Additional Consideration for Retirement Plan Sponsors Regarding The Tax Cuts and Jobs Act: 

As explained in The Speed Reader’s January 2018 edition, on December 22, 2017 the bill originally known as “The Tax Cuts and Jobs Act” (the “Act”) became law. (The final version was re-named as the easy-to-remember “Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” after the Senate objected to the bill’s original name.) Main provisions of the Act included significantly reducing the corporate tax rate, reducing certain individual income tax rates, and repealing the Affordable Care Act’s so-called “individual mandate.” Most provisions, including the one discussed below, became effective as of January 1, 2018.

With respect to tax-qualified retirement plans (e.g., 401(k) plans), the Act provides a more lenient rule than under prior law, in the situation where participants have an outstanding loan when their plan terminates or when their employment with the plan sponsor terminates. Under the Act, such participants have until the due date for filing their tax return (for the year in which the termination occurred) to roll over their outstanding loan balance to an IRA or another employer’s plan. If they do so by that deadline, then their outstanding loan balance will not be treated as a taxable distribution solely because of the plan’s termination or their employment’s termination.

Under pre-Act law, in order for a participant to avoid a taxable distribution of his or her outstanding loan balance, the outstanding loan balance had to be rolled over within 60 days of the plan’s termination or the participant’s employment termination.

That pre-Act rule is still reflected in the IRS’s current version of the “special tax notice” that must be provided to qualified retirement plan participants under Internal Revenue Code (the “Code”) Section 402(f) when they receive an eligible rollover distribution of their plan account. However, that current version, which is set forth in IRS Notice 2014-74, states that its “updated safe harbor explanations will not satisfy §402(f) to the extent the explanations are no longer accurate because of a change in the relevant law occurring after December 8, 2014.” Notice 2014-74 is “no longer accurate because of a change in the relevant law occurring after December 8, 2014” (i.e. the Act’s loan rollover rule). Therefore, plan sponsors may wish to discuss with their service providers the process of updating the “special tax notice” in this regard.