Budget Act Broadens Disaster Relief, Rewrites Hardship Rules, and More—Retirement Plan Amendments Expected
On February 9, 2018, Congress approved and President Trump signed into law the Bipartisan Budget Act of 2018 (BBA-18). In addition to funding the federal government, it makes important changes to retirement plans. Specifically, it provides expanded tax relief for victims of natural disasters, relaxes the rules for hardship distributions from employer-sponsored retirement plans, makes slight changes to portability rules, and requires the IRS to create a simplified tax return for filers age 65 or older.
Relief for Victims of California Wildfires
BBA-18 provides relief to California wildfire victims consistent with previous legislation following major natural disasters, dating back to 2005 for Hurricane Katrina and, more recently, to October 2017 for Hurricanes Harvey, Irma, and Maria. The relief is provided to individuals who receive “qualified wildfire distributions.” A qualified wildfire distribution is a distribution to an individual whose principal residence is within the declared disaster area and who has suffered an economic loss as a result of the wildfires. The following relief is granted.
Individuals may distribute up to $100,000 from their IRAs and employer-sponsored retirement plans.
Qualified distributions must be received on or after October 8, 2017, and before January 1, 2019.
Individuals may evenly spread taxation of their qualified distributions over a three-year period.
Qualified distributions are exempt from the 10 percent early distribution penalty tax.
Individuals may repay qualified distributions to a retirement plan or IRA over a three-year period.
Retirement plan distributions are not subject to the mandatory 20 percent withholding requirement.
Employers may grant up to $100,000 in plan loans (increased from $50,000), and the usual 50 percent-of-vested-balance limitation is increased to 100 percent.
Retirement plan loan repayments due between October 8, 2017, and December 31, 2018, may be delayed for one year.
Participants have until June 30, 2018, to repay hardship distributions taken for home construction suspended because of wildfires.
Employers have until the end of their 2019 plan year (2021 for governmental plans) to adopt any applicable amendments.
Softening the Hardship Rules
Participants in employer-sponsored retirement plans must have a distribution triggering event before they can receive a plan distribution. Plan permitting, certain hardship conditions qualify as such an event. BBA-18 alters the following restrictions on hardship distributions. (Effective for 2019 and later plan years)
Elimination of six-month deferral suspension requirement: BBA-18 directs the Treasury Department to write new regulations eliminating the portion of the current safe harbor rule which requires participants to suspend deferrals for at least six months after receiving a hardship distribution.
Employer contributions eligible for hardship distributions: Qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), and their earnings, are eligible for hardship distributions. In addition, earnings on elective deferrals will be eligible for hardship distribution.
Loans need not precede hardship distributions: Participants will not be required to take a plan loan before receiving a safe harbor hardship distribution.
Rollover of Wrongful IRS Levy
The IRS may levy (seize) IRA and retirement plan assets in order to collect taxes it is owed. If the Treasury Department determines that a prior levy from an IRA or retirement plan should not have occurred and returns assets to the taxpayer, the taxpayer may return the assets to an IRA or retirement plan under the following terms. (Applies to amounts returned on or after January 1, 2018)
The amount of money returned to the taxpayer, adjusted for earnings, may be rolled over to an IRA or retirement plan (plan permitting).
The rollover must occur by the individual’s tax return deadline (not including extensions), for the year in which the amount is returned. For tax purposes, the rollover will be treated as if it occurred in the year the IRS levy resulted in the distribution.
A rollover to an IRA will not count towards the one-per-12-month IRA rollover limitation.
A non-Roth (generally pretax) amount rolled over to a Roth IRA or designated Roth account will be taxable.
Nonspouse beneficiaries with inherited IRAs may roll over returned amounts to such IRAs.
Simplified Tax Form for Seniors
Certain items of income have historically required taxpayers to file an income tax return other than simplified tax returns 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, or 1040, U.S. Individual Income Tax Return. BBA-18 directs the Treasury Department to draft a new, simplified income tax form (Form 1040SR) that any taxpayer age 65 or older may use. (Available for 2019 tax year filings)
Form 1040SR is to be as similar to Form 1040EZ as possible.
A taxpayer must be age 65 or older in the tax year for which the form is filed.
Form 1040SR may be used by individuals whose income includes capital gains and losses, interest or dividends, distributions from most retirement plan arrangements, and Social Security benefits.
Income limits will not apply to the use of Form 1040SR.
Solvency of Union Pension Plans and PBGC
BBA-18 establishes a Joint Select Committee on Solvency of Multiemployer Pension Plans. While defined benefit pension plans in general sometimes face solvency issues, the problem has been particularly acute among multiemployer (i.e., union) pension plans. The Committee is to make recommendations and propose legislation to improve the solvency not only of these plans, but also of the Pension Benefit Guaranty Corporation (PBGC). The mandate requires public hearings, approving a report, and proposing legislation by November 30, 2018.
Foreshadowing of Things to Come?
2018 could be a year of significant legislative action for retirement plans. As both the tax reform bill and the Bipartisan Budget Act of 2018 have demonstrated, retirement provisions can readily find their way into legislation that does not target them specifically. This appears to be especially true of concepts that are noncontroversial and have bipartisan support. It would not be a great surprise if we see more of the same in the months to come. Ascensus will continue to analyze the changes made by BBA-18 and their effect on retirement products, services, and operations.