Retirement Plan Industry Update – Q2 2018
July 24, 2018
Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®
The Bipartisan Budget Act
Congress recently announced changes to the hardship distribution rules for qualified retirement plans by the Tax Cuts and Jobs Act. These changes are implemented through the Bipartisan Budget Act (BBA) of 2018, which eases various restrictions on a participant’s ability to request and receive a hardship distribution.
- Additional Amounts Eligible for Hardship Withdrawals. Under current IRS guidance, hardship distributions are limited to employee elective deferrals and cannot include qualified non-elective contributions, qualified matching contributions, safe harbor contributions, or earnings. Effective for plan years beginning after December 31, 2018, participants may receive hardship distributions comprised of employee elective deferrals, employer contributions, and earnings on both.
- Elimination of Six Month Suspension Requirement. Currently, plans that wish to take advantage of a regulatory safe harbor for hardship withdrawals must suspend a withdrawing employee’s elective deferrals for a period of six months following the withdrawal. Effective for plan years beginning after December 31, 2018, participants may continue contributing to the plan after initiating a hardship withdrawal. Thus, an employee who obtains a hardship withdrawal could continue contributing to the plan. From a plan administrator’s perspective, there would be no need to enforce the suspension requirement.
- Coordination with Participant Loan Provisions. Currently, participants are required to request a plan loan before requesting a hardship withdrawal. Effective for plan years beginning after December 31, 2018, participants may receive a hardship distribution without first requesting a loan from the plan.
At this time, it appears that none of these changes are mandatory. Employers have the opportunity to amend their qualified retirement plans to reflect these changes made by the BBA. It is important to note that the amendments will not happen automatically. MRA will continue to monitor and keep plan committees informed.
Changes to Loan Repayment Period for Terminating Employees
Prior to December 22, 2017, when a participant with an outstanding loan from his/her defined contribution plan terminated employment, any outstanding loans were required to be repaid within 60 days. If the participant was unable to repay the loans within 60 days, his/her loan balance was treated as a taxable distribution.
Implementation of the Tax Cuts and Jobs Act: The repayment period is now extended to the date the participant’s federal income tax return is due (including extensions) for the year in which the plan loan offset occurred. It is the plan sponsor’s responsibility to confirm that the plan documents are updated to reflect the change in the law.
Lost and Found Database
A bill for The Retirement Savings Lost and Found Act of 2018 has been reintroduced to congress to address the lost plan participant problem. The act would establish a lost and found online database that compiles the required information employers already report to allow individuals to locate their former employer-sponsored retirement plan accounts. Individuals will be provided the contact information for the plan administrator for any accounts that have a balance and where the individual is listed as a plan participant or beneficiary.
Under the proposed bill, a plan that fails to locate a missing participant would not be treated as violating the required minimum distribution (RMD) rules and the Employee Retirement Income Security Act (ERISA) fiduciary rules if it has fulfilled certain requirements.
The bill also increases the automatic rollover amount from $5,000 to $6,000 and proposes to expand investment options for these rollovers to include a target-date or lifecycle fund.
For plan balances of $1,000 or less, if the plan participant has not made an election to receive a distribution of the benefit directly or has not accepted any direct payment within six months of notification, the plan administrator can transfer the amount of such benefit to the Director of the Retirement Savings Lost and Found or to an individual retirement account established by the Secretary of Treasury on behalf of the individual.
- The plan must make at least one attempt to contact the participant at the most recent address in the plan’s records, by certified mail if the most recent address is a physical address and by electronic mail if the only address on record is an electronic address. The plan would be required to take at least one additional measure for a participant if the plan records indicate a physical address or two additional measures if the plan records indicate an electronic address.
- Check with the plan sponsor or the administrator of a related plan for an updated address.
- Make at least one attempt to contact the individual’s designated plan beneficiary.
- Perform at least one search using free electronic search tools.
- Attempt to locate the participant using a commercial locator service.
Electronic Delivery Saves Money for Participants and Plan Sponsors
The American Retirement Association (ARA) announced findings from a new study it commissioned with the Investment Company Institute (ICI) that suggest the electronic delivery of required defined contribution (DC) plan disclosures would save plan participants hundreds of millions of dollars annually (this would be the result of presumably reduced recordkeeping fees). The study, “Why the Time Has Come to Prefer Electronic Delivery”, also concludes that electronic delivery improves access for the visually impaired and others with disabilities. Recipients are able to adjust the font size, brighten the text, and other settings that are crucial to effective reading.
E-delivery may lead to increased saving and investing due to interactivity of the process. It helps to achieve public policy goals for DC plans which include increasing retirement savings and enabling participants to manage their own accounts. Participants can receive just-in-time notices, layered notices, contribution prompts, and online calculators with hyperlinks, allowing the user to simply click on a link when are interested in learning more or taking action.
Chiarello, M. (2018, June 8). Congress Eases Restrictions on Hardship Distributions. Retrieved July 16, 2018 from http://www.swlaw.com/blog/employee-benefits/2018/06/08/congress-eases-restrictions-on-hardship-distributions/
Barney, L. (2018, July 6). Plan Documents Require Update After Tax Reform. Retrieved July 17, 2018 from https://www.planadviser.com/plan-documents-require-updates-tax-reform/
Moore, R. (2018, July 11). Retirement Savings Lost and Found Act Reintroduced in Congress. Retrieved July 18, 2018 from https://www.planadviser.com/retirement-savings-lost-found-act-reintroduced-congress/
Moore, R. (2018, June 25). ARA Study Finds Electronic Delivery of DC Plan Disclosures Can Save Money. Retrieved July 18, 2018 from https://www.plansponsor.com/ara-study-finds-electronic-delivery-dc-plan-disclosures-can-save-money/