Budget Bill Retirement Plan Provisions Mailbag
After releasing last week’s Compliance Alert on the retirement plan-related provisions included in the recently enacted budget bill, I received a number of questions from people whom, I suspect, were taken aback that there were even retirement plan changes to address, since tax reform came and went with little impact on retirement. Since some of you may have these very same questions, we’ll address them in this week’s Top of Mind.
But first, let’s recap the budget bill changes:
- The IRS has been directed to, within a year, write regulations that would eliminated the six-month elective deferral suspension period following a hardship distribution. Since the regulations would be effective beginning in 2019, there is presumably some time for plan sponsors/recordkeepers to change their operations once the regulations are released.
- QNECs, QMACs, and contributions to profit-sharing or stock bonus plans, and all earnings related to these contributions (note that this differs from elective deferrals, where only contributions may be distributed, but not earnings), are eligible for hardship withdrawals, provided that the plan permits such distributions. Again, this is effective in 2019.
- The requirement that an individual must take all available loans from the plan prior to taking a hardship distribution has been eliminated, effective in 2019.
- Effective immediately, if an employee’s retirement plan was levied by the IRS, and the money is eventually returned to the individual, then the employee could re-contribute the amount of the levy to the plan, as long as the plan permits such a contribution. The contribution must be made by the employee’s tax return filing deadline for the year the money is returned.
- Effective immediately, several loan and distribution rules for participants affected by the California wildfires have been modified, including, but not limited to, the following:
- The 10% early withdrawal penalty is waived for qualified distributions up to $100,000 made on or after Oct. 8, 2017, and before Jan. 1, 2019. Distributions must be made by an individual whose principal place of residence was in a wildfire disaster area and who sustained an economic loss due to the wildfires. In addition, distributions can be repaid to the plan, if desired, within three years.
- The loan limit for these individuals will increase to 100% of plan assets up to $100,000 (keep in mind that this provision might be difficult for recordkeepers to administer).
- All loan repayments during the aforementioned period are delayed for one year. This delay does not count toward the repayment period of a loan, but interest will accrue during the delay.
And now, on to your questions!
Q: Is there any immediate action required by plan sponsors?
A: If you have any plan participants who live in the affected wildfire areas, be sure to check with your recordkeeper as to whether there is any difficulty in administering these provisions, since they are effective immediately. Keep in mind that even if you are not a California-based employer, this provision applies to former employees with account balances in your plan that may have moved to a wildfire area. You may also wish to check with counsel as to any required plan amendment. Plan sponsors should address the IRS levy issues in a similar fashion, although I suspect that very few plan participants will be affected by this provision. Action regarding hardship withdrawals can wait until the IRS has provided relevant guidance.
Q: Many plans have a requirement that all available loans must be taken prior to eligibility for a hardship distribution, in order to satisfy the regulatory safe harbor. Should plans remove this requirement?
A: This is a particularly good question, since, unlike the six-month suspension, Treasury was not specifically directed to remove the loan provision from the existing 401(k) regulations that contain the safe harbor provisions. Instead, the budget bill simply added a new subsection to Section 401(k) of the Code that states that there is no longer a requirement (though there never was one on the Code, only the regulations) that all outstanding plan loans must be taken prior to eligibility for a hardship distribution. However, could plans still impose this type of restriction? The answer might be yes, but that it would not be part of the safe harbor, which would remove the incentive for plan sponsors to require loans prior to hardship. Treasury was directed to “make any other modifications necessary to carry out the purposes of section 401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 18 1986” (which was the part of the Code that was amended to include the loan provision), so we should know for certain in the coming months. It would be nice if plan sponsors could still be incentivized to restrict hardship distributions to those who have exhausted their loan limits, since this minimizes plan leakage (as loans must be repaid).
Q: Must plans permit participants to repay IRS levies? Sounds counterintuitive to the purpose of a levy to me! And does this apply to other reductions of a participant’s account balance, such as a return of excess?
A: No, for two reasons: First, a participant is only permitted to repay an improper plan levy by the IRS (where the IRS returned the amount of the levy to the individual; proper levies, where no money was returned, may not be repaid). Secondly, this is an elective plan provision; a plan may prohibit the repayment of improper levies even though the Code allows for such payment. And, as for the second part of your question, the new provision only applies to improper levies, not other types of account balance reductions.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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