After the Tax Cuts and Jobs Act (TCJA) was enacted in December 2017, who would have thought that more retirement changes would be issued a few months later?! But, here we are again…
Congress passed the Bipartisan Budget Act of 2018 (H.R. 1892) to keep the government open, and the next morning, on Feb. 9, 2018, President Trump signed it into law. The fact that the budget contained retirement plan changes was a surprise to many in the retirement benefits community.
Some “good” changes did not make it into the TCJA in 2017, so it is somewhat of a relief to see that a few were included under the Budget Act. In this article we will focus on the hardship distribution changes.
Remove six-month suspension on contributions to retirement plans after a hardship withdrawal. The Budget Act directs the IRS to change its administrative guidance to allow employees taking hardship distributions from a retirement plan the option to continue contributing to the plan. The revised regulations will apply to plan years beginning after Dec. 31, 2018.
Allow QNECs, QMACs, Profit-Sharing contributions and earnings on contributions to be included in a hardship withdrawal. This change will modify the rules relating to hardship withdrawals from 401(k)s and 403(b)s to permit employers to extend hardship distributions to amounts not previously permitted. The current rule limits hardship distributions to the principal amount of elective deferrals; therefore, this may cause an issue in cases in which the provider does not track the earnings in the account.
In 403(b) plans, this was a major problem before 2009, causing participants to have restricted funds for hardship distribution requests. That problem will no longer exist beginning in 2019.
Loan first requirement. The Budget Act removes the requirement that a participant exhaust all available loan amounts from all plans of the employer before taking a hardship withdrawal. This provision has proven to be an administrative nightmare, requiring an employee who has a hardship to take a loan first and then proceed to applying for a hardship. This is also effective for plan years beginning after Dec. 31, 2018.
Treasury has one year to revise regulations. The Budget Act requires that the Treasury, within one year of enactment (Feb. 9, 2019), amend the regulations to reflect the above changes to hardship distributions. Outstanding questions hopefully will be answered in the revised regulations, such as amendment deadlines to plans and possible accounting changes to calculate available amounts.
Since these changes are not effective until Jan. 1, 2019, there is time for employers to embrace these amendments and make the appropriate changes to their hardship policy. It also provides time for the IRS to amend the regulations and provide any guidance that is needed for employers, TPAs and employees.
Remember that these are optional amendments to employer plans. For example, an employer may continue to provide the six month suspension rule even though it would no longer be required after Dec. 31, 2018!
Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc. and Chair of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.