Hiding in Plain View: Impact of Recent Tax Legislation on Retirement Plans

Transcription

1 Hiding in Plain View: Impact of Recent Tax Legislation on Retirement Plans Presented by Eric Paley and Claire Rowland March 14, 2018 Tax Cut and Jobs Act ( TCJA ) signed December 22, 2017 TCJA included a number of changes that affect (directly or indirectly) employer retirement plans: Restriction of casualty loss deduction Elimination of rule permitting recharacterizations of Roth conversions Extension of time limit to roll over certain retirement plan distributions and loan offsets Recontribution rights for qualified disaster distributions Imposition of new excise tax on tax-exempt organizations for certain excess compensation Focusing on the first three for this presentation 1

2 for tax years Pre-TCJA, moving expenses reimbursed by employers generally were excluded from employee s income Post-TCJA, moving expenses reimbursed by employers are included in employee s income (i.e., taxable) Note: Exception for active duty military members and their spouses and dependents who have a permanent change of station due to military orders Ok so why is this an issue for retirement plans? 2

3 Plan definition of compensation determines: Allocation in defined contribution plan Benefit accrual in defined benefit plan Maximum annual additions limit under Code Section 415 Top heavy minimum benefit Employer s deduction for contributions Identification of HCE and Key employees Also: used for nondiscrimination testing Common plan definitions of compensation Current includible compensation W-2 compensation Wages for income tax withholding 3

4 Current includible compensation Includes all wages, salaries, fees and other amounts received by the employee for personal services in the course of employment with the employer, but only to the extent includible in gross income Includes overtime, bonuses, commissions, tips, fringe benefits, and or other expense allowances under a nonaccountable plan Note: If it is not reasonable to believe moving expenses paid or reimbursed by the employer are deductible by the employee under Code Section 217 (i.e., qualified moving expenses ), the amount paid or reimbursed for such expenses is included in current includible compensation (Treas. Reg (c)-2(b)(4)) Simplified compensation rule Allows plans to use modified definition of current includible compensation in order to exclude: All fringe benefits (cash and noncash) Reimbursements or other expense allowances s Deferred compensation Welfare benefits 4

5 W-2 compensation Includes federal withholding wages determined under Code Section 3401(a) and other payments for which the employer must file a written statement (in other words, Form W-2) Qualified moving expenses an employer pays to a third party (e.g., a moving company) and services an employer furnishes in kind to the employee were excluded Nonqualified moving expense were included Note: W-2 Compensation definition also could be modified to exclude qualified moving expense paid to the employee Wages for income tax withholding Includes wages determined under Code Section 3401(a) for purposes of federal income tax withholding at the source Includes taxable fringe benefits Excludes or other expense allowances under an accountable plan 5

6 Summary of treatment of moving expense for various plan definitions of compensation: Current includible compensation Simplified compensation W-2 compensation Wages for Income Tax Withholding Pre-TCJA Qualified: EXCLUDED Qualified: EXCLUDED Qualified: EXCLUDED Qualified: EXCLUDED Nonqualified: INCLUDED Nonqualified: EXCLUDED Nonqualified: INCLUDED Nonqualified: INCLUDED Post-TCJA INCLUDED EXCLUDED INCLUDED INCLUDED Plan operation failures involving erroneous administration of plan s compensation definition is Number 2 on the IRS list of Top Ten Failures Found in Voluntary Correction Program :

7 IRS states the usual failure involves the exclusion of types of compensation that should have been included, or the inclusion of types of compensation that should have been excluded Common resulting failures: Participants receive allocations that are either greater than or less than the amount they should have received NHCEs receive lower contribution rate than HCEs Incorrect determination of HCEs, Key employees, plan limits and top heavy minimum benefits Corrections of compensation definition-related failures can be costly Corrective make-up contributions often required for missed deferral opportunities, missed matching contributions, missed catch-up contributions, associated earnings, etc. Administrative and legal costs Also: Nondeductible contributions can result from higher amounts of compensation being used, resulting in the employer owing additional taxes (including excise taxes on the excess) 7

8 What should plan sponsors, human resources personnel, payroll processors, third party administrators, service providers, and advisors do now? Review current plan definitions of compensation for each plan purpose to determine if affected by change in deductibility of moving expenses Review current payroll codes to determine whether they need to be revised to reflect whether moving expenses are plan compensation Review and revise procedures if necessary to ensure accurate compensation data is transmitted to payroll processor, third party administrator, or other service providers Amend plan documents if necessary and update summary plan descriptions, safe harbor notices, and any other notices or forms that specify the plan definition of compensation Confirm with service providers and vendors whether and how plan definition of compensation is being operated/amended Also: Regularly review plan operation in the future to ensure continued compliance and to quickly identify and fix any errors TIP: Don t forget about employment agreements, nonqualified deferred compensation plans and other executive compensation arrangements! 8

9 Restriction of casualty loss deduction for tax years Pre-TCJA, generally could claim a deduction for property losses not compensated by insurance or otherwise that were attributable to losses arising from fire, storm, shipwreck or other casualty. Losses generally were deductible only to the extent that the aggregate net casualty and theft losses exceeded 10% of adjusted gross income Post-TCJA, the newly added Code Section 165(h) limits deductions for personal casualty losses only if they are attributable to a federal disaster declared by the President Restriction of casualty loss deduction for tax years (cont d) How are retirement plans affected? Six safe harbor reasons listed by Treasury regulations permitting retirement plans to allow hardship distributions if the distribution is made to address an immediate and heavy financial need of the employee: Medical care expenses for the employee, the employee s spouse, dependents or beneficiary Costs directly related to the purchase of an employee s principal residence (excluding mortgage payments) 9

10 Restriction of casualty loss deduction for tax years (cont d) Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee s spouse, children, dependents or beneficiary Payments necessary to prevent the eviction of the employee from the employee s principal residence or foreclosure on the mortgage on that residence Funeral expenses for the employee, the employee s spouse, children, dependents, or beneficiary Expenses for the repair of damage to the employee s principal residence that would qualify for the casualty deduction under section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income) Restriction of casualty loss deduction for tax years (cont d) Law of unintended consequences? Due to the limitations imposed by Code Section 165(h), participants may not make hardship withdrawals to repair a damaged principal residence unless the principal residence is in a federally declared disaster area Not clear that TCJA drafters intended this result The IRS has not yet issued guidance to clarify this issue What should plan sponsors, human resources personnel, payroll processors, third party administrators, service providers, and advisors do now? 10

11 Restriction of casualty loss deduction for tax years (cont d) Review current plan provisions governing hardship distributions Review hardship distribution requirements described in current SPD Review and revise procedures if necessary to ensure requirements to qualify for a hardship distribution are met if requested for expenses for the repair of damage to the employee s principal residence Amend plan documents if necessary and update SPDs, safe harbor notices, and any other notices or forms that specify the hardship distribution requirements Confirm with service providers and vendors whether and how hardship distribution requirements are being operated/amended Also: Ensure adequate documentation of hardship is retained Recharacterization of Roth Conversions Pre-TCJA, contributions and conversions to an IRA could be recharacterized to another type of IRA up until the deadline (plus extensions) for the filing of the individual s tax return for the year of contribution or reconversion Post-TCJA, Roth conversions cannot be recharacterized as a traditional IRA after 2017 Traditional IRA contributions can still be recharacterized to Roth IRA Roth IRA contributions can still be recharacterized to traditional IRA 11

12 Recharacterization of Roth Conversions (cont ) How are retirement plans affected? Roth conversions performed by rolling over a plan distribution to a Roth IRA cannot be unwound. Recharacterization of Roth Conversions (cont ) What should plan sponsors, human resources personnel, payroll processors, third party administrators, service providers, and advisors do now? Update language in Special Tax Rollover Notice Review and revised distribution form templates as necessary Review and amend plan document if necessary Review and revised summary plan description if necessary 12

13 Bipartisan Budget Act of 2018 signed February 2018 Hardship withdrawal restrictions and requirements applicable to defined contribution plans (e.g., 401(k), 403(b), etc.) relaxed effective for plan years beginning after December 31, 2018 (i.e., January 1, 2019, for calendar year plans): Hardship withdrawals allowed from QNECs and QMACs (and earnings) Requirement for participants to first obtain a loan from the plan eliminated Six-month suspension requirement eliminated Bipartisan Budget Act of 2018 signed February 2018 (cont d) Optional or required? Plan sponsors that wish to implement the changes beginning in 2019 will need to amend their plans and update their SPDs and distribution forms But: IRS has to issue new regulations to reflect the changes Unanswered questions Unclear how six-month suspensions that have not ended as of 2019 plan year commencement will be affected IRS is expected to issue guidance 13

14 Bipartisan Budget Act of 2018 signed February 2018 (cont d) What should plan sponsors, human resources personnel, payroll processors, third party administrators, service providers, and advisors do now? Discuss with counsel/advisors whether plan will be amended to implement relaxed requirements beginning with 2019 plan year Amend plan documents if necessary and update summary plan descriptions, safe harbor notices, and any other notices or forms that specify the hardship distribution requirements Confirm with service providers and vendors whether and how hardship distribution requirements are being operated/amended Thank you! Questions? Paley, Eric Partner Claire Rowland Associate This presentation contains images used under license. Retransmission, republication, redistribution, and downloading of this presentation, including any of the images as stand-alone files, is prohibited. This presentation may be considered advertising under certain rules of professional conduct. The content should not be construed as legal advice, and readers should not act upon information in this publication without professional counsel Nixon Peabody LLP. All rights reserved. 14