Prior to the TCJA, if an employee had a loan from the employer’s retirement plan account that was outstanding at the time the employee terminated employment or the plan was terminated, the amount of that outstanding loan was treated as an actual distribution to the employee, reported on Form 1099-R, taxable to the employee and subject to the 10% additional income tax on early distributions unless an exception applied. The distribution was eligible for rollover treatment, thereby avoiding tax as well as the 10% penalty, if the employee accumulated the necessary funds and contributed them to another qualified plan or an IRA within 60 days of the distribution. Accumulating sufficient funds within that short time frame might have been a hardship or even impossible for some taxpayers.
Thanks to the TCJA, employees in this situation now have a longer time frame to pay the amount of that loan to another qualified plan or an IRA to accomplish a tax-free rollover of the loan and avoid taxation of the loan amount as a plan distribution. Under the new pro-taxpayer rule, the employee now has until the due date of their income tax return, including extensions, for the tax year in which the distribution occurred.
This change is effective for amounts treated as distributed in tax years beginning after December 31, 2017.