Under ERISA, those who administer, manage, or control plan assets have a fiduciary duty to plan participants. One of the many fiduciary duties of plan sponsors is to provide disclosures to plan participants, including a summary of material modifications (SMM), annual reports, and notice of any applicable updates. The Tax Cuts and Job Act (TCJA) went into effect on January 1, 2018. Among the many changes made by the tax plan, the TCJA has changed the time period for making eligible rollover loan offsets for 401(k)s, which will require a notification for plan participants to understand the changes.
Under Internal Revenue Code (IRC) 402(f), “[t]he plan administrator of any plan shall, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to the recipient,” of some of the following provisions:
- Those which the recipient may have the distribution directly transferred to an eligible retirement plan;
- Those which require the withholding of tax on the distribution if not transferred to an eligible plan;
- Those under which the distribution will not be taxed if transferred to an eligible plan within 60 days; and
- Those under which distributions from eligible retirement plans may be subject to other restrictions and tax consequences.
The IRS has issued model special tax notices in the past that meet the notification requirements for tax changes. However, as of yet, the IRS has not issued any model notices based on TCJA changes to comply with Section 402(f). Therefore, plan sponsors will have to provide notice to plan participants about how the tax law changes will affect their plans.
Generally, participants can take a loan from their 401(k) account. However, under the prior tax laws, there was an acceleration provision that required repayment of the loan within 60 days upon termination of employment. If the loan was not repaid within that time, the loan balance was considered a taxable distribution. Any remaining 401(k) account balance could then be rolled over into another qualifying retirement plan within 60-days.
After the TCJA, participants with a plan loan offset now have until their tax-year filing deadline to repay the loan (including tax withholdings). For most taxpayers, this would give them until April 15 of the year following the offset, (or October 15th if they filed an extension).
ERISA's fiduciary rules hold the plan provider responsible for making any necessary updates and disclosures to plan participants. If you have any questions about special notice disclosures after the TCJA, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits. Our firm can provide fiduciary counseling and help you avoid ERISA penalties or litigation. Contact our office today with any questions on how we can help you and your business succeed.