Budget Reconciliation Act contains 401(k) provisions

The Bipartisan Budget Reconciliation Act of 2018 (P.L. 115-123) keeps the lights on for the federal government. The short-term government spending bill, signed Feb. 9, also picks up some 401(k) provisions that were stripped from the Tax Cuts and Jobs Act (TCJA), and provides more disaster relief to the victims of the California wildfires. Plans will need to be amended to account for this relief.

Hardship distributions. The Budget Act picks up three key provisions regarding hardship distributions. Key: Hardship distributions remain discretionary with plans.

Plans that allow employees to take hardship distributions must prohibit them from contributing into their accounts for six months. The Budget Act directs the IRS to modify these 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.

Employees can take hardship distributions from their pretax contributions and their after-tax contributions, but not from earnings on those contributions. In addition, they can’t take hardship distributions attributable to employer matching contributions or employer nonelective contributions. The Budget Act allows hardship distributions to include account earnings and employer contributions. This provision also becomes effective with the 2019 plan year.

Finally, under the Budget Act, employees don’t have to take out plan loans before they take hardship distributions.

Disaster relief for California wildfires. 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.

Employees who had their principal homes in the core disaster area and who sustained wildfire-related economic losses may borrow up to the lesser of $100,000, or the greater of $10,000 or 100% of their accrued balances. This provision applies for loans taken out between Feb. 9, 2018, and Dec. 31, 2018.

A temporary tax credit—worth 40%, up to $6,000 in wages paid per employee—is available to employers 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.

BEFORE THE BUDGET ACT: An earlier continuing resolution (P.L. 115-120) postponed the effective date of the Affordable Care Act’s so-called Cadillac tax—the 40% excise tax on high-cost health plans—until 2022.