Tax Cut and Jobs Act - Hardship / Casualty Loss Impact

[Gruegen]

Treasury Regulation 1.401(k)-1(d)(3)(iii)(B) permits Participants to take a “safe harbor” hardship distribution if they incur expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC §165 (determined without regard to whether the loss exceeds 10% of adjusted gross income). However, the Tax Cut and Jobs Act seems to amend IRC 165 (effective after December 31, 2017) to state that casualty losses are only deductible to the extent it is attributable to a federally declared disaster. 

This would mean that participants would only be able to take a hardship distribution for a casualty loss situation if they live in a federally declared disaster area, which would appear to dramatically reduce the number of participants that could take hardship distributions due to a repair of principal residence. 

So, in 2018, if my house burned down due to an accident (and was not covered by insurance) and it is unrelated to a federally declared disaster, I can't take a hardship distribution anymore?  Is that right?

[Peter Gulia]

Gruegen, thank you for spotting a potential issue.

Here's one of many other ways to think about the problem:

(Assume the plan limits hardship distributions to only the situations stated in 26 C.F.R. 1.401(k)-1(d)(3)(iii)(B)(1)-(6), and assume the plan's governing document exactly follows that text.)

If (after 2017) a plan's administrator interprets the plan to allow a hardship distribution in circumstances that met (B)(6) as it applied before December 22, 2017, how likely is it that the Internal Revenue Service would tax-disqualify the plan for its administrator's failure to obey the plan's governing document?

 

[JamesK]

There was a provision in the House bill allowing the Secretary one year to modify the regulations governing hardship distributions to conform with the legislation.  Unfortunately, that provision (section 1503) was not included in the final bill. 

Your tax dollars hard at work making life more confusing!  

I agree with Peter above that disqualification would be unlikely but in the meantime we are all left wondering.  I would guess that some guidance will be issued clarifying your concern.  This oversight is particularly irksome since the old hardship distribution rule will apparently snap back into place on January 1, 2026.  Inconsistency is not a virtue with retirement plans. 

[Peter Gulia]

The Treasury department's rule includes a delegation to the department's bureau:

"The Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin ..., expanding the list of deemed immediate and heavy financial needs[.]"

26 C.F.R. 1.401(k)-1(d)(3)(v).