Retirement Provisions Included in Federal Budget Deal
The two-year budget agreement that Congress passed in the early morning hours of Friday, Feb. 9 includes several tax policy changes affecting retirement plans.
In general, the amended version of the Bipartisan Budget Act of 2018 (H.R. 1892) increases discretionary budget caps for both defense and non-defense spending for fiscal years 2018 and 2019, lifts the statutory debt limit to March 2019, and funds the federal government through March 23, 2018. The full text of the bill is here
; for a tabular summary of the bill’s tax provisions prepared by the Joint Tax Committee, click here
As part of the agreement, the legislation also includes a number of policy “riders,” including disaster relief, tax provisions and other policy changes. Many of the retirement provisions included in this legislation were previously included in last year’s Tax Cuts and Jobs Act, but were dropped prior to final passage.
President Trump signed the legislation Friday morning, Feb. 9.
The provisions in H.R. 1892 that affect the retirement industry include: Remove six-month prohibition on contributions to retirement plans after a hardship withdrawal (section 41113):
The legislation directs the IRS to change its administrative guidance to allow employees taking hardship distributions from a retirement plan to continue contributing to the plan. The revised regulations will apply to plan years beginning after Dec. 31, 2018. Allow QNECs, QMACs and profit-sharing contributions to be included in a hardship withdrawal (section 41114):
The legislation modifies the rules relating to hardship withdrawals from cash or deferred arrangements to permit employers to extend hardship distributions to amounts not previously permitted. It also would remove the requirement to take a loan before taking a hardship withdrawal. The provision applies to plan years beginning after Dec. 31, 2018. Provide IRS authority to release a levy on property held in retirement plans (section 41104):
The legislation allows an individual to recontribute to an IRA or employer-sponsored plan an amount withdrawn (and any interest thereon) pursuant to a levy and later returned to the individual by the IRS. Contributions are allowed without regard to the normally applicable limits on IRA contributions and rollovers. The provision is effective for tax years beginning after Dec. 31, 2017.
Special disaster-related rules for use of retirement funds for individuals impacted by the California wildfires (section 20102):
In general, the legislation provides relief from the 10% early withdrawal penalty for qualified distributions up to $100,000 made on or after Oct. 8, 2017, and before Jan. 1, 2019. Distributions must be made by an individual whose principal place of residence was in a wildfire disaster area and who sustained an economic loss due to the wildfires. Distributions can be included in income ratably over a three-year period beginning with the year of distribution, unless the individual elects not to have ratable inclusion apply.
Alternatively, amounts that are recontributed within the three-year period would be treated as a rollover and not includible in income. The legislation also:
- permits individuals to recontribute funds to retirement plans if the funds were distributed for a home purchase in a wildfire disaster area that was cancelled on account of the wildfires; and
- increases the limit and extends the repayment deadline for loans from retirement plans.
The legislation also includes tax provisions relating to employment-retention tax credits for employers affected by the wildfires, temporary suspension of limitations for charitable contributions and special rules for qualified disaster-related personal casualty losses. Create a Joint Select Committee on Solvency of Multiemployer Pension Plans (sections 30421-30424):
A bipartisan committee composed of members from both parties and both houses of Congress will be formed in an attempt to address multiemployer pension plan solvency issues. The legislation details the process that will be used to consider and develop any recommendations. The committee will include 12 members — six from each chamber and an equal number of Democrats and Republicans. If at least four members from each party agree on a compromise, the committee’s recommendation will be guaranteed an expedited vote on both the House and Senate floors with no amendments that will occur no later than the last day of the 115th Congress.
Create new Form 1040SR for individuals over age 65 (section 41106):
The IRS is required to publish a simplified income tax return form that can be used by taxpayers 65 or older. The legislation explains that the form will be similar to Form 1040EZ, but its use shall not be restricted because of the amount of taxable income or because the income for the tax year includes Social Security benefits, distributions from qualified retirement plans, annuities or other such deferred payment arrangements, interest and dividends, or capital gains and losses. The legislation states that the form shall be made available for tax years beginning after the date of enactment.