December 29, 1992
TO: PENSION MEMBERS NO. 38-92
OPERATIONS MEMBERS NO. 52-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 76-92
RE: IRS NOTICE CONCERNING APPLICATION OF TWENTY-PERCENT
WITHHOLDING TO PLAN LOANS
__________________________________________________________
Attached is a copy of IRS Notice 93-3, which clarifies the
treatment of distributions attributable to qualified plan loans
under the temporary and proposed regulations concerning the
Unemployment Compensation Amendments of 1992 (the "UCA"). (See
Institute Memorandum to Pension Members No. 28-92, Operations
Members No. 39-92, Transfer Agent Advisory Committee No. 62-92,
dated October 22, 1992.)
The Notice provides that the only type of distribution
related to a plan loan that cannot be an eligible rollover
distribution under the UCA is a deemed distribution based on the
provisions of section 72(p) of the Code. Such a deemed
distribution can occur when the loan is made or at a later time,
such as when the loan is in default because it is not repaid in a
manner that satisfies section 72(p)(2).
The other type of distribution related to a plan loan is a
distribution of an offset amount, which occurs when, under the
terms governing a plan loan, the participant’s accrued benefit is
offset in order to repay the loan (including the enforcement of
the plan’s security interest in the accrued benefit). Under the
Notice, such an offset amount qualifies as an eligible rollover
distribution, if it otherwise satisfies the basic definition.
Under the Notice, a plan will not fail to satisfy section
401(a)(31) of the Code merely because the plan does not permit
the direct rollover of an offset amount that is an eligible
rollover distribution. In addition, for income tax withholding
purposes, the offset amount is treated in the same manner as a
distribution of employer securities. Although the offset amount
must be included in the amount that is multiplied by 20 percent,
the total amount required to be withheld does not exceed the sum
of the cash and the fair market value of the property received by
the participant, excluding any amount of the distribution that is
an offset amount or that is distributed in the form of employer
securities.
The Notice contains a number of examples illustrating these
rules, as well as certain transition rules.
We will keep you informed of developments.
Kathy D. Ireland
Associate Counsel - Pension
Attachment