Retirement Plans and the Federal Budget Bill

By Teresa J. Leonard, QPA/QKA/ERPA, AIF® | Vice President Retirement Plan Services | 03.26.2018

The 2-year budget agreement was not expected to have any impact on Retirement Plans, however to everyone’s surprise some of the provisions previously removed from the Tax Cuts and Jobs Act found their way into the budget agreement.

Here is what you can expect:

Effective Immediately:

  1. Retirement accounts that are levied by the Internal Revenue Service (and have been returned to the participant), will be eligible to be returned back to the Retirement Account. The funds must be contributed to the plan by the employee’s tax filing due date for the year the money was returned. Note: Your Plan document may need to be amended to permit this contribution.
  2. Participants impacted by the California wildfires will be granted special loan and withdrawals provisions:
  • (i) The 10% excise is waived for distributions up to $100,000 issued on or after October 8, 2017 and before January 1, 2018. The waiver only applies to individuals whose principal residence was in the wildfire disaster zone and who sustained economic loss to due to the wildfire. Furthermore, participants who take a distribution will be allowed to repay the funds to their retirement account within three years.
  • (ii) Loans will be increased to 100% of the account balance up to $100,000.
  • (iii) Loan repayments for loans taken after October 8, 2017 and before January 1, 2019 are delayed one year. However, while this delay does not count toward the repayment period, interest will accrue during the delay

The following changes will take place effective January 1, 2019. The delay in implementing these changes will give Plan Sponsors and Recordkeepers time to make the necessary document and recordkeeping changes.

  1. Hardship Suspension | The six-month suspension of salary deferral after taking a hardship will be eliminated. Currently participants who take a hardship distribution are prohibited from making salary deferral contributions for six months. In addition, these participants also lost out on the employer match contributing. Eliminating the suspension has been a top issue for retirement specialist and finally legislatures realized the six-month suspension worked against the participant.
  2. Loan vs. Hardship | Participants will no longer be required to take a loan before requesting a hardship distribution. Currently, if your plan allows for both loans and hardships, participants are required to exhaust the loan provision before they can request a hardship. Taking a loan first was an additional burden for some participants. Many would stop their deferrals in order to make the loan payments. Allowing the participant to obtain a hardship (the participant must still satisfy hardship requirement) is a win for the participant. However, hardships should always be a last resort for the participant. Since these funds cannot be returned to their retirement account, participants need to remember this distribution could affect their retirement benefit at retirement.
  3. Funds Available for a Hardship | QNECs, QMACs, profit sharing, stock bonus plans and all earnings related to these contributions will now be available for a hardship distribution. It should be noted, the new regulation does not allow earnings on salary deferrals to be distributed as a hardship.

Over the next couple of months, your Recordkeeper and/or Third Party Administered will contact you regarding the new regulations and what action is needed to bring your document into compliance.

In the meantime, if you have any questions regarding the changes and how the provisions will affect your participants, please feel free to contact your LAMCO team member.

For a hard copy of this update please click here.

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