United States: Congressional Tax Reform Efforts May Impact Retirement Plan Sponsors

SUMMARY

On Saturday, the Senate passed its version of the Tax Cuts and Jobs Act. The process of reconciling the House and Senate versions of the bill has already begun in earnest. Currently, the retirement-plan-related changes included in each version of the bill still differ in many respects, and it is unclear which (if any) changes will be included in the final bill. As a result, with only a few weeks left until the holiday recess, a clear picture of the potential impact of tax reform on retirement plan sponsors has yet to emerge.

IN DEPTH

Early Saturday morning, following an all-night voting session, the Senate passed its version of the Tax Cuts and Jobs Act (Act), bringing Congressional Republicans one step closer to securing the most sweeping overhaul of the tax code in decades. Changes to the nearly 500-page bill, including handwritten revisions to the document, were still being made only hours before the final vote concluded just before 2 am on Saturday. Now that both the House and Senate have approved their own versions of the Act, they will begin the process of reconciling those versions to create a final bill, which must then be passed by both chambers.

Both the House and Senate versions of the Act include proposed changes that would affect all tax-qualified retirement plans, including both pension and savings plans. Despite early speculation, neither version of the Act includes the most controversial potential change, a proposal to significantly reduce the limit on pre-tax contributions to employer-sponsored 401(k) plans ($18,500 for 2018). In addition, the version of the Act passed by the Senate on Saturday does not include some of the more significant changes that would have applied to section 403(b) and governmental section 457(b) plans under the summary of the bill released by the Senate last month. However, both the House and Senate versions of the Act include a number of smaller changes that could impact retirement plan administration.

In Depth

Of the retirement-plan-related changes currently under consideration, very few have been approved by both the House and Senate. Instead, many of the proposed changes appear in only one version of the Act.

Proposed Changes Approved by Both the House and the Senate

Rollovers of Loan Repayments

Both the Senate and House versions of the Act include relief that would extend the period for rolling over a loan offset. Retirement plan loans generally become immediately due and payable when a plan 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. Both versions of the Act would extend 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 to Traditional and Roth IRAs

In addition, both the Senate and House versions of the Act would eliminate the ability to recharacterize a traditional IRA contribution as a Roth IRA contribution, as well as the ability to recharacterize a Roth IRA contribution as a traditional IRA contribution.

Proposed Changes Approved by Only the House

Expanded In-Service Distributions for Defined Benefit Plans

When the House version of the Act was passed last month, it included a rule that would lower the minimum age for receiving an in-service distribution from a defined benefit plan. Currently, defined benefit plan sponsors may allow active employees to request in-service distributions of their plan benefits beginning as early as age 62. The House version of the Act lowers the age for receiving this type of distribution to age 59˝. The House version would also lower the age at which in-service distributions would be permitted from governmental section 457(b) plans from 70˝ to 59˝. Both changes would provide plan sponsors greater flexibility in plan administration; however, the Senate version of the Act does not currently include similar provisions.

Non-Discrimination Testing Relief for Closed Defined Benefit Plans

The House version of the Act also permanently extends the temporary nondiscrimination testing relief currently available to certain employers sponsoring closed defined benefit plans. Many employers have closed their defined benefit plans to new participants, but permit existing participants (or groups of participants) to continue to earn benefits under the plan. Because new employees can no longer enter the plan, closed plans can become discriminatory if the attrition rate of non-highly compensated employees outpaces the attrition rate of highly compensated employees.

Therefore, the House version of the Act provides permanent nondiscrimination testing relief that mirrors relief previously established by Notice 2014-5 and extended earlier this year. Like the existing relief, the permanent relief provided under the House version of the Act would make it easier for closed pension plans to satisfy certain nondiscrimination testing requirements by expanding the availability of cross-testing between defined benefit and defined contribution plans. However, the Senate version of the Act does not include this relief, meaning its inclusion in any final bill will need to be addressed in the reconciliation process.

Hardship Withdrawals

The House version of the Act includes several provisions that would relax certain rules that apply to participants requesting hardship withdrawals from employer-sponsored 401(k) plans.

Specifically, the House version of the Act would eliminate the requirement that employers suspend employee contributions under 401(k) plans for the six month period following a hardship withdrawal. The House version of the Act would also eliminate the requirement that participants take all available retirement plan loans before receiving a hardship distribution and would expand the sources of 401(k) accounts currently available for hardship withdrawals (to include not only elective deferrals, but qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) and earnings on those amounts), together with earnings on elective deferrals. The Senate version of the Act does not include any similar provisions designed to facilitate or expand the availability of hardship distributions.  However, the summary comparison of the House and Senate versions of the Act, published on December 7, 2017, by the Joint Committee on Taxation, suggests that both versions of the Act include the same proposed changes to current hardship withdrawal rules.

Proposed Changes Approved by Only the Senate

Contribution Limits under Section 403(b) and Section 457(b) Plans

When the Chairman's Mark of the "Tax Cuts and Jobs Act" (Chairman's Mark) was released last month, it included a number of provisions that, if adopted, would have had significant implications for governmental section 457(b) plan sponsors who also maintain a 403(b) plan. However, the version of the Act passed by the Senate on Saturday does not include some of those more significant changes.

The Chairman's Mark suggested that the Senate would adopt rules that would harmonize the contribution limits that apply to 401(k), 403(b) and 457(b) plans beginning next year, meaning that all 401(k), 403(b) and 457(b) plans (rather than just 401(k) and 403(b) plans) would have a combined deferral limit ($18,500 for 2018). The Chairman's Mark also indicated that the Senate would (i) set a single aggregate limit on contributions to all 401(k), 403(b) and 457(b) plans maintained by the same employer; (ii) modify the special catch-up contributions available to certain 403(b) plan participants and the special contribution limitations for governmental section 457(b) plans; and (iii) eliminate a special rule under which employers may continue to make contributions to 403(b) plans for up to five years after an employee terminates from employment.

However, the Senate version of the Act passed on Saturday only includes one of the changes original proposed in the Chairman's Mark, a rule that would increase the special contribution limitations for governmental 457(b) plans from $3,000 to $6,000 (as adjusted each year), to mirror the 401(k) plan catch-up contribution limit.

Conclusion

Given the substantial differences between the House and the Senate versions of the Act, it is unclear what changes, if any, retirement plan sponsors will be required to make to their plans. However, because these bills may affect retirement plan administration as early as 2018, employers should keep a close eye on the developing legislation. As the House and Senate continue the reconciliation process, a clearer picture of the potential impact of tax reform on retirement plan sponsors should begin to emerge over the next couple of weeks.

Congressional Tax Reform Efforts May Impact Retirement Plan Sponsors

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions