For Individuals,For Plan Sponsors

ICMA-RC Review of Tax Reform Legislation's Potential Impact on Public Sector Retirement Plans as of December 4, 2017

December 4, 2017

Congress is in the process of considering the most substantial amendments to U.S. federal tax law since 1986. On November 16, 2017, the House of Representatives passed the Tax Cuts and Jobs Act (H.R.1), and on December 2, 2017, the Senate passed its version of the Tax Cuts and Jobs Act.

Both bills generally reduce individual and corporate income tax rates and make substantial changes to many deductions, credits, and other provisions of the tax code. There are, however, a number of differences between the House and Senate legislation, and these differences will need to be reconciled before tax reform can be signed into law. President Trump and Republican congressional leaders are seeking to enact the tax bill into law by the end of this year.

New/Changed Provisions Beneficial to Public Defined Contribution Plans

The House and Senate tax reform bills would affect many aspects of the U.S. economy, including public sector retirement plans. At this time, the following are provisions that would directly and beneficially affect public Section 457(b) deferred compensation and Section 401(a) defined contribution plans:

  • Lower Age for Access to Section 457(b) Plan In-service Distributions

    House Bill: The age in which in-service distributions from governmental 457(b) plans would be allowed is reduced from 70½ to 59½, consistent with the age in which in-service distributions can be taken from 401(k) plans under current law. Participants in public defined benefit and money purchase plans with a normal retirement age above 59½ would also be allowed to make in-service distributions at age 59½.

    Senate Bill: No change proposed.
  • Hardship Distributions: Expansion of Available Assets

    House Bill: Assets from which a 401(k) plan hardship distribution may be taken would be expanded to now also include: 1) employer contributions in the form of qualified non-elective contributions (QNECs) or qualified matching contributions (QMACs), and 2) earnings on contributions. While this would not directly address 457(b) unforeseeable emergency withdrawals, many plans follow hardship rules in administering such withdrawals. Currently, hardships are only allowed from an employee's own contributions.

    Senate Bill: The same provision is included in the Senate bill (this provision was added after passage of the bill out of the Senate Finance Committee on November 16).
  • Hardship Distributions: Elimination of Loan Requirement

    House Bill: Section 401(k) plan participants would no longer be required to take all available loans from the plan before a hardship distribution is allowed. While this does not directly address 457(b) unforeseeable emergency withdrawals, many plans follow hardship rules in administering such withdrawals.

    Senate Bill: The same provision is included in the Senate bill (this provision was added after passage of the bill out of the Senate Finance Committee on November 16).
  • Hardship Distributions: Elimination of Six-Month Waiting Period to Re-start Contributions

    House Bill: Participants taking a hardship distribution from a 401(k) plan that follows the Treasury Department's hardship safe harbor would no longer be restricted from making contributions for the following six months. While this does not directly address 457(b) unforeseeable emergency withdrawals, many plans follow hardship rules in administering such withdrawals.

    Senate Bill: No change proposed.
  • Extension of Time for Terminated Employees to Repay Offset Loans

    House Bill: The period in which a terminated participant can roll over a loan offset to an IRA or another employer plan and avoid payment of taxes and penalties for a distribution would be extended from 60 days after termination under current law to the individual's tax return due date, including extensions, for the year in which the offset occurred.

    Senate Bill: The same provision is included in the Senate bill.

Provisions Dropped from Senate Bill that would have been Detrimental to Public Plans

The following provisions detrimental to public deferred compensation and/or defined contribution plans that were passed out of the Senate Finance Committee were removed from the bill passed by the Senate.

  • Aggregation of 457(b) Elective Deferrals with 401(k) and 403(b) Deferrals: Section 457(b) plan elective deferrals would, for the first time, have been aggregated at the employer level with 401(k) and 403(b) plan elective deferrals in determining whether the participant satisfies the annual elective deferral limit. Section 457(b) plan participants also contributing to 401(k) or 403(b) plans would have had their aggregate elective deferral limit reduced by $18,500 in 2018, if this provision were passed into law. Public 401(a) plans without elective deferrals would not have been affected by this change.
  • Inclusion of 457(b) Contributions in Defined Contribution Plan 415(c) Limits: All employer and employee contributions to any DC plan — 401, 403(b), and 457(b) — maintained by the same employer would have been required to be aggregated when determining conformance with 415(c) contribution limits. Under current law, in 2018, the limit for contributions to 401 and 403(b) defined contribution plans (but not 457(b) plans) is the lesser of $55,000 or the employee's compensation. In addition, rules regarding aggregation of employers' contributions for purposes of the 401 rules would have been extended to apply to 403(b) and governmental 457(b) plans. For the first time, 457(b) contributions would have been included in assessing participant conformance with the 415(c) contribution limit. This provision in the legislation would have meant that a public employer's defined contribution 401 plan would need to take into account an employee's 457(b) contributions when testing the 415(c) limit on total contributions to the 401 plan.
  • Elimination of Special 457(b) Catch-up Contributions: The ability of governmental 457(b) plan participants to make an alternative catch-up contribution for the last three years before attainment of normal retirement age would have been eliminated.
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