Tax bill signed into law, retirement plan provisions included

The Tax Cuts and Jobs Act (P.L. 115-97) was signed into law by President Trump on December 22, 2017. The Senate approved the bill, 51 to 48, a little after midnight on December 20, 2017. The House re-voted the same day, passing the bill, 224 to 201. The bill includes retirement plan-related provisions concerning Roth IRA conversions, loan offset amounts, and disaster relief.
The House approved, by a 227-203 vote, the Conference Agreement for the measure on December 19, 2017. The House voted for the bill despite unified opposition from Democrats. Twelve Republicans also voted no. However, the Senate parliamentarian determined that several provisions violated the reconciliation rules. The Senate GOP removed the offending language and the Senate approved the bill along party-lines. The bill then returned to the House for a revote, where again it passed.

Repeal of rule permitting characterization of Roth conversions

The bill, effective for tax years beginning after December 31, 2017 repeals the special rule permitting the recharacterization of Roth conversions. Thus, while taxpayers may still convert traditional IRAs to Roth IRAs, a Roth IRA conversion may no longer be recharacterized or reversed.
Prior to 2018, if an individual makes a contribution to an IRA for a tax year and then transfers the contribution (or a portion of the contribution) to another IRA in a trustee-to-trustee transfer, the individual can elect to treat the contribution as having been made to the transferee IRA and not the transferor IRA. Thus, a taxpayer who converted an IRA into a Roth IRA could, within a stipulated time period, recharacterize the Roth IRA as a traditional IRA. The transfer must be made on or before the federal income tax due date (including extensions) for the tax year for which the original contribution was made. In addition, the transfer must include allocable net income on the contribution and no deduction is permitted for the contribution to the transferor IRA.
Such “recharacterizations” are intended to provide tax relief to individuals who erroneously convert traditional IRAs into Roth IRAs or who otherwise wish to change the nature of an IRA contribution (e.g., in response to a decline in the value of the Roth IRA after conversion). Although recharacterizations are generally corrective measures, a taxpayer may recharacterize an IRA contribution for any reason. Thus, the relief is available to taxpayers who wish to change the nature of an IRA contribution and is not restricted to only those individuals who need to correct Roth IRA conversions for which they were ineligible.

New law.

Under the bill, although recharacterization of Roth conversions is repealed, recharacterization remains an option with respect to other contributions. Accordingly, taxpayers who have made contributions for a year to a Roth IRA may (prior to due date of their individual income tax return for the year) recharacterize it as a contribution to a traditional IRA.

Extended rollover period for plan loan offset amounts

The bill provides that the period during which a qualified loan offset amount must be rolled over to an eligible retirement plan is extended, effective for tax years beginning after December 31, 2017, to the due date (including extensions) for filing the income tax return for the year in which the loan offset occurs (i.e., the tax year in which the amount is treated as distributed from a qualified plan).
Under current rules, a qualified plan may allow a loan to be offset against the participant’s accrued benefits in order to repay the loan. A loan offset typically occurs when the plan terms require that, in the event of an employee’s termination or request for distribution, the loan be repaid immediately or treated as in default. Loan offset also arises when the plan terms require the loan to be cancelled upon an employee’s termination or within a specified period thereafter.
In the event a plan offsets the distribution of a terminating participant’s account balance by the amount of the outstanding loan balance, the distribution must include the loan balance at the time of the offset. However, the amount of the account balance that is offset against the loan is an actual distribution, and not a deemed distribution.
As an actual distribution, the amount of the loan offset is an eligible rollover distribution. Accordingly, an amount equal to the plan loan offset amount may be rolled over by the employee (or spousal distribute) to an eligible retirement plan. However, the rollover must occur within the 60-day period required under Code Sec. 402(c)(3).

New law.

For purposes of the bill’s extension of the rollover period, a qualified plan offset will be treated as a loan offset amount that is treated as distributed from a qualified plan (including a 403(b) or 457(b) governmental plan) to a participant or beneficiary solely because of: (1) the termination of the plan, or (2) the failure to meet the payment terms of the loan because of the participant’s severance from employment. The bill provides that the amount of a qualified plan loan offset will remain the amount by which the participant’s accrued plan benefit is reduced in order to repay the loan.

Relief for 2016 disaster areas

The bill extends relief from the 10% penalty tax to “qualified 2016 disaster distributions” from qualified plans, 403(b) plans and IRAs of up to $100,000.
Under current law, a 10% penalty tax is imposed on an individual under age 59 ½ who receives a distribution from a plan qualified under Code Sec. 401(a) or from an individual retirement arrangement. The tax applies to the amount of the distribution includible in income. However, in addition to other exceptions enumerated under Code Sec. 72(t), the 10% early distribution penalty does not apply to “qualified hurricane distributions.”
Congress has periodically provided relief allowing taxpayers affected by major hurricanes to take distributions from their retirement plans without incurring the additional tax. Specifically, Code Sec. 1400Q, added by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135), expanded relief first enacted under the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) to cover victims of Hurricanes Rita and Wilma. Subsequently, the Heartland, Habitat, Harvest, and Horticulture Act of 2008 (P.L. 110-246), extended the Code Sec. 1400Q relief to victims of tornadoes and storms that hit the Greensboro, Kansas area in May 2007. Most recently, The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (P.L. 115-63), extended the relief to qualified individuals affected by Hurricanes Harvey, Irma, and Maria in 2017.
The relief provided under current law includes the following: the aggregate amount of distributions received by an individual that may be treated as qualified hurricane contributions cannot exceed the excess (if any) of $100,000 over any qualified hurricane distributions received for prior tax years; the portion of a qualified hurricane distribution that is includible in income may be reported ratably over three years, beginning with the year in which the distribution is received; and an individual who receives qualified hurricane distributions may recontribute up to the amount of those distributions to an eligible retirement plan within three years of receiving them
The current law further provides that a temporary increase in the available dollar amount of a plan loan is authorized for qualified individuals affected by specified hurricanes. In addition, the due dates for the repayment of loans made available to qualified individuals affected by designated hurricanes may be delayed for one year.

New law.

The bill extends the relief from the 10% penalty tax to “qualified 2016 disaster distributions” from qualified plans, 403(b) plans and IRAs of up to $100,000, essentially mirroring the relief provided under Code Sec. 1400Q. Thus, income attributable to a qualified 2016 disaster distribution may be included in income ratably over three years, and the amount of a qualified 2016 disaster distribution may be recontributed to an eligible retirement plan within three years. However, the bill does not incorporate the loan options under Code Sec. 1400Q(c).

Qualified 2016 disaster distribution requires loss.

A qualified 2016 disaster distribution is a distribution from an eligible retirement plan made on or after January 1, 2016, and before January 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area (as declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act). In addition, however, the individual must have sustained an economic loss by reason of the events giving rise to the disaster declaration.

Recontribution of qualified disaster distribution.

Any portion of a qualified 2016 disaster distribution may, at any time during the three-year period beginning the day after the date on which the distribution was received, be recontributed to an eligible retirement plan to which a rollover can be made. Any amount recontributed within the three-year period is treated as a rollover and, thus, is not includible in income. Thus, if an individual receives a qualified 2016 disaster distribution in 2016, that amount is included in income, generally ratably over the year of the distribution and the following two years, but is not subject to the 10% early withdrawal tax. Moreover, if the amount of the qualified 2016 disaster distribution is recontributed to an eligible retirement plan in 2018, the individual may file an amended return to claim a refund of the tax attributable to the amount previously included in income.

Retroactive plan amendments.

The bill allows a plan amendment made pursuant to the provision (or a regulation issued thereunder) to be retroactively effective. The amendment must be made on or before the last day of the first plan year beginning after December 31, 2018 (or in the case of a governmental plan, December 31, 2020), or a later date prescribed by the Secretary.

Source: P.L. 115-97.
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