Drinker Biddle: Tax Cuts Alter Loan Offset Rollover Requirements and More
One change in the law means that in many cases, a participant will have more time in which to effect a tax-free rollover of a plan loan offset amount that occurs following termination from employment.
Drinker Biddle staffers Christine Kong, partner; Karen Gelula, counsel; and Monica Novak, associate, have published a new client alert analysis, offering some important observations about a few of the more obscure changes included in the Tax Cuts and Jobs Acts anticipated to impact employers and their retirement plans.
The attorneys warn that many of the elements discussed here generally apply to plan years beginning after December 31, 2017.
As the trio points out, before President Trump Signed the Tax Cuts and Jobs Act, a participant had 60 days to roll over a plan loan offset amount from a 401(k) or 403(b) plan account to an eligible retirement plan that accepts the rollover. “The Act extends this time period until the due date (with extensions) for filing the participant’s federal income tax return,” they note. “This new rule applies only to plan loan offset amounts resulting solely from the participant’s termination of employment or the employer’s termination of the plan. The plan loan offset provisions of the Act apply to amounts that are treated as distributed in tax years beginning after December 31, 2017.”
The Drinker Biddle attorneys observe, that when an offset occurs, the unpaid loan balance is deducted from the participant’s plan account—the loan is “offset”—and the amount of the loan offset is reported to the participant on a Form 1099-R as an actual distribution.
“This change in the law means that in many cases, the participant will have more time in which to effect a tax-free rollover of a plan loan offset amount that occurs following termination from employment,” the attorneys suggest. “Plan sponsors may wish to coordinate administration of their plan loan offset rollover rules with the plan’s third-party administrator in order to avoid inadvertently defaulting the participant’s plan loan.”
The Drinker Biddle client alert discusses the various natural disaster relief provisions that were handed down by the Internal Revenue Service during 2016 and potentially applying to 2017 taxes for sizable groups of plans and participants. Without recounting all the relief that is available, it is important to note, as the Drinker Biddle attorneys suggest, that plans adding qualified 2016 disaster distributions will need to be amended on or before the last day of the first plan year beginning on or after January 1, 2018 (for governmental plans, January 1, 2020), “or any later date that the IRS may prescribe.”
The attorneys further highlight the finalized version of the Tax Cuts and Jobs Act made no direct changes to retirement plan hardship distribution rules. However, they suggest changes to the rules for deducting a personal casualty loss under Section 165 of the Code will impact 401(k) plans and 403(b) plans that follow the “safe harbor” standards for allowing participants to receive hardship distributions.
“The Act amends Section 165 of the Code to provide that personal casualty losses are deductible only to the extent such losses are attributable to a federally declared disaster (i.e., a disaster that is determined by the president to warrant federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act). This change applies to losses incurred in tax years beginning after December 31, 2017, and before January 1, 2026,” they note. “The revisions to Section 165 of the Code have the effect of limiting the circumstances under which a plan participant may receive a hardship distribution to pay expenses to repair damage caused by a casualty loss, where the plan relies on the retirement plan safe harbor standards for approving hardship distributions. For example, under the Act, expenses to repair damage caused by a house fire would not justify a hardship distribution unless the fire is the result of a federally declared disaster.”
Generally speaking, the attorneys argue, plans that follow the “safe harbor” standards for approving hardship distributions should make sure that any necessary administrative changes are made to conform to Section 165 of the Code. “This may require coordination with the plan’s TPA,” they note, “especially if the TPA has been delegated responsibility for approving and administering hardship distributions.”
The full client alert analysis is available here.