The Bipartisan Budget Act of 2018 addresses relief for the California wildfires of 2017, including, but not limited to:
- “Qualified individuals” whose primary residences were in specific wildlife disaster zones between October 8 and December 31, 2017 have several new opportunities to access plan benefits that are not otherwise available, including not being hit with the early withdrawal penalty and the ability to effectively pay back the distribution with repayments that would be treated as qualified rollovers.
- Anyone who took a distribution between March 31, 2017 and January 15, 2018 to build or purchase a home in the wildfire disaster zone but were not able to use the money, can “recontribute” the money to the plan.
- A loan of up to $100,000 may be taken (based on participant balances), and loan repayments can be delayed for one year. During this period, the loan will not be in default, but it will continue to accrue interest.
Normally, rollout of such changes would require at least one plan amendment and a communication process and would occur only after significant code reviews and testing. However, the budget states that such provisions can be made available to participants immediately and that the IRS will deem the plans qualified so long as the amendment is made before the last day of the plan year beginning on or after January 1, 2019. While this may seem like it’s streamlining the process, it creates some considerable challenges.
Significantly complex manual workarounds may have to be developed in the short term simply to process the new withdrawal options. Most defined contribution recordkeeping systems have well-tested (and often hard-coded) withdrawal processes in which the only way to create a distribution for a participant under the age of 59½ is through a hardship withdrawal process, which carries with it a mandatory early withdrawal penalty. Creating these unique in-service withdrawals could require significant systemic workarounds, not just in how they are funded, but in how they are reflected in statements, both online and on confirmations.
On many of these systems, loan processing is also an often complex and codified system. The sudden creation – for a subset of participants – of new rules allowing specific overrides on dollar amounts available and the prevention of loan forfeiture for non-payment may require significant analysis and re-programming in a very short window.
These special withdrawals are to be made available only to participants whose “principal place of abode” is within “presidentially-declared wildfire disaster zones” during specific periods of time. Identifying principal places of abode depending on the plan sponsor and their rigor in maintaining records is often highly problematic. Reconciliation of those addresses with the “presidentially-declared wildfire disaster zones” can be done only manually, which begs the question of who will be tasked with conducting the retroactive analysis (e.g., what was the “primary” abode in the last quarter of 2017?) and requires mapping that to see who qualifies. Will this become an additional responsibility of the existing Hardship Committee and be approved along with those?
What about those participants who were already living in the area and took a hardship withdrawal for significant construction on their primary residence? Can they “recharacterize” the money as a California wildfire relief withdrawal so that they can repay the withdrawal over three years? If so, what happens to the early withdrawal penalty that will already have been taken out? Will they get an additional check? A refund into their accounts?
For those who want to take advantage of the ability to “repay” the money they had withdrawn to build in those areas, who is responsible for determining their eligibility? Do they have to “recontribute” all the money they removed, or only a portion?
Many recordkeepers and plan sponsors may be thinking that because they have no client locations or payroll centers located in the California wildfire areas, they may have little or no reason to prepare for these challenges. However, it is important to bear in mind that these rules apply based not on the plan sponsor’s payroll location, but on the participant’s primary abode. In today’s business environment, where “work from home” is encouraged more and more, even small East Coast-based companies could find themselves with participants who are pleading with their HR representatives to let them avail themselves of these new alternatives.
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