In the waning days of 2019, President Trump signed into law the most significant retirement legislation in more than a decade. The Setting Every Community Up for Retirement Enhancement – or “SECURE” – Act includes far-reaching changes that affect qualified retirement plans, 403(b) and 457(b) plans, IRAs, and other employee benefits. In a series of articles, we will describe key provisions of the Act. Our first article provides an overview of the Act’s key provisions and their effective dates. Some of the changes under the SECURE Act are effective immediately, while others are effective for plan or tax years beginning on or after January 1, 2020. Although the Act generally provides sufficient time to amend plan documents, employers must modify certain aspects of plan administration (and potentially financial planning decisions) now to align with the SECURE Act’s more immediate requirements.
The IRS has issued final regulations modifying and clarifying the rules for in-service hardship distributions from 401(k) and 403(b) plans. The final regulations are substantially similar to the proposed regulations issued in November of 2018, but they contain a few changes of which plan sponsors should be aware.
The IRS issued Revenue Ruling 2019-19 to describe the tax and reporting treatment of uncashed distribution checks from tax-qualified retirement plans. The ruling describes a situation in which a plan is required to make a distribution and the participant receives the distribution check, but does not cash it. The ruling makes clear that, regardless of why the participant does not cash the check (or even if the participant cashes the check in a later year), the distribution is subject to applicable tax withholding and reporting in the year in which the distribution is made. In addition, the participant must include the distribution in his or her gross income for that same year.
Buried in Sections 41113 and 41114 of the recent Bipartisan Budget Act of 2018 are provisions designed to facilitate hardship withdrawals from 401(k) and 403(b) plans. Because these provisions take effect for plan years beginning after December 31, 2018, sponsors of these plans will want to consider whether to broaden their hardship withdrawal provisions – or even add such provisions.
Although the main feature of the Tax Cuts and Jobs Act is a significant reduction in the corporate federal income tax rate, the Act also makes a number of significant changes to the rules governing employer-sponsored retirement plans and individual retirement accounts. From plan loans to hardship withdrawals and Roth recharacterizations, employers should make sure that they understand how these new rules might affect them.