The Bipartisan Budget Act of 2018 (the “Act”), which President Trump signed into law to end the government shutdown last week, makes several changes affecting retirement plans. These include three hardship withdrawal provisions previously dropped from the final version of last year’s tax legislation, as well as an extension of disaster relief to victims of the California wildfires.
New Hardship Rules
Elimination of Six-Month Suspension Following Hardship Withdrawals. IRS regulations provide a safe harbor for when a hardship withdrawal will be deemed necessary to satisfy an immediate and heavy financial need. Under this safe harbor, the employee must be suspended from making contributions for a period of at least 6 months after the distribution. Although not required if the plan obtains the employee’s certification as to the financial need, many 401(k) plans take advantage of this safe harbor. The Act directs the IRS to modify these regulations to eliminate the 6-month suspension effective for plan years beginning after December 31, 2018. At this point, it is not clear whether the IRS will replace the 6-month suspension with another safe harbor or simply eliminate the safe harbor entirely. The IRS is directed to issue updated regulations by February 9, 2019.
Elimination of Requirement to Take Available Loans Before a Hardship Withdrawal. The safe harbor described above also requires the participant to take any available distributions and plan loans before taking a hardship withdrawal. The Act modifies this rule for plan years beginning after December 31, 2018, to provide that hardship withdrawals may be taken before the participant has taken all available plan loans.
Expansion of Amounts Available for Hardship Withdrawals. Currently hardship withdrawals are not permitted from (i) post-1988 investment earnings on employee pre-tax and Roth contributions, (ii) qualified nonelective contributions (“QNECs”), or (iii) qualified matching contributions (“QMACs”). For plan years beginning after December 31, 2018, hardship withdrawals can be distributed from all of these amounts. The Act also formalizes a long-standing IRS position that all other amounts under a 401(k) or profit sharing plan (including employer matching and profit sharing contributions) may be made available for hardship withdrawal.
Relaxed Distribution Rules for Victims of California Wildfires
In General. Similar to the relief provided to victims of hurricanes in prior years, the Act allows participants affected by recent wildfires in California to have greater access to retirement funds. The relief applies to plan participants who (i) had a principal place of abode at any time from October 8, 2017 through December 31, 2017 in a federally declared California wildfire disaster area; and (ii) sustained economic loss as a result of the wildfire.
- Tax-Favored Withdrawals. For distributions from an eligible retirement plan made between October 8, 2017 and January 1, 2019 to a qualified individual of up to $100,000, the Act:
- Eliminates the 10% early distribution penalty;
- Exempts distributions from 20% mandatory Federal tax withholding;
- Allows participants to avoid taxation by repaying distributions within 3 years; and
- Allows participants to spread the inclusion of income over 3 years.
Like earlier disaster relief legislation, plan sponsors may allow qualified individuals to take qualified wildfire distributions without regard to the normal rules that otherwise may prohibit such in-service distributions, such as the requirement that the distribution be based on need and not exceed the amount of the hardship.
- Repayment for Home Purchases. Participants who received a hardship distribution for a home purchase or home construction in a wildfire disaster area between March 31, 2017 and January 15, 2018, but who were unable to purchase or build because of the wildfires, may avoid taxation by repaying the amount of the distribution prior to June 30, 2018.
- Loan Relief. For loans to qualified individuals made between February 9, 2018 and December 31, 2018, plan sponsors may (i) increase the maximum loan amount from $50,000 to $100,000, and (ii) allow qualified individuals to take the full amount of their vested balance (up to $100,000) as a loan, rather than limiting the amount to 50%. Also, the Act allows plan sponsors to delay the due date for certain loan repayments for 1 year and to extend the repayment period accordingly.
- Extended Amendment Deadline. Plan sponsors who implement these disaster relief provisions must amend their plans before the last day of the plan year ending on or after January 1, 2019 (a later date applies to governmental plans). Plan sponsors may begin operating their plans in accordance with these provisions of the Act immediately.
Next Steps for Employers
Employers will need to take into account various considerations in determining whether to include these more liberal rules in their plans, including:
- Employers should begin deciding whether to take advantage of these expanded hardship withdrawal opportunities.
- For the most part, the hardship withdrawal changes will be optional.
- However, the elimination of the 6-month suspension may be necessary for safe harbor 401(k) plans, since current safe-harbor regulations allow plans to impose only the minimum suspension period.
- In most cases, the changes should result in administrative simplification, but they may also facilitate additional “leakage” of retirement plan assets.
- Any changes will need to be coordinated with the plan’s recordkeeper.
Contact Information. For more information from Mazursky Constantine, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), Toby Walls (404.888.8870), Teri King (404.888.8847) or Chandra Burns (404.888.8834).