On December 22, 2017, the Tax Cuts and Jobs Act (“2017 Tax Reform”) became law. Most of the major provisions of the new tax law affect corporate and individual tax rates, however, a few minor changes which were made to retirement plan provisions that take effect with tax years beginning after December 31, 2017 are listed below:
New Rules provide additional flexibility for 401(k) loans
The new tax law now provides additional flexibility for participants who take a loan from their 401 (K) account. Prior to the new tax law, if a participant separated from service, the participant had 60 days to roll over a plan loan offset amount to an eligible retirement plan that accepts the rollover
. The tax implications to not rolling over the amount is that the loan offset is considered to be a distribution from the plan subjecting the distribution to taxes and potentially a 10% early withdrawal penalty if the participant was under age 59 ½.
The new rules apply to loan offsets treated as distributable on or after January 1, 2018 and provide the participant with more time to rollover the amount of the loan balance upon separation of service. Generally speaking, a participant will now have until the due date of their tax return in the following year (including extensions) to roll the money into , a new 401 (k) that will accept the rollover or an IRA. By doing so, you may be able to avoid the income taxes and potential penalty.
Changes to Fringe Benefits
Prior to the change, the value of a qualified transportation fringe benefit provided by an employer to an employee was treated as tax-free, and the law allowed employer deductions for such expenses.
Under the new law, employers can still provide tax-free qualified transportation fringe benefits to employees, but an employer cannot deduct these expenses. Additionally, the new tax law eliminates the tax exclusions for qualified bicycle commuting reimbursements, tax exclusions for moving expense reimbursements, and limits employers’ deductions for meals and entertainment expenses.
Length of Service Award Programs for Public Safety Volunteers
Under Code Section 457, the annual accrual for length of service awards to bona fide volunteers or their beneficiaries for qualified volunteer services increases from $3,000 to $6,000. If the plan is a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of the length of service awards accruing with respect to any year of service.
2016 Disaster Area Relief
The Tax Reform Law provides relief for certain retirement plan distributions that were made on or after January 1, 2016 and before January 1, 2018 to individuals who sustained economic loss to their primary residence located in a federally declared disaster relief area during 2016 and is similar to the relief given to those affected in the hurricane areas during 2017.
Repeal of certain IRA Conversions
Under the new tax law, re-characterizations of conversion contributions from traditional IRAs to Roth IRAs will no longer be permitted. This means a traditional IRA contribution that is converted to a Roth IRA contribution cannot later be re-characterized back to a traditional IRA contribution. Other types of re-characterizations between Roth and traditional IRAs are still permitted.
Changes will apply to plan years beginning after Dec. 31, 2018.
Initially, the proposed new tax law eliminated the 6 month suspension on 401(k) deferrals following a hardship distribution allowing a participant to continue making contributions without interruption. Unfortunately, this did not make it into the final version of the new tax law changes. However, the Bipartisan Budget Act of 2018 signed by the President on February 9th includes legislation allowing participants to continue contributing to the plan without a six-month suspension upon taking a hardship withdrawal. The legislation also removes the requirement that a participant must exhaust loans before taking a hardship and also permits the usage of QNEC and QMAC contributions and earnings which were previously not permitted.
Sentinel Benefits & Financial Group and its affiliates do not provide tax advice. This material has been prepared for information purposes only and is not intended to provide and should not be relied upon for tax advice. You should consult your own tax advisors before engaging in any transaction.