Tax Reform Series II: Retirement Plan and IRA Provisions

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1 If yu have questins, please cntact yur regular Grm attrney r ne f the attrneys listed belw: Elizabeth Dld edld@grm.cm (202) David Levine dlevine@grm.cm (202) Mark Lfgren mlfgren@grm.cm (202) Luis Mazawey lmazawey@grm.cm (202) David Pwell dpwell@grm.cm (202) Brigen Winters bwinters@grm.cm (202) Jeff Witt jwitt@grm.cm (202) J. Rse Zaklad rzaklad@grm.cm (202) January 12, 2018 Tax Refrm Series II: Retirement Plan and IRA Prvisins This summary f the tax bill fcuses n the rather limited changes made t pensin benefits and IRAs. Unfrtunately, a number f the participant-friendly prvisins in the Huse and Senate bills did nt survive t the final tax bill, but stay tuned as Cngress has pensin refrm n the frnt burner, which culd give rise t a number f mre sweeping changes later this year. A summary f the changes, and next steps fr plan spnsrs and IRA prviders, are summarized belw. The Changes 1. Extended Rllver Perid fr Lan Offsets. A lan ffset due t plan terminatin r default due t terminatin f emplyment can be indirectly rlled ver t anther eligible retirement plan r IRA by the individual s tax filing deadline (including extensins) fr the year f the ffset. Prir Law A lan ffset amunt is generally eligible fr rllver treatment, but the rllver must be cmpleted under the standard rllver rules. As such, this amunt is eligible fr an indirect rllver t anther qualified plan r IRA within 60 days t avid taxatin f the utstanding lan balance. What Changed A lan default due t (1) plan terminatin, r (2) severance frm emplyment that results in a lan ffset, may be indirectly rlled ver by the individual s tax filing deadline (plus extensins) fr the year f the lan ffset. When Taxable years beginning after Impacted Plans Tax-qualified retirement plans, including 401(k), 401(a), 403(b), gvernmental 457(b) plans that ffer lans. Review yur lan plicy and plan lan prvisins t determine if either shuld be updated t reflect this rule, r cnsider whether t mdify the lan plicy t take advantage f this rule (e.g., if yur plan allws the cntinuatin f lan repayments fllwing terminatin f emplyment, cnsider eliminating this ptin, r recnsider if a lan nte shuld be rlled ver t a successr plan n plan terminatin r if this extended rllver perid is sufficient t address the utstanding lan). It is unlikely that a plan amendment wuld be needed t reflect the extended perid, and in any event fr individually designed plans, n amendment is needed until it is listed n the IRS Required Amendment List. This change is unlikely t impact the timing f lan ffsets and reprting and withhlding f lan ffsets, but gives participants additinal time t cme up with the additinal funds t avid the adverse tax cnsequence (i.e., taxatin f the utstanding lan balance).

2 Next Steps (Cntinued): Revise yur distributin paperwrk and rllver ntice (402(f) ntice) t reflect this special rllver extensin. As this is currently effective, discuss with yur third party plan administratr the impact f this change. (IRA prviders shuld als update their rllver prcedures t accept these lan ffsets.) Disaster Relief. The bill prvides fr varius tax relief fr 2016 and 2017 distributins frm eligible emplyer plans and IRAs due t 2016 strms and flding, similar t (but nt as extensive as) the recent Cngressinal relief fr Hurricanes Harvey, Irma, and Maria. Prir Law N special relief was available fr 2016 strms. What Changed Distributins made in 2016 and 2017 that cnstitute a qualified 2016 disaster distributin are eligible fr the fllwing tax and plan treatment: N 10% early distributin tax under Cde sectin 72(t). Nt eligible fr rllver treatment, and therefre, plan spnsrs shuld nt impse the 20% mandatry withhlding r prvide the 402(f) ntice. (As this prvisin is retractive, we anticipate that any withhlding impsed will nt be changed). Permissible in-service distributin (as this is retractive relief it is unlikely t have been used). Taxed pr rata ver a three-year perid. Ability t recntribute the amunt t an eligible retirement plan within three years. A plan amendment is required by the end f the 2018 plan year (lnger fr gvernmental plans), unless the Secretary indicates a later date, fr plan spnsrs that make qualified 2016 disaster distributins. Fr this purpse, a qualified 2016 disaster distributin is a distributin fr disaster victims resident in any area with respect t which a majr disaster has been declared by the President under sectin 401 f the Rbert T. Staffrd Disaster Relief and Emergency Assistance Act during calendar year 2016 f up t $100,000 frm a 401(a), 403(b), IRA r gvernmental 457(b) plans n r after January 1, 2016 thrugh December 31, 2017, t an individual whse principal place f abde at any time during 2016 was in a disaster area and wh sustained an ecnmic lss by reasn f events giving rise t a Presidential disaster declaratin. When As f the date f enactment (December 22, 2017). Impacted Plans Tax-qualified retirement plans, including 401(k), 401(a), 403(b), gvernmental 457(b) plans and IRAs. We anticipate the IRS will prvide guidance t plan spnsrs and participants regarding these special distributins. Plan spnsrs are nt required t ffer these distributins, and as the distributin perid has expired, it is likely that mst plan spnsrs will nt need a plan amendment, but will still need t develp prcedures t implement the recntributin ptin. 2 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

3 3. Restrictin n Casualty Lss Deductin. The bill narrws the casualty lss deductin under Cde sectin 165 t lsses attributable t a disaster declared by the President under sectin 401 f the Rbert T. Staffrd Disaster Relief and Emergency Assistance Act. This in effect narrws the safe harbr hardship withdrawals n accunt f damage t an emplyee s principal residence that wuld qualify fr a casualty deductin. Prir Law The 401(k) regulatins list certain expenses as being deemed t be n accunt f an immediate and heavy financial need, which includes a distributin fr expenses fr the repair f damage t the emplyee s principal residence that wuld qualify fr the casualty deductin under sectin 165 (determined withut regard t whether the lss exceeds 10% f adjusted grss incme). What Changed The bill requires the casualty lss t be attributable t a disaster declared by the President under sectin 401 f the Rbert T. Staffrd Disaster Relief and Emergency Assistance Act. When Taxable years beginning after 2017 thrugh Impacted Plans Defined cntributin plans with safe harbr hardship prvisins. Revise yur hardship prcedures t gather infrmatin regarding the president declared disaster fr casualty lsses fr the principal residence (r therwise discuss with yur third party administratr t ensure implementatin f this change). 4. Vlunteer Public Safety 457(e) Plan. The bill dubles the benefit accrual permitted fr special vlunteer public safety prgrams under Cde sectin 457(e)(11) frm $3,000 t $6,000, and indexed the $6,000 fr inflatin ging frward. Prir Law Vlunteer Public Safety plans under Cde sectin 457(e)(11) histrically capped annual accruals t $3,000. What Changed The bill replaces the $3,000 cap with a $6,000 cap, which is indexed thereafter. When Taxable years beginning after Impacted Plans Length f service award plans under Cde sectin 457(e)(11). If yu ffer these prgrams, cnsider increasing the plan s benefits in light f the increased cap f benefits. A plan amendment will be required, which we typically recmmend adpting by the end f the plan year in which the change is made. If yu dn t ffer such a prgram fr yur vlunteer public safety wrkers, recnsider ffering such a prgram t prvide a valuable retirement benefit fr yur wrkers. 3 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

4 5. Recharacterizatin f Rth Cnversins. The bill eliminates the ability t recharacterize a Rth cnversin after Prir Law Cntributins and cnversins t an IRA can be recharacterized t anther type f IRA within the individual s tax deadline (plus extensins) fr the year f the cntributin/recnversin. What Changed The bill prhibits Rth cnversins frm being recharacterized after Hwever, cntributins t a traditinal IRA can still be recharacterized t a Rth IRA (and vice versa). When Taxable years beginning after Impacted Plans IRAs (including rllver frm a qualified plan t an IRA). IRA prviders shuld mdify their recharacterizatin prcesses t reflect the new limitatin n Rth cnversins. Plan spnsrs may cnsider adding a nte t their distributin packages r rllver ntice t make clear that a rllver t a Rth IRA cannt be unwund. 6. New Cst f Living Adjustment Index fr IRA Limits. The bill changes the index used t determine the annual cst f living adjustment n IRA (including Rth IRA) cntributin and deductin limits. Prir Law IRA limits were set by the CPI-U index. What Changed IRA limits are set by the chained CPI-U index, which is typically viewed as a slwer inflatin index. When Taxable years beginning after Impacted Plans Traditinal and Rth IRAs. IRA prviders shuld update their disclsure statements t reflect the new limits (pending release frm IRS). 7. Fringe Benefit Changes. The bill makes a number f changes t fringe benefits, regarding either the taxatin f such amunts, r the cmpany deductin f these amunts. The details f these changes are set frth in the Tax-Refrm Series I: Fringe Benefit and Health & Welfare Prvisins write-up. Prir Law The Cde has histrically prvided favrable tax treatment t certain fringe benefits. What Changed The bill changed either the emplyer deductibility f certain fringe benefits r the tax treatment t the emplyees that will likely result in a fresh lk at these prgrams. Fr example, mving expenses are nw taxable. 4 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

5 When Generally, taxable years beginning after Impacted Plans All plans. Plan spnsrs shuld review their varius definitins f cmpensatin under the plans t ensure the prper pay cdes are being cunted in cmpensatin. 5 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.