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Employee Benefit Services

Tax Reform Impact on Retirement Plans

While the Tax Cuts and Jobs Act of 2017 (Act), which was signed into law last December, will impact most individuals and business taxpayers, the changes regarding retirement plans were not as significant as had been contemplated in some of the original proposals. The following is a summary of the specific retirement plan provisions that were changed or modified. In the next edition of our newsletter, we will detail the changes to the pass-through deduction rules that will have an indirect impact on retirement plans.

ROTH Conversions

Prior to the Act, taxpayers could change their minds about making a taxable conversion of a traditional IRA to a Roth account. Individuals who made such conversions had until the extended due date of their federal tax returns to undo the conversion. This allowed taxpayers to avoid the consequences of a subsequent decline in their Roth accounts by re-characterizing the account back into a traditional IRA to avoid excess taxation. Effective in 2018, this option is repealed, and any Roth conversions are irrevocable once made.

Extended Rollover Period for Loan Offsets

When a qualified retirement plan makes a distribution to a participant with an outstanding loan balance, the loan is a taxable offset against the balance of the distribution. Many plans require that loans be repaid through payroll or that a loan is automatically considered in default as of separation from service. This causes the outstanding balance of the loan to become subject to taxation if not repaid. For example:

Jane separates from employment with a $20,000 account balance, which includes a $5,000 loan. Jane desires to roll her account to an IRA. She would receive a taxable distribution of the loan balance and roll the remaining $15,000 to the IRA. No tax withholding is required.

The loan balance is still treated as eligible for rollover, however. Therefore, under current law the participant has 60 days to contribute equivalent funds to the IRA to avoid being taxed on the loan balance.

The new law allows participants up until the extended due date of their federal tax returns for the year of distribution to make up for the loan offset by making contributions to their IRAs. The new rules apply only to offsets that are due to plan termination or where a plan’s loan policy requires the plan to consider a loan in default at termination of employment, absent immediate repayment.

Disaster Relief

The new law included relief from the early distribution penalties for any withdrawals from qualified plans or IRAs by anyone affected by the 2016 hurricanes and tornadoes. Similar relief has been provided under subsequent legislation for the 2017 storms and fires.

Nonqualified Plans

The Act made some changes to nonqualified plan arrangements, including an excise tax on “excess compensation” paid by tax-exempt organizations to designated executives, and new tax treatment of stock transfers.

For questions or more information, please contact Richard Green at rgreen@windes.com or 844.4WINDES.

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