Compliance February 9, 2018

Budget Deal Includes Provisions Affecting Retirement Plans

Among other things, the bill allows for hardship withdrawals from more contribution types.

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In the two-year budget bill signed by President Donald Trump, there are provisions that affect retirement plans.

If the Internal Revenue Service (IRS) has levied a participant’s employer-sponsored retirement account or individual retirement account (IRA) and subsequently returned the money and interest, the bill allows for the person to recontribute the amount to the retirement plan or IRA. The contribution will be treated as a rollover, and the interest treated as earnings within the plan.

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According to the bill, the plan or IRA must permit rollovers and the contribution must be made no later “than the due date (not including extensions) for filing the return of tax for the taxable year in which such property or amount of money is returned.” The rule regarding the allowance of repayment of a levy applies to 401(k)s, 403(b)s and 457 plans. It is effective for taxable years beginning after December 31, 2017.

The bill also calls for the Secretary of Treasury to amend regulations to delete the six-month prohibition on contributions to a retirement plan following a hardship withdrawal. The allowance of hardship withdrawals is also extended in the bill to contributions to a profit sharing or stock bonus plan, qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) and earnings on the contributions now allowed. In addition, the bill says, “A distribution shall not be treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan.” These rules say they amend section 401(k) and subsections under that. They are effective for plan years beginning after December 31, 2018.

The bill provides relief from the early withdrawal penalty on distributions of up to $100,000 from an employer plan for victims of California wildfires. Participants can spread the amount over three years for inclusion in income for tax purposes. It also allows individuals to repay any distributed amounts to the plan within three years from the date the distribution was made. The bill also includes an increase in the allowable amount of loans for wildfire victims and relief for loan repayments not made due to the wildfires.

Finally, the new law calls for creation of a Joint Select Committee to Solve the Multiemployer Pension Crisis which will introduce bipartisan legislation to address the multiemployer pension crisis by December this year.
Data and Research February 9, 2018

Study Shows Pension Funding Relief Helped DB Plans

When computing defined benefit (DB) plan liabilities for 2015 using unsmoothed corporate bond rates to discount liabilities, roughly 84% of plans had unfunded liabilities, versus 11% for plans using the smoothed bond rates, the Society of Actuaries found.

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Many more defined benefit (DB) plans have an unfunded liability when using lower, unsmoothed discount rates than when using the higher, smoothed rates allowed under current law, a study from the Society of Actuaries (SOA) shows.

DB plans were given relief for funding calculations by the Highway and Transportation Funding Act of 2014 (HATFA). HATFA extended relief provided in the Moving Ahead for Progress in the 21st Century Act (MAP-21)—passed in 2012—which allowed defined benefit plans to discount future benefit payments to a present value using a 25-year average of bond rates rather than a two-year average. MAP-21 created a “corridor” of rates on either side of a 25-year average that were permissible for discounting purposes. If the two-year average falls outside this corridor, a company can use the 25-year average that is closest to the two-year average in the corridor. HATFA reset the corridor’s boundaries.

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The Bipartisan Budget Act of 2015 kept the corridor on interest rates at 10% through 2019, then increases it by 5% through 2023, and sets it at 30% beyond that. The SOA notes in its report that “in the current economic environment, smoothed discount rates are higher than the unsmoothed rates. Higher discount rates generate lesser liabilities and, hence, lesser unfunded liabilities, than unsmoothed rates.”

Using publicly available data from the Department of Labor as of November 14, 2017, the study provides results through the 2015 plan year, with preliminary results for the 2016 plan year based on a partial year of reporting. For 2015, about 11% of plans had an unfunded liability as computed using the smoothed corporate bond rates allowed under current law. The 11% is split between about 8% of plans that contributed at least enough to maintain unfunded liabilities and about 3% that failed to do so.

When computing liabilities for 2015 using unsmoothed corporate bond rates to discount liabilities, roughly 84% of plans had unfunded liabilities. About 25% of plans contributed at least enough to maintain the unfunded liability, while the remaining 59% fell short.

In general, using smoothed rates, results for 2015 are very similar to those for 2014. However, using unsmoothed corporate bond rates, results for 2015 are generally down from 2014, primarily because the unsmoothed rates for 2015 were significantly lower than for 2014, while the smoothed rates for 2015 were only somewhat lower than for 2014.

Plan sponsors contributed about $79 billion to their pension plans for 2015. Virtually all plan sponsors contributed at least the minimum amount required by law for 2015; preliminary data for 2016 indicate the same. Under current law, plan liabilities for 2015 totaled $2.0 trillion, 99% of which was funded.

“Current law phases out the smoothing of discount rates over time. In the current economic environment, if all other items are equal, as smoothing lessens, liabilities will increase significantly, and contributions will tend to increase in order to pay down unfunded liabilities,” the SOA notes.

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