Publication 575 - Pension And Annuity Income - 2002 Page 16
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34Loans Treated as Distributions
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Members of a controlled group of corporations,
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Businesses under common control, or
If you borrow money from your retirement plan, you must
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treat the loan as a nonperiodic distribution from the plan
Members of an affiliated service group.
unless it qualifies for the exception explained below. This
treatment also applies to any loan under a contract pur-
An affiliated service group generally is two or more
chased under your retirement plan, and to the value of any
service organizations whose relationship involves an own-
part of your interest in the plan or contract that you pledge
ership connection. Their relationship also includes the reg-
or assign (or agree to pledge or assign). It applies to loans
ular or significant performance of services by one
from both qualified and nonqualified plans, including com-
organization for or in association with another.
mercial annuity contracts you purchase directly from the
Denial of interest deduction. If the loan from a quali-
issuer. Further, it applies if you renegotiate, extend, renew,
fied plan is not treated as a distribution because the excep-
or revise a loan that qualified for the exception below if the
tion applies, you cannot deduct any of the interest on the
altered loan does not qualify. In that situation, you must
treat the outstanding balance of the loan as a distribution
loan during any period that:
on the date of the transaction.
•
The loan is secured by amounts from elective defer-
You determine how much of the loan is taxable using
rals under a qualified cash or deferred arrangement
the allocation rules for nonperiodic distributions discussed
(section 401(k) plan) or a salary reduction agree-
under Figuring the Taxable Amount, earlier. The taxable
ment to purchase a tax-sheltered annuity, or
part may be subject to the additional tax on early distribu-
•
tions. It is not an eligible rollover distribution and does not
You are a key employee as defined in section 416(i)
qualify for the 10-year tax option.
of the Internal Revenue Code.
Exception for qualified plan, 403(b) plan, and govern-
Reporting by plan. If your loan is treated as a distribution,
ment plan loans. At least part of certain loans under a
you should receive a Form 1099 –R showing code “L” in
qualified employee plan, qualified employee annuity,
box 7.
tax-sheltered annuity (403(b) plan), or government plan is
not treated as a distribution from the plan. This exception
Effect on investment in the contract. If you receive a
applies only to a loan that either:
loan under a qualified plan (a qualified employee plan or
•
Is used to buy your main home, or
qualified employee annuity) or tax-sheltered annuity plan
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(403(b) plan) that is treated as a nonperiodic distribution,
Must be repaid within 5 years.
you must reduce your investment in the contract to the
To qualify for this exception, the loan must require sub-
extent that the distribution is tax free under the allocation
stantially level payments at least quarterly over the life of
rules for qualified plans explained earlier. Repayments of
the loan.
the loan increase your investment in the contract to the
extent that the distribution is taxable under those rules.
If a loan qualifies for this exception, you must treat it as a
nonperiodic distribution only to the extent that the loan,
If you receive a loan under a nonqualified plan other
when added to the outstanding balances of all your loans
than a 403(b) plan, including a commercial annuity con-
from all plans of your employer (and certain related em-
tract that you purchase directly from the issuer, you in-
ployers) exceeds the lesser of:
crease your investment in the contract to the extent that
•
the distribution is taxable under the general allocation rule
$50,000, or
for nonqualified plans explained earlier. Repayments of
•
Half the present value (but not less than $10,000) of
the loan do not affect your investment in the contract.
your nonforfeitable accrued benefit under the plan,
However, if the distribution is excepted from the general
determined without regard to any accumulated de-
allocation rule (for example, because it is made under a
ductible employee contributions.
contract entered into before August 14, 1982), you reduce
your investment in the contract to the extent that the
You must reduce the $50,000 amount above if you
distribution is tax free and increase it for loan repayments
already had an outstanding loan from the plan during the
to the extent that the distribution is taxable.
1-year period ending the day before you took out the loan.
The amount of the reduction is your highest outstanding
Transfers of Annuity Contracts
loan balance during that period minus the outstanding
balance on the date you took out the new loan. If this
If you transfer without full and adequate consideration an
amount is zero or less, ignore it.
annuity contract issued after April 22, 1987, you are
treated as receiving a nonperiodic distribution. The distri-
Related employers and related plans. Treat separate
bution equals the excess of:
employers’ plans as plans of a single employer if they are
treated that way under other qualified retirement plan rules
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The cash surrender value of the contract at the time
because the employers are related. You must treat all
of transfer, over
plans of a single employer as one plan.
•
Employers are related if they are:
Your investment in the contract at that time.
Page 16
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