401k and the TCJA: Changes for the Future
Contributed by: Peter Ventura, Principal
As the biggest tax reform bill passed in the last 30 years, many people assume that the Tax Cuts and Jobs Act (TCJA) primarily impacts their annual tax filings. However, when passing the TCJA, Congress not only focused on taxpayer claims and deductions, but also took aim at specific functions of retirement plans as well. While most of the changes aren’t earth-shattering, these modifications do tend to help 401k participants, making it essential to understand some of the biggest distinctions of the new plan and policies.
If you are currently contributing to a 401k or 403b plan, here are two specific functions where you may need to consider the new Tax Cuts and Jobs Act.
Generally only allowed if there is an immediate and substantial financial need, a hardship distribution is restricted to qualified medical expenses, funeral expenses, tuition, and related education expenses. It may also be approved for principal residence costs including eviction, foreclosure, specific repairs, and purchase. Under previous rules, upon taking a hardship distribution, participants were not allowed to contribute to the plan for six months. However, under TCJA, this provision is removed effective January 1, 2019. Additionally, under previous regulations, certain funds were restricted from hardship distributions. New regulations remove those restrictions, thereby allowing a larger pool of funds.
If allowed under the plan, plan loans required certain repayment terms (generally less than five years, unless for the purchase of a primary residence) and were typically repaid ratably through payroll deductions. This, of course, created issues when an employee no longer worked for the sponsor and triggered a distributable event after 60 days of non-payment. Under the new regulations, participants may repay the loan to the latest date the participants file their return for the tax year in which the loan amount would have ordinarily been determined a distribution. Meaning, if participant John Smith left employment on November 1, 2018, and had a $25,000 outstanding loan, Mr. Smith would have until October 15, 2019, to repay the loan, with a properly filed extension.
Additionally under both hardship distribution and plan loans, any loans that have not been repaid in a timely manner will almost inevitably incur a 10% penalty plus any applicable taxes for the participant.
Contact Leone, McDonnell & Roberts Today
The best way to understand how the TCJA will impact your retirement plan is to discuss your 401k distributions and loans with a professional accounting firm. Contact Leone, McDonnell & Roberts to consult with one of our experienced accountants about your 401k plan today.