How Does the Federal Budget Act Affect Retirement Plans?
On Feb. 9, President Donald Trump signed into law the Bipartisan Budget Act of 2018 (the BBA), a two-year budget agreement that increases federal spending and funds the government through March 23. The BBA includes several budget provisions that affect retirement plans. So what do they mean to retirement savers? Let’s explore the key provisions in greater depth.
• The BBA removes the six-month prohibition on contributions to retirement plans after a hardship withdrawal. It directs the Internal Revenue Service (IRS) to change its administrative guidance to allow employees taking hardship distributions from a retirement plan to continue contributing to the plan. The revised regulations will apply to plan years beginning after Dec. 31, 2018.
• Prior to the BBA, under 401(k) and 403(b) plans, elective deferrals could be withdrawn upon hardship, but the earnings attributable to such elective deferrals could not. In addition, matching or nonelective employer contributions that met certain requirements were deemed to be “qualified matching contributions” (QMACs) or “qualified nonelective contributions” (QNECs), and could be used to help the plan meet certain nondiscrimination tests. QMACs and QNECs were subject to the withdrawal restrictions applicable to elective deferrals, but these amounts could not be withdrawn on account of hardship.
Under the BBA, effective for plan years beginning after Dec. 31, 2018, earnings on elective deferrals, QMACs (and related earnings) and QNECs (and related earnings) may now be withdrawn upon hardship.
• Plans may not require a participant to obtain an available plan loan before taking a hardship distribution, effective for plan years beginning after Dec. 31, 2018.
Recontributions of improperly levied amounts
Under the BBA, if the IRS levies a participant’s employer-sponsored retirement account or individual retirement account (IRA), and subsequently returns the money and interest, that person can recontribute the amount to the retirement plan or IRA. The contribution will be treated as a rollover and the interest treated as earnings within the plan.
Also under the BBA, the plan or IRA must permit rollovers, and the contribution must be made no later “than the due date (not including extensions) for filing the return of tax for the taxable year in which such property or amount of money is returned.” The rule regarding the allowance of repayment of a levy applies to 401(k), 403(b) and 457 plans. It is effective for taxable years beginning after Dec. 31, 2017.
Relief for victims of California wildfires
In general, the legislation provides relief from the 10% early withdrawal penalty for qualified distributions up to $100,000 made on or after Oct. 8, 2017, and before Jan. 1, 2019. Distributions must be made by an individual whose principal residence was in a wildfire disaster area and who sustained an economic loss due to the wildfires.
Distributions can be included in income ratably over a three-year period beginning with the year of distribution, unless the individual elects not to have ratable inclusions apply. Alternatively, amounts that are recontributed within the three-year period would be treated as a rollover and not includible in income. The legislation also permits individuals to recontribute funds to retirement plans if the funds were distributed for a home purchase in a wildfire disaster area that was cancelled on account of the wildfires. It also increases the limit and extends the repayment deadline for loans from retirement plans.
Establishment of a joint committee of Congress to improve the solvency of multiemployer plans
The joint committee of Congress was established to provide “recommendations and legislative language that will significantly improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation.” The joint committee is required to vote before Nov. 30, 2018, on a report and proposed legislative language. It will have 16 members of Congress (with four appointed by each of the Senate leaders and the House leaders). In order for the joint committee to approve a report and legislative language, both a majority of the Democrats and a majority of the Republicans must approve.
Certain special rules for expedited consideration of the joint committee’s proposals are provided, but a motion to proceed to consideration will still require 60 votes in the Senate, and such a motion must be held during this Congress.
Creation of new Form 1040SR for individuals over age 65
In addition to the provisions affecting retirement plans described above, the BBA requires the IRS to create a new simplified income tax return (Form 1040SR) for individuals age 65 or older by the end of the taxable year. The form is intended to be similar to the Form 1040EZ, but its use may not be restricted based on the amount of taxable income reported or the inclusion of certain types of income. (Social Security benefits, distributions from qualified retirement plans, annuities or other deferred payment arrangements, interest and dividends, or capital gains and losses will all be taken into account in determining adjusted net capital gain.) The new form shall be made available for taxable years beginning after the date of enactment.