2018 Budget Act Contains Retirement Provisions

Feb 16, 2018

The Bipartisan Budget Act of 2018 (the “Act”) was enacted on February 9, 2018.  The Act includes a number of provisions that will affect qualified retirement plans, as follows:

Disaster Relief for California Wildfires.  The Act provides relief for “Qualified Wildfire Distributions” taken (i) on or after October 8, 2017, and prior to January 1, 2019 (ii) by individuals whose principal place of abode at any time during that period was located in the California wildfire disaster area and who sustained an economic loss by reason of those wildfires (iii) from qualified plans, tax-sheltered 403(b) annuity plans, eligible governmental 457(b) plans, and other “eligible retirement plans.” Specifically, up to $100,000 of distributions made during the above period may be treated as Qualified Wildfire Distributions, to which the following favorable tax treatment applies: 
  • Exemption from the 10% early payment penalty tax
  • Ratable inclusion in income over a three-year period
  • Exclusion from income of that portion of the distribution that is re-contributed to an eligible retirement plan during the three-year period beginning on the day after the date the distribution was received
  • Not treated as an eligible rollover distribution for purposes of tax withholding or provision of tax notices
  • Treated as a permissible distribution event under the federal tax code.

Additionally, the Act provides that individuals who received a hardship distribution from a qualified plan, qualified annuity, 403(b) plan, or governmental 457(b) plan (or who received a first-time homebuyer distribution from an Individual Retirement Account (IRA)) between April 1, 2017 and January 14, 2018, that was to be used to purchase or build a principal residence located in the California wildfire disaster area but which was not so used on account of the wildfires, can re-contribute all or a portion of the amount distributed to an eligible retirement plan between October 8, 2017 and June 30, 2018.  To the extent all or any portion of the distribution is re-contributed, it will be excluded from income as though originally rolled over on a tax-deferred basis.
Finally, the Act allows qualified plans, qualified annuities, 403(b) plans, and governmental 457(b) plans, to apply special loan provisions to “Qualified Individuals.”  Specifically, such plans can:
  • Make larger non-taxable loans (up to $100,000) between February 9, 2018 and December 31, 2018, to Qualified Individuals
  • With respect to Qualified Individuals who had an outstanding loan on or after October 8, 2017, (i) defer any payments due between October 8, 2017 and December 31, 2018 for a period of one year, (ii) extend the term of the loan for a period of one year (even if the extension would push the term out beyond the normal five-year period), and (iii) adjust any subsequent repayments to reflect the delay in payments and interest accruing during the deferment period.
A Qualified Individual is an individual whose principal place of abode during any portion of October 8, 2017 to December 31, 2017 is located in the California wildfire disaster area and who sustained an economic loss caused by the wildfires.

Any plan amendments that may be needed in order to reflect use of any of these relief provisions will generally need to be adopted by the last day of the first plan year beginning on or after January 1, 2019.

Modification of Relief for Hurricanes Harvey and Irma.  The relief provided in the Disaster Tax Relief and Airport and Airway Extension Act of 2017, related to Hurricanes Harvey and Irma, has been broadened to include areas declared major disasters by the President before October 17, 2017 (rather than before September 21, 2017).

Establishment of Joint Select Committee on Solvency of Multiemployer Pension Plans.  The Act provides for the establishment of a Congressional committee tasked with improving the solvency of multiemployer plans and the Pension Benefit Guaranty Corporation, and proposing legislation for that purpose. 

Wrongful Levies on Retirement Plan Assets.  The Act provides that if amounts taken from an account under a qualified plan, a qualified annuity, a 403(b) plan, or a governmental 457(b) plan pursuant to an IRS levy are returned on or after January 1, 2018 for specified reasons, the individual may re-contribute the returned amount, with any interest paid, to the plan from which the distribution was originally made (or to an IRA, if the distributing plan does not permit such contributions) by the due date for filing his or her tax return for the taxable year in which the money is returned.  To the extent all or any portion of the distribution is re-contributed, it will be excluded from income as though originally rolled-over on a tax-deferred basis.

Elimination of Safe Harbor Hardship Suspension Period.  The Act directs the Secretary of the Treasury to modify current 401(k) regulations to (i) remove the provision that requires employees to stop making contributions to plans of his or her employer for a period of six months after receiving a hardship distribution, and (ii) make any other changes to those regulations to facilitate the making of hardship distributions.  Any modifications are to be made within one year of the enactment date of the Act, and will be effective for plan years beginning after December 31, 2018.

Other Changes to Hardship Distributions.  Effective for plan years beginning after December 31, 2018, the Act will allow qualified non-elective contributions, qualified matching contributions, and all earnings on those contributions (as well as earnings on elective deferrals) to be distributed on account of a financial hardship.  Additionally, the Act now specifically provides that a participant does not have to take plan loans prior to receiving a hardship distribution.

Next Steps.  Newport Group clients may immediately make disaster relief distributions and loans available to plan participants impacted by the California wildfires prior to amending their plans.  However, in order to administer your plan using the disaster relief provisions, Newport Group will need written direction from you.  If you wish to make disaster relief available to plan participants, you may contact your Client Relationship Manager to request a Disaster Relief Election form and board resolution adopting the disaster relief provisions. If you use a Newport Group-sponsored document, Newport Group will provide an amendment when it becomes available to reflect the provisions of the Act, including the disaster relief provisions.  If you do not use a Newport Group-sponsored document, you will need to contact your document provider to obtain the necessary document updates prior to the amendment deadline. 

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