The two-year budget agreement passed by Congress on Friday, February 9th, and signed by President Trump later that day, includes tax policy changes that affect qualified retirement plans. Specifically, qualified retirement plan hardship withdrawal operations will be impacted by the Bipartisan Budget Act of 2018 (the Budget Act) as follows:

• Removal of the six-month prohibition on deferrals following a hardship withdrawal. Section 41113 of the Budget Act directs the IRS to issue updated guidance to permit 401(k) and 403(b) plan participants who have taken a hardship distribution from a retirement plan to continue contributing to the plan, even immediately following the hardship distribution. Under current rules, once a participant elects to take a hardship distribution, no elective deferrals are permitted to be made until six months have passed from the date of the distribution. The revised rule will take effect on January 1, 2019 for plans that have a calendar-year plan year.
• Inclusion of QNECs, QMACs, and profit-sharing contributions in hardship withdrawals. Under current regulations, a plan sponsor may specify the sources of a participant’s plan assets eligible for a hardship withdrawal, but such assets may in no event include certain employer contributions. Beginning on January 1, 2019 (for calendar-year plans), the Budget Act rules will permit a participant’s 401(k) or 403(b) plan assets deriving from employer profit-sharing contributions, as well as from employer corrective contributions known as Qualified Nonelective Employer Contributions (QNECs) and Qualified Matching Contributions (QMACs), to be included in sources from which a hardship withdrawal may be taken. The earnings on such contributions will also be included among the assets available for withdrawal. Section 41114 of the Budget Act not only expands the potential sources of a hardship withdrawal, but also eliminates the requirement (previously elected by some employers) that a participant must have taken a plan loan before qualifying to take a hardship withdrawal.  
  

The Tax Cuts and Jobs Act of 2017 (the Tax Act), signed into law by President Trump on December 22, 2017, affects certain plan loan distributions. Specifically, for all tax-qualified retirement plans that offer loans, including 401(k), 401(a), 403(b), and governmental 457(b) plans, the Tax Act provides for an:

• Extended Deadline for Rolling Over Certain Plan Loan Offsets.
  • Background and prior law: A plan loan “offset” occurs when an individual owes an outstanding loan to a qualified retirement plan, but then experiences a distribution event that is either (1) a termination of employment; or (2) the termination of the plan. If the plan, in such situation, permits a participant’s account balance to be paid out in full, minus the loan amount, then a plan loan offset occurs. A Form 1099-R is issued, indicating that the offset amount is an actual distribution. If a participant receiving a loan offset takes no action, the offset loan amount is considered or “deemed” to be a distribution, and is subject to taxation. Under these facts, taxation of the offset amount can be avoided if: (1) the distribution is otherwise eligible to be rolled over; and (2) the participant rolls the full amount of the distribution, including the amount of the offset, into an IRA. To include the offset amount in the rollover, the participant will need to contribute personal (or borrowed) funds to the rollover amount. Previously, offset loans could only avoid taxation if such a rollover occurred within the 60-day period beginning on the date offset distribution.
  • New law, effective for plan years beginning on and after January 1, 2018: The Tax Act expressly extends the time period for avoid taxation by rolling over an offset loan until the participant’s deadline for filing a federal income tax return (taking any extensions into account). This change means that in many cases, a participant will have more time in which to effect a tax-free rollover of a loan offset occurring following termination of employment.
    

Caution: No Change to Basic Tax Rules

Although recent legislation is trending toward easing the rules relating to hardship withdrawals and plan loans, it is important to remember that nothing about the fundamental tax treatment of these distributions have changed.

A common misconception (especially among participants) is that if a participant qualifies for a hardship distribution, then the distribution from the plan is tax-free. A hardship distribution is subject to the same taxation rules as other plan distributions. Satisfying the standards for a hardship distribution simply entitles the participant to receive an in-service distribution of elective deferrals (and other contributions) from the plan, but the hardship distribution is subject to income taxes applicable to plan distributions. A hardship distribution is also generally subject to a 10% early distribution penalty, unless the participant has reached age 59-1/2. A hardship distribution is never eligible to be rolled over into an IRA.

Similarly, once a plan loan has been deemed distributed (either due to a plan loan repayment default, because a plan does not provide for an offset option upon distribution, or because an offset is not timely rolled into an IRA), the deemed distribution of a plan loan is taxed in the same manner as a regular plan distribution for purposes of determining the tax, including any early distribution penalty. A deemed distribution may never be rolled over into an IRA.

Plan Sponsor Action Items

With respect to plan hardship distributions, employer sponsors of 401(k) and 403(b) plans should prepare for the 2019 plan year by:

• Considering whether it is desirable to add a hardship distribution option to the plan (if not already permitted). If hardship distributions will be added, amend the plan and communicate the availability of the option to participants by preparation and distribution of a Summary of Material Modification (SMM) (or other appropriate form of communication in the event of a non-ERISA plan).
• Plan documents that already provide for hardship distributions should be amended, effective for the first day of the 2019 plan year, to eliminate the 6-month restriction on elective deferrals following a hardship distribution and to expand the permitted accounts from which hardship distributions may be taken. These details should be communicated to participants in the form of an SMM.

With respect to plan loans, plan sponsors of plans that permit loans should:

• Review the plan loan policy and plan loan provisions to determine if either should be updated to reflect this rule, or consider whether to modify the loan policy to take advantage of this rule. For example, if the plan currently permits continued loan repayments following termination of employment consider whether this option should be continued or eliminated. Consider also whether a loan note should be allowed to be rolled over to a successor plan upon plan termination or if the new extended rollover period provides sufficient flexibility to participants absent a rolled over loan note.
• Consider whether plan participant communications should be revised to alert participants to the greater flexibility now allowable for rollover of loan offset amounts.
• As applicable, confer with any third-party administrator for the plan to avoid inadvertently deeming a participant’s loan a deemed (taxable) distribution.

The George Washington statue has returned to Wisconsin Avenue near the campus of Marquette University. The 133 year-old monument had been removed for restoration, which involved removing layers of black corrosion and the repair of splitting bronze. Attorney Claude Krawczyk currently serves as the president of The Westown Association, which raised funds for the restoration effort. In total, the restoration project cost more than $100,000 to complete. Attorney Krawczyk had a special interest in the project, explaining “I can remember seeing [the statue] when I was a kid, it’s been there all my life. I think it’s an important memory for Milwaukee … an important symbol.” Read full story here.

Newsletter Article Highlights:

• What Should You Do If You are Named Trustee?
• Do Your Due Diligence
• A Deeper Dive Into the Arbitration Process and a Look at the Advantages and Disadvantages of Arbitration
• ACA Employer Payment Notices Arriving Soon
• What Should Individuals Know About the Tax Plan?

Pleased to Announce:

• OCHDL Welcomes New Attorney Kelly M. Spott
• Scoby and Gagan Elected Shareholders
• Congratulations to Our 2017 Super Lawyers

Click the image below to read more.

O’Neil, Cannon, Hollman, DeJong and Laing is pleased to announce that Attorney Jason Scoby and Attorney Bob Gagan were recently elected as shareholders of the firm.

Mr. Scoby has been with the firm since 2009 and is a member of the firm’s Business Practice Group and Banking and Creditors’ Rights Practice Group. He advises and represents individuals, businesses, and banks on a variety of corporate, banking, and business-related issues, including mergers and acquisitions, commercial loan transactions, corporate issues, contract negotiation and preparation, and business entity selection and formation.

Learn more about Mr. Scoby by visiting his full profile.

Mr. Gagan has been with the firm since 2016. Bob is a respected Wisconsin business law attorney. He focuses his practice on corporate law and commercial litigation as well as municipal law. Mr. Gagan is a Past President of the State Bar of Wisconsin. He previously served as the Brown County representative on the State Bar Board of Governors and also served on the Board of Governors Executive Committee. Mr. Gagan is the co–founder of the Brown County Free Legal Clinic and continues to volunteer his time at this Free Legal Clinic.

Learn more about Mr. Gagan by visiting his full profile.

We are pleased to add both Jason and Bob as shareholders.

O’Neil Cannon has been ranked in the 2018 U.S. News – Best Lawyers® “Best Law Firms” list in 13 practice areas:

• Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law
• Commercial Litigation
• Construction Law
• Corporate Law
• Family Law
• Litigation – Bankruptcy
• Mergers and Acquisitions Law
• Personal Injury Litigation – Plaintiffs
• Product Liability Litigation – Defendants
• Real Estate Law
• Securities / Capital Markets Law
• Tax Law
• Trusts and Estates Law

Firms included in the 2018 “Best Law Firms” list are recognized for professional excellence with persistently impressive ratings from clients and peers. Achieving a tiered ranking signals a unique combination of quality law practice and breadth of legal expertise.

Each year, Super Lawyers surveys the State’s attorneys and judges, seeking the State’s top attorneys. The lists for 2017 were recently published and, once again, a large number of our attorneys are included thereon.

Dean Laing was named one of the Top 10 attorneys in Wisconsin for the third time. He was also named one of the Top 50 attorneys in Wisconsin for the twelfth straight year. In doing so, he is one of only six attorneys out of over 15,000 attorneys in Wisconsin—and the only commercial litigator in Wisconsin—to make the list all twelve years. Dean was also named one of the Top 25 attorneys in Milwaukee.

Seth Dizard and Patrick McBride were also named among the Top 50 attorneys in Wisconsin. This is the fifth time that Seth has made the list. Seth was also named one of the Top 25 attorneys in Milwaukee.

Doug Dehler, Jim DeJong, Pete Faust, Bob Gagan, John Gehringer, Joe Gumina, Greg Lyons, Greg Mager, Joe Newbold, Chad Richter, John Schreiber, Jason Scoby, and Steve Slawinski were also named Super Lawyers, a recognition given to the top 5% of attorneys in Wisconsin. Jim DeJong, Pete Faust, John Gehringer, and Greg Lyons have made the list for the past 10 or more years.

Erica Reib was also named Rising Stars, which is limited to 2.5% of the young attorneys in Wisconsin.

We are extremely proud of these recognitions, but even more proud of the quality of service we provide to our clients.

Effective January 1, 2018, Attorney Steve Slawinski was elected to the Board of Directors for the Associated Builders and Contractors (ABC) of Wisconsin. Throughout the country, the ABC is an effective force in business development, education, labor relations, and legislation. The ABC actively promotes merit, or performance-based construction.

For 30 years, Steve has represented his clients in complex construction, business, and real estate litigation. His practice emphasizes the areas of construction litigation and construction law—representing general contractors, subcontractors, owners, design professionals, lenders, and title insurers in construction disputes, both in court and in arbitration.

Steve is pleased to be elected for a three-year term and looks forward to adding his expertise to the board.

The spirit of the holiday season is upon us once again and the attorneys and staff at O’Neil, Cannon, Hollman, DeJong and Laing wanted to do something special for our community. For our annual holiday donation OCHDL collected 521 pounds of food for the Hunger Task Force.

The Hunger Task Force provides a safety net of emergency food to a network of local food pantries and meal programs. They are the only food bank in Milwaukee that does not charge for food, delivery, or network membership. We are honored to support them and their mission to end hunger.

From all of us at O’Neil, Cannon, Hollman, DeJong and Laing:

“Best wishes for a wonderful holiday and a very Happy New Year!”  

Employer sponsors of nonqualified deferred compensation (NQDC) plans, as well as the executives and other service providers, who benefit from them, can breathe a sigh of relief. The ability to reward and retain key employees with incentive and compensation plans that provide a current opportunity to earn a payment to be provided (and taxed) in the future, will continue to be available, as it has been under American tax law for more than 80 years.  Since late 2004, NQDC agreements have been regulated primarily by Internal Revenue Code (Code) Section 409A.

The House Tax Bill

The ongoing viability of NQDC came under direct threat in the initial draft of the Tax Cuts and Jobs Creation Act (TCJA) as proposed by the U.S. House of Representatives Ways and Means Committee on November 2, 2017 (the House Tax Bill). Section 3801 of the House Tax Bill, which was proposed in substantially similar form to the Section 409A repeal-and-replace proposal introduced in a proposed Tax Reform Act of 2014, would have drastically reduced the ability of employers to reward key employees with deferred compensation arrangements.

As drafted, the House Tax Bill would have eliminated Section 409A and supplanted it with a new Section 409B. These changes, intended to be effective for services performed on and after January 1, 2018, would have meant, as of the New Year, that all NQDC arrangements would become fully taxable upon vesting, with only very limited opportunity to defer taxation until a future year. The proposed law would have applied not only to the common elective, nonelective, incentive payment, and phantom stock forms of NQDC, but would have also expressly included the (currently) sometimes-exempt equity-based compensation forms such as stock options, restricted stock units, and stock and stock appreciation rights.

The Joint Tax Committee had estimated that the proposed change would increase revenues by $16.2 billion between 2018 and 2027.

2017 Senate Tax Bill

The language that would repeal section 409A and replace it with a new Section 409B was removed from the final version of the House Ways and Means Committee’s Tax House Bill, as issued on November 9, 2017. The Chairman’s Mark of the Senate tax reform proposal issued on the same day, however, resurrected the proposals. As unveiled on November 9, 2017 by Senator Orrin Hatch, Chairman of the Senate Finance Committee, the initial Senate version of the TCJA (the Senate Tax Bill) contained the identical Section 409A repeal-and-replace provisions.

Senate Finance Committee Mark Up

Finally, upon the successful amendment offered by Senator Rob Portman, the Section 409A repeal-and-replace proposal was stricken in its entirety from the legislation. This action preserves the current, well-established system, which would have been rendered virtually extinct by the repeal-and-replace proposal. The proposal’s demise became known concurrent with the Joint Committee on Taxation’s issuance of the Chairman’s Modification to the Chairman’s Mark of the TCJA late in the day on November 14, 2017.

Impact

The retention of the existing system of taxation for NQDC arrangements is great news for employers and key employees, who can now continue to offer (and benefit from) compensation packages as appropriate to reward and retain top talent. It is also good policy, in that it does not impose limitations on the ability to earn and save for retirement at a time when the general retirement savings rates of Americans across nearly all income levels are widely reported to be insufficient.

Attorney Kelly M. Spott, a graduate of Marquette University Law School, has recently joined the Milwaukee law firm O’Neil Cannon Previously Kelly was an Advanced Planning Attorney at Northwestern Mutual. Kelly is a member of the Business Law and Tax and Succession Planning Groups. She assists clients with estate planning, probate, trust administration and inheritance litigation.

O’Neil Cannon, founded in Milwaukee in 1973, is a full-service legal practice that primarily focuses on providing business law and civil litigation services to closely-held businesses and their owners. The firm represents corporations, institutions, and partnerships at all stages of the business life cycle, helping them start, grow and transition from one generation to the next. We also assist business owners with their personal legal needs including tax and estate planning, family law and litigation—including personal injury litigation.