Budget Act Eases Hardship Distribution Rules and Provides Relief for California Wildfires

On Feb. 9, 2018, Congress passed and Pres. Trump signed H.R. 1892, the Bipartisan Budget Act of 2018 (The Budget Act), creating Public Law No. 115-123. Several provisions affect qualified retirement plans, including 401(k) plans. Here are some highlights:

Hardship Distribution Rules. The Budget Act eases the requirements for taking a hardship distribution from a 401(k) plan. As background, plan participants may request distributions when faced with certain financial hardships. Under current rules, hardship distributions aren't available from certain contributions or from earnings on elective deferrals, because participants must first exhaust available plan loans prior to taking a hardship distribution. Moreover, the safe harbor rules require plan participants to forgo new contributions for six months following the distribution.

Effective for plan years beginning in 2019, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings will be available for hardship distributions. So, in the future, participants don't have to take a loan before requesting a hardship distribution. Additionally, the IRS has been directed to provide new regulations eliminating the six-month prohibition on new contributions.

Relief for California Wildfires. The Budget Act provides relief for victims of the 2017 California wildfires (must be within the declared disaster area) that's similar to that provided to victims of Hurricanes Harvey, Irma and Maria in 2017 (see our Oct. 17, 2017, edition of Compliance Corner on the Disaster Tax Relief and Airport and Airway Extension Act of 2017).

On distributions, the 10 percent penalty tax wouldn't apply to qualified distributions taken by individuals whose principal residence is in a declared disaster area and who sustained an economic loss due to the hurricane. These non-penalized distributions must be taken between the California wildfire start date and Jan. 1, 2019, and are limited to an aggregate of $100,000 (whether received in one or more taxable years). Such distributions can be repaid (in whole or in part) through contributions to the retirement plan. Repayments would be treated as timely rollover contributions, which has the effect of deferring taxation. Instead of repayments, individuals can elect to spread the applicable distribution taxation over a three-year period.

The legislation also provides a special rule relating to hardship withdrawals taken within certain specified dates to build or buy a house in the California wildfire disaster area (but only if the withdrawals weren't used to build or buy the house because of the wildfires). Specifically, all or a part of the hardship withdrawal amount may be repaid or contributed to an eligible retirement plan.

For loans taken between the passage of this law and Dec. 31, 2018, the legislation increases the plan loan limit to $100,000, or 100 percent of an individual's vested account balance. To take advantage of the increased plan loan limit, the individual must have a principal residence in the disaster area and must have suffered an economic loss. Also, such individuals may delay for one year the due date for outstanding loan payments.

Retirement plan sponsors should review their plan designs and work with employees who may have been impacted by the California Wildfires. Ultimately, employers may need to work with outside counsel to ensure the relief described above is properly administered.

Bipartisan Budget Act of 2018 »