Tax Reform: The Impact on Qualified Retirement Plans and IRAs

On December 20, 2017, Congress passed into law the “Tax Cuts and Jobs Act” (the “Act”). The Act makes several notable changes to employee benefit plans by amending certain sections of the Internal Revenue Code. Below is a summary of the key provisions of the Act as they relate to qualified retirement plan and IRAs. These provisions will require or permit many employers to amend their plans. Such amendments will need to be communicated to affected employees.

Loan Offsets

Under current law, if an employee receives a loan from the retirement plan and either the plan terminates or the employee terminates employment, then the employee’s obligation to repay the loan is accelerated and the employee must either repay the outstanding balance on the loan or roll the outstanding balance into another eligible retirement plan within 60 days to avoid tax liability for loan offset. Under the Act, if the plan terminates or an employee fails to meet the repayment terms of the loan because they sever employment, then the time period within which a loan offset can be rolled over tax-free to another eligible retirement plan is extended from 60 days to the employee’s due date (including extensions) for filing federal income taxes for the tax year in which the plan loan offset occurs. This provision takes effect for plan loan offset amounts treated as distributed in taxable years beginning after December 31, 2017.

IRAs

Under current law, individuals making an IRA (traditional or Roth) contribution for a taxable year are permitted to convert both traditional and Roth IRAs and later recharacterize back to the original IRA, so long as the conversion and recharacterization are completed before the due date for the individual’s income tax return for that year. However, under the Act, conversion from a traditional IRA to a Roth IRA and later recharacterization back to a traditional IRA will no longer be permitted. Thus, recharacterization will not be able to be used to unwind a Roth conversion. This change will take effect for 2018 and later years.

Employees Impacted by Natural Disasters

The Act provides more relief for employees impacted by natural disasters occurring in the 2016 or 2017 tax years. The natural disaster had to occur in an area declared as a disaster area by the President and the casualty damage (exceeding $500) must have resulted from that disaster. In such cases, employees who received a distribution from their eligible retirement plan (including a 401(k) plan, a 457(b) plan, or an IRA) may recontribute the funds to an eligible retirement plan to which a rollover can be made within three years after the date on which the distribution was received to avoid the money being included as income. For this to apply to employees, employers will need to make retroactive plan amendments on or before the last day of the first plan year beginning after December 31, 2018 (December 31, 2020, for governmental plans) or a later date prescribed by the Secretary of the Treasury. The amendment is retroactively effective if it applies retroactively for the applicable period and the plan is operated in accordance with the amendment during that period. Therefore, amendments should reflect their operations during that time period.

For more information or questions about this article, please contact Stephanie Kramer, Supervisor with McKonly & Asbury, at skramer@macpas.com.