Senate's Amended Tax Bill: Several "Hot Button" Items Removed (For Now), But Many Important Changes Remain

The United States Senate passed the Tax Cuts and Jobs Act with an amendment ("Senate Bill") on Dec. 2, 2017. The Senate Bill contains fewer changes concerning retirement plans than were originally proposed, which suggests this year's tax reform efforts might have less impact on public and private retirement plans than previously expected. However, many key provisions still remain, and until a final bill is passed, uncertainty remains. Our summary of both the House Bill and Senate Bill is available here.
 
The Senate Bill includes the following changes relevant to retirement plans:
 

1. Expanded Hardship Withdrawal Sources. The Senate Bill, like the House Bill, permits hardship distributions from account earnings and employer contributions and does not require participants to take available loans before receiving a hardship distribution. Effective for plan years beginning after 2017.
2. No IRA Recharacterization. The Senate Bill, like the House Bill, eliminates the ability of taxpayers to convert contributions to a Roth IRA into contributions to a traditional IRA and to convert contributions to a traditional IRA into contributions to a Roth IRA. Effective for plan years beginning after 2017.
3. Increased Volunteer Service Awards Limits. The Senate Bill 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. The Internal Revenue Code currently does not treat these plans as providing deferred compensation under Section 457 for annual awards of up to $3,000. The Senate Bill increases this limit to $6,000. Effective for plan years beginning after 2017.
4. Extended Rollover Period for Loans. The Senate Bill, like the House Bill, 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 currently must repay or roll over loans within 60 days. The Senate Bill extends this period to the due date for filing tax returns for that year (with extensions). Effective for plan years beginning after 2017.
5. Extended Holding Period for Investment Interests. The Senate Bill, like the House Bill, extends the holding period required for interests in an investment or real estate business to receive long-term capital gains treatment. Currently, gains from the sale of capital assets, including interests in an investment or real estate business, qualify for long-term capital gains treatment after a one-year holding period. The Senate Bill requires a three-year holding period for interests in an investment or real estate business. Effective for tax years beginning after 2017.

The Senate Bill omits some of the most significant changes affecting retirement plans that the Senate's early draft contained. However, as noted above, until a final bill is passed and signed into law, the proposals remain in flux.  Among the omitted changes are the following:
 

1. No Single Annual Limit for 457(b), 401(k), 403(b). The Senate originally proposed applying a single annual limit for each employee to deferrals made to 401(k), 403(b), and governmental 457(b) plans of the same employer. This would have required that all such contributions in the aggregate comply with a single annual limit in the same way limits on deferrals under 401(k) and 403(b) plans are currently coordinated. The original proposal also repealed the ability of participants to make additional catch-up contributions under 403(b) and governmental 457(b) plans and the ability of employers to make contributions to 403(b) plans for up to five years after termination of employment. The Senate Bill omits these changes.
2.  No 10% Early Withdrawal Tax for 457(b). The Senate originally proposed eliminating the exemption for governmental 457(b) plans from the 10% early withdrawal tax that ordinarily applies to other qualified retirement plans for taxable distributions before age 59½. The Senate Bill omits this change.
3.  No Compensation Limit on Catch-Up Contributions. The Senate originally proposed prohibiting employees who receive wages of $500,000 or more in a year from making catch-up contributions to a 401(k), 403(b), or governmental 457(b) plan for the subsequent year. Currently, all employees age 50 and older can make catch-up contributions to these plans. The Senate Bill omits this change.
4. No Change to Taxability of Nonqualified Deferred Compensation. The Senate originally proposed including all nonqualified deferred compensation in an employee's income on the earlier of actual or constructive receipt or when the employee's right to the compensation was no longer subject to a substantial risk of forfeiture. Currently, compliance with Section 409A permits some employees to defer compensation until actual or constructive receipt. Because most governmental nonqualified deferred compensation plans are already subject to Code Section 457(f), the proposed change would not have affected them significantly. QEBAs, however, would have been rendered ineffective as a deferred compensation tool. The Senate Bill omits this change.

The Senate and House of Representatives are now in the process of resolving the differences between their two bills. The Senate Bill omits a few of the more concerning changes affecting retirement plans proposed by the House Bill, including the application of unrelated business income tax to any trust exempt from tax under Code Section 501(a), which could result in significant taxation of public pension plans. Congress is working to resolve these differences and pass the Tax Cuts and Jobs Act by the end of the year.
 
In addition to the highlights listed above, there may be other changes that could impact retirement plans, including certain items which could be included in an employee's taxable compensation.  
 
For more information about the Tax Cuts and Jobs Act and how it might affect your employee benefit plans, please contact Audra Ferguson-Allen, Rob Gauss, Tara Schulstad 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.