PSCA
Join our Community

PSCA Executive Reports

January 31, 2018

Retirement Provisions in Tax Reform

1. Extended Rollover Period for Loan Offsets. A loan offset due to plan termination or default due to termination of employment can be indirectly rolled over to another eligible retirement plan or IRA by the individual’s tax filing deadline (including extensions) for the year of the offset.

  • Prior Law – The loan offset amount is generally eligible for rollover treatment.  A direct rollover is accomplished by a trustee-to-trustee transaction.  To rollover a loan offset, a participant must make an indirect rollover – coming up with funds and completing the rollover within 60 calendar days of the loan offset.  The indirect rollover to another qualified plan or IRA within 60 days will avoid taxation of the outstanding loan balance.
  • What Changed – A loan offset due to (1) plan termination, or (2) severance from employment, may be indirectly rolled over by the individual’s tax filing deadline (plus extensions) for the year of the loan offset.
  • When – Taxable years beginning after 2017. 
  • Impacted Plans – Tax-qualified retirement plans, including 401(k), 401(a), 403(b), and governmental 457(b) plans.                     

2. 2016 Disaster Relief. The bill provides for various tax relief for 2016 and 2017 distributions from eligible employer plans and IRAs due to 2016 storms and flooding, similar to (but not as extensive as) the recent Congressional relief for Hurricanes Harvey, Irma, and Maria.

  • • Prior Law – No special relief was available for 2016 storms.
  • What Changed – Distributions made in 2016 and 2017 that constitute a “qualified 2016 disaster distribution” are eligible for the following tax and plan treatment:
    - No 10% early distribution tax under Code section 72(t).oNot eligible for rollover treatment, and therefore, plan sponsors should not impose the 20% mandatory withholding or provide the 402(f) notice. (As this provision is retroactive, we anticipate that any withholding imposed will not be changed).
    - Permissible in-service distribution (as this is retroactive relief it is unlikely to have been used).
    -Taxed pro rata over a three-year period.
    -Ability to recontribute the amount to an eligible retirement plan within three years.oA plan amendment is required by the end of the 2018 plan year (longer for governmental plans), unless the Secretary indicates a later date, for plan sponsors that make qualified 2016 disaster distributions.

    For this purpose, a “qualified 2016 disaster distribution” is a distribution for disaster victims resident in any area with respect to which a major disaster has been declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016 of up to $100,000 from a 401(a), 403(b), IRA or governmental 457(b) plans on or after January 1, 2016 through December 31, 2017, to an individual whose principal place of abode at any time during 2016 was in a disaster area and who sustained an economic loss by reason of events giving rise to a Presidential disaster declaration.
  • When – As of the date of enactment (December 22, 2017). 
  • Impacted Plans – Tax-qualified retirement plans, including 401(k), 401(a), 403(b), governmental 457(b) plans and IRAs.

3. Restriction on Casualty Loss Deduction. The bill narrows the casualty loss deduction under Code section 165 to losses attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This in effect narrows the safe harbor hardship withdrawals on account of damage to an employee’s principal residence that would qualify for a casualty deduction.

  • Prior Law – The 401(k) regulations list certain expenses as being deemed to be on account of an immediate and heavy financial need, which includes a distribution for expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income).
  • What Changed – The bill requires the casualty loss to be attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
  • When – Taxable years beginning after 2017 through 2025.
  • Impacted Plans – Defined contribution plans with safe harbor hardship provisions.

4. Volunteer Public Safety 457(e) Plan. The bill doubles the benefit accrual permitted for special volunteer public safety programs under Code section 457(e)(11) from $3,000 to $6,000, and indexed the $6,000 for inflation going forward.

  • Prior Law – Volunteer Public Safety plans under Code section 457(e)(11) historically capped annual accruals to $3,000. 
  • What Changed – The bill replaces the $3,000 cap with a $6,000 cap, which is indexed thereafter.
  • When – Taxable years beginning after 2017.
  • Impacted Plans – Length of service award plans under Code section 457(e)(11).

5. Recharacterization of Roth Conversions. The bill eliminates the ability to recharacterize a Roth conversion after 2017.

  • Prior Law – Contributions and conversions to an IRA can be recharacterized to another type of IRA within the individual’s tax deadline (plus extensions) for the year of the contribution/reconversion.  
  • What Changed – The bill prohibits Roth conversions from being recharacterized after 2017. 
  • What Did Not Change - Contributions to a traditional IRA can still be recharacterized to a Roth IRA (and vice versa). 
  • When – Taxable years beginning after 2017.  The Internal Revenue Service has issued a FAQ clarifying that 2017 Roth IRA conversions may be recharacterized by October 15, 2018. 
  • Impacted Plans – IRAs (including rollover from a qualified plan to an IRA).

6. New Cost of Living Adjustment Index for IRA Limits. The bill changes the index used to determine the annual cost of living adjustment on IRA (including Roth IRA) contribution and deduction limits. 

  • Prior Law – IRA limits were set by the CPI-U index.
  • What Changed – IRA limits are set by the chained CPI-U index, which is typically viewed as a slower inflation index. 
  • When – Taxable years beginning after 2017.
  • Impacted Plans – Traditional and Roth IRAs. 

EXECUTIVE REPORTS HOME >

Browse Executive Reports Archive:

2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009