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Tax Reform and A Retirement Plan Surprise

As previously discussed, the Tax Cuts and Jobs Act passed at year end contained relatively few retirement plan-related provisions.  However, upon closer review of the more than 1,000-page bill, some of the provisions were found to indirectly affect retirement.  

One such example, about which I recently Tweeted, is a previously unreported provision that changes Code Section 165.  Code Section 165 relates to the deductibility of casualty losses (e.g., a tree falling on your house).  It used to be that such losses were generally deductible, to the extent that they were not reimbursed or reimbursable by insurance.  However, under the new law, these losses will only be deductible if the loss was due to a federally declared disaster.  Therefore, an ordinary tree falling on your house will not longer be deductible, but a tree that falls due to a major hurricane, which the federal government declares to be a disaster, would be deductible.

Okay, you are probably saying to yourself at this point, “Mike, thanks for the highly entertaining lesson on the deductibility of casualty losses, but what on earth does this have to do with retirement plans?” Well, a casualty loss is one of the reasons a participant may take a hardship distribution under the safe harbor provisions established for retirement plans.  With the new legislation, casualty loss hardship distributions should not be approved unless the casualty loss was the result of a federally declared disaster.

While the intent of rewriting the casualty loss deduction was unlikely to eliminate the ability for retirement plan participants to take hardship distributions due to casualty loss, other provisions may also have an indirect impact on retirement plans, intentional or not.  However, unintended consequences of legislation are often addressed in future legislation, in what is called a “technical corrections” bill.  Will there be others?  Stay tuned!

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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