2019 Benefits Limits and Recent Changes to 401(k) and Other Qualified Retirement Plans
The Tax Cuts and Jobs Act of 2017 (“TCJA”), the Bipartisan Budget Act of 2018, and recently proposed IRS regulations have made significant changes to the rules governing 401(k) and other qualified retirement plans.
Hardship Distribution Changes: The potential sources of hardship distributions have been expanded to include qualified nonelective contributions (“QNECs”), qualified matching contributions (“QMACs”), and earnings. Also, plans no longer need to require participants who want to take hardship distributions to first take a participant loan. Plans can implement these changes as early as 1/1/2019. However, as was previously the case, employers are not required to include hardship distributions in their plans and are not required to make the maximum permissible amount available for a hardship, so an employer has discretion whether, and if so when and to what extent, to implement these changes.
For plans that do include hardship distributions, employers are no longer required to suspend the ability of a participant who received a hardship distribution to make elective deferrals. This change is optional for 2019, but mandatory for plan years beginning on or after January 1, 2020.
The IRS has added expenses (not just casualty losses) in FEMA-declared disaster areas to its “safe harbor” hardship list. Also, the IRS has changed the cross reference in its regulations to confirm that hardship distributions can be made for all previously permitted casualty losses. TCJA’s suspension of the deductibility of casualty losses outside federally declared disaster areas had placed in doubt the ability to treat casualty losses outside federally declared disaster areas as hardships during the suspension period.
Under the Rev. Proc. 2016-37, employers with individually designed plans are not required to amend their plans for any of the above changes until the IRS places them on the “Required Amendments List” (“RAL”), and this will probably not occur soon. However, the provisions of any plan amendment eventually adopted by an employer will need to "walk back" the changes actually made by an employer in the operation of its plan, including the effective date(s) of such changes, so it would be unwise for an employer to implement any of the changes until the employer has in hand a detailed writing that describes the changes the employer will make and such changes’ implementation date(s). This writing could take the form of a draft amendment, a memorandum explaining what the employer intends to include in its eventual amendment, a Summary of Material Modifications (an “SMM”) that would also serve the purpose of communicating the changes to employees, or, if and when the IRS publishes one, an IRS model amendment. Employers should consult with their ERISA counsel about the preparation of such a detailed writing.
Employers using preapproved (i.e., master or prototype, or volume submitter) plan documents will likely want to wait until they have been contacted by the preapproved plan’s sponsor regarding the above changes to implement any of them.
“Loan Offset” Rollover Changes: Although a plan’s participant loan policy is not required to do so, many include provisions accelerating the requirement to pay off a participant loan in connection with an employee’s termination of employment. If the employee does not then pay off the outstanding balance of the loan, that unpaid balance is treated as a distribution to the terminated employee and reported as such on IRS Form 1099-R. Previous rules provided that if the employee was able, within 60 days of the date of the “loan offset,” to come up with all or some portion of the amount of the distribution in cash, and rolled that amount of cash over to an IRA or an employer-sponsored qualified retirement plan, the participant would not have to include the rolled over portion of the loan offset amount in his or her gross income for federal income tax purposes.
Effective 1/1/2018, TCJA extended the period for “loan offset” rollovers to the terminated employee’s filing deadline, including extensions, for his or her personal federal income tax return (i.e., IRS Form 1040) for the year in which the loan offset occurred. Thus, for a loan offset distribution occurring in 2018, the terminated employee would have until as late as April 15, 2019 (or October 15, 2019, if the terminated employee obtained an extension of the deadline to file his or her 2018 federal income tax return) to make the loan offset rollover.
In October of this year, the IRS published a new “Your Rollover Options” model notice that includes the new extended period for loan offset rollovers. The change to the loan offset rollover rules does not require a plan amendment, but employers will want to make sure they are using the latest version of the “Your Rollover Options” notice in connection with distributions to terminated employees from any qualified retirement plan.
403(b) and 457(b) Plans: The hardship distribution changes described above do not apply to 457(b) plans, whether maintained by tax-exempt organizations or state or local governmental organizations. Most, but not all, of the hardship distribution changes described above apply to 403(b) plans that permit hardship distributions. The plan loan offset rollover changes described above apply to any 403(b) plan or governmental 457(b) plan that permits participant loans and accelerates the loan’s repayment obligation in connection with a participant’s termination of employment.