Wednesday, March 21, 2018

Stay up-to-date on tax reform law changes.

In December 2017, President Trump signed the Tax Cuts and Jobs Act (the Act) into law. Highlights of the changes made to retirement plans are described below.

Rollover of Offset Retirement Plan Loans
There are times when a participant may need to take a loan. If the participant terminates employment and takes a plan distribution while still having an outstanding loan, the plan treats the loan amount as a distribution, subject to taxation and possibly a 10 percent penalty. Based on the laws before the Act was effective, a participant would have only 60 days to roll over a distribution into another eligible plan (such as an IRA) in order to avoid this result.

The Act extends the 60-day period for rolling over the amount of the offset retirement plan loan. Participants now have until their tax filing deadline, including extensions, for the tax year in which the loan offset occurs. The extension applies to offsets as a result of both plan termination and severance from employment.

NOTE: Effective for loan amounts treated as distributed in tax years beginning after 2017. This revision shouldn’t affect how plan sponsors administer plans; however, you should make sure you understand the change so that you can explain it to your participants.

Recharacterizing Roth IRA Conversions Eliminated
The Act eliminates a taxpayer’s opportunity to recharacterize a conversion to a Roth IRA. As a result, converting non-Roth IRA assets or rolling over employer plan assets to a Roth IRA cannot be reversed. Before the law change, participants could move pretax assets to a Roth IRA and could later undo the transaction before their tax return due date (plus extensions). This allowed taxpayers to speculate, deciding on recharacterizing based on how much the Roth IRA gained—or lost. Or perhaps a taxpayer recharacterized simply because of the size of the looming tax obligation arising from the conversion. Significant assets can be involved in such transactions, and taxpayers can no longer undo the conversion and avoid the tax implications. So they must now be especially cautious when moving non-Roth assets to a Roth IRA.

Annual contributions to a Roth IRA can still be recharacterized as Traditional IRA contributions for the same tax year—and vice versa. In addition, recent guidance from the IRS confirms that conversions made in 2017 may still be recharacterized in 2018. The IRS has published FAQs that address the ambiguity in the statute. In this guidance, the Service states: A Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018.

NOTE: Effective for tax years beginning after December 31, 2017. Participants can still roll over pretax plan assets into a Roth IRA, so this change does not affect plan administration.

Casualty Loss Provision Could Affect Plan Hardship Distributions
The Act no longer allows a deduction for casualty losses unless a taxpayer suffering the casualty loss is located in a presidentially declared disaster area. This change could severely restrict the deduction for those not covered by such a declaration. For example, if a falling tree damages your roof or your basement floods within an official disaster area, you can deduct unreimbursed losses once a certain threshold is reached. However if any damages occur to your house outside this zone, that would not be an eligible deduction for uncovered casualty losses.

Deductible casualty losses are also among the “safe harbor” conditions for hardship distributions from employer-sponsored retirement plans under existing Treasury regulations. If you don’t qualify for this deduction because of the law change, you also may not qualify for a hardship distribution from your plan. It is expected that casualty losses experienced by certain plan participants may no longer meet the safe harbor condition commonly used in granting certain hardship distributions.

NOTE: Effective for losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2026. This change may require plan administrators to verify whether any casualty loss happened within a presidentially declared disaster area before approving a hardship distribution.