Rollovers of Loan Repayments
The Act includes relief that extends the period for rolling over a loan offset. Retirement plan loans typically become immediately due and payable when a participant terminates employment. If the loan is not repaid, the plan offsets the loan against the value of the participant’s account. Currently, this type of loan offset may be rolled over by a participant tax-free if he or she makes an equivalent contribution to another tax-qualified plan or individual retirement account (IRA) within 60 days of the date of the offset. Beginning in 2018, the Act extends this period, from the current 60 days to the due date (including extensions) for the affected participant’s tax return for the year in which the offset occurred.
Recharacterization of Contributions as Roth or Pre-Tax
Currently, individuals have the ability to convert funds contributed to a traditional pre-tax or Roth IRA to the other type of IRA. Individuals who convert pre-tax contributions as Roth contributions are required to pay taxes on those amounts at the time of conversion. Under existing law, taxpayers normally have until October 15 of the year following the conversion to change their mind and undo the conversion transaction. This means that a taxpayer can decide he or she does not want to be stuck with the tax liability associated with all or part of the conversion transaction and can go back and change it.
Under the Act, an individual will no longer be allowed to reclassify (or “recharacterize”) a converted amount. This means, for example, that if an individual transfers money from a traditional IRA (or from a pre-tax contribution source in his or her employer retirement plan to a Roth IRA), the individual will not be allowed to reclassify the amount for tax years beginning after December 31, 2017. If a taxpayer completed a conversion at any time in 2017, it is unclear whether this means that the taxpayer must reverse that action by December 31, 2017, or will have until October 15, 2018, to do so.
Contribution Limits under Governmental Section 457(b) Plans
Governmental and other tax-exempt plan sponsors are subject to certain limits on the deferral of compensation. However, under current law, a special length of service award made to a volunteer who provides firefighting and prevention, emergency medical and ambulance service is not treated as deferred compensation as long as the aggregate amount the volunteer accrues for each year of service does not exceed $3,000. Beginning in 2018, the Act doubles this limit to $6,000 (as adjusted each year for cost-of-living).
2016 Disaster Area Relief
The Act also contains tax relief for certain retirement plan and IRA distributions taken on or after January 1, 2016, and before January 1, 2018, by an individual whose primary residence was located in a federally declared disaster relief area during 2016 and who sustained economic loss as a result of such a disaster. For distributions treated as a “qualified 2016 disaster distribution,” the Act: (1) provides an exception to the 10 percent early distribution penalty; (2) exempts the distribution from mandatory 20 percent withholding; (3) permits ratable income inclusion over three years; and (4) permit repayments or rollovers (to the extent that a plan or IRA accepts rollovers) within three years. This special tax treatment is limited to distributions not in excess of $100,000. While not entirely clear from the text of the Act, we believe such distributions are only available if permitted by the plan, subject to further guidance from the IRS.
The disaster relief is similar to the retirement-plan-related relief signed into law after Hurricanes Harvey, Irma and Maria.
Although the retirement plan changes in the Act are few, plan sponsors should be prepared to consider and implement the changes in 2018. In particular, changes to loan rollover procedures will require updates to plan administration, participant communications, and possible plan amendments.