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How the New Tax Bill Impacts Employer-Sponsored Retirement Plans and IRAs

  • Compliance
  • Article
  • 6 min. Read
  • Last Updated: 01/19/2018
tax reform and retirement plans
The recent tax overhaul has changed some rules around employer-sponsored retirement plans and IRAs. Plan sponsors should read on to understand how various provisions of the tax law could impact retirement plan decisions.

Table of Contents

  • The recent tax overhaul has made a few changes to employer-sponsored retirement plans and IRAs.
  • Individuals living in 2016 presidentially declared disaster areas can take up to $100,000 in distributions from retirement plans and IRAs, and are exempt from the 10 percent early withdrawal tax.
  • The rollover period for offset loans has been extended from 60 days to the due date for filing taxes in the year of an offset loan distribution.
  • The rule allowing the recharacterization of converted Roth IRAs to traditional IRAs, or vice versa, has been repealed.

Although it was anticipated that the tax reform bill, signed into law by President Trump on Dec. 22, 2017, would make significant changes to employer-sponsored retirement plans and individual retirement accounts (IRAs), a few notable changes were included in the final legislation. They include the following:

Relief for 2016 Disaster Areas

Similar to the previously released law for qualified hurricane distribution relief, retirement plan and IRA tax relief has been granted to eligible victims for any 2016 presidentially declared disaster event. Such a distribution is eligible for tax relief if it’s made between Jan. 1, 2016 and Dec. 31, 2017, and the cumulative distribution amount is limited to $100,000. The 10 percent early withdrawal tax is also waived.

Participants have three years to repay their distributions to their retirement plan or IRA. Qualified retirement plans will have until Dec. 31, 2018, to amend plan documents.

Extended Rollover Period for Plan Loan Offset Amounts

Some retirement plans offer the option to take out a loan, which must be paid back within five years with quarterly payments. Loans that are not paid back are deemed distributions, and are treated as early withdrawals subject to income tax and possibly additional early withdrawal tax. If a retirement plan participant takes out a loan and fails to make timely payments due to separation from service or plan termination, the outstanding loan balance is treated as a plan offset against the participant’s account balance, and becomes taxable if not rolled over to another qualified plan within 60 days.

The new tax law extends the 60-day rollover period to the participant’s tax filing deadline (including extensions) for the tax year in which the loan offset occurs. This is effective for loan offsets treated as distributed in tax years beginning Jan. 1, 2018.

IRA Recharacterizations of Roth Conversions

The IRS previously had rules permitting individuals using traditional IRAs to convert their contributions or pretax retirement plan contributions to a Roth IRA by paying income tax on the contribution amounts. If an individual later wished to undo or reverse a conversion to move back to a traditional IRA, the tax code allowed for a recharacterization, where the individual could “undo” or “reverse” a conversion or rollover to a Roth IRA. Conversely, a traditional IRA contribution could be recharacterized to a Roth IRA.

The new tax law repeals this rule. Reversals of these transactions are also no longer permitted.

Changes affect plan administration

While the changes listed above may be relatively minor, they will likely impact retirement plan administration. Plan sponsors may want to consult with their tax advisor regarding how various provisions of the new tax law could impact retirement plan decisions.

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Maree P. Vahue, MBA, QKA, is a professionally accredited Retirement Services Compliance Analyst II for Paychex, Inc. who concentrates in retirement plan, S125 and HSA Administration. She leads monitoring and analysis of ERISA legislative and regulatory changes within the retirement services and S125 compliance disciplines.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.