February 21, 2018 – On February 9, 2018, Congress passed and the President signed – the Bipartisan Budget Act of 2018, H.R.1892 (“BBA”). In addition to funding the federal government through March 23, 2018, the BBA contains a number of tax changes impacting qualified retirement plans. The Tax Cuts and Jobs Act (“TCJA”) signed at the end of 2017 also impacts the availability of hardship distributions. Plan sponsors will want to note the following changes that may impact the administration of their retirement plans:

Modifications to Hardship Distribution Rules

Sponsors of 401(k) plans currently are permitted, but not required, to allow participants to take a distribution of elective deferrals from the plan on account of hardship. Hardship distributions are currently subject to numerous IRS rules and requirements. Effective for plan years beginning after December 31, 2018, the BBA relaxes and expands the general rules governing hardship withdrawals from 401(k) plans, as follows:

• The current 6-month prohibition on contributions following a hardship withdrawal is eliminated.
• Participants will be allowed to take hardship distributions from qualified non-elective contributions (such as safe harbor non-elective contributions), qualified matching contributions (such as safe harbor matching contributions), profit-sharing contributions, and earnings thereon. Such sources were previously not available for hardship withdrawal under the IRS safe harbor rules.
• Participants no longer will be required to take plan loan before taking a hardship withdrawal.

Please remember that the safe harbor hardship distribution rules were also recently impacted at the end of 2017 by the TCJA. Under the TCJA, for tax years beginning in 2018 through 2025, safe harbor hardship withdrawals from 401(k) and 403(b) plans to address a personal casualty loss of a principal residence may no longer be allowed unless the loss is attributable to a federally declared disaster area. Before TCJA, personal casualty loss safe harbor hardship withdrawals were generally permitted for property losses not compensated by insurance, or that were otherwise attributable to losses arising from fire, storm, shipwreck, theft or other casualty, without having to demonstrate any relationship with a federally declared disaster area.

Special California Wildfire Relief Provisions

The BBA also relaxes the rules regarding “qualified wildfire distributions” made for participants who were impacted by the California wildfires. The BBA generally exempts from the 10% early withdrawal penalty up to $100,000 of “qualified wildfire distributions” made on or after October 8, 2017, and before January 1, 2019. A retirement plan distribution generally qualifies as a “qualified wildfire distribution” if it is made to an individual whose principal place of abode during any portion of the period from October 8, 2017, to December 31, 2017 was located in the California wildfire disaster area, and who has sustained an economic loss by reason of the wildfires to which the declaration of the area relates.

In addition to offering relief from the 10% early withdrawal penalty, the BBA allows qualified wildfire distributions to be ratably included in income over three years, beginning with the year of distribution, unless the participant elects not to have ratable inclusion apply. Participants may also recontribute qualified wildfire distributions within the three-year period as an eligible rollover distribution.

The BBA also permits participants who took distributions for home purchases in the California wildfire disaster area to recontribute such amounts to the plan, if the purchase was cancelled on account of the wildfires. Finally, the BBA increases the qualified plan loan limit from $50,000 to $100,000 for participants affected by the wildfires, and permits an extended repayment period.

Next Steps

Sponsors of 401(k) or 403(b) plans that permit safe harbor in-service hardship distributions should review and, if necessary, adjust their procedures for approving hardship withdrawals for purposes of repairing damage to a principal residence. Only those hardship distributions that fall under the new TCJA casualty loss definition should be approved.

Sponsors who wish to take advantage of the special California wildfire provisions may need to amend their plans to reflect the changes described in the BBA. Because this disaster relief is effective immediately and only covers distributions made before Jan. 1, 2019, employers may want to take immediate action to maximize participant access to qualified wildfire distributions.

Sponsors of 401(k) plans that permit in-service hardship distributions may need to amend their plan documents and summary plan descriptions to incorporate the new hardship distribution rules under the BBA. However, sponsors may want to wait until the Secretary of the Treasury promulgates revised regulations implementing the new rules before taking action. Because the hardship distribution changes under the BBA are effective beginning with the 2019 plan year, there should be ample time to amend plan documents before the new rules take effect.

If you have any questions about the BBA, TCJA, or require any assistance in determining whether the changes may impact your retirement plan, please contact an attorney in the Sherman & Howard Employee Benefits Group.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.