Recap of the Tax Cuts and Jobs Act for Governmental Plans Recap of the Tax Cuts and Jobs Act for Governmental Plans

Recap of the Tax Cuts and Jobs Act for Governmental Plans

In a whirlwind of less than 60 days, the Tax Cuts and Jobs Act ("Act") was introduced in the U.S. House on Nov. 2, 2017, amended and passed by both the House and the Senate through reconciliation, and signed by the President on Dec. 22, 2017. For an overview of the Act's progression, see our original summary and chart and our review of the final Senate Bill and chart.
 
Although many provisions of the original House and Senate Bills could have impacted governmental plans, the Act finally signed into law omits most of them, including the most potentially disruptive proposals. Our updated overview of the new law is available here. Governmental plans should be aware of the following changes in particular:
 
1.    Extended Rollover Period for Loans. The Act extends the period in which participants may repay loans or roll them into an IRA to avoid taxation upon plan termination or severance from employment. Plan participants were formerly required to repay or roll over loans within 60 days. The new deadline is the due date for filing tax returns for the relevant year (with extensions). Effective for plan years beginning after 2017.
 
2.    Extended Holding Period for Investment Interests. The Act extends the holding period required for interests in an investment or real estate business to receive long-term capital gains treatment. Previously, gains from the sale of capital assets, including interests in an investment or real estate business, qualified for long-term capital gains treatment after a one-year holding period. The new law requires a three-year holding period for interests in an investment or real estate business. Effective for tax years beginning after 2017.
 
3.    Increased Volunteer Service Awards Limits. The Act increases the annual dollar limit for plans that pay only length of service awards to volunteers who provide firefighting and prevention services, emergency medical services, or ambulance services. Going forward, the Internal Revenue Code will not treat these plans as providing deferred compensation under Section 457 for annual awards of up to $6,000. Effective for plan years beginning after 2017.
 
4.    Excise Tax on Excess Tax-Exempt Executive Compensation. The Act imposes an excise tax on "covered employees" of a tax-exempt organization who receive either remuneration in excess of $1,000,000 or an "excess parachute payment." The tax is equal to 21% of the remuneration in excess of $1,000,000 plus 21% of any excess parachute payment. "Covered employees" are the five most highly compensated employees of the tax-exempt organization during the current tax year, along with any former "covered employees" from tax years beginning after Dec. 31, 2016. An "excess parachute payment" is the amount in excess of any parachute payment over the base amount allocated to the payment.
 
5.    No Recharacterization of Roth Conversions. The Act eliminates the ability of taxpayers to unwind conversion contributions made to a Roth IRA. Distributions from a qualified retirement plan that are contributed to a Roth IRA in a qualified rollover contribution cannot be recharacterized as traditional IRA contributions. Effective for plan years beginning after 2017.
 
In the coming weeks, Ice Miller will issue a series of publications taking a closer review of certain provisions of the Act, including fringe benefits, qualified transportation, executive compensation, and the new Code § 4960 (relevant to tax-exempt organizations).

For more information about the Tax Cuts and Jobs Act and how it might affect your employee benefit plans, please contact Mary Beth Braitman, Audra Ferguson-Allen, Rob Gauss, Lisa Harrison, Tara Schulstad Sciscoe, Chris Sears, Austin Anderson, 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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