amount of the A penalty).

2018 Tax Reform Series: Change to Employer Deduction Rules

This is the sixth article in our series covering the various tax and employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

One surprising change made by the Act, summarized below, is the elimination of the employer deduction for certain settlement payments made in the employer-employee context.

General Rule

Payments made in settlement of claims or suits arising out of the employer-employee relationship are tax deductible by an employer unless the payment is specifically listed as nondeductible in the Internal Revenue Code (“Code”).

Prior to the Act, Section 162 of the Code provided that only the following types of payments were nondeductible:

  • Any punitive fine or similar penalty paid to a government for the violation of any law.
  • Any illegal payment, bribe, kickback, or rebate when made under any of the circumstances or to or by any of the persons described in the Code.
  • A portion of treble damage payments under the antitrust laws.

Limitations on Deductions Added by the Act

The Act adds two limitations to the tax deductibility of payments that can apply in the employer-employee context. In particular, the Act adds the following types of payments as nondeductible:

  1. Any settlement or payment related to sexual harassment or sexual abuse and attorney fees related to such settlement or payment IF the settlement is subject to a nondisclosure agreement.
  2. Any amount paid at the direction of a governmental entity in connection with the violation of any law or the investigation or inquiry by the governmental entity into a potential violation of law − OTHER THAN amounts paid as restitution for damages or paid to come into compliance with the law.

Both changes are effective for payments made after December 22, 2017.

Issues to Consider Regarding Nondeductibility of Sexual Abuse or Harassment Claims

  • The changes made by the Act apply only to the deductibility of the payments by the employer. The Act does not change the plaintiff’s/claimant’s tax treatment of the payments.
  • As neither the Act nor the Conference Report provide any indication as to how to answer the following questions, we will need further guidance from the IRS to answer such questions:
    • Does nondeductibility apply if the sexual abuse or harassment claim is meritless or frivolous?
    • If a claimant/plaintiff includes claims other than sexual harassment or sexual abuse, can the settlement amount be allocated among the nondeductible sexual harassment or abuse claims and the deductible other claims?
    • If the settlement amount is allocated, on what basis can the allocation be made?
    • For example, the basis for allocating a settlement amount between W-2 wages subject to withholding taxes and Form 1099 taxable income can be problematic. Both the courts and the IRS have stated that the allocation made by the parties in a settlement agreement can be ignored if the allocation does not reflect the economic substance of the claims.

Employer Takeaway

If a claimant/plaintiff includes claims other than sexual harassment or sexual abuse, we suggest that the settlement agreement designate the portion of the settlement amount (either as a percentage or a dollar amount) being allocated to the sexual harassment or abuse claims. The purpose is to provide the basis for taking the position that the portion of the payment made for the other claims is tax deductible.

If a settlement payment is made at the direction of a governmental entity in connection with the violation of any law or the investigation or inquiry by the governmental entity into a potential violation of law, the law, as revised by the Act, retains the distinction between nondeductible punitive fines and deductible compensatory penalties. The employer should consult with counsel to determine the deductibility of such payment.

2018 Tax Reform Series: New Excise Tax on “Excess” Executive Compensation Paid by Tax-Exempt Employers

This is the fifth article in our series covering the various employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

Some of the most fundamental changes under the Act in the employee benefits and executive compensation arena impact executive compensation paid by tax-exempt employers and may result in the imposition of significant new excise taxes on such employers.  These changes are summarized below.

Excise Tax on “Excess” Compensation and “Excess Parachute Payments” Paid by Tax-Exempt Employers

Under the Act, starting in 2018, tax-exempt organizations are subject to a 21% excise tax on

(i) remuneration exceeding $1 million paid to a “covered employee” in a tax year, and

(ii) any “excess parachute payment” paid to a covered employee.

“Covered employee” includes any active or former employee who is one of the 5 highest compensated employees of the organization for the current tax year, or was a covered employee in any prior year beginning in 2017 (so that the “covered employee” status persists into subsequent years, meaning that a tax-exempt employer may eventually accumulate more than 5 covered employees).

“Excess parachute payments” generally refers to compensatory “parachute payments” that are contingent on a covered employee’s separation from employment and exceed the employee’s 5-year average annual compensation (the “Base Amount”), provided that the aggregate parachute payments exceed 3 times the Base Amount.  This definition is subject to some exceptions, including exceptions for payments made to individuals who are not “highly compensated employees” under Code Section 414(q) and payments for services performed by a licensed medical professional.

Remuneration is considered to be paid when the covered employee’s right to such remuneration is not subject to a substantial risk of forfeiture, so deferred compensation may fall within the scope of these rules before it is actually paid to the covered employee.

This excise tax, if applicable, is payable by the tax-exempt employer and not by the covered employee. The Act does not provide for any grandfathering of existing compensation arrangements, or any transition period.

Employer Action Items

Tax-exempt employers must (i) identify their “covered employees” for 2018 and 2017 (because, as noted above, the “covered employee” status persists into subsequent years), and (ii) review their existing executive compensation and severance arrangements (including any deferred compensation plans) to determine whether payments to any covered employee in 2018 or future years could result in the imposition of the 21% excise tax. If so, then the employer should consider potential modifications to such arrangements, or other strategies to avoid or mitigate the impact of the excise tax.

Tax-exempt employers and their counsel will also need to consider the new rules when structuring new compensation arrangements for executives. For example, an employer may consider including protective language in any new executive compensation arrangements that would allow it to unilaterally modify or reduce compensation to the extent needed to avoid the excise tax (similar clauses are already used by some taxable corporations for excise taxes under Code Section 280G, but as this new excise tax is imposed on the employer rather than the executive, it may be more difficult to negotiate a cutback where the excise tax applies).

Although the new rules are already in effect, they raise a number of compliance questions that will need to be resolved by the IRS in future guidance. Until guidance is issued, employers and their counsel will need to put forth their best efforts to interpret the Act.

2018 Tax Reform Series: Executive Compensation Changes for Publicly Held Entities

This is the fourth article in our series covering the various employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

In addition to the changes we have already discussed in this blog, the Act made significant changes to the taxation of executive compensation arrangements through its amendment of Section 162(m) of the Internal Revenue Code (“Section 162(m)”).  These changes, summarized below, will require publicly held employers, and certain other companies not previously subject to Section 162(m), to revisit their executive compensation arrangements and make appropriate adjustments in 2018 and beyond.

Expansion of Application of 162(m) Limitation and Repeal of Performance-Based Compensation Exclusion

An employer generally may deduct reasonable compensation for personal services as an ordinary and necessary business expense, however, Section 162(m) limits the deductibility of compensation paid to a covered employee of a publicly held corporation to no more than $1 million per year.

Prior to the Act, there was an exception to this rule permitting the deduction of compensation in excess of $1 million in certain cases, including where the compensation was performance-based within the meaning of Section 162(m). The Act has eliminated this exception.

In addition, the Act has expanded the definition of “publicly held corporation” for purposes of the $1 million deductible compensation limitation to include additional securities registrants and has expanded the definition of “covered employee” to include an employer’s chief financial officer and any individual who was previously a covered employee (so that the deductibility limitation continues to apply to payments made to former covered employees or their estates, even after their death).

The Act does contain a transition rule that exempts from these changes remuneration provided pursuant to a written binding contract that was in effect on November 2, 2017 and that was not modified in any material respect on or after such date.

Employer Action Items

Although the performance-based exception has been eliminated, this change presents publicly traded employers with new flexibility to be more creative in structuring their performance-based executive compensation arrangements. For example, such employers will no longer be constrained by strict requirements under the eliminated performance-based compensation exception in setting and approving performance goals and can make adjustments to performance goals at the conclusion of a performance period that increase compensation payable where appropriate.

Moreover, employers who previously granted stock options and stock appreciation rights to ensure compliance with the performance-based compensation exception may now consider replacing such awards with other forms of incentive compensation.

Employers will also need to reevaluate their performance metrics to take into account the impact of the reduction of the corporate tax rate to 21%. In some cases, performance metrics affected by this reduction may be permitted or required to be adjusted.

Additionally, employers will now have more flexibility to provide for acceleration of the payment of performance-based compensation regardless of whether performance conditions have been satisfied, such as in the case of certain involuntary terminations.

Publicly traded employers will need to conduct an inventory of their executive compensation arrangements and compensation committee charters in 2018 and thoughtfully consider, with assistance from their tax and legal counsel, what revisions may be required or appropriate given the changes made by the Act. And certain companies that have publicly traded debt and some foreign private issuers, which were not previously subject to Section 162(m), will need to determine whether the amended Section 162(m) applies to them.

Finally, employers will need to take precautions to ensure that any pre-November 2, 2017 grandfathered arrangements intended to comply with the performance-based compensation exception under Section 162(m) are not materially modified in a way that will cause them to lose their grandfathered status.

2018 Tax Reform Series: Is Your Company Eligible for a Tax Credit for Paid Leave?

Below is the third article in our series covering the employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

The Act provides employers with a welcome tax credit for offering paid family and medical leave to employees – at least for 2018 and 2019. If your company voluntarily offers paid family and medical leave to rank and file employees or is considering offering such paid leave, read on!

New section 45S of the Internal Revenue Code provides a tax credit to employers that voluntarily offer up to twelve weeks of paid family and medical leave annually to qualifying employees pursuant to a written policy.  To enjoy the tax credit, the leave benefit amount need not be equal to the employee’s normal pay, but must be at least 50% of that amount.  The amount of the tax credit is 12.5% if the leave benefit amount equals 50% of normal pay.  The 12.5% credit increases incrementally (up to a maximum of 25%) to the extent the leave benefit exceeds 50% of normal pay.  A qualifying employee is one who has been employed by the employer for at least a year and who is paid no more than 60% of the “highly compensated employee” dollar amount on an annual basis (i.e., $72,000 for 2018).

To claim the tax credit, the written policy must provide full-time qualifying employees at least two weeks (annually) of paid family and medical leave and must provide part-time qualifying employees a proportionate amount of paid family leave (based on the part-time employee’s expected work hours). The policy must also specify the leave benefit (i.e., at least 50% of normal pay).  Employers that provide paid family and medical leave for employees who aren’t covered under the Family and Medical Leave Act also must include a non-retaliation provision in the policy.  Note that the credit does not apply with respect to paid leave that is mandated under state or local law.

Congress must revisit the paid leave credit in two years, so the tax credit might not motivate employers who are not already voluntarily offering paid family and medical leave to start doing so.

If you would like assistance drafting or revising your company’s paid leave policy to qualify for the tax credit, contact the Jackson Lewis attorney with whom you normally work.

2018 Tax Reform Series: Tax Law Changes to Employee Fringe Benefits

Below is the second article in our series covering the employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

As discussed below, the Act makes several changes to the taxability and deductibility of employee fringe benefits beginning January 1, 2018.

The changes are somewhat arbitrary and sporadic. Basically, employer payment or reimbursement of an employee’s business expenses (so-called working condition fringe benefits) will continue to be tax-free to the employee and tax deductible by the employer.  But certain fringe benefits that still can be provided tax-free to an employee will no longer be tax deductible by the employer.  On the other hand, if an employer chooses to provide the affected fringe benefits on a taxable basis to the employee (i.e., as W-2 wages), the employer will be able claim a tax deduction for the taxable benefits.

The following is a summary of the employee fringe benefits affected by the Act.

Employees Can No Longer Deduct Unreimbursed Business Expenses

Prior to the Act, an employee who itemized tax deductions could deduct unreimbursed employee business expenses as a miscellaneous itemized deduction (to the extent that the aggregate miscellaneous itemized deductions exceeded 2% of the employee’s adjusted gross income). However, beginning January 1, 2018 miscellaneous itemized deductions are no longer allowed.  That means that if an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee.  However, if the employer does not reimburse the employee’s business expense, the employee no longer will be able to claim a tax deduction for the expense.

Moving Expenses

Prior to the Act, an individual could claim an above-the-line deduction (a non-itemized deduction) for moving expenses paid in connection with commencement of work at a new principal place of work.  Alternatively, an employer could pay or reimburse an employee for moving expenses as a tax-free fringe benefit.

Beginning in 2018, an employee can no longer deduct moving expenses nor can an employer pay or reimburse an employee’s moving expenses on a tax-free basis. On the other hand, if an employer treats payment or reimbursement of an employee’s moving expenses as W-2 wages, the employer can deduct the payment as a compensation expense.

Qualified Transportation Benefits

Prior to the Act, the value of a “qualified transportation fringe” benefit provided by an employer to an employee was treated as tax-free, subject to monthly limits. A “qualified transportation fringe” is defined as:

  • transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment;
  • transit passes;
  • qualified parking; and
  • qualified bicycle commuting reimbursement.

Employers can still provide tax-free qualified transportation fringe benefits to employees (although qualified bicycle commuting reimbursements cannot be provided tax-free). However, an employer cannot deduct the expenses for providing tax-free transportation fringe benefits.

  • On the other hand, if an employer treats the transportation fringe benefits as taxable W-2 wages to the employee, the employer can deduct the expenses of providing those benefits.

Commuting Benefits

The Act provides that an employer cannot deduct any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.

In general, commuting expenses always have been treated as taxable to an employee.

Entertainment Expenses

The Act provides that an employer cannot claim a tax deduction for entertainment, amusement or recreation expenses or with respect to any facility used in connection with such activity. The Act also prohibits any deduction for amounts paid for membership in any club organized for business, pleasure, recreation or social purpose.  In contrast to prior law, it does not matter whether the expense is directly related to or associated with the active conduct of the employer’s trade or business.

Note that an employer can still fully deduct expenses for goods, services or facilities that are treated as W-2 wages to the employee. In addition, an employer can fully deduct expenses paid to reimburse an employee under a reimbursement or other expense allowance arrangement that can be treated as tax-free to the employee under the accountable plan rules.

Expenses for Employer-Operated Eating Facilities Only 50% Deductible

The Act does not change the rules for determining whether the value of meals provided to an employee at employer-operated eating facility can be treated as tax-free to the employee.

  • Section 132(e)(2) provides that the value of the meals can be tax-free if: (1) the facility is located on or near the employer’s business premises, (2) the facility’s annual revenue equals or exceeds its direct operating costs; and (3) for highly compensated employees, the facility is operated without discriminating in favor of such employees.
  • Section 119 provides the value of meals furnished to an employee can be tax-free if: the meals are provided on the employer’s business premises; and (2) are provided “for the convenience of the employer”.

However, the Act now imposes a 50% limit on deducting food or beverage expenses to employees at an employer-operated eating facility. These expenses are made fully nondeductible after Dec. 31, 2025.

Definition of Tangible Personal Property for Tax-Free Employee Achievement Awards

The Code permits an employer to make a tax-free award of tangible personal property to an employee for length-of-service or safety achievement subject to certain conditions and dollar limits.

The Act codifies the definition of “tangible personal property” (based on the proposed regulations issued in 1989) to state that tangible personal property does not include

  • cash, cash equivalents, gift cards, gift coupons, or gift certificates; or
  • vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.

However, arrangements that confer only the right to select and receive tangible personal property from a limited array of items pre-selected or pre-approved by the employer qualify as tangible personal property.

2018 Tax Reform Series: A Change to Participant Loan Rollovers

One welcome qualified plan change under the Tax Cuts and Jobs Act is the extension of the period within which a participant may pay the amount of an “offset” of an outstanding plan loan to another qualifying plan or IRA to accomplish a tax-free rollover of the loan offset amount. The change became effective January 1, 2018.

A distribution of a plan loan offset occurs when, under the plan terms, a participant’s accrued benefit is reduced (or offset) in order to repay the loan. A distribution of a plan loan offset amount may occur in a variety of circumstances, such as where the plan terms require that, in the event of the participant’s request for a distribution, a loan be repaid immediately or treated as in default. The new rule applies to unpaid accrued loan amounts that are offset from the participant’s plan account at plan termination or at or after severance from employment if the plan provides that the accrued unpaid loan amount must be offset at such time.  Prior to this law change, the deadline to roll over the offset was the 60th day after the date the loan offset arose.  As of January 1, 2018, the deadline is the filing due date (including extensions) for the participant’s tax return for the year in which the loan offset amount arises.   As a result of this change, the loan offset rollover period can be as long as 21 months where the loan offset occurs early in the calendar year and the participant requests an extension of his or her Form 1040 deadline for the year of the offset.

The change means that a qualifying participant who desires to defer taxes on the maximum amount of distributions by rolling over all of his or her distributed account in a plan (including qualified plans such as 401(k) plans, 403(b) plans or governmental 457(b) plans) will now have significantly more time to accumulate from other sources an amount equal to the accrued and outstanding unpaid principal and interest on any plan loan that was earlier extended to him or her and treated as an offset and then pay and roll over such amount to another qualifying plan or IRA.

Note, however, that such tax-free rollover treatment does not apply to any offset amount under a loan that has already been deemed to be taxed as a distribution under the Code (and reportable on Form 1099-R) either because its terms did not comply with the Code or because it remained in default past the plan’s default cure period (which cannot be longer than the end of the calendar quarter that begins after the quarter in which the default arises). The amount of such a defaulted loan will, absent correction under the EPCRS plan correction procedures, be treated as of the end of the allowed cure period as if it were a taxable distribution from the plan that can also be subject to the 10% early distribution penalty tax.

Finally, remember that a loan offset amount is treated as both a repayment and a distribution of a plan loan amount.  Therefore, unless a deemed tax distribution (as discussed above) has occurred, the offset amount will be taxed to a participant except where an amount equal to the offset is timely rolled over tax-free by the participant.  The new liberalization of the rollover period for offsets will make possible many more such rollovers.