Senate Tax Bill’s Passage Paves the Way for Qualified Retirement Plan Changes
December 8, 2017
In November, we advised you on the proposed changes to qualified retirement plan requirements in the House version of H.R. 1 - Tax Cuts and Jobs Act (House Bill). (See Qualified Retirement Plans Are Winners under the Tax Cuts and Jobs Act). In this article, we advise you on the Senate’s version of H.R. 1 (Senate Bill)—comparing relevant House Bill provisions along the way.
Early on, the GOP engine sputtered on tax reform, but they set themselves up for a smoother ride by passing a budget resolution with “reconciliation” instructions, allowing them to expedite a tax bill through a process called “budget reconciliation.” Senators find it particularly useful, because Senate reconciliation bills cannot be filibustered, are permitted only limited debate, and require a simple majority vote to pass.
Using the budget reconciliation process does introduce budgetary constraints. Complying with the “Byrd Rule” on “extraneous provisions” explains why many of the proposed changes in the Senate Bill expire on January 1, 2026, as increasing the deficit outside the 10-year budget window is considered extraneous in a Senate reconciliation bill. Most of the proposed changes in the House Bill are permanent. The bill that will come out of conference will be subject to the Byrd Rule when voted on in the Senate.
The proposed changes
Similar to the House Bill, the Senate Bill leaves most of the current retirement plan provisions intact. Here is what’s in the current Senate Bill for retirement plans (note, that unless otherwise indicated, the proposed changes would be effective for taxable years beginning after 2017).
• Loan rollovers – The Senate Bill extends the rollover deadline for loan offsets due to severance of employment or plan termination. Affected employees would have until the federal due date (including extensions) for filing the individual’s federal income tax return for the tax year in which the plan loan offset occurs to complete the rollover of the qualified plan loan offset amount to an eligible retirement plan. Currently, the loan rollover deadline is 60 days from the date of the loan offset.
The House passed a similar provision, except their version applies in the event of a plan termination or any separation from service.
• Hardship distributions – Proposed changes, effective for plan years beginning after 2017, eliminate the requirement that a participant take any available plan loan prior to taking a hardship distribution, and it would permit hardship distributions of employer contributions, and earnings on employer (and employee) contributions.
The House Bill includes the above provisions but eliminates the six-month suspension of elective deferrals imposed after receipt of a hardship distribution.
• Length of service awards for public safety volunteers – Under current Internal Revenue Code (the Code) Sec. 457 rules, a plan that pays service awards to bona fide volunteers for “qualified services” is not a deferred compensation program, as long as the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer does not exceed $3,000.
The proposed changes would increase the aggregate maximum “length of service” amount from $3,000 to $6,000, with a cost-of-living adjustment in $500 increments based on Code Section 415(d) rules.
If the plan is a defined benefit plan, the limit would apply to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service.
More specifically, “actuarial present value [would] be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant's age at the time of the calculation.”
Other relevant provisions
• In-service distributions minimum age – Proposed in the House Bill, not in the Senate Bill.
• Non-discrimination testing and other relief for “soft frozen” defined benefit plans – Proposed in the House Bill, not in the Senate Bill.
• Application of unrelated business income tax (UBIT) to governmental plans – Proposed in the House Bill, not in the Senate Bill.
Caveat: until the proposed Senate Bill goes to the conference committee where it will be reconciled with the House Bill, it is subject to further amendment, and prior agreement on a provision does not preclude amendment.
Plan sponsors do not need to do anything now. If the reconciled tax 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. Plan sponsors are typically given 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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