Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules 66233

FMLA and the Labor Regulations

thereunder.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–30681 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

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.

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
66234 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules

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:

§ 1.72–17A Special rules applicable to

employee annuities and distributions under

deferred compensation plans to selfemployed individuals and owneremployees.

* * * * *

(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 § 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:

§ 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 § 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
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules 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 § 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?
66236 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules

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 threemonth 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 threemonth 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)
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules 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

§ 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

§§ 1.402(c)–2, Q&A–4(d) and § 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 § 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 § 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 §§ 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 §§ 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 debtorcreditor 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