UPDATED NOV. 8
While much of the focus has been on the potential “Rothification” of 401(k) plans, the Tax Cuts and Jobs Act included a number of other retirement plan-related provisions, including changes that impact hardship withdrawals and loans.
Among the provisions of Title I, Subtitle F of the Tax Cuts and Jobs Act (H.R. 1) that impact retirement plans are:
Under current law, Qualified Non-elective Contributions (QNECs), Qualified Matching Contributions (QMACs), investment earnings on those accounts and investment earnings on elective deferrals are not available for a hardship distribution [IRC § 401(k)(2)(B)(i)(IV)]. Section 1504 would now allow plans to include these amounts as available for a hardship distribution, which raises $700 million over 10 years.
At present, most plans provide for an “offset” distribution at the time a participant terminates with an outstanding loan balance. As a result, a participant receiving this type of distribution would, under current law, have 60 days to come up with the loan offset amount from his or her other funds and roll those monies into an IRA or qualified plan to avoid being taxed on the loan offset amount [IRC § 402(c)(3)]. Section 1505 would extend the period for rolling over the offset amount until the due date for filing their tax return for the year (including extensions).
Participants in qualified retirement plans are not currently allowed to take distributions from the plans while still working for the employer unless the employee reaches age 62 in the case of defined benefit plans and governmental defined contribution plans [IRC § 401(a)(36)] or age 59 ½ for all other defined contribution plans [IRC § 401(k)(2)(B)(i)(III)]. Section 1502 in the new legislation would lower the in-service distribution minimum age for defined benefit plans and governmental defined contribution plans from age 62 to age 59 ½ (this raises $13.1 billion in revenue over 10 years).
IRA Contribution/Conversion Recharacterization
Individuals are currently allowed to recharacterize either contributions or conversions to a traditional IRA into a Roth IRA and vice versa [IRC § 408A(d)(6)]. However, Section 1501 would repeal that provision in the tax code (raising $500 million in revenue over 10 years).
Closed Plan Nondiscrimination Testing
Employer-sponsored retirement plans must currently satisfy rules to ensure that the benefits provided under the plan do not discriminate in favor of highly compensated employees [IRC § 401(a)(4)]. Certain employers have closed their defined benefit plan to new employees but have allowed existing employees to continue to accrue benefits, arrangements that have, over time, run afoul of the nondiscrimination rules. New Section 1506 would provide nondiscrimination testing relief to certain employers with closed defined benefit plans, provided they give new employees an increased benefit in a defined contribution plan.
As with the other changes in the current bill, these changes are a long way from reality, however. But these will be worth keeping an eye on as well.