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The Impact of the Federal Budget Deal on Retirement Plans

3.20.2018

On February 9, 2018, Congress passed the amended Bipartisan Budget Act of 2018. This Act contained provisions impacting retirement plans. Sponsors should decide whether to adjust their plan documents and policies in response to these changes.

Hardships

First, this two-year budget agreement will make retirement funds more accessible to participants. Effective for plan years beginning after December 31, 2018, the Act will ease rules on hardship distributions by removing (1) the requirement to exhaust all other options by taking a loan from the plan, (2) the restriction on withdrawing certain employer contributions, and (3) the requirement to suspend participant contributions for 6 months after the hardship distribution. For the first time, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), contributions made to certain stock bonus plans or profit-sharing plans, safe harbor contributions, plus earnings on all contributions, are now available for hardship withdrawal.

California Wildfires

Individuals impacted by the California wildfires will find some additional relief. Generally, individuals who had their principal residence in the California wildfire disaster area, and who suffered economic loss by reason of the wildfires, may be entitled to what the Act calls “qualified wildfire distributions.” The relief for qualified wildfire distributions includes:

  1. For any qualified wildfire distribution up to $100,000 made between October 8, 2017 and December 31, 2018, the 10% withdrawal penalty will be waived.
  2. Unlike other hardship distributions, the participant can repay a qualified wildfire distribution within the three-year period after withdrawal. If repaid, the amount will be considered a rollover and not includible as part of reportable income. If the amount is not paid back, the withdrawal may be taken into income ratably over three years for tax purposes.

In addition, if a participant received a hardship distribution between April 1, 2017, and January 14, 2018, for the purchase or construction of a home that was then cancelled on account of being within a wildfire disaster area, the participant can recontribute that amount to the plan by June 30, 2018.

The maximum permissible limit on loans from retirement plans were also increased and the repayment deadline extended for individuals impacted by wildfires.

Tax Levies

The Act also provides relief relating to certain tax levies. If the funds held in a retirement fund are ever levied by the IRS and subsequently returned to the taxpayer, then the individual can contribute that amount, with interest, into an eligible retirement plan (including an IRA). The amount will be treated as a rollover contribution, and must be contributed by the filing deadline for the taxpayer’s tax return in the year the funds are refunded. This rule applies to amounts refunded in tax years beginning after December 31, 2017.

Next Steps

All of the above changes are permissive, not mandatory. Sponsors should consider whether they want to adjust retirement plan administration in response. Particularly:

  • Should the more lenient hardship rules be adopted?
    • Effective as early as 2019 plan year and may require a plan amendment.
  • Should the California wildfire relief be adopted?
    • May require changes to plan policies and/or a plan amendment. May be effective immediately.
  • Will the plan accept repayments of a tax levy?
    • May require a change to plan policies and/or a plan amendment. Some plans indicate all rollovers will be accepted, so a change may be required if a sponsor does not wish to accept these repayments. May be effective immediately (in 2018).

Sponsors should be sure to speak with their plan administrator and benefits counsel to ensure these decisions are properly reflected in both the plan and administrative procedures to avoid potential errors and sanctions for improper administration.

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