Updates reflect changes implemented from the 2017 Tax Cuts and Jobs Act. Recently added to this form are new distribution codes for reportable death benefits on life insurance contracts (Code C) and qualified loan offsets. Qualified plan loan offsets are the amounts an employer plan account balance is reduced, or offset, to repay a loan from the plan (Code M). Previously the instructions only address deemed loans. Below are definitions for each type of reportable event:
- Deemed distribution (Code L): A deemed distribution occurs when a loan does not meet any one of the IRS loan requirements. The most common situation is when a participant fails to make payments in accordance with the established schedule. If payments exceed certain timeframes, then the IRS rules require that the participant pays tax on the outstanding balance of the loan. The loan is still required to be maintained in the plan’s recordkeeping until the participant has a distributable event as it still impacts the participant’s eligibility for future loans. A distributable event is when a participant could otherwise be eligible to take a distribution from the plan, generally termination of employment or attainment of plan’s normal retirement age, death or disability.
- Loan Offset (Code M): A loan can be fully removed from the plan’s recordkeeping once a participant with a deemed distribution has a distributable event such as termination of employment. At this time the loan is fully removed from all plan records.
Beyond these new codes, the form and associated guidance were also revised to include special rules pertaining to retirement plan distributions made to employees affected by specific natural disasters as declared by the President. Lastly, an additional update states that there will be no recharacterizations of a conversion of a traditional IRA to a Roth IRA made in 2018 or later.
For further guidance regarding the updated Form 1099-R, please contact your Sikich advisor.