Many 401(k) plans permit hardship withdrawals. Some profit sharing and other defined contribution plans may also permit them. Treasury regulations list the possible “safe harbor” reasons for a hardship withdrawal. One is for expenses for repair of damage to the employee’s principal residence, which qualifies for the casualty deduction under Code Section 165.
Under the recently-passed Tax Cuts and Jobs Act, a hardship withdrawal for a casualty loss would no longer be allowed unless the loss is attributable to a federally – declared disaster area. The change is effective for 2018 through 2025. Why the change? The answer is far from clear.
Another unusual provision in the Tax Cuts and Jobs Act addresses participant loans and loan offsets that typically occur when a participant terminates employment and has an outstanding plan loan. The new law gives participants the opportunity to contribute an amount equal to the loan offset to an IRA by the due date (including extensions) for filing their individual tax returns for the year of the offset. Prior to this change, a participant only had a 60-day rollover period in which to replace the loan offset with other funds for rollover.
Voluntary Correction Program (VCP) Fees
VCP filings have been a popular means for plan sponsors to have the IRS bless the correction of plan errors that were not eligible for self-correction. With Revenue Procedure 2018-4, error correction just became more expensive for small plans. Previous fees were based on number of participants. New fees will be based on assets. The lowest fee has increased from $500 (for plans with 20 or fewer participants) to $1,500 (for plans with $500,000 or less in assets). The Revenue Procedure also eliminated certain reduced fees that had been in place for common errors. While small plans lose out, very large plans could see reduced fees for their VCP filings.
Protests from the retirement industry, including the American Retirement Association, hold some promise. Stay tuned.