What, more tax legislation?
Haven’t finished digesting the Tax Cuts and Jobs Act, the tax reform legislation signed into law late in 2017? Well, how about a side of Bipartisan Budget Reconciliation Act of 2018 (P.L. 115-123) to make everything go down a bit easier?
That law, which President Trump signed Feb. 9, averts another government shutdown, extends some expired tax provisions (no payroll provisions were included), picks up some 401(k) provisions that were stripped from the TCJA and provides additional disaster relief.
TCJA leftovers: Hardship distributions
The TCJA left provisions regarding 401(k) plans on the cutting room floor. The Bipartisan Budget Reconciliation Act picks up three important provisions regarding hardship distributions. Key: Hardship distributions are still discretionary with plans.
Prohibition on contributions: Financial hardship is supposed to mean just that. So plans that allow employees to take hardship distributions from their 401(k) accounts must also prohibit them contributing into their accounts for six months.
The Budget Reconciliation Act directs the IRS to modify the hardship distribution rules by allowing employees to continue to make pretax contributions into their 401(k) accounts. New regulations will apply to plan years beginning after Dec. 31, 2018.
Distributions from earnings: Employees who take hardship distributions can take them from their pretax contributions and their after-tax contributions, but not from earnings on those contributions. They are also prohibited from taking hardship distributions that are attributable to employer matching contributions or employer nonelective contributions.
The Budget Reconciliation Act allows plans to include account earnings and employer contributions in hardship distributions. This provision will also become effective for plan years beginning after 2018.
Loans not required: Finally, under the Budget Reconciliation Act, employees don’t have to take out plan loans before they take hardship distributions.
Victims of California wildfires that occurred between Jan. 1, 2017, and Jan. 18, 2018, may take qualified wildfire distributions from their 401(k) plans, even if plans generally prohibit hardship distributions. These distributions must be made on or after Oct. 8, 2017, and before Jan. 1, 2019. Maximum amount: $100,000. Employees won’t be liable for the 10% penalty or the 20% withholding tax on distributions. Employees have three years to pay back their distributions; if they don’t, the distributions are included in employees’ income ratably over a three-year period.
Two provisions apply to plan loans taken out by employees who had their principal homes in the core disaster area and who sustained wildfire-related economic losses.
Under the first, the borrowing limits are doubled to the lesser of $100,000, or the greater of $10,000 or 100% of employees’ accrued balances. This provision applies for loans taken out between Feb. 9, 2018, and Dec. 31, 2018.
Plans will need to be amended to account for this relief.
A temporary tax credit—worth 40%, up to $6,000 in wages paid per employee—is available to employers with active business operations, and that employed employees, in the core disaster areas. Maximum credit: $2,400 per employee. Wages qualify for the credit regardless of whether employees have actually worked (the retention aspect of this credit), where employees end up working (i.e., working outside the disaster area still counts), or whether employees began working prior to the resumption of significant operations.