On February 9, 2018, Congress passed the Bipartisan Budget Act of 2018 (“Budget Act”). This two-year budget agreement contains a number of provisions relating to tax-qualified retirement plans, including hardship withdrawal changes, improper levies, and disaster relief provisions.
Hardship Withdrawal Changes
The Budget Act changes hardship withdrawals in three ways. First, the IRS is directed to eliminate, within one year of February 9, 2018, the regulations providing for the six-month suspension of elective contributions upon a participant’s receipt of a hardship withdrawal. The revised regulations are to apply to plan years beginning after December 31, 2018.
Second, for plan years beginning after December 31, 2018, participants will no longer be required to obtain available loans under the plan before requesting a hardship withdrawal.
Third, amounts available for distribution due to hardship have been expanded to include elective deferrals (plus earnings) to profit sharing or stock bonus plans (this includes 401(k) plans), qualified matching contributions (plus earnings) and qualified nonelective contributions (plus earnings). Under present law, only elective deferrals and pre-1989 earnings on elective deferrals are available for distribution on account of hardship. This provision is also effective for plan years beginning after December 31, 2018.
Please be advised that all of these provisions, which are intended to facilitate hardship withdrawals, are optional provisions. Plan sponsors concerned about “leakage” resulting from hardship withdrawals need not adopt any of these modifications.
With respect to amounts paid under an improper levy, the Budget Act permits an individual to recontribute the amounts (plus interest), within a specified timeframe, to the eligible retirement plan after it has been returned by the IRS. The eligible retirement plan must permit such recontribution, and if it is amended to so provide, the amounts will be treated as an eligible rollover contribution. This provision applies to amounts paid under an improper IRS levy in tax years beginning after December 31, 2017. It is at the discretion of plan sponsors whether to amend their qualified plans to provide for this change.
The third area addressed by the Budget Act is relief for individuals impacted by the California wildfires.
Qualified wildfire distributions. An individual whose principal place of residence during any portion of the period from October 8, 2017 to December 31, 2017 is in a Presidentially-declared wildfire disaster area and who sustained an economic loss due to the wildfires is eligible to receive a qualified wildfire distribution from his or her eligible retirement plan. The amount of the distribution may not exceed $100,000 and is not subject to the 10% early withdrawal tax under section 72(t) of the Internal Revenue Code of 1986, as amended (the “Code”). Qualified wildfire distributions are available from eligible retirement plans on or after October 8, 2017 and before January 1, 2019.
Further, the amount of a qualified wildfire distribution can be included in income ratably over a three-year period, unless the individual elects not to have ratable inclusion apply. Alternatively, the amount can be repaid/recontributed to the eligible retirement plan within the three years and will be treated as an eligible rollover contribution and not included in income.
Cancelled home purchases. The Budget Act also permits individuals to recontribute certain retirement plan withdrawals received after March 31, 2017 and before January 15, 2018 for the purchase of a home or construction in the California wildfire disaster area that was cancelled because of the wildfires.
Loan relief. For an individual whose principal place of residence during any portion of the period from October 8, 2017 to December 31, 2017 is located on the California wildfire disaster area and who sustained an economic loss due to the wildfires, the maximum amount that a participant or beneficiary can borrow from a retirement plan is increased to the lesser of $100,000 and the full amount of the vested account balance (from the lesser of $50,000 or one-half of a participant’s vested account), for loans made during the period February 9, 2018 to December 31, 2018. Loan repayments may also be delayed for a one-year period. These provisions are effective immediately, although they will require a plan amendment to be implemented.
Additionally, the Budget Act created a joint select committee composed of 16 members – eight from the House and eight from the Senate, with an equal number of Democrats and Republicans, to address solvency issues for multiemployer plans and the Pension Benefit Guaranty Corporation (“PBGC”). The Joint Committee is required to provide legislative language by November 30, 2018.
Finally, the IRS is directed to create a Form 1040SR for individuals over age 65. The form will be similar to Form 1040 EZ, but its use shall not be restricted because the individual’s income for the year includes, among other items, distributions from tax qualified plans.