One of the more difficult issues in corporate transactions that are structured as asset purchases is how to deal with outstanding participant loans. In the typical asset purchase scenario – where the purchaser does not assume sponsorship of, or accept a transfer of assets from, the seller’s retirement plan – employees of the seller who become employed by the asset purchaser generally incur a termination of employment with the seller, and therefore a distributable event under the seller’s 401(k) plan. If a participant has an outstanding loan at the time of the asset sale, then unless the distribution is paid in a direct rollover to another employer plan that is willing to accept a rollover of a participant loan, the participant must either (i) pay off the loan before taking the distribution, or (ii) incur a potentially taxable “plan-loan offset” (where the participant’s account balance is reduced, or offset, by the outstanding loan balance).
Tax Cuts and Jobs Act
2017 Tax Cuts and Jobs Act Breathes New Life Into Old Trick For Dealing With Participant Loans in Corporate Transactions
For many years tax exempt organizations and retirement plan trusts have been permitted to avoid tax on income generated by unrelated trades or businesses they hold by netting the gains, losses, and deductions among those trades or businesses. The Tax Cuts and Jobs Act modifies those rules, increasing the likelihood that such entities must report, and pay tax on, UBTI.
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.
Although the recent Tax Cuts and Jobs Act eliminates the ACA individual mandate, the employer mandate, ACA benefit mandates, and ACA reporting requirements remain in effect. Thus, employers should continue to be mindful of and comply with their obligations under the ACA.
This is the second in a series of articles by which the Spencer Fane LLP Employee Benefits Practice Team will explain key changes made in the employee benefits area by the Tax Cuts and Jobs Act (Public Law 115-97), which was signed into law on December 22, 2017. In addition to establishing new rules for transportation fringe benefits (see our first article in this series), the Act makes a number of changes that may affect how employers structure their executive compensation programs. This article describes the Act’s impact on for-profit employers, and outlines options that those employers should consider for their compensation arrangements.
Although the recent Tax Cuts and Jobs Act largely retains the favorable tax treatment afforded employees who receive employer-provided transportation assistance, it denies employers any tax deduction for providing these tax-favored benefits. Moreover, tax-exempt employers will now be subject to unrelated business income tax on such benefits. Because the new rules took effect as of January 1, 2018, employers currently sponsoring such programs should promptly evaluate their options.