Qualified Retirement Plans are Winners under the Tax Cuts and Jobs Act
November 9, 2017
Yesterday, we advised you on the potential impact that H.R. 1 – Tax Cuts and Jobs Act (the “Bill”) could have on nonqualified deferred compensation and executive compensation. The proposed changes were not friendly. (See Proposed Tax Bill Radically Alters Nonqualified Deferred Compensation and Executive Compensation). Today, we are advising you that the proposed Bill also includes proposed changes to current qualified retirement plan requirements.
After much hand-wringing regarding a rumored proposal that would limit 401(k) plan deferrals to approximately $2,400, it seems we can relax, for now, when it comes to the Bill’s qualified retirement plan provisions. The Bill does not propose any sweeping changes to the qualified retirement plan landscape, in general, let alone to the current 401(k) plan contributions structure. Here’s what’s in the current Bill for retirement plans:
• In-service distributions – If enacted as is, the Bill will lower the minimum age to commence in-service distributions from qualified defined benefit plans from age 62 to age 59½. The same in-service distribution expansion will also apply to eligible deferred compensation plans under Internal Revenue Code (“Code”) Section 457(b) maintained by governmental employers.
• Hardship distributions – Proposed changes to hardship distributions will eliminate the six-month suspension of elective deferrals imposed after receipt of a hardship distribution, eliminate the requirement that a participant seek a plan loan before seeking a hardship distribution, and expand the sources for hardship contributions to include employer contributions and investment earnings.
• Loan rollovers – The Bill will extend the deadline for completing a loan rollover to a qualified employer plan to the due date (including extensions) for the individual’s tax return for the year in which the loan balance was treated as a distribution. This “deemed distribution” treatment occurs when payment of an outstanding loan balance is accelerated at the time the plan is terminated or at the time the participant terminates employment, and the loan balance cannot be paid. Currently, the deadline for a loan rollover is 60 days from the date of the deemed distribution.
• Nondiscrimination testing and other relief for “soft frozen” defined benefit plans – A proposed new Code Section 401(o) will allow defined benefit plans that are “soft frozen” (that is, the plan is closed to hires after a certain date, but participants continue to accrue benefits) to be combined with other ongoing qualified retirement plans for nondiscrimination testing purposes. Currently, this testing relief is in temporary guidance that requires renewal from time to time. In addition, the Bill would provide relief from certain benefits, rights, and features testing requirements and the minimum participation requirement under Code Section 401(a)(26).
As a reminder, the proposed Bill has already been amended at least once since its release, and is subject to still further amendment. In addition, it reflects only the proposals of Republicans in the House of Representatives. The Senate has yet to weigh in. That being said, the proposed changes to qualified retirement plans, discussed above, are not controversial, and may well live on in a final bill.
Plan sponsors do not need to do anything now. If the Bill is enacted in a form that includes required changes to qualified retirement plans, the Internal Revenue Service will include those changes in its Required Amendments List, which is issued annually, and which gives plan sponsors a long lead time in which to adopt the required amendments. If the enacted changes to qualified retirement plans are discretionary, then any discretionary amendments must be adopted by the end of the plan year in which the plan sponsor wants to implement those changes.
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