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CAUTION

The taxable portion of distributions from nonquali- fied plans is subject to the NIIT. See the Instruc- tions for Form 8960.

Distribution of U.S. savings bonds. If you receive U.S. savings bonds in a taxable distribution from a retirement or profit-sharing plan, report the value of the bonds at the time of distribution as income. The value of the bonds includes accrued interest. When you cash the bonds, your

18 Publication 575 (2025)

Substantially level payments. To qualify for the exception to the loan-as-distribution rule, the loan must require substantially level payments at least quarterly over the life of the loan. If the loan is from a designated Roth account, the payments must be satisfied separately for that part of the loan and for the part of the loan from other accounts under the plan. This level payment requirement doesn’t apply to the period in which you are on a leave of absence without pay or with a rate of pay that is less than the required installment. Generally, this leave of absence must not be longer than 1 year. You must repay the loan within 5 years from the date of the loan (unless the loan was used to acquire your main home). Your installment payments after the leave ends must not be less than your original payments.

However, if your plan suspends your loan payments for any part of the period during which you are in the uniformed services, you won’t be treated as having received a distribution even if the suspension is for more than 1 year and the term of the loan is extended. The loan payments must resume upon completion of such period and the loan must be repaid in substantially level installments within 5 years from the date of the loan (unless the loan was used to acquire your main home) plus the period of suspension.

Example 1. On May 1, 2025, you borrowed $40,000 from your retirement plan. The loan was to be repaid in level monthly installments over 5 years. The loan wasn’t used to acquire your main home. You make 9 monthly payments and start an unpaid leave of absence that lasts for 12 months. You weren’t in the uniformed services during this period. After the leave period ends and you resume active employment, you resume making repayments on the loan. You must repay this loan by April 30, 2030 (5 years from the date of this loan). You can increase your monthly installments or you can make the original monthly installments and on April 30, 2030, pay the balance.

Example 2. The facts are the same as in Example 1 , except that you are on a leave of absence performing service in the uniformed services for 2 years. The loan payments were suspended for that period. You must resume making loan payments at the end of that period and the loan must be repaid by April 30, 2032 (5 years from the date of the loan plus the period of suspension, which is 2 years in this example).

Related employers and related plans. In determining loan balances for purposes of applying the exception to the loan-as-distribution rule, you must add the balances of all your loans from all plans of your employer and from all plans of your employers who are treated as a single employer. Treat separate employers’ plans as plans of a single employer if they are treated that way under other qualified retirement plan rules because the employers are related.

Employers are related if they are:

• Members of a controlled group of corporations,

• Businesses under common control, or

• Members of an affiliated service group.

An affiliated service group is generally two or more service organizations whose relationship involves an ownership connection. Their relationship also includes the regular or significant performance of services by one organization for or in association with another.

Denial of interest deduction. If the loan from a qualified plan isn’t treated as a distribution because the exception applies, you can’t deduct any of the interest on the loan during any period that:

• The loan is secured by amounts from elective deferrals under a qualified cash or deferred arrangement (section 401(k) plan) or a salary reduction agreement to purchase a tax-sheltered annuity, or

• You are a key employee as defined in section 416(i) of the Internal Revenue Code.

Reporting by plan. If your loan is treated as a distribution (deemed distribution), you should receive a Form 1099-R showing code “L” in box 7. If your loan is treated as a qualified plan loan offset, you should receive a Form 1099-R showing code “M” in box 7. If your loan is not a qualified plan loan offset, no code will be reported on Form 1099-R for the offset.

Effect on investment in the contract. If your loan is treated as a distribution, you must reduce your investment in the contract to the extent that the distribution is tax free under the allocation rules for qualified plans, explained earlier. Repayments of the loan increase your investment in the contract to the extent that the distribution is taxable under those rules.

If you receive a loan under a nonqualified plan other than a 403(b) plan, including a commercial annuity contract that you purchase directly from the issuer, you increase your investment in the contract to the extent that the distribution is taxable under the general allocation rule for nonqualified plans, explained earlier. Repayments of the loan don’t affect your investment in the contract. How- ever, if the distribution is excepted from the general allocation rule (for example, because it is made under a contract entered into before August 14, 1982), you reduce your investment in the contract to the extent that the distribution is tax free and increase it for loan repayments to the extent that the distribution is taxable.