While the Bipartisan Budget Act of 2018 (“Budget Act”) may have sounded like just a law to end the government shutdown, there were some retirement plan provisions included.
In an effort to simplify the hardship distribution process, the Budget Act makes the following changes to the hardship distribution rules:
- Removes the rule that all available loans must be taken before a hardship distribution is allowed.
- Allows hardship distributions to be taken from earnings on deferrals, QNECs, QMACs and safe harbor contributions. These items are currently restricted from being used for a hardship distribution.
- The IRS has been instructed to modify the regulations that require a participant to be suspended from making elective deferrals for a period of six months after a hardship distribution.
It is important to note that these changes are not effective until plan years beginning after December 31, 2018, so hardship distributions will not be affected until January 1, 2019. Once finalized in the regulatory process, it is anticipated that future plan amendments will be required.
Disaster relief for victims of the California wildfires
Similar to past hurricane relief, the Act extends disaster relief provisions to those in California who were victims of the wildfires. Victims are those whose principal place of abode is in the Federally-declared disaster area between October 8, 2017 and December 31, 2018 and incurred a loss is due to the fires. The Act allows the following disaster distributions until January 1, 2019:
- Distributions to qualified individuals of up to $100,000 are not subject to the 10% early distribution penalty nor the 20% mandatory withholding. In addition, the inclusion of the distribution in income can be spread over three years or avoided completely if repaid within the three-year period.
- The maximum loan amount is increased to the less of 100% of the vested account balance or $100,000 (normally, 50% or $50,000).
The Act also allowed the following relief for loans and hardships that have already been distributed:
- Any hardship distributions that were taken between March 31, 2017 and January 15, 2018 for a home purchase or construction that was uncompleted because of the wildfire, may repay the amount back to the plan prior to June 30, 2018 and avoid taxation.
- Any outstanding loans on or after October 8, 2017 for a wildfire victim may be extended by a year and the five-year maximum repayment period is determined without regard to the one-year extension.
Plans wanting to allow the disaster relief provisions will need an amendment to effectuate the change(s). The amendment must be adopted by the end of the plan year that begins in 2019.
For more information or to determine whether this affects your plan, please contact your Nyhart consultant.