Latest Government Funding Legislation Impacts Retirement Plans and Includes Health Provisions | Practical Law

Latest Government Funding Legislation Impacts Retirement Plans and Includes Health Provisions | Practical Law

Congress has passed, and President Trump has signed into law, the Bipartisan Budget Act of 2018, which funds the federal government until March 23, 2018. The Act includes provisions relating to loans and distributions from retirement plans, the solvency of multiemployer pension plans, and funding for the Children's Health Insurance Program (CHIP).

Latest Government Funding Legislation Impacts Retirement Plans and Includes Health Provisions

by Practical Law Employee Benefits & Executive Compensation
Published on 13 Feb 2018 • USA (National/Federal)
Congress has passed, and President Trump has signed into law, the Bipartisan Budget Act of 2018, which funds the federal government until March 23, 2018. The Act includes provisions relating to loans and distributions from retirement plans, the solvency of multiemployer pension plans, and funding for the Children's Health Insurance Program (CHIP).
On February 9, 2018, Congress passed and President Trump signed into law the Bipartisan Budget Act of 2018 (Pub. L. No. 115-123), which continues to fund the federal government until March 23, 2018. The Act also includes provisions that, among other things:
  • Set out special rules governing the use of retirement plan funds by participants impacted by recent wildfires in California.
  • Establish a Joint Select Committee on Solvency of Multiemployer Pension Plans.
  • Modify hardship distribution rules.
  • Extend funding for the Children's Health Insurance Program (CHIP) until 2027.

Retirement Plan Provisions Under the Act

Special Disaster-Related Rules for Using Retirement Plan Funds

The Act sets out special rules governing the use of retirement plan funds by participants impacted by the California wildfires. The rules are substantively identical to the rules provided for participants affected by Hurricanes Harvey, Irma, and Maria (see Legal Update, New Legislation Provides Disaster Tax Relief for Victims of Hurricanes Harvey, Irma, and Maria).

Qualified Wildfire Distributions

The Act permits participants in an eligible retirement plan to treat a distribution as a qualified wildfire distribution. A "qualified wildfire distribution" is a distribution made:
  • From an eligible retirement plan (26 U.S.C. § 402(c)(8)(B)) on or after October 8, 2017, and before January 1, 2019.
  • To an individual:
    • whose principal residence was located in the California wildfire disaster area sometime between October 8, 2017, and December 31, 2017; and
    • who sustained an economic loss because of the wildfires.
Under the Act, treating a distribution as a qualified wildfire distribution allows the participant to:
  • Avoid the Internal Revenue Code's (Code) 10% tax on certain early distributions (26 U.S.C. § 72(t)).
  • Withdraw up to $100,000 in the aggregate.
  • Pay taxes on the distribution on a ratable basis over a three-year period.
  • Repay the distribution to an eligible retirement plan during a three-year period.

Loans from Qualified Plans

For loans made before December 31, 2018, to a qualified individual (that is, a participant whose principal residence was located in the California wildfire disaster area sometime between October 8, 2017, and December 31, 2017, and who suffered economic loss from the wildfires), the Act:
  • Increases the limit for loans to the lesser of:
    • $100,000; or
    • the dollar value of the participant's vested account balance.
  • Provides for a one-year delay of loan repayments due between October 8, 2017, and December 31, 2018.
(For more information on retirement plan loans, see Practice Note, Qualified Retirement Plan Loans and Qualified Retirement Plan Loans Toolkit.)

Other Provisions

The Act also allows participants to repay withdrawals that they intended to, but could not, use to purchase or construct a principal residence in the area affected by the wildfires. This provision applies to withdrawals received between March 31, 2017, and January 15, 2018. The withdrawals must be repaid by June 30, 2018.
Plan amendments to provide the relief outlined in the Act are required by the last day of the 2019 plan year.

Joint Select Committee on Solvency of Multiemployer Pension Plans

The Act establishes the Joint Select Committee on Solvency of Multiemployer Pension Plans. The Committee's purpose is to improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation by providing recommendations and legislative language (see Practice Note, Multiemployer Pension Plans).
16 members will comprise the Committee, including an even number of Democrats and Republicans from the House of Representatives and the Senate. The Committee will have the authority to require witness attendance at hearings and compel the production of evidence.
The Act sets out the timeline for introducing and considering a bill containing the Committee's proposed legislative language in Congress.
The Committee will terminate the earlier of:
  • December 31, 2018.
  • 30 days after the Committee submits its report and legislative recommendations to Congress.

Recontributions of Amounts Withdrawn From Retirement Plans Due to IRS Levies

The Act also addresses amounts that are withdrawn from eligible retirement plans as a result of an Internal Revenue Service (IRS) levy, but later returned to the participant (see 26 U.S.C. § 6343). Under a new subsection added by the Act, participants may recontribute the amounts returned by the IRS (including interest paid on those amounts) to an eligible retirement plan or individual retirement plan. Distributions and contributions resulting from an IRS levy will receive rollover treatment.
The new subsection applies in taxable years beginning after December 31, 2017.

Modified Hardship Rules

The Act makes changes to the hardship rules effective for plan years beginning after December 31, 2018.

Elimination of Six-Month Prohibition on Contributions After Hardship Distribution

A hardship distribution can be made to a plan participant if the distribution is:
  • Because of an immediate and heavy financial need.
  • Limited to the amount necessary to satisfy that financial need.
(See Hardship Distribution Checklist: Determine if a Hardship Distribution Can Be Made.)
Under a safe harbor, a hardship distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if, among other things, the participant is prohibited from making contributions for a six-month period after receiving a hardship distribution (26 C.F.R. § 1.401(k)–1(d)(3)(iv)(E)(2); see Hardship Distribution Checklist: Safe Harbor (Amount Necessary to Satisfy the Financial Need)).
The Act requires the Secretary of the Treasury to amend the regulation containing the safe harbor to eliminate the six-month prohibition on contributions following a hardship distribution.

Contributions Eligible for Hardship Withdrawals

The Act amends Code Section 401(k) to permit hardship withdrawals to include:
  • Contributions to a profit-sharing or stock bonus plan to which Code Section 402(e)(3) applies (26 U.S.C. § 402(e)(3)) and earnings thereon.
  • Qualified nonelective contributions (QNECs) and earnings thereon.
  • Qualified matching contributions (QMACs) and earnings thereon.

Availability of Hardship Withdrawals Prior to Taking Available Loans

The Act also eliminates the requirement that a participant take an available loan under the plan before taking a hardship withdrawal (see Hardship Distribution Checklist: Safe Harbor (Amount Necessary to Satisfy the Financial Need)).

Health-Related Provisions Under the Act

The Act again extends CHIP funding, this time through 2027. Funding legislation from earlier this year had extended CHIP funding until 2023 after it expired in September 2017 (see Legal Update, Government Funding Legislation Delays Cadillac Plan Tax Until 2022).
The Act also expands the use of telehealth benefits, including in the Medicare Advantage context. In this regard, the Act instructs the government to seek public comment concerning what types of items and services might be considered telehealth benefits going forward (including, for example, remote patient monitoring, secure messaging, store-and-forward technologies, and other nonface-to-face communication).