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Retirement ‘Dodged a Bullet,’ But Issues Remain Post-Reform

Posted on January 8, 2018 by STEPHANIE CUMINGS

Retirement plans were largely untouched in tax reform, but there are still some narrower provisions employers should be wary of, according to practitioners.

“The employee plans community dodged a bullet, quite frankly,” Marcia Wagner of the Wagner Law Group told Tax Analysts. “There could have been very significant ramifications if the elective deferral amounts were decreased or the section 415 amounts were decreased. . . . It seems like the one area of the Internal Revenue Code that wasn’t affected. So, I think we got lucky.”

Michael Kreps of Groom Law Group, speaking during a January 4 webinar hosted by his firm, agreed that the provisions affecting retirement in the new tax law (P.L. 115-97) were narrow in scope, but that they would have a profound impact on practitioners. Kreps also agreed that the retirement community “dodged a bullet,” particularly regarding the so-called Rothification plan once offered by Republican leaders.

One provision that did make it into the final law involves the ability to recharacterize IRA contributions. Under the new law, individuals who convert money from a traditional IRA to a Roth IRA will no longer be able to undo that decision by recharacterizing those converted funds. The prior law allowed taxpayers to reverse their decision by October 15 of the year following the conversion. Elizabeth Thomas Dold of Groom said that Roth IRA providers should update their forms on recharacterization.

Jeffrey M. Holdvogt of McDermott Will & Emery LLP said that a clarification may be required for IRA contributions made in 2017 to specify that there’s time in 2018 for the contributions to be recharacterized, or that they’re prohibited after December 31, 2017. “The new provision on this applies to tax years beginning after December 31, 2017, so I think there is a good argument that taxpayers still have until October 15, 2018, to recharacterize IRA contributions made during the 2017 tax year,” Holdvogt said. Groom attorneys participating in the webinar agreed this seemed like the right interpretation.

Another retirement provision in the new law extends the time period for employees with an outstanding plan loan to roll over their outstanding loan balances to an IRA and not have the loans treated as taxable distributions. The prior rollover period was 60 days, but employees now have until the due date of their tax return, including extensions, for the year in which the offset occurred. Wagner said she thought the changes to the rollover rule were fair and reasonable because the 60-day rule had often been difficult to meet.

Holdvogt said that changes to the loan rollover procedures will require updates to plan administration, participant communications, and possibly plan amendments. However, he said that overall, plan sponsor changes will likely be pretty minimal. “The changes made by the tax act will have surprisingly little effect on employer-sponsored retirement plan administration,” he said.