You’ve likely analyzed the implications the tax reform changes signed into law in 2017 and 2018 will have on your personal and company’s taxes, or at least have it on the back of your mind to analyze soon. However, another area the new tax law may impact is your 401(k)/403(b) plan. Recent tax law changes are making it easier to take early distributions from retirement accounts and easing the repayment requirements on loans from retirement accounts. If your company sponsors an employee benefit plan, you’ll want to understand the couple areas of the new tax law which may impact your plan.
- Changes to 401(k) Loans under the Tax Cuts and Jobs Act 2017
Loan repayment terms, specifically the repayment requirements when an employee leaves, are becoming less stringent. Under previous law, if an employee had an outstanding loan at the time they terminated employment with the company, that loan would become due within 60 days. If not repaid within 60 days, it was recategorized as a distribution subject to taxes, including possible penalty if the employee was under age 59.5.
Under the new tax law, that time period for repayment is extended to the employee’s tax return filing due date (including extension periods).
- Changes to Hardship Distributions under the Bipartisan Budget Act of 2018
Some benefit plans allow employees to take distributions from their account, while still employed, for certain reasons classified as hardship. Under previous law, the distribution was limited to funds contributed by the employee. Meaning, any matching or profit sharing contributions made by the company on behalf of the employee, were off limits for hardship distribution.
Under the new tax law, hardship distributions may be taken from funds consisting of employer contributions and earnings, in addition to the employee’s own contributions.
Furthermore, many times the employee was first required to take a loan from the plan, if available, and the employee was restricted from contributing to the plan for the 6 months following the hardship distribution. The new law removes both these requirements, allowing employees to take hardship distributions, even if no loan has been taken, and to continue contributing to the plan immediately after a hardship distribution.
These changes go into effect in 2018 and 2019. If your company sponsors a benefit plan that allows loans and/or hardship distributions, we recommend reviewing your plan documents and discussing any changes with your plan providers now. If you have any further questions about these changes, reach out to Audit Senior Manager, Susie Bettis.