Act eases hardship access to retirement funds – Bipartisan Budget Act of 2018 and its impact on retirement plans
You know your employee is going through tough financial times.
Perhaps he is facing home foreclosure through no fault of his own. Maybe she has unexpected medical expenses that aren’t covered by insurance.
Money already set aside in a retirement plan may help them to get back on their feet.
Provisions of the Bipartisan Budget Act of 2018, which takes effect in 2019, will make it easier to access funds in a 401(k) or other qualified defined contribution plan and increase the pool of money available as hardship withdrawals.
What is a hardship withdrawal?
The IRS says a hardship withdrawal must cover an “immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” This need may include medical expenses, tuition and related educational fees and expenses, burial or funeral expenses, and costs related to purchasing or repairing damage to a primary residence or needed to prevent eviction or foreclosure.
Every retirement plan has rules regarding hardship withdrawals and the maximum amount available, usually capped at $50,000.
What has changed?
Provisions in the new Bipartisan Budget Act help to ease constraints on hardship withdrawals in three ways:
- As of January 2019, employees will be able to withdraw not only from the portion of their retirement account deducted from their compensation but also from company matching contributions and earnings on the account. Previously, withdrawals were limited to the funds contributed by the employee.
- The act eliminates the requirement that a participant take a loan before receiving a hardship withdrawal. While loans, which must be repaid, will still be permitted, they no longer are required as the first step.
- Employees will be able to continue saving for retirement immediately after taking a hardship withdrawal. A hiatus previously in place prevented employees from contributing to their retirement accounts for six months after receiving the hardship withdrawal, forcing them to miss out on company matching funds and interest earned.
Other changes in the Bipartisan Budget Act of 2018 focusing on retirement plans have a narrower scope. They are:
Multiemployer Pension Plan Committee
The act establishes the Joint Select Committee on Solvency for Multiemployer Pension Plans. The 16-member committee, composed of party leaders from the Senate and House of Representatives, is tasked with making recommendations that will improve multiemployer pension plans and the Pension Benefit Guarantee Corp. Their deadline is the end of November 2018.
A multiemployer pension plan covers workers from two or more unrelated companies, typically union members who work in the same profession or industry and is funded under the terms of a collective bargaining agreement. These traditional pension plans pay into the Pension Benefit Guarantee Corp., which makes sure retirees receive the benefits they expect, even if the pension plan isn’t fully funded or goes bankrupt.
According to the U.S. Bureau of Labor Statistics, Pennsylvania ranks fourth in the nation in the number of unionized employees. In 2017, 12 percent of the commonwealth’s workers were members of a union.
Wrongful IRS levy
Although it rarely occurs, the IRS is permitted to take funds from an employer-sponsored retirement plan or Individual Retirement Account (IRA) to cover an IRS Levy. The most common type of IRS levy is unpaid taxes. But what if the wrong amount erroneously is withdrawn from the retirement plan?
The act permits affected individuals to recontribute the amount returned, including interest, to their retirement plan. The rule is effective for amounts repaid for taxable years beginning after Dec. 31, 2017.
Disaster relief for California wildfires
Last year, 9,000 California wildfires caused at least 46 deaths and consumed 1.2 million acres and 10,800 structures. In recognition of the devastation, the act contains disaster-related rules for the use of retirement plan funds by individuals whose principal residence was in a presidentially declared California wildfire disaster area and they sustained damage to that property between Oct. 8, 2017 and Dec. 31, 2017.
This provision could apply to Pennsylvania companies with employees who live in the affected areas and work at a branch location in the Golden State.
Over the past two years, Congress has enacted many changes to laws that relate to retirement plans. Knowledgeable financial professionals, tax advisers and CPAs study these changes in depth to understand provisions and how they apply to individuals, employers and businesses of all sizes.
An experienced CPA can help you understand how these changes and others affect you and your employees.
Kimbarley A. Williams, CPA, is a principal at Boyer & Ritter LLC, where she provides audit, accounting and tax services to employee benefit plans, business trade associations, charitable organizations, community foundations and closely held businesses. Contact Williams at 717-761-7210 or email@example.com