Our previous Advisory on the Tax Cuts and Jobs Act reported that it made few changes that affected retirement plans. However Congress got another chance in the recent Bipartisan Budget Act of 2018, and included changes to hardship withdrawals, relief for California Wildfires, and more. Some of those provisions were dropped from the Tax Act but revived a month later. Some are effective immediately, while others do not take effect until 2019.
The Budget Act expands the availability of hardship withdrawals by including additional sources besides a participant’s own salary deferrals. Qualified matching contributions, qualified nonelective contributions, and earnings will be available for withdrawal. The Budget Act also eliminates the requirement that plan loans be taken before hardship distributions can be made. These changes are all effective for plan years after 2018. In addition, it directs the IRS to revise its safe harbor hardship rules within one year, so that a 6-month suspension of deferrals will not be required.
The Tax Act did make one, possibly unintentional, change to hardship provisions. It narrowed the use of the “casualty loss” deduction so that it only applies in federal disaster areas. The safe harbor hardship rule references this section. So apparently a participant who suffered an isolated loss, like a home fire, could not take a hardship withdrawal from a plan using the safe harbor rules. It is possible the IRS will fix this problem by future guidance. Plans may also consider using a non-safe harbor definition of a casualty loss without the statutory reference.
The Budget Act provides relief for victims of California wildfires similar to that previously provided for the 2016-17 hurricanes. Participants who withdraw funds up to $100,000 from October 8, 2017 through December 31, 2018 can spread the tax over three years. They can also roll the funds back into their plans within three years. Participants who took withdrawals between March 2017 and January 15, 2018 to purchase a home but couldn’t use it can also repay the money to their plan. Plan loans that would come due through the end of 2018 can take a one-year extension. To be eligible, a participant must have resided in the federally declared wildfire disaster zone during October – December 2017 and suffered an economic loss. Plans offering this relief must be amended by the end of 2019.
Qualified plan accounts are exempt from most creditors, but not the IRS. The IRS can force the plan to distribute a participant’s savings to it, if the participant was otherwise eligible to take a distribution. Under the Budget Act, effective after 2017, if the IRS levies on a plan account but the levy turns out to be wrongful, the taxpayer can now re-contribute the funds to the plan by the due date of the individual’s tax return for the year in which the IRS returns the funds.