IRS updates required tax notice to address plan loan offsets

Recently, the IRS updated the model notice that must be sent out to all plan participants. This model notice modifies the prior model notices that were published four years ago in 2014. Continue reading to learn more.


The IRS has updated the model notice that is required to be provided to participants before they receive an “eligible rollover distribution” from a qualified 401(a) plan, a 403(b) tax-sheltered annuity, or a governmental 457(b) plan.

Notice 2018-74, which was published on September 18, 2018, modifies the prior safe-harbor explanations (model notices) that were published in 2014. Like the 2014 guidance, the 2018 Notice — sometimes referred to as the “402(f) Notice” or “Special Tax Notice” — includes two separate “model” notices that are deemed to satisfy the requirements of Code Section 402(f): one for distributions that are not from a designated Roth account, and one for distributions from a designated Roth account. The 2018 Notice also includes an appendix that can be used to modify (rather than replace) existing safe-harbor 402(f) notices.

The model notices were updated to take into consideration certain legislation that has been enacted, and other IRS guidance that has been published, since 2014. They include:

  • changes related to qualified plan loan offsets under the Tax Cuts and Jobs Act of 2017;
  • changes in the rules for phased retirement under the Moving Ahead for Progress in the 21st Century Act (“MAP-21”);
  • changes in the exceptions to the 10% penalty for early distributions from governmental plans under the Defending Public Safety Employees’ Retirement Act; and
  • IRS guidance (in Revenue Procedure 2016-47) regarding a self-certification procedure for waivers of the 60-day rollover deadline.

The model notices also make some “clarifying” changes to the 2014 notices, including:

  • clarification that the 10% additional tax on early distributions applies only to amounts includible in income;
  • an explanation of how the rollover rules apply to governmental 457(b) plans that include designated Roth accounts;
  • clarification that certain exceptions to the 10% tax on early distributions do not apply to IRAs; and
  • recognizing that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers.

The updated model 402(f) notices should be particularly useful in communicating to participants the extension, under the Tax Cuts and Jobs Act, of the time to roll over a “qualified plan loan offset amount.”

Inside the plan load offset

By way of background, Notice 2018-74 reminds us that distribution of a “plan loan offset amount” is an eligible rollover distribution, and that a “plan loan offset” occurs when, under the plan terms governing a plan loan, the participant’s accrued benefit is reduced, or offset, in order to repay the loan. According to the Notice, this can occur when, for example, the terms of the plan loan require that, in the event of an employee’s termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default.

The Notice also indicates that a plan loan offset may occur when, under the terms of the plan loan, the loan is canceled, accelerated, or treated as if it were in default (for example, when the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter). The Notice also reminds us, however, that a plan loan offset cannot occur prior to a distributable event.

This is helpful guidance for distinguishing between a “deemed distribution” of a defaulted loan (a taxable event which is not eligible for rollover) and a “plan loan offset amount,” which is an eligible rollover distribution.

Generally, if a default occurs before the participant has a distributable event (such as termination of employment, or attainment of age 59½), and the default is not cured by the last day of the cure period, it must be treated as a “deemed distribution” and reported on Form 1099. Such defaulted amounts are not eligible for rollover.

However, if the default occurs at or after a distribution event, and the plan terms require that the participant’s account be offset to pay off the loan, then the reduction of the account may be treated as a plan loan offset, which is an eligible rollover distribution.

Notice 2018-74 (and the new model notices) also reflect that, prior to the Tax Cuts and Jobs Act of 2017, participants who incurred a “plan loan offset” only had 60 days to “roll” an equivalent amount of money to an IRA or another employer plan (to avoid the offset being treated as a taxable distribution). However, for plan loan offsets that occur after December 31, 2017, if the plan loan offset is a “qualified plan loan offset” (meaning it occurs in connection with termination of employment or termination of the plan), then the participant has significantly more time (until the extended due date of the participant’s tax return for the year of the offset) in which to roll an amount equal to the loan offset amount to an IRA or another employer plan.

SOURCE: Browning, R (4 October 2018) "IRS updates required tax notice to address plan loan offsets" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/opinion/irs-updates-required-tax-notice-to-address-plan-loan-offsets?brief=00000152-146e-d1cc-a5fa-7cff8fee0000


Compliance Bulletin: IRS Issues New Tools for 2018 Tax Withholding

As of Feb. 15, 2018, employers must use new tables to determine how much income tax to withhold from their employees’ paychecks. The Internal Revenue Service (IRS) issued the required new tables in Notice 1036 on Jan. 9, 2018. The new tables are also available in IRS Publication 15.

In addition, the IRS issued a new Form W-4 and a new withholding calculator on Feb. 28, 2018.

The updated tools aim to help employers improve the accuracy of their tax withholdings under changes made by the tax reform law, the Tax Cuts and Jobs Act, which was enacted on Dec. 22, 2017.

ACTION STEPS

Employers should already be using the new tables for 2018. Employers are not required to use the new Form W-4 for 2018 but may use it for any 2018 withholding changes. Employers will be required to use the new version of Form W-4 for 2019.

Taxpayers can use the updated tax withholding calculator to determine whether they should make any changes to their 2018 withholdings.

Background

The Tax Cuts and Jobs Act made several changes to the tax code that will affect individual taxpayers in 2018. For example, the new law:

 

  • Adjusted tax rates and tax brackets;
  • Increased the standard deduction;
  • Repealed certain exemptions;
  • Changed itemized deductions;
  • Increased the child tax credit; and
  • Created a new dependent credit.

 

To reflect these changes, the IRS has issued three new tax withholding tools. The tools aim to help employers avoid withholding too much or too little from their employees’ paychecks for income taxes in 2018 and 2019.

For 2018, New Tables Work with Existing Forms W-4

The IRS’ new withholding tables are designed to work with the Forms W-4 that employees have already filed with their employers to claim withholding allowances for 2018. Thus, employers do not need to obtain updated Forms W-4 from their employees to use the new tables. The deadline for employers to begin using the new tables was Feb. 15, 2018.

New Form W-4 for 2019 May Be Used in 2018

For 2019, the IRS has revised Form W-4 to more fully reflect the new tax law and to help employees determine appropriate withholding amounts. Released on Feb. 28, 2018, the Form W-4 can be used in 2018 if an employee starts a new job or if existing employees wish to update their 2018 withholding in response to the new law or changes in their personal circumstances.

New Calculator

The IRS’ updated withholding calculator allows employees to perform a quick “paycheck checkup” to help them determine whether they should make changes to their 2018 withholdings. While the IRS encourages all taxpayers to use the new calculator, employees who have simple financial situations are not likely to require any revisions for 2018. Those with more complicated situations, however, are strongly encouraged to check their 2018 withholdings using the calculator. These include employees who itemized their deductions in 2017 or have:

     Two-income households;

Two or more jobs at the same time;

     Children who claim credits; or

High incomes.

Employees with even more complex situations (such as those who owe self-employment tax or have capital gains) may need to use Publication 505 instead of the withholding calculator. The IRS expects to release an updated version of this publication in the near future.

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