Federal Budget Law Includes Retirement Plan Provisions:

In the early morning hours of February 9, 2018, Congress passed a two-year budget agreement that President Trump signed later that day. The main purpose of the law, called the Bipartisan Budget Act of 2018 (the “Act”), was to end the brief government shutdown that occurred on February 9, 2018. However, the Act also contains several provisions that affect retirement plans.

First, effective for plan years beginning after December 31, 2018, the Act will make certain rules more participant-friendly with respect to safe harbor hardship withdrawals. (If allowed under a plan, hardship withdrawals constitute an exception to the general rule that in-service distributions from 401(k) plans and 403(b) plans are not permitted before a participant reaches age 59-1/2. Most plans apply the law’s safe harbor hardship provisions.) Under the Act:

  • Participants will no longer have to take an available plan loan before qualifying for a hardship withdrawal.
  • Participants will no longer be prohibited from making plan contributions for the six-month period immediately following their receipt of a hardship withdrawal.
  • Participants will be allowed to access the following portions of their account when receiving a hardship withdrawal: elective deferrals, qualified nonelective contributions, qualified matching contributions, and the earnings on each of these contribution sources.

Note that defined contribution plan sponsors will not have to adopt these rules. Therefore, plan sponsors will need to evaluate whether they will want to make it easier for participants to receive hardship withdrawals, as well as the administrative changes that implementing these new rules will involve.

Second, for individuals who withdraw funds from their qualified plan accounts after December 31, 2017 to satisfy an IRS levy, the Act permits amounts returned by the IRS due to a wrongful levy to be re-contributed to the plan. That is the case even if the re-contributed amount exceeds applicable annual contribution limits. However, the re-contribution must be made by the due date, not including extensions, of the individual’s income tax return for the year in which the IRS returns the levy amount to the individual. (Federal tax levies are an exception to the general rule prohibiting the assignment or alienation of a participant’s qualified plan benefits.)

Third, the Act provides relief for individuals affected by the late-2017 California wildfires. Specifically, for qualified plan distributions of up to $100,000 made from October 8, 2017 to December 31, 2018, the Act provides relief from the pre-age 59 ½ 10% early withdrawal tax penalty. Qualified distributions are those made by an individual whose principal residence was in a wildfire disaster area and who sustained an economic loss because of the wildfires. Such distributions can be included in income ratably over a three-year period beginning with the year of distribution, unless the individual elects not to have ratable inclusion apply. As an alternative, amounts that the individual re-contributes within the three-year period will be treated as a rollover and not includible in income. The Act also relaxes certain rules regarding plan loans for those affected by the California wildfires (e.g., increasing the available loan amount; expanding the repayment period).

Here is a link to the Act:  https://www.congress.gov/115/bills/hr1892/BILLS-115hr1892enr.pdf