Recent Changes in Tax Laws Affect Qualified Retirement Plans and Health & Welfare Benefits The Tax Cuts and Jobs Act of 2017 ( Tax Cuts Act ), the Bipartisan Budget Act of 2018 ( Budget Act ), and other recent legislation impacts certain elements of 401(k), 403(b) and other retirement plans, as well as numerous Health & Welfare benefits. The table below identifies the key changes, the effective date of the change and if applicable the action that Fidelity has taken to implement them. Changes Affecting Qualified Retirement Plans: Description Old Law New Law 1. Hardship withdrawals Participants in 401(k) and 403(b) plans could request hardship withdrawals for the repair of their principal residence due to a casualty loss. The definition of casualty loss for income tax purposes was based on Section 165 of the Internal Revenue Code before January 1, 2018. That definition was also used for purposes of the safe harbor hardship withdrawal test for participants who requested money for the repair of their principal residence due to a casualty loss. A participant could request a hardship withdrawal regardless of whether or not their principal residence was located in a federally declared disaster area for fires, floods, sewer backups, etc. The Tax Cuts Act changed the definition of a casualty loss deduction for income tax purposes under Section 165 of the Internal Revenue Code for calendar year taxpayers for the period January 1, 2018 through December 31, 2025. That change affects participants in 401(k) and 403(b) plans since that definition is also used to determine hardship withdrawals under the safe harbor test. Now a participant s principal residence must be located in a federally declared disaster area to request a hardship withdrawal for expenses related to a casualty loss. This change will also impact 403(b) plans using the IRS 401(k) plan safe harbor test but will not directly impact 457(b) governmental plans. Fidelity Action: Fidelity has updated all of the NetBenefits screens and standard safe harbor hardship withdrawal templates to reflect the new casualty loss definition. Fidelity is working with an industry trade group on the change to the Section 165 definition since it may have had some unintended consequences on hardship withdrawals.
2. Rollover of Participant Loan Offsets Participants in qualified retirement plans with loans that default and are offset (removed from their accounts) only had 60 days after the date of the loan offset to complete a rollover to avoid potential income tax consequences. The Tax Cuts Act added an extended rollover window starting in 2018 for participants whose loans default and are offset because of their severance of employment or the plan termination. Those participants will have until the due date (including extensions) of the filing of their federal income tax return for the year of the offset to complete the rollover to an IRA or eligible employer plan. That will enable them to avoid paying income taxes and any early withdrawal penalty on the amount rolled over. See Example 1 for an illustration of a plan loan offset. This change does not apply to participants who default on their loans and are still active employees. Fidelity Action: Fidelity revised the 402(f) Notice ( Special Tax Notice ) to reflect the relevant loan offset rollover language. The Fidelity Volume Submitter plan document will be amended to allow the extended rollover window for a loan offset.
3. Hardship withdrawals Participants in 401(k) or 403(b) plans may qualify to obtain hardship withdrawals under the safe harbor test if the costs or expenses are deemed to satisfy an immediate and heavy financial need for any of the following reasons: 1. medical care, 2. the purchase of a principal residence, 3. post-secondary education, 4. prevent eviction or foreclosure of a principal residence, 5. burial and funeral expenses, or 6. repairs to a principal residence due to a casualty loss which would otherwise be tax-deductible under Section 165 of the Internal Revenue Code Participants must exhaust all other available plan options for withdrawal, including a plan loan. Elective deferral contributions under the safe harbor test must be suspended for six months after the date of their hardship withdrawal. Qualified nonelective contributions (QNECs), qualified matching contributions (QMACs) and earnings on elective deferral contributions are not available for hardship withdrawals. The six safe harbor test hardship withdrawal reasons under the safe harbor test did not change. However, the Budget Act made several changes to the hardship withdrawal rules that appear to be optional provisions and will become effective on the first day of the plan year that begins in 2019: 1. directs the Treasury to update its 401(k) safe harbor regulations to remove the required six month suspension of deferral contributions after receipt of a hardship withdrawal, 2. extends Section 401(k) of the Internal Revenue Code to allow distributions of QNECs, QMACs, elective deferral contributions and earnings as a hardship withdrawal, and 3. amends Section 401(k) of the Internal Revenue Code Section to allow hardship withdrawals without regard to whether participants have first obtained available plan loans. The first one of the three changes will also impact 403(b) plans using the 401(k) safe harbor test but will not directly impact 457(b) governmental plans. The second and third of the three changes do not appear to apply to 403(b) or 457(b) governmental plans, but additional clarification is being sought. Fidelity Action: Fidelity has been reviewing these changes to determine the impact for clients using a Fidelity Volume Submitter plan document. Initially, it appears that these changes are optional. We have been working with an industry trade group on this issue and they have submitted comments to the IRS requesting clarification. Once we know more we will communicate with Sponsors.
4. California Wildfires No favorable income tax benefits were available to participants affected by the California wildfires. The Budget Act provided the same income tax relief to those participants who were affected certain California wildfires as the relief that was included in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 for participants who were affected by Hurricanes Harvey, Irma or Maria. The relief is available to affected participants whose principal place of abode from October 8, 2017 through December 31, 2017 was located in a federally declared disaster area and they sustained an economic loss as a result of one of the hurricanes or a California wildfire. Please refer to information that is located on Plan Sponsor Webstation SM for further information (See Note 1 below). Fidelity Action: Fidelity has incorporated these changes into our processes and procedures. We are also in the process of drafting a good faith amendment for these changes for clients using a Fidelity Volume Submitter plan document. Note 1: Fidelity has prepared a table with a side-by-side comparison of the relevant retirement plan provisions in the Tax Act and Budget Act. The table is located on PSW, within the Disaster relief resources page. Example 1: Here s a hypothetical example of a rollover of a loan offset for a terminated employee under the new law. Mary has a vested account balance in her employer s 401(k) plan of $25,000, which includes a $10,000 outstanding loan. She terminates her employment in 2018 and requests a distribution of her $25,000 vested account balance. The plan offsets her $10,000 loan that she borrowed from the 401(k) plan so it is removed from her account and then pays her the $15,000 cash balance so she is taxed on the full $25,000. If she rolls over the $15,000 cash portion of her distribution then she will still be taxed on the $10,000 loan offset that was removed from her account. There are two ways that Mary can avoid the income taxation. First, she can repay the loan to the plan before her distribution occurs so the plan would have paid her the full $25,000 amount, and then she can roll over the total amount to an IRA or her new employer s qualified plan. The second option is that Mary may rollover the $15,000 net distribution amount now. She will have the ability to contribute $10,000 of her own money and roll it over to an IRA or an eligible employer s plan. She has until the tax filing deadline (usually April 15), unless she files an extension of time to file her federal income tax return, to complete the rollover of an amount equal to the $10,000 outstanding loan balance.
Changes Affecting H&W Benefits Description Old Law New Law Individual mandate penalty Paid family and medical leave Under the Affordable Care Act, individuals without health insurance coverage were potentially subject to a financial penalty. There was previously no federal tax credit provided to employers offering paid family and medical leave. The Tax Cuts Act reduced the financial penalty to $0 for the ACA s individual mandate effective for the 2019 plan year. The Congressional Budget Office estimates that eliminating this financial penalty will increase the number of uninsured Americans by 4 million in 2019 and 13 million by 2027. The Tax Cuts Act provided a tax credit to eligible employers offering paid family and medical leave for at least one qualifying reason under the Family and Medical Leave Act, such as the birth of a child. Eligible employers can claim this credit only for 2018 and 2019. Employee Achievement Awards Employers could deduct Employee Achievement Awards such as cash, gift cards, vacations, event tickets, etc., and employees received awards as non-taxable income. The Tax Cuts Act eliminated the employer tax deduction and employee exclusion from income for Employee Achievement Awards for non-tangible personal property, such as cash, gift cards, vacations, event tickets, etc., effective 2018. Qualified Transportation Fringe Benefits Employers could deduct Qualified Transportation Fringe Benefits. The Tax Cuts Act eliminated the employer deduction for Qualified Transportation Fringe Benefits. Effective 2018, the employer deduction for transportation, payment, or reimbursement to an employee for commuting is eliminated (except as necessary to ensure an employee s safety).
Qualified Bicycle Commuting Reimbursement Employers could reimburse employees who were eligible for the Qualified Bicycle Commuting Reimbursement as non-taxable income. The Tax Cuts Act suspended the Qualified Bicycle Commuting Reimbursement. Effective 2018 through 2025, employees cannot exclude the reimbursement amount from their income. On-site gym or fitness center deduction Employers could deduct expenses related to an on-site gym or fitness center offered to employees. The Tax Cuts Act eliminated the employer deduction for expenses associated with offering an on-site gym or fitness center, effective 2018. On-site food and beverage deduction Employers could deduct 100% of food and beverages at on-site eating facilities. The Tax Cuts Act reduced the employer deduction for food and beverages at on-site eating facilities to 50%, effective 2018 2025. Beginning 2026, this deduction is eliminated entirely. Deduction for entertainment Employers could deduct entertainment and amusementrelated expenses. The Tax Cuts Act eliminated the employer deduction for entertainment, amusement, and recreational activities, including membership dues relating to business, pleasure, recreation, or other social purpose, and facility fees related to any of these items, effective 2018. Work-related moving expenses Employers could deduct expenses related to an employee s work-related move. The Tax Cuts Act eliminated the employer deduction for workrelated moving expenses, effective 2018 2025. Reimbursements for work-related moving expenses also must be included in employees income, effective 2018 2025.
Medical expenses deduction Cadillac Tax Individuals could deduct medical expenses that exceeded 10% of adjusted gross income. The Excise Tax on high-cost coverage, or the so-called Cadillac Tax was previously scheduled for implementation in 2020. The Tax Cuts Act increased the amount individuals can deduct for medical expenses to over 7.5% of adjusted gross income. Beginning in 2019, the threshold returns to 10%. In January 2018, a short-term government funding law delayed implementation of the Cadillac Tax until 2022. There continues to be bipartisan support in Congress to eliminate the tax entirely. Despite the delay, employers should continue prioritizing vigilant health plan cost management. If the tax were eliminated, Congress could look to fill funding gaps for ACA initiatives by other means that impact plan sponsors.
Health Insurer Fee or HIF The HIF is currently levied on all fully-insured health plan contracts and insurers often pass the tax along to employers and plan participants through premiums. It was suspended for the 2017 plan year, but in place for the 2018 plan year. The short-term government funding law suspended the HIF again for the 2019 plan year. Suspending the tax will likely reduce all fully-insured health plan premiums during 2019. During renewal discussions in 2018, employers with insured health plan contracts should confirm their 2019 premium development does NOT include the HIF. Employers with multi-year contracts extending beyond 2019 may also consider proactively negotiating future premium agreements with and without the HIF in case the suspension continues beyond 2019. Employers that provide insured retiree medical coverage and/or project to have their retiree medical plan impacted by the excise tax in the future should also engage their actuary to discuss any implications of these changes on the company s FAS accounting liability.
Health Savings Accounts (HSAs) Adoption assistance The IRS had reported the HSA annual contribution threshold for family coverage as $6,900 for the 2018 plan year. The IRS had reported the 2018 adoption assistance benefit limit as $13,840. In March, the IRS announced changes to certain benefits as the result of the Tax Cuts Act s new inflation formula. The 2018 HSA annual contribution limit for individuals with family health insurance coverage decreased $50 from $6,900 to $6,850. The annual contribution limit for those with individual coverage has not changed. Fidelity Action (if applicable): Given this unexpected change, your Fidelity team is quickly analyzing the impact to you and your employees and creating an action plan that includes employee communications. Your service team will be sharing the plan with you in the very near future. As a result of the Tax Cuts Act s new inflation formula, the 2018 adoption assistance benefit limit was reduced by $30 from $13,840 to $13,810. If you have any questions about these changes, do not hesitate to contact your Fidelity representative. Investing involves risk, including the risk of loss. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 2018 FMR LLC. All rights reserved. 838253.1.0