Tax Reform, Federal Budget Agreement & Employee Benefits: The Trend Continues
Although several significant changes to qualified retirement plans were proposed as part of the Tax Cuts and Jobs Act of 2018 (the “TCJA”), the final law contains very few changes of substance. It has been over 10 years since any significant substantive changes were made to the federal laws governing tax qualified retirement plans, but Congress continues to tinker with the existing rules.
Changes to Participant Loans
The TCJA only made two minor changes to the laws that apply to tax qualified retirement plans. The first allows participants who terminate employment with an outstanding plan loan balance more time to roll over the outstanding loan balance to another plan or IRA without incurring tax on the loan balance. The deadline was previously 60 days after the loan offset occurs, but now the loan offset can be rolled over as late as the participant’s tax return filing deadline for the year during which the loan offset occurred.
The only action required by employers to comply with the new rule is to make sure that participants are properly notified of the new rule when the loan offset occurs, which should be the case if the participant is given an updated Special Tax Notice (or a supplement to the Special Tax Notice until it is updated by the IRS). But, employers who allow their former employees to continue to repay loans after their employment terminates may now want to revise their plans to require immediate repayment.
The second change relates to safe harbor hardship distributions caused by a casualty. Effective as of the first day of the first plan year beginning on or after January 1, 2018, these distributions may only be made in the event of damage to a participant’s principal residence if the damage is attributable to a natural disaster declared by the President of the United States. Isolated damage to a participant’s home caused by a fire or tornado that does not also affect a large number of other homes (resulting in a presidentially declared disaster) will no longer qualify. Therefore, plan administrators will need to revise their policies and possibly summary plan descriptions to include this new limitation.
Surprisingly, the temporary budget agreement recently approved by Congress contains several more significant changes to the hardship distribution rules. One is the elimination of the 6 month period after a participant receives a hardship distribution from a 401(k) plan during which the participant is prohibited from making pay deferral contributions. Another is the elimination of the requirement that the participant borrow from the plan to the extent a loan is available before receiving a hardship withdrawal. Finally, hardship withdrawals will be permitted from qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs). These provisions do not become effective until plan years beginning in 2019 and will likely require plan amendments as well as modifications to summary plan descriptions and distribution forms.
As a result of the temporary reduction in federal income tax rates, all sponsors of 401(k) or 403(b) plans should consider allowing Roth deferrals to be made under their plans, if they do not already. This is particularly true with respect to partnerships, limited liability companies taxed as partnerships and S corporations, since some owners of these entities may be entitled to a tax deduction that will make Roth deferrals more favorable than pre-tax deferrals.
Although not a retirement plan change, the TCJA makes another change that may affect the operation of plans. The TCJA no longer allows moving expenses paid or reimbursed by an employer to be excluded from an employee’s taxable income. Therefore, unless an employer’s qualified plan specifically excludes moving expenses from the definition of compensation, such payments will now generally be included in the participant’s compensation. This will affect the calculation of a participant’s 401(k) contributions and the amount of employer contributions for the participant. If moving expenses are not excluded from compensation under an employer’s plan, an employer may want to amend its plan.
Although several additional proposed changes to the employee benefit provisions have been floated in Congress, these are the only significant ones to be adopted so far. But, stay tuned for more tinkering.
If you have any questions, please contact the author or any member of the Employee Benefits Practice Group.