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DISCLAIMER: This blog is published for general information only - it is not intended to constitute legal advice and cannot be relied upon by any person as legal advice.  U.S. Treasury Regulations require us to notify you that any tax-related material in this blog (including links and attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties, and may not be referred to in any marketing or promotional materials.  While we welcome you to contact our authors, the submission of a comment or question does not create an attorney-client relationship between the Firm and you. 


Budget Agreement Contains Changes to 401(k) Plan Hardship Distribution Rules

The budget agreement approved by Congress and signed into law on February 9, 2018 includes several changes to the rules governing hardship distributions from 401(k) plans.  These changes — which were included in the House version of the tax reform bill, but removed during the reconciliation process — may make hardship distributions more readily available to plan participants.  All of the changes will apply to plan years beginning after December 31, 2018.

First, the budget law directs the IRS to modify the regulatory safe harbor for determining that a distribution is necessary to satisfy a participant’s “immediate and heavy financial need.”  Specifically, the regulation will no longer require a six-month suspension of the participant’s contributions following a hardship withdrawal.

Second, the budget law creates a new statutory provision governing hardship withdrawals.  New Code Section 401(k)(14) authorizes hardship distributions of qualified nonelective employer contributions, qualified matching contributions, and earnings on either of them, in addition to hardship distributions from elective deferrals plus earnings.  It also provides that a distribution will not fail to be made due to hardship solely because the participant does not take any available plan loan.  (Obtaining all currently available nontaxable plan loans remains a condition of the regulatory safe harbor that included the six-month suspension rule.)

These changes are almost certainly intended to apply to 403(b) plans that offer hardship distributions.  However, due to what appears to be a technical glitch, application of the second set of changes to 403(b) plans may require further IRS guidance.


How can a tax-exempt employer manage the new excise tax on executive compensation? 

The executive compensation provisions of the Tax Cut and Jobs Act have been widely reported, and public companies and tax-exempt employers are now thinking about how to adjust to the new statutory changes.  Tax-exempt employers face the startling new reality of a 21% excise tax on “remuneration” exceeding $1,000,000 paid to a “covered employee” in a tax year and on severance pay in excess of certain limits paid to a covered employee in connection with a separation from service.  We are all just beginning to fully process the new changes and, thus far, there has been no administrative guidance from the Treasury Department.  But based on preliminary analysis, tax-exempt employers may be able to mitigate (or at least manage) the sting of the new excise tax through a combination of traditional supplemental executive retirement plans and long-term incentive plans, and (where possible) well-designed non-competes that comply with the proposed regulations under Code Section 457(f) published last year.  In ideal circumstances, a tax-exempt employer may even be able to avoid the excise tax entirely. 

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Tax Reform: A Brief Overview of the Final Legislation

Congress passed the Tax Cuts and Jobs Act on December 20, 2017 and President Trump signed the bill into law on December 22nd. As everyone knows by now, the new law makes sweeping changes affecting most areas of income taxation. And while the final legislation contained fewer provisions affecting employee benefit plans and executive compensation than the original House Bill, employers will still be faced with a number of significant changes in law - most of which can fairly be characterized as revenue raisers - that will require careful review of their current arrangements. 

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Noteworthy Federal Cases Relating to Employee Benefit Plans in 2017

Here is a round up of cases decided by the U.S. Supreme Court and the First and Second Circuit Courts of Appeals in 2017 involving ERISA employee benefit plans.  While courts decided a number of cases pertinent to benefit plans, we found these to be noteworthy:

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Practical Guidance for Required Minimum Distributions and Missing Participants

Retirement plan administrators often run into this problem:  a participant has reached his or her required beginning date – the date on which distributions must commence under the required minimum distribution (RMD) rules of Code Section 401(a)(9) – and the participant cannot be located.  A recent IRS Field Memorandum provides guidance to IRS examiners that plan administrators should find helpful.  The Memorandum, dated October 19, 2017, states that field examiners “shall not challenge” a qualified plan as failing to satisfy the RMD rules in situations where a distribution to a participant or beneficiary has not been made and the plan has:

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