Can TCJA's Impact on 401(k) & 403(b) Be Corrected?

Aug 10th 2018
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The AICPA has asked the Treasury Department and the IRS to provide guidance to correct the effect of the Tax Cuts and Jobs Act (TCJA) on the ability of 401(k) plans and 403(b) arrangements to issue hardship distributions for casualty losses.

In a letter to the agencies, AICPA Tax Executive Committee Chair Annette Nellen, CPA, CGMA, explained that the TCJA amended Internal Revenue Code Section 165 to narrow the definition of “casualty” for purposes of the casualty loss deduction.

As per the amended Section 165(h), losses from casualties from 2018 through 2025 are only deductible if they occur in a federally declared disaster area. Thus, qualifying for hardship distributions from 401(k) plans and 403(b) arrangements is limited to those occurring in federally declared disaster areas and from 2018 through 2025.

“We recommend that Treasury and the IRS issue guidance permitting an individual who suffers a casualty loss that would have qualified under the rules of section 165(h) prior to their amendment by the TCJA, to continue to qualify for a hardship distribution from their 401(k) plan, as well as from elective deferrals made to a 403(b) arrangement,” Nellen wrote.

“There is no indication that Congress intended to restrict the hardship distributions from 401(k) plans or 403(b) arrangements when amendments were made to section 165,” Nellen stated. “The IRS and Treasury are not required to tie hardship distributions from 401(k) plans or 403(b) arrangements to the criteria in section 165(h) as amended. Therefore, we recommend that the IRS and Treasury define a casualty loss for purposes of the hardship distribution safe harbor by using a standard other than the standard under section 165 as amended by the TCJA.”

The AICPA’s eight recommendations include the following:

  1. Provide automatic and simplified accounting method change procedures for small-business taxpayers seeking to comply with the new provisions under the TCJA
  2. Clarify whether taxpayers that exceed the threshold for small-business taxpayers in the future must file accounting method changes and provide certain automatic accounting method changes for such taxpayers to file the accounting method changes
  3. Clarify that the interest deduction limitation under Internal Revenue Code (IRC or “Code”) section 163(j) is not considered a method of accounting
  4. Provide relief for small-business taxpayers, who meet the $25 million gross receipts test, that are currently on improper accounting methods
  5. Clarify the definition of gross receipts under section 448 for purposes of qualifying as a small-business taxpayer
  6. Clarify that the definition of a tax shelter for purposes of section 448 does not include an entity with negative taxable income as a result of a negative section 481(a) adjustment
  7. Clarify that Qualified Improvement Property is treated as 15-year property
  8. Provide guidance regarding the tax consequences of changing to the cash method of accounting

The recommendations were promulgated by the AICPA Small-Business Taxpayers Taskforce and approved by the AICPA Tax Methods and Periods Technical Resource Panel and Tax Executive Committee.

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