Bipartisan Budget Act of 2018 Brings Changes for Retirement Plans Bipartisan Budget Act of 2018 Brings Changes for Retirement Plans

Bipartisan Budget Act of 2018 Brings Changes for Retirement Plans

The Bipartisan Budget Act of 2018 ("Act") was passed into law on Feb. 9, 2018, and introduces some unexpected changes for retirement plans. Many of these changes were originally proposed by the House and Senate as part of the Tax Cuts and Jobs Act, but the Conference Committee ultimately excluded them from the final draft of the bill. The most significant of the Act's changes for retirement plans reduces the existing restrictions on hardship distributions from 401(k) and 403(b) plans.
Hardship Distributions. Regulations under Section 401(k) of the Internal Revenue Code permit distributions made on account of an employee's hardship if "necessary" to satisfy an "immediate and heavy financial need." In general, whether an employee's need is "necessary" and "immediate and heavy" is determined on the basis of all facts and circumstances. In some cases, however, an employee's need is automatically deemed to satisfy these standards. In order for a need to be deemed "necessary" under the safe harbor, the employee
  • must have obtained all other distributions and nontaxable loans available under the plan and all other plans of the employer, and
  • must be prohibited under the plan from contributing to any qualified or nonqualified plan maintained by the employer for at least six months after receiving the hardship distribution.
The Act directs the Secretary of the Treasury to modify the 401(k) regulations to delete the second of these requirements. Effective for plan years beginning after Dec. 31, 2018, employees experiencing hardship will not, in order for their hardship distributions to be deemed "necessary" under the safe harbor, be prohibited from contributing to employer plans for six months after receiving a hardship distribution. Rather, only the first requirement, to obtain all other available distributions and nontaxable loans from the employer's plans, will apply for the distribution to be deemed "necessary" under this safe harbor.
Comment: Regulations under Section 403(b) incorporate the 401(k) regulations on hardship distributions by reference, and make them applicable to 403(b) plans. Accordingly, the change to the 401(k) regulations will apply to 403(b) plans as well.
The Act clarifies that a distribution will not fail to be made for hardship merely because the employee does not take any available loan under the plan. Note this clarification does not change the safe harbor for determining a distribution is necessary, but rather clarifies that taking all available loans is not required to satisfy the hardship standards.
The Act also expands the sources from which employees may take hardship distributions. Currently, hardship distributions are limited to the amount of the employee's total elective deferrals. This means hardship distributions cannot be taken from Qualified Non-elective Contributions ("QNECs"), Qualified Matching Contributions ("QMACs"), or earnings on any employer or employee contributions. The Act removes this limitation by expressly permitting hardship withdrawals from elective contributions, QNECs, QMACs, and any earnings thereon.
Comment: These changes were made to the 401(k) statute, not the regulations. Since the 403(b) regulations incorporate the 401(k) regulations by reference, and not the statutory provisions, it is not clear that these two changes will apply to 403(b) plans without a change to the 403(b) regulations. This is particularly true as to the expansion of hardship distribution sources to earnings, since the 403(b) regulations specifically prohibit distributions from earnings.
Comment: Most plan sponsors will want to take advantage of some or all of these new rules both to simplify plan administration and to benefit participants. Plan sponsors who wish to do so will need to amend their plan documents to take advantage of the new law beginning with the 2019 plan year.
Joint Select Committee. The Act establishes a new joint select committee of Congress called the "Joint Select Committee on Solvency of Multiemployer Pension Plans." The stated purpose of the Committee is to improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Association ("PBGC"). The bipartisan Committee, comprised of both Senate and House members, has broad powers to investigate matters related to its purpose and may hold hearings, require witness testimony, and require the production of documents. The Committee is required to finalize and vote on recommended legislative language to achieve these goals before Dec. 1, 2018. If approved by at least five Republican and five Democrat members of the Committee, the proposed legislation will be considered on an expedited basis in the Senate.
Comment: While a step forward in trying to resolve the multiemployer pension plan funding crisis, any proposed legislation will still depend on bipartisan agreement on an approach.
Repayment After Improper Levy. The Act provides tax relief for individuals whose retirement accounts have been wrongfully levied by the Internal Revenue Service ("IRS"). Effective Jan. 1, 2018, if the IRS determines an account or benefit under a qualified 401(a) retirement plan, 403(b) plan, governmental 457(b) plan, or IRA was wrongfully levied, and therefore, returns an amount of money and/or interest to an individual, the individual may contribute the amount returned plus interest to that plan, if permitted by the plan's written terms. Alternatively, the individual may contribute the amount to an IRA. The contribution must be made no later than the due date (without extensions) for filing the tax return for the year in which the wrongfully levied amount is returned to the individual. Both the distribution of the levied amount and the contribution of the return of that amount are treated as eligible rollover distributions and are not subject to income tax, unless the distribution is made from a non-Roth IRA or account and contributed to a Roth IRA or account. This action will restore the tax-deferred status of the wrongfully levied amounts.
Comment: This rule allows a longer time to rollover the returned amount than the 60 day rule that applies to traditional plan rollovers and permits the rollover of interest on the returned amount.
Comment: Plans sponsors who would like to allow the repayment of amounts wrongfully levied upon by the IRS to their plans should consider amending their plan language to expressly permit these contributions.
Wildfire Distributions. The Act provides relief for individuals who suffered losses from the California wildfires in 2017. The relief is similar to that provided to victims of Hurricanes Harvey, Irma, and Maria, as well as that recently provided by the Tax Cuts and Jobs Act for those who experienced major disasters in 2016. The relief is available to individuals (i) whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, was located in an area of California for which a major disaster was declared by the President on account of wildfires during 2017, and (ii) who suffered an economic loss from the wildfires.
For these individuals, distributions from a qualified 401(a) retirement plan, 403(b) plan, governmental 457(b) plan, or an IRA between Oct. 8, 2017, and Dec. 31, 2018, receive the following special tax treatment:

  1. The 10-percent tax on early distributions under Section 72(t) does not apply;
  2. The 20-percent withholding requirement applicable to eligible rollover distributions under Section 3405 does not apply;
  3. The distribution may be repaid or contributed to a plan that would accept it as a rollover distribution, at any time during the three-year period following distribution; and
  4. If not repaid to the plan, the distribution is included in the recipient's income ratably over the three taxable year period beginning with the year of receipt, unless the recipient elects otherwise.
Qualified distributions are limited to $100,000 for the entire period.
In addition, the Act increases, through the end of 2018, the limit on loans from 401(a) qualified plans to the lesser of $100,000 or 100% of the employee's non-forfeitable account balance and provides a one-year delay in repayment for loans with due dates between Oct. 8, 2017, and Dec. 31, 2018.
Individuals who received a distribution from a 401(k) or 403(b) plan between April 1, 2017, and Jan. 14, 2018, either on account of financial hardship or as a qualified first-time homebuyer distribution, and who intended to use the distribution to construct a home but did not do so on account of the wildfires, may contribute the amount distributed to a qualified 401(a) retirement plan, 403(b) plan, governmental 457(b) plan, or an IRA between Oct. 8, 2017 and June 30, 2018.
Comment: Private plan sponsors may amend their plans to comply with these changes on or before the last day of the first plan year that begins in 2019, provided that (i) the plans are operated in compliance until the amendments are adopted, and (ii) the amendments apply retroactively beginning with the effective date of the Act or the date on which the IRS or DOL issues related regulations. Governmental plan sponsors have an additional two years to amend their plans, but are otherwise subject to the same conditions.
For more information about the Bipartisan Budget Act of 2018 and how it might affect your employee benefit plans, please contact Craig Burke, Audra Ferguson-Allen, Sarah Funke, Rob Gauss, Melissa Proffitt, Marc Sciscoe, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you work.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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