FIS Relius is providing the following information to keep you abreast of plan document developments and other related issues.
Hardship Distributions
Will FIS provide an amendment to address the hardship distribution rules of the Bipartisan Budget Act of 2018?
Yes, but at a future date. IRS guidance is forthcoming, and this guidance might impact the terms of the amendment. We are, however, updating the Relius Document ASP language systems to address the changes to ensure that 2019 employee communications (summary plan descriptions, safe harbor notices and hardship forms) reflect a plan’s operation. This release is targeted for October.
The Bipartisan Budget Act of 2018 (Section 41114) makes the following modifications to the hardship distribution rules:
1. Modification of safe harbor hardship requirements. The safe harbor hardship standards (more specifically, the requirements to when a distribution is deemed necessary to satisfy an immediate and heavy financial need) will be modified to eliminate: (a) the requirement that elective deferrals be suspended for six (6) months after a hardship distribution, and (b) the requirement that a participant obtain a plan loan to qualify for a hardship. The law directs the Treasury to revise the regulations to eliminate these requirements and therefore official guidance will be needed. It is likely the IRS will issue a Notice similar to what was issued when the suspension requirement was lowered from 12 months to 6 months (See IRS Notice 2002-4).
2. Expansion of sources available for a hardship. The hardship distribution sources can include earnings on elective deferrals, as well as amounts attributable to Qualified Nonelective Contributions (QNECs) and Qualified Matching Contributions (QMACs). The expansion to QNECs and QMACs also includes ADP test safe harbor contributions but does not appear to include Qualified Automatic Contribution Arrangement (QACA) safe harbor contributions.
While some of these changes seem relatively straightforward, there are numerous issues around the implementation. These include issues such as recordkeeping constraints, transition rules, plan amendments, and employee and employer communications.
The process of updating the RD ASP language systems helps us determine how the amendment will be structured. If your firm is a sponsor of a preapproved plan, then the amendment, when available, will be designed to be adopted at the sponsor level. The defaults in the amendment (i.e., the provisions that will not require each employer to adopt the amendment) will likely be:
1. If the plan permits hardship distributions using the safe harbor hardship provisions then the amendment will eliminate the 6-month suspension of elective deferrals and the requirement that all plan loans be obtained. This would be effective for loans made after December 31, 2018.
2. If the plan permits hardship distributions from elective deferrals, then earnings on the elective deferrals may also be withdrawn on account of a hardship.
An employer who wants to make alternative elections would then be required to sign the amendment. This only affects preapproved plans where the sponsor is adopting the amendment on behalf of all adopting employers. For all other plans, the employer will be required to sign the amendment.
What issues do we hope the IRS will address with respect to the hardship changes?
1. Which plans can keep the 6-month suspension/loan requirement?
If the IRS follows the approach of IRS Notice 2002-4 and Notice 2001-56 (which was when the 12-month suspension period was reduced to 6 months), then we expect that plans with a matching contribution that satisfies the ADP and/or ACP test safe harbor will be required to eliminate the 6-month suspension period to retain safe harbor status. Such plans will, however, be allowed to keep the 6-month suspension for hardship distributions made prior to January 1, 2019.
It is not clear whether certain other plans or arrangements will be required to eliminate the 6-month suspension period. For example, the previous Notices were issued prior to the enactment of automatic contribution arrangements. It is possible that Eligible Automatic Contribution Arrangements (EACAs) and Qualified Automatic Contribution Arrangements (QACAs) will be required to eliminate the 6-month suspension period due to the uniformity requirement.
It is also possible that 403(b) plans subject to the universal availability requirement will also need to eliminate the 6-month suspension period.
2. If a plan eliminates the suspension period, what happens with those participants who took a hardship within 6 months prior to January 1, 2019?
If the IRS follows what was done in Notice 2002-4, then those plans that are required to eliminate the suspension period would need to do so with respect to hardship distributions made on and after January 1, 2019. The plan would be able to keep the suspension period intact for hardship distributions made in 2018.
3. What are the consequences to a plan if the plan sponsor elects to keep the suspension period or the loan requirement?
Except for the plans described above that may be required to eliminate the suspension period, the answer is not clear. IRS Notice 2002-4 provided that a plan was still using the safe harbor standards even though it retained the 12-month suspension period. It’s not clear if the same reasoning would apply with this change in the law which eliminates the suspension period in its entirety. It seems that retaining the requirement that all plan loans be obtained would continue to be allowed.
If the IRS provides that a plan retaining either of these provisions is no longer considered to be using the safe harbor hardship standards, then it’s not clear what impact this would have on prototype plans which are prohibited from using facts and circumstances for hardship distributions (volume submitter plans, including “prototype formatted” volume submitter plans do not have this prohibition).
4. Can safe harbor contributions in a QACA plan be withdrawn for a hardship?
It appears that the answer is no. QACA safe harbor contributions are not required to be fully vested when contributed and therefore do meet the definition of a QNEC or QMAC. This may have been a technical error in the law, and if so, the IRS would only be able to confirm that these amounts cannot be withdrawn for a hardship.
5. Can earnings on elective deferrals to a 403(b) plan be withdrawn for a hardship?
No. The restriction on the withdrawal of earnings on deferrals in a 403(b) plan was not modified by the law. Some have suggested that this was intentional, not an oversight.
6. Will the Treasury modify the regulations to fix the hardship criteria for casualty losses?
The law that is referred to as the Tax Cuts and Jobs Act of 2018 modified the casualty loss deduction rules to require that a loss be due to a federally declared disaster area. The 401(k) regulations provide that a deemed heavy and financial need (part of the safe harbor hardship rules) includes expenses for the repair or damage of an employee’s residence that would qualify for the casualty loss deduction. This means the more restrictive deduction rules automatically apply to the safe harbor hardship standards. This may have been an unintended result, and the Treasury could modify the regulations to expand this category of expenses to what was allowed prior to the change in the law, although at this point we have no indication that they intend to do so.
When must plans be amended to reflect the new hardship rules?
The safe position is to have the amendment (when available) adopted by the last day of the plan year beginning on or after January 1, 2019 (e.g., adopt the amendment by December 31, 2019 for a calendar year plan). This ensures the amendment is adopted by the general deadline applicable to discretionary plan amendments. Employers who maintain plans that are required to be amended (as explained above) technically have until the due date of the tax return including extensions, to adopt an amendment but most providers will likely want to adopt amendments by the last day of the 2019 plan year in order to have a uniform date.
Note that the above applies to qualified plans, not 403(b) plans. The IRS has not set forth rules for the adoption of plan amendments to 403(b) plans, so it is not clear whether sponsors of these plans must adopt an amendment, and if so, by what date. Nevertheless, it is a best practice to amend 403(b) plans within the same time frames that apply to qualified plans.
402(f) Notices
The IRS recently issued safe harbor eligible rollover notices (402(f) notices). Do we need to update the notices FIS provided earlier this year?
Technically no. The IRS 402(f) notices (see IRS Notice 2014-7) are safe harbor notices but are not required to be used. The notices FIS made available earlier this year reflect the same substantive changes made by the IRS. We will likely adjust our notices to mirror the wording used by the IRS at some point in the future, but we have no immediate plans to do so.
IRS Guidance on Student Loan Repayment Programs
Will FIS provide an amendment to address student loan repayment programs as described in Private Letter Ruling (PLR) 131066-17?
No. A PLR is not considered a change in law that warrants an interim good-faith amendment. In addition, in many cases, a student loan repayment program can be accommodated within existing plans without the need of a separate amendment that might affect an employer’s reliance on an IRS approval letter. We will, however, send out a separate email regarding student loan repayment programs within the next several weeks.
Defined Benefit Plans
What is the status of the preapproved Defined Benefit (DB) plan document system?
Let the restatements begin! FIS released the preapproved DB plans on September 24, 2018. A separate email was sent regarding this release.
Forfeitures as QNECs/QMACs
Is an amendment needed to address the final regulations permitting forfeitures to be used to reduce QNECs and QMACs (including safe harbor contributions)?
Yes, unless the amendment has already been adopted. An amendment is needed if an employer wants to use forfeitures to reduce these contributions. We published an amendment for forfeitures in 2017, and it is posted to our website. This amendment is still applicable (i.e., it does not need to be updated for the final regulations). This is because the final regulation did not change the provisions in the proposed regulations. If an employer adopted the 2017 amendment, then that amendment will remain in effect until the provisions are incorporated into the Cycle 3 document during the next restatement window (circa 2021), and no further action is required.
Defined Contribution Plan Restatements
What do pre-approved plan sponsors need to do for the next defined contribution (DC) plan restatement?
We recently sent out an email regarding the next restatement cycle. As a reminder, FIS must submit our defined contribution plans for the next 6-year restatement cycle (referred to as the “Cycle 3” restatement period) to the IRS by December 31, 2018. This is also the general deadline to submit applications for preapproved plan sponsors that intend on obtaining IRS approval letters in their firm’s name (e.g., as word-for-word adopters or minor modifiers of the FIS mass submitter plans). You do not need to do anything if you are using FIS approval letters (e.g., if your firm only uses our IDP-formatted DC qualified plan documents).
If you have additional questions, please click on the following link to submit your questions online. Our staff will respond to you as soon as possible. http://www.relius.net/Support/CAS.aspx
Thank you,
FIS Relius Documents
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