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Author: jschreier

Changes to Retirement Plan Hardship Distribution Rules

As Congress negotiated the legislation that ended up as The Tax Cut and Jobs Act (“Jobs Act”) and the Bipartisan Budget Act of 2018 (“Budget Act”), it considered significant changes to employer based retirement plan rules.  However, very few of these were included in the final versions of these acts.  One set of changes that did become law were to the rules that apply to hardships distributions from Internal Revenue Code (“Code”) Section 401(k) and 403(b) retirement plans. Background Although not required by law, a retirement plan may allow a participant to receive a hardship distribution from the participant’s elective deferral contribution, discretionary employer contribution and regular matching contribution accounts (and the earnings on these contributions made before December 31, 1988), but only if the distribution is due to an immediate and heavy financial need and is limited to the amount necessary to satisfy the financial need. A plan may provide that the plan administrator will made an individualized determination of whether a hardship distribution satisfies these standards or it can provide for a regulatory safe harbor under which a distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met: The distribution isn’t greater than the amount of the immediate and heavy financial need, including amounts necessary to pay any taxes resulting from the distribution. The...

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Will Tax Reform Mean the “Rothification” of Your 401(k) Plan?

As congressional republicans continue to work on tax reform legislation, many media reports have mentioned the possibility of significant changes to the current 401(k) retirement plan structure. Today a 401(k) plan participant may elect to defer on a pre-tax basis (no current income tax) up to $18,000 ($18,500 in 2018), plus another $6,000 if the participant is age 50 or older. Amounts deferred on a pre-tax basis plus earnings are includable in gross income for income tax purposes when distributed to the participant.  Alternatively, if the plan allows it, a participant may elect to defer some or all of these amounts on an after-tax basis as a “Roth” 401(k) contribution. Roth contributions are includable in gross income for income tax purposes when contributed, but provided certain holding rules are satisfied, the earnings on the Roth deferrals are distributed tax-free. The most significant reported possible changes to the current rules are: Employee contributions would be allowed up to $2,400 on either a pre-tax or Roth after-tax basis Employee contributions above $2,400 would have to be made on a Roth after-tax basis Taxing employee payroll deferrals into 401(k) plans would result in substantially increased tax revenue today, though it would reduce future tax revenue since the contributions would not be taxed at distribution. There is concern among employers that if employees can’t contribute more than $2,400 to a 401(k) plan on...

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Tax Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.