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.
