What’s New That Affects You?

The new year has begun, and in an NTSA webcast Susan Diehl, President of PenServ Plan Services, offers a look at important developments that will affect your plans and those whom you – and they – serve.

In a Jan. 9 webcast, Diehl focused on many important issues affecting 403(b) and 457 plans, including hardship rules, conversion recharacterizations, escheatment reporting for traditional IRAs, restatement of 403(b) plans, and the once-in, always-in (OIAI) rule.

New Hardship Rules

The Bipartisan Budget Act, as well as regulations the IRS has proposed concerning hardship distributions, affect all 401(k) plans, Diehl noted. However, that is not the case for all 403(b)s; not all the changes the law and new rules make apply to them. “403(b)s often are the stepchildren in government changes. The IRS and Congress often forget 403(b)s.” Diehl said. “There are places where we need Congress to make changes so they can apply to 403(b) plans,” she said.

Nonetheless, there are some changes that do apply to 403(b)s, Diehl noted, including repeal of the six-month suspension. The suspension is optional this year, she said, but is mandatory in 2020. Plans and hardship policies should be reviewed and may need to be amended, Diehl said.

Changes to the Internal Revenue Code Section 165(h) casualty deduction also apply to 403(b)s, Diehl noted. The Tax Cuts and Jobs Act of 2017 amended the definition of a casualty deduction to include only casualties that were caused by a federally declared disaster, she said. If a third party administrator, vendor or employer amended their hardship policy to reflect the change in 2018, they will need to do so again, she cautioned,

Another change applicable to 403(b)s concerns amounts available for hardship distributions. “Now things get dicey!” Diehl said of this change. Regarding 403(b)s, it applies to earnings on QMAcs, QNEcs and safe harbor contributions, but only to 403(b)s  invested in annuities. “In the 403(b) world it will be very difficult” to follow this rule, Diehl said.

“Bottom line: you should understand which changes effect which type of plan,” Diehl said of changes to the hardship rules.

Conversion Recharacterizations

The repeal of conversion recharacterizations is effective for taxable years after Dec. 31, 2017. It also will affect the fair market value (FMV) for required minimum distributions (RMDs), Diehl noted. She suggested reviewing marketing material and worksheets to delete provisions that are premised on the former rule under which recharacterizations from conversions were added back to the FMV to calculate RMDs.

Escheatment Reporting for Traditional IRAs

Under Revenue Ruling 2018-17, when assets are escheated to the state from an IRA, a 1099-R is issued for the distribution and voluntary withholding applies to the distribution, Diehl said, noting that the provisions of the guidance is effective for taxable years beginning after Dec. 31, 2017.

Associated reporting is optional for 2018, she noted, but mandatory beginning Jan. 1, 2019. It is important to note, she added, that this only applies to traditional IRAs as of 2019. The problem, Diehl said, is that the IRS did not provide a year’s notice about this change. “Some parties have requested that the IRS delay,” she said, but there has been no word. “We’re still hoping for a delay,” she added.

Restatement of 403(b) Plans

The period for restatement of 403(b) plans ends on March 31, 2020, Diehl noted, remarking. “Time is ticking away.” She said that it is important to remember that:
 

• employers must have had a valid plan document for 2009;
• employers must restate back to 2010 and include all changes that were made from 2010 through the date of restatement;
• it will not be unusual for employers to have operationally used provisions that are not permitted; and
• one should not assume that whatever their old plan says is what they have actually done in operation.

“It’s an onerous task,” she remarked.

Diehl added that during the restatement period, it will also be a good idea to review the following:

• procedures for universal availability
• employee handbooks
• post-employment contributions
• overall administration
• union contracts
• the administrative appendix, to make sure all functions are being handled

And, Diehl said, the deadline of March 31, 2020 is also for custodial agreements and annuity contracts to be updated to reflect current law and be written to go with the new pre-approved plans. They cannot be written to supersede plan document provisions, she noted, and must be sent to all participants once updated.

Once in, Always in

The IRS provided guidance in Notice 2018-95 on the OIAI rule, Diehl noted. It provides a relief period for employers from 2009 through 2019, not the end of the remedial amendment period. The rule is in now in force for the 2019 year, she reminded. Diehl also noted that remains unclear whether an employer that has another failure in not providing the exclusion correctly can make a correction through the Employee Plans Compliance Resolution System (EPCRS. “The guidance does not address that,” she said.

Webcast Available

Diehl’s Jan. 9 webcast is available on demand here.