In February 2018 the president signed the Bipartisan Budget Act of 2018 (Budget Act). This legislation unexpectedly revived a number of changes to tax laws affecting retirement plans. Many of these changes were originally included in the Tax Cut and Jobs Act of 2017, but were cut from the final version of that bill before its passage on December 22, 2017.
The latest changes relax certain limitations on retirement plans, generally beginning next year. But the law also contains immediately effective changes for certain plan participants affected by the California wildfires. Implementation of these changes may require changes to existing plan documents, administrative procedures and trust accounting practices.
Summary of tax law changes for retirement plans
- Hardship withdrawal restrictions and requirements applicable to defined contribution plans (e.g., 401(k) plans and 403(b) plans) will be relaxed effective for plan years beginning after December 31, 2018 (i.e., January 1, 2019, for calendar year plans) so that:
- Plans may permit participants to make hardship withdrawals from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs) and employee contributions, as well as the earnings on those contributions (regardless of whether these contributions and earnings were credited after 1988);
- Participants who wish to take a hardship withdrawal need not be required to first obtain a loan from the plan; and
- Participants no longer need to be prohibited from making salary deferral contributions and employee contributions to their employer’s plans for the six-month period following the date of their hardship distribution.
- Re-contribution of refunded IRS levy amounts to IRAs and employer-sponsored retirement plans is permitted for plan years beginning after December 31, 2017 (i.e., January 1, 2018, for calendar year plans):
- If the IRS withdraws an amount from an individual’s eligible retirement plan account pursuant to a levy and later returns that amount to the individual, the individual may re-contribute the withdrawn amount, plus interest, to the eligible retirement plan (regardless of whether the re-contribution exceeds the annual contribution limits). The re-contribution must be made by the due date, not including extensions, of the individual’s income tax return for the year in which the IRS returns the levy amount to the individual.
- Tax penalty relief for special California wildfire disaster-related use of retirement funds:
- Qualified wildfire distributions of up to $100,000 that are made from eligible retirement plans on or after October 8, 2017, and before January 1, 2019, to a qualified individual (i.e., an individual whose principal place of abode was in a California wildfire disaster area and who sustained an economic loss due to the California wildfires) will not be subject to the 10% early withdrawal penalty that would otherwise apply to an early distribution.
- Qualified wildfire distributions will not be subject to the mandatory federal income tax withholding that is otherwise applicable to eligible rollover distributions.
- Rather than including the entire qualified wildfire distribution amount in income in the year of distribution, a qualified individual may instead elect to include the distribution in income ratably over a three-year period beginning with the year of distribution.
- If a qualified individual does not elect to have the three-year ratable income inclusion apply, then the individual may re-contribute the retirement plan distributions to a plan within three years. Qualified wildfire distribution amounts that are re-contributed to an eligible retirement plan within the three-year period will be treated as eligible rollover distribution amounts and will not be taxable.
- Qualified wildfire distribution amounts that were received after March 31, 2017, and before January 15, 2018, and that were supposed to be used to build or purchase a home in the California wildfire disaster area that was not built or purchased because of the wildfires, may be re-contributed by a qualified individual to an eligible retirement plan between October 5, 2017, and June 30, 2018.
- California wildfire disaster-related loan relief for qualified individuals:
- For a qualified individual, the maximum amount of a participant loan that may be made between February 9, 2018, and December 31, 2018, is increased to the lesser of $100,000 or 100% of the present value of the qualified individual’s vested accrued benefit in the plan.
- The repayment due date for outstanding participant loan repayments occurring between October 8, 2017, and December 31, 2018, are delayed for qualified individuals by one year, and any subsequent repayments will be adjusted to reflect the one-year delay, as well as for any interest accruing during the delay.
- The period between October 8, 2017, and December 31, 2018, is not counted for purposes of calculating the five-year maximum loan period and the level amortization term for a qualified individual.
Plan documents and forms may require amendment
Plans must be amended to comply with the new California wildfire disaster-related rules by the last day of the first plan year beginning on or after January 1, 2019.
The liberalized hardship distribution rules are generally optional, and plan sponsors can consider whether they may wish to adopt the changes. However, plan sponsors that wish beginning in 2019 to eliminate their plans’ requirements for first obtaining all nontaxable loans available under the plan before taking a hardship distribution and for imposing a six-month suspension of participant contributions following a hardship distribution will need to amend their plans.
First, however, the Treasury Department must modify the current Treasury regulations to remove the six-month suspension requirement, as Congress specifically instructed it to do in the Budget Act. Congress imposed a one-year deadline for the Treasury Department to accomplish this task, which technically means the IRS has until February 8, 2019, to issue new regulations. Nevertheless, Congress also mandated that the removal of the six-month suspension requirement must be effective for plan years beginning after December 31, 2018 (i.e., January 1, 2019, for calendar year plans), so the new regulations will be effective January 1, 2019, for calendar year plans even if the modification of the regulations is not finalized until after that date.
Additional guidance needed for compliance
In is currently unclear how any six-month suspensions that begin prior to the 2019 plan year and that have not yet ended when the 2019 plan year commences will be affected by the modified regulations. The IRS is expected to issue guidance regarding operational compliance and any plan language that will need to be amended, and the deadline by which any amendments will need to be adopted.
Plan sponsors and fiduciaries should also consult with their counsel, third-party administrator and other service providers or vendors in order to identify plan documents, forms and procedures that may need to be amended to take advantage of the liberalized hardship distribution rules.
Committee to address multiemployer pension plan solvency issues
The Budget Act also created the Joint Select Committee on Solvency of Multiemployer Pension Plans, which will be comprised of twelve members, including an equal number (six) from both the Democratic and Republican parties as well as from both the Senate and the House of Representatives. This bipartisan committee will be tasked with improving the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation (PBGC). Provided at least four committee members from each party are able to agree on a compromise, an expedited vote on the committee’s recommendation—without amendments—would take place by the end of the current congressional session later this year.
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