Spring 2018 ERISA-Extra In this issue 01 02 03 New tax law makes retirement plan changes Calendar of key 2018 dates Increasing plan participation how workers view automatic plan features New tax law makes retirement plan changes Although initial versions of the legislation suggested that substantial changes might be forthcoming, the Tax Cuts and Jobs Act of 2017 1 ultimately made only minor modifications to the rules that affect retirement plans. Following is a brief summary of what the new law has changed. Extension of rollover period for plan loan offsets Many plans allow participants to take loans from their retirement accounts. Plans frequently provide that in certain circumstances (such as separation from service or termination of the plan), any unpaid plan loan balance will be accelerated and, if the loan remains unpaid, the employee s account will be offset by the unpaid balance. Although such loan offsets are treated as distributions for tax and penalty purposes, prior law allowed participants to avoid such treatment by rolling over the loan offset amount to another eligible retirement plan within 60 days. 2 Completing such a rollover required the employee to take the funds from another source and deposit them in an eligible retirement plan, such as a 401(k) plan, a 403(b) plan, or an individual retirement account (IRA). 3 The new law provides that for tax years beginning after December 31, 2017, the 60-day rollover period will be extended to the due date (including extensions) for filing the federal income tax return for the tax year in which the loan offset occurs. Note that to qualify for the extension, the offset must be caused solely by reason of the termination of the plan or the employee s separation from service. 4 Exception to 10% penalty for qualified disaster distributions Generally, a distribution from an employer-sponsored retirement plan or IRA is included as income in the year it is distributed. In addition, if the distribution is received by the participant before he or she reaches age 59½, that distribution is subject to an additional 10% early withdrawal penalty, unless another penalty exception applies. 5 However, a taxpayer may avoid both income taxes and penalties by rolling the distribution over to another eligible retirement plan within 60 days. Under the new law, up to $100,000 of qualified 2016 disaster distributions will be exempt from the 10% early withdrawal penalty if certain requirements are met. To qualify, these distributions must have been made from an eligible retirement plan on or after January 1, 2016, and before January 1, 2018, to a person whose principal place of abode at any time during 2016 was located in a 2016 disaster area and who sustained an economic loss due to the disaster. 6
In addition to providing penalty relief, the new law allows qualifying individuals to minimize the income tax effect of qualifying distributions by spreading them over a threeyear period. The law also allows qualifying individuals to recontribute a qualified 2016 disaster distribution to an eligible retirement plan within three years. 7 Limit on recharacterizations Generally, individuals may make contributions to either of two types of IRAs traditional or Roth and later choose to recharacterize those contributions as having been made to the other type. To do so, the individual must make a trustee-to-trustee transfer of the funds (plus any earnings) to the other type of IRA within the required time period. The new law limits such recharacterizations. Beginning with the 2018 tax year, individuals will no longer be able to recharacterize amounts previously converted from a traditional IRA to a Roth IRA. The new law also prohibits recharacterizations of amounts rolled over to a Roth IRA from 401(k) and other retirement plans. In other words, taxpayers may no longer unwind a Roth conversion. 8 However, since the law was enacted, the IRS has confirmed that taxpayers who completed Roth conversions in 2017 will have until October 15, 2018, to recharacterize them. 9 Note also that recharacterizations will still be allowed for other contributions. For example, an individual may make a contribution to a Roth IRA and later recharacterize it as a contribution to a traditional IRA. If you have questions about any of these tax law changes, please talk with your UBS Financial Advisor. Calendar of key 2018 dates For 401(k) and other defined contribution plans operating on a calendar-year basis Action Distribute 2017 Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to participants and beneficiaries who received plan distributions in 2017 10 for the fourth quarter of 2017 11 January 31 February 14 Action File paper copies of 2017 Forms 1099- R and 1096, Annual Summary and Transmittal of U.S. Information Returns, with the IRS (electronic filers have until April 2) 12 If the plan failed ADP/ACP nondiscrimination testing for the 2017 plan year, make corrective distributions to highly compensated employees to avoid the assessment of a 10% excise tax. Eligible automatic contribution arrangement (EACA) plans have until June 30 to make corrective distributions and avoid the 10% excise tax 13 Distribute first required minimum distribution (RMD) to each terminated participant who reached age 70½ in 2017 and to each 2017 retiree older than 70½ File copies of 2017 Forms 1099-R and 1096, Annual Summary and Transmittal of U.S. Information Returns, with the IRS (electronic filers) 14 February 28 March 15 April 1 April 2 Refund excess elective deferrals (plus April 15 related income) for the 2017 plan year 15 for the first quarter of 2018 16 Provide a Summary of Material Modifications (SMM) describing any material changes in the plan or in the information provided in the Summary Plan Description (SPD) to each covered participant and each beneficiary receiving plan benefits (unless an updated SPD was distributed) 17 File Form 5500, Annual Return/Report of Employee Benefit Plan, for the 2017 plan year or file Form 5558, Application for Extension of Time to File Certain Employee Plan Returns, to apply for a 2½ month filing extension 18 for the second quarter of 2018 19 investments: provide annual fee disclosure to participants and beneficiaries (unless relying on the once in each 14-month period rule) 20 May 15 July 29 July 31 August 14 August 30 Page 2
Action Provide 2017 Summary Annual Report (SAR) containing basic financial information and a description of participants rights to additional information concerning the plan s operation to each participant and each beneficiary in pay status 21 Earliest date to provide annual notices for the 2019 plan year, as applicable: 401(k) plan ADP safe harbor notice; 22 qualified automatic contribution arrangement (QACA) notice; 23 eligible automatic contribution arrangement (EACA) notice; 24 qualified default investment alternative (QDIA) notice 25 September 30 October 3 File 2017 Form 5500 if a 2½ month October 15 extension was obtained 26 investments: Distribute benefit statements for the third quarter of 2018 27 Latest date to provide annual notices for the 2019 plan year, as applicable: 401(k) plan ADP safe harbor notice; 28 qualified automatic contribution arrangement (QACA) notice; 29 eligible automatic contribution arrangement (EACA) notice 30 ; qualified default investment alternative (QDIA) notice 31 November 14 December 1 Distribute recurring RMDs for 2018 32 December 31 Deadline for making corrective distributions or qualified nonelective contributions (QNEC) for failed 2017 ADP/ACP nondiscrimination test to maintain qualified plan status 33 December 31 Increasing plan participation how workers view automatic plan features Ensuring high levels of plan participation is a continuing problem, as more than a quarter of American workers who have access to employer-sponsored plans still choose not to participate. 34 To examine why, The Pew Charitable Trusts (Pew) conducted an online survey in 2016 of nearly 2,000 workers having access to employer-sponsored plans at small and midsize businesses with five to 500 employees. 35 In addition to asking workers why they weren t participating, Pew asked for their reactions to two tools that are frequently used to increase participation automatic enrollment and automatic escalation. Following is a summary of the findings. Encouraging nonparticipants The researchers asked nonparticipants what would motivate them to participate in their retirement plan. The most commonly cited major factors were: Employer contributions or matching contributions (72%) A promotion or salary increase (58%) Confidence that investments would perform well in the market (54%) Tax benefits (51%) Getting closer to retirement (47%) Paying down other debt (40%) While the responses concerning salary and debt may suggest that many nonparticipants feel they lack the surplus income to contribute, the other responses may indicate a need for additional educational information. For example, regarding the question of employer and matching contributions, nonparticipants might do well to note that even without employer contributions, participation in a retirement savings plan may be worthwhile. Likewise, nonparticipants concerned about tax benefits might profit from knowing that most participants do receive tax benefits from contributions; moreover, those tax benefits are only one reason for contributing. Similarly, concerns about investment performance suggest a lack of knowledge about the inherent volatility of the investment markets, while the response regarding getting closer to retirement suggests a failure to understand the potential long-term benefits of compounding. Page 3
Reactions to automatic enrollment Nonparticipants were also asked whether they would opt out of a plan that offered automatic enrollment. Half the participants were presented with a 3% default contribution rate and half a 6% default rate. Overall, more than half approximately 54% of those surveyed said they would stay in the plan, although 11% indicated they would either raise or lower the default rate. And while 15% said they would opt out of the program, a significant percentage 31% were undecided. Again, more than half 54% indicated they would participate, albeit with likely adjustments to the default contribution rate. Workers in households earning less than $75,000 per year were at least 25% more likely to say they did not know if they would participate than those in higher income households. Pew concluded that confidence in automatic escalation may increase if it s made clear to potential participants that they have the ability to change their contribution amounts. Reactions to automatic escalation Survey respondents were also asked how they would react to automatic escalation, a plan feature that automatically increases contributions by a certain percentage each year until a ceiling is reached. Respondents were presented with two hypothetical scenarios: (1) a 3% default contribution with a 7% maximum and (2) a 6% default contribution with a 10% maximum. 1 PL 115-97, 12/22/2017 2 Reg. Sec. 1.402(c)-2, Q&A 9 3 IRC Sec. 402(c)(8) 4 IRC Sec. 402(c)(3), as amended by PL 115-97 Sec. 13613 5 IRC Sec. 72(t) 6 PL 115-97 Sec. 11028(b) 7 Id. 8 IRC Sec. 408A(d)(6)(B)(iii), as amended by PL 115-97 Sec. 13611(a) 9 IRS. IRA FAQs Recharacterization of IRA Contributions. irs.gov. January 23, 2018. Web. of Access 2/1/2018. https://www.irs. gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions 10 2017 Instructions for Forms 1099-R and 5498. irs.gov. Web. of Access 2/14/2018. https://www.irs.gov/pub/irs-prior/i1099r--2017. pdf and 2017 General Instructions for Certain Information Returns. irs.gov. Web. of Access 2/14/2018. https://www.irs.gov/pub/irsprior/i1099gi--2017.pdf 11 12 2017 General Instructions for Certain Information Returns. irs.gov. Web. of Access 2/14/2018. https://www.irs.gov/pub/irs-prior/ i1099gi--2017.pdf 13 IRC Secs. 4979(a)(1) and 4979(f)(1) 14 2017 General Instructions for Certain Information Returns 15 IRC Sec. 402(g)(2) 16 17 ERISA Sec. 104(b)(1), Labor Reg. Sec. 2520.104b-2(b), and Labor Reg. Sec. 2520.104b-3(a) 18 IRC Sec. 6058(a) and 2017 Instructions for Form 5500. dol.gov. Web. of Access 2/14/2018. https://www.dol.gov/sites/default/files/ ebsa/employers-and-advisers/plan-administration-and-compliance/ reporting-and-filing/form-5500/2017-instructions.pdf 19 20 Labor Reg. Sec. 2550.404a-5 21 ERISA Sec. 104(b)(3) and Labor Reg. Sec. 2520.104b-10(c) 22 IRC Sec. 401(k)(12)(D) and Treas. Reg. Sec. 1.401(k)-3(d)(3)(i) 23 Treas. Reg. Sec. 1.401(k)-3(k)(4) 24 Treas. Reg. Sec. 1.414(w)-1(b)(3)(iii)(B) 25 ERISA 404(c)(5)(B)(i)(l) and Labor Reg. Sec. 2550.404c-5(c)(3)(ii) 26 2017 Instructions for Form 5500. dol.gov. Web. of Access 2/14/2018. https://www.dol.gov/sites/default/files/ebsa/employersand-advisers/plan-administration-and-compliance/reporting-and-filing/ form-5500/2017-instructions.pdf 27 28 IRC Sec. 401(k)(12)(D) and Treas. Reg. Sec. 1.401(k)-3(d)(3)(i) 29 Treas. Reg. Sec. 1.401(k)-3(k)(4) 30 Treas. Reg. Sec. 1.414(w)-1(b)(3)(iii)(B) 31 ERISA 404(c)(5)(B)(i)(l) and Labor Reg. Sec. 2550.404c-5(c)(3)(ii) 32 Treas. Reg. Sec. 1.401(a)(9)-5, Q&A 1(c) 33 IRC Sec. 401(k)(8)(A)(i) and Treas. Reg. Sec. 1.401(k)-2(b)(2)(v) 34 The Pew Charitable Trusts, Workers Open to Retirement Plan Features Intended to Boost Savings. www.pewtrusts.org. December, 2017. Web. of Access 1/29/2018. http://www.pewtrusts.org/ en/research-and-analysis/issue-briefs/2017/12/workers-open-toretirement-plan-features-intended-to-boost-savings 35 Id. Page 4
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