Industry & Regulatory News

IRS Issues Required Amendments List for Individually Designed Plans

On November 30, 2021, the IRS released Notice 2021-64 containing the 2021 required amendments list. This annually issued list describes changes in retirement plan qualification requirements and amendment deadlines for individually designed qualified and individually designed 403(b) plans. Some items require plans to be amended, while others do not. The list of changes to qualification requirements are as follows.

Required Amendments

Multiemployer plans that had amended to reduce benefits and to begin receiving special financial assistance for financially troubled plans pursuant to the American Rescue Plan Act of 2021 must amend to reinstate benefits previously suspended as of the first month in which the effective date for the special financial assistance occurs.


Washington Pulse: House Version of “Build Back Better” Act Contains Retirement Plan and Benefits Provisions

On November 19, 2021, the U.S. House of Representatives passed H.R. 5376, the Build Back Better Act (“BBB Act” or “the Act”). Following quickly on the heels of the Infrastructure Investment and Jobs Act, the BBB Act contains several retirement and benefits provisions that may affect financial organizations, service providers, and consumers. This bill has gone through numerous revisions as it made its journey to the House floor for a vote. It will now go to the Senate, which will likely make further revisions. So the Act’s final version—if passed by both the House and Senate—may be different from the current version.

Retirement Plan Provisions

  • Moving after-tax assets from eligible plans to a Roth IRA would be prohibited. In 2010, Congress removed the income thresholds that prevented high-income individuals from converting Traditional IRA assets to Roth IRAs. But income limits still applied to annual Roth IRA contributions: so individuals who earned too much couldn’t contribute to a Roth IRA. They could, however, make after-tax contributions to a Traditional IRA, and then convert the assets to a Roth IRA. (Detailed pro rata distribution rules applied to such conversions.) Effective January 1, 2022, the BBB Act would eliminate these “back door Roth” contributions.This proposed change would affect more than Roth IRA conversions. It would also prohibit employer plan rollovers of after-tax assets to designated Roth accounts or to Roth IRAs (sometimes called “mega back door Roths”).Effective January 1, 2032, the BBB Act would also prohibit any Roth IRA conversions and in-plan Roth rollovers for the following high-income individuals. (Income limits would be indexed for inflation.)
    • Single filers with modified adjusted gross income (MAGI) over $400,000.
    • Joint filers with MAGI over $450,000.
    • Heads of households with MAGI over $425,000.
  • High-income individuals with large retirement balances could not contribute to an IRA. To avoid subsidizing taxpayers with large IRA balances, this provision would disallow IRA contributions for those with combined IRA and defined contribution plan balances exceeding $10 million. This change would apply only to those whose annual income exceeds certain (indexed) amounts.
    • Single filers with modified adjusted gross income (MAGI) over $400,000.
    • Joint filers with MAGI over $450,000.
    • Heads of households with MAGI over $425,000

    Certain types of “annual additions” would not be considered IRA contributions, and so would be unaffected by this provision. They would, however, be used to determine whether an individual’s balance exceeds $10 million.

    • Contributions to SEP and SIMPLE plans.
    • Rollovers from other eligible plans.
    • IRA assets received as the beneficiary of an eligible retirement plan.
    • IRA assets received through a valid divorce or separation agreement.

    Ineligible individuals who make IRA contributions would be subject to the six percent excess contribution penalty tax if they fail to remove the excess contribution by their tax return due date, plus extensions. This provision would also require defined contribution plan administrators to report to the IRS any participant or beneficiary balances of at least $2.5 million (indexed). This restriction on contributions for those with higher incomes and plan balances would not be effective until tax years beginning on or after January 1, 2029.

  • Additional RMDs would be required for high-income individuals with large retirement balances. Using the same income limitations found in the previous two provisions, the BBB Act would require high-income individuals with retirement balances exceeding certain thresholds at the end of the preceding year to take additional required minimum distributions (RMDs) for the current year, irrespective of their age. This provision is intended to reduce the transfer of significant wealth through retirement plans and would limit tax-advantaged accounts to an amount that reflects more reasonable retirement needs. The proposed formula for these increased RMDs is a bit complicated.Individuals with combined IRA and defined contribution balances that exceed the “applicable dollar amount” would need to distribute 50% of the excess as an RMD. The applicable dollar amount would start at $10 million and would be indexed for inflation. Further, if the balance exceeded 200% of the applicable dollar amount (initially $20 million), an individual would need to satisfy the RMD by first distributing the lesser of
    • the amount needed to bring the total balance in all accounts down to $20 million (indexed), or
    • the aggregate balance in the Roth IRAs and then the aggregate balance in the designated Roth accounts.

    Once the initial distribution is made, the individual would then distribute 50% of the aggregate balance that exceeds $10 million. This second part of the distribution would be reduced by any amount that was distributed from the Roth accounts (under the previous step). In this second step, the individual could determine the accounts from which to take RMDs in order to fulfill the RMD requirement. The individual would also need to take the normal RMD—calculated without regard to the new provision.

    This increased RMD requirement would apply to all those with retirement balances exceeding the applicable dollar amount, even those not normally subject to RMDs (i.e., those under age 72). Individuals may have to take distributions for several years in order to whittle large balances down toward the $10 million (indexed) limit.

    There are some other notable details of this provision.

    • Mandatory 35% withholding would apply to the increased RMD amounts.
    • As with other RMDs, these additional RMDs would not be eligible for rollover treatment.
    • Employee Stock Ownership Plan balances—if invested in stock that is not readily tradable—would not be considered when calculating the special RMD.
    • Required Roth IRA or designated Roth account distributions would be treated as qualified (that is, tax free) distributions.
    • The 10% early distribution penalty tax would not apply (for affected individuals under age 59½).

    This provision would apply to taxable years beginning on or after January 1, 2029.

  • Statute of limitations would increase to six years for IRA noncompliance. This BBB Act provision would lengthen the current three-year statute of limitations to six years. The increase in the time that the IRS could continue to examine IRAs would apply to substantial errors (willful or otherwise) in reporting the value of investments and to the imposition of any tax associated with prohibited transactions under Internal Revenue Code (IRC) Section 4975. The six-year window would apply to taxes to which the current three-year period ends after December 31, 2021. Additionally, the new rule would allow taxes to be assessed up to six years after a return was actually filed, even if it was filed late.
  • IRA owners would be treated as disqualified persons under prohibited transaction rules. This provision clarifies that, when determining whether an entity or individual has engaged in a prohibited transaction under IRC Sec. 4975, a disqualified person would include the IRA owner and those who inherit the IRA after the owner’s death. This provision would apply to transactions occurring on or after January 1, 2022.
  • Prohibited transaction provision would be added for certain IRA investments. Although this provision may affect few individuals, it would preclude an “investment, at the direction of a disqualified person, by an individual retirement account in an interest in a DISC or FSC that receives any . . . payment from an entity [that is] owned by the individual for whose benefit the account it maintained.”A DISC is a Domestic International Sales Corporation, and an FSC is a Foreign Sales Corporation. These business entities were created to promote U.S. exports—and they were given substantial tax incentives. If an IRA owned (all or a portion of) a DISC or FSC, the IRA would not only reap significant tax benefits each year for the business, but the IRA would also accrue tax-deferred (or tax-free) growth.Because of the potential for an IRA owner or other disqualified person to structure these types of investments in a way that was not originally intended, the BBB Act would prohibit this transaction, effective for stock or other interests acquired or held on or after December 31, 2021.
  • Rules would be modified to limit losses from wash sales of certain assets. Wash sales rules limit the deduction that a taxpayer can take for an investment loss if the taxpayer (or the spouse) acquires the same or similar assets within 30 days of selling the original assets. While these rules have typically been applied to stock transactions, the BBB Act would specifically include “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” In addition, this definition “include[s] contracts or options to acquire or sell, or notional principal contracts in respect of, any specified assets.”Presumably, this new rule was designed to reduce the tax advantages of speculating in such assets as cryptocurrencies and nonfungible tokens (NFTs). The BBB Act would also preclude “related parties” from conducting wash sale transactions on a taxpayer’s behalf. These parties would specifically include (among others) the taxpayer’s IRAs, HSAs, 529 plans, and qualified retirement plans (such as 401(k) plans).This provision would apply to sales, dispositions, and terminations of assets on or after January 1, 2022.

Other BBB Act Provisions

  • Four weeks of paid leave for all workers. Currently, public entities and private companies with 50 or more employees must offer up to 12 weeks of time off under the Family and Medical Leave Act (FMLA). This, however, is unpaid time off. The BBB Act would provide paid Eligible individuals could receive up to four weeks of paid leave in a 52-week period. This leave provision would be paid directly through a new federal program or through each state (or employer), which would be reimbursed for most of the costs. The following details would also apply.
    • Payment amounts would vary depending on a worker’s weekly income, from approximately 90% of pay down to 53% of pay. Lower-paid worker would receive the higher percentage, and the benefit percentage would shrink for those with higher weekly pay. No amounts would be paid based on wages that exceed $1,192 weekly (1/52 of $62,000 in 2024, subject to indexing).
    • Unlike the FMLA, all workers would be eligible for the BBB Act’s paid leave, including self-employed business owners.
    • As with the FMLA, leave could be taken for events such as the birth or adoption of a child, the worker’s own serious health condition, or to care for a family member with a serious health condition. The BBB Act would also expand the definition of “family members” to those whose care would qualify for paid leave.

    This provision would become effective January 1, 2024.

  • Fringe benefits for bicycle commuting. The Tax Cuts and Jobs Act of 2017 repealed employer-provided benefits for workers who commute by bicycle. The BBB Act would reinstate and expand this benefit. Employers could once again reimburse employees’ expenses associated with the purchase, lease, rental, improvement, repair, or storage of bicycles that are used to commute from home to work or to a mass transit facility. Based on the projected adjustment for 2022, the reimbursement could go up to approximately $80 per month.

Takeaways

The Build Back Better Act is advancing through the budget reconciliation process, which allows the Senate to pass the bill with a simple majority. The Senate will likely make changes to the House version, meaning that the two chambers of Congress will have to reconcile their bills’ differences so that they can vote on identical bills. If the House and Senate can agree to terms, we expect that the final bill will contain at least some of the provisions discussed above. Because Congress must address other pressing legislative matters, such as a defense spending bill and the national debt ceiling, the BBB Act may not receive immediate attention. However Congress acts, Ascensus will continue to follow this bill. Visit ascensus.com for the latest developments.

 

Click here for a printable version of this issue of the Washington Pulse.


IRS Provides Guidance on Information Reporting of Health Insurance Coverage

On November 22, 2021, the Department of the Treasury released a Notice of Proposed Rulemaking (NPR) entitled, “Information Reporting of Health Insurance Coverage and Other Issues Under Internal Revenue Code Sections (IRC Secs.) 5000A, 6055, and 6056,” that extend the applicable deadlines to furnish statements, clarify that certain Medicaid coverage is not minimum essential coverage, and provide a deadline to submit comments relating to 2016 proposed rules affecting reporting. Comments related to the NPR are due 60 days following the publication of the NPR in the federal register. The NPR provides as follows.

Automatic Extensions

The NPR automatically extends the applicable deadlines pursuant to Sections 6055 and 6056 by 30 days. The automatic extension replaces the 30-day extension for good cause and the authorization by the Commissioner to provide an automatic extension. If an extended date falls on a weekend or a legal holiday, the statement is considered timely if provided on the following business day.

 

Alternative Notice

For any year that the penalty applicable to individuals is $0, the employer is permitted to furnish an alternative notice to comply with IRC Sec. 6055. The alternative notice is available for part-time employees and non-employees enrolled in self-insured health coverage. The employer may post a clear and conspicuous notice on the employer’s website that is easily accessible by individuals searching for tax information. The notice must include the employer’s contact information for the individual to request the alternative notice upon request and must be retained on the website until October 15 of the following calendar year. The NPR also provides, as an example, that the alternative notice may contain the heading “Important health Coverage Tax Documents” to reflect the importance of the alternative notice. If the applicable penalty is increased in future years, the Department of Treasury and the IRS will provide updated guidance.

 

Medicaid Coverage

Pursuant to Notice 2020-66, Medicaid coverage that was limited to COVID-19 testing and diagnostic services is not considered minimum essential coverage. As a result, individuals that retain this type of coverage are not prevented from qualifying for the premium tax credit.

 

Transitional Good Faith Relief

For calendar years 2015–2019, the Department of Treasury and the IRS have extended good faith relief to employers that make an effort to comply with IRC Secs. 6055 and 6056. In 2020, the relief was extended to calendar year 2020 pursuant to Notice 2020-76. However, the Department of Treasury and the IRS clarified that good faith relief will not be renewed beginning calendar year 2021. Consistent with Notice 2020-76, the Department of Treasury and the IRS do not extend the good faith relief beginning calendar year 2021.

 

Proposed Regulation

In 2016, the Department of Treasury and the IRS introduced proposed rules that addressed catastrophic health coverage, truncated tax identification numbers, and duplicative or supplemental coverage. In response to the proposed regulation, the IRS received approximately 10 comment letters. The Department of Treasury and the IRS will reopen the comment period to permit stakeholders to comment on the proposed rules. The comments are due 60 days after publication of the document in the Federal Register. Following the comment period, the Department of Treasury and the IRS intend to finalize the 2016 proposed regulation.

 


Build Back Better Bill Passes House, Moves to Senate

The House of Representatives passed the $1.9 trillion Build Back Better bill in a 220-213 near party line vote. The House-passed version of the bill contains several IRA provisions, including

  • limiting contributions and requiring additional minimum distributions for high-income taxpayers with aggregate retirement account balances over $10 million, beginning in 2029,
  • closing the “back-door” Roth IRA loophole by eliminating conversions of after-tax IRA and employer-sponsored retirement plan contributions for all taxpayers, beginning in 2022, and
  • eliminating conversions of pretax IRA and employer-sponsored retirement plan contributions for high-income taxpayers, beginning in 2032.

Additionally, the bill provides for four weeks of federally-funded, paid family and sick leave for all workers. Currently, it appears that this provision may be removed in the Senate version of the bill.

The bill now heads to an evenly divided Senate where it is anticipated that amendments will be made. All 50 members of the Senate Democratic caucus must agree to support the bill in order for it to pass under the budget reconciliation process, as opposed to the 60 votes necessary for other legislation.


Washington Pulse: Infrastructure Act Includes Additional Pension Funding Relief, Disaster Relief Changes, and New Digital Asset Reporting Requirements

The Infrastructure Investment and Jobs Act (the Act), signed by President Biden on November 15, 2021, includes extensions to the single employer pension funding relief originally provided in the American Rescue Plan Act of 2021 (ARPA). Other provisions include modifications to the mandatory 60-day postponement period, which grants relief to taxpayers for certain tax-related acts due to federally declared disasters and new reporting requirements for transactions involving digital assets. The effective dates vary—pension funding relief provisions apply to plan years beginning after December 31, 2021; the disaster relief changes are effective for federally declared disasters that occur after November 15, 2021; and the new reporting requirements for digital assets apply to information reports required to be filed after December 31, 2023.

Extension of Single Employer Pension Relief

The Act would extend by five years the relief granted by ARPA. Segment rates based on corporate bond yields are used to determine the applicable interest rate for calculating plan contributions. ARPA provided funding relief for single employer defined benefit plans by modifying the minimum and maximum “corridor” for segment rates through 2029, and applying a minimum five percent floor to the average segment rate for any 25-year period. The Act extends ARPA’s pension smoothing corridor to 2034.

Changes to Mandatory 60-Day Postponement Period for Disasters

Originally added in December 2019 by the Taxpayer Certainty and Disaster Tax Relief Act of 2019, new Internal Revenue Code Section (IRC Sec.) 7508A(d) requires the IRS to automatically postpone for 60 days certain time-sensitive, federal tax-related deadlines—including those related to retirement savings plans—in response to “federally declared disasters.” The 60-day extension applies to qualified taxpayers, which include individuals whose principal residence or principal place of business is located in a “disaster area.”

Although the IRS typically extends deadlines for more than 60 days, the provision ensures that affected taxpayers will have at least a minimum 60-day time frame to complete certain tax-related acts following a disaster. In June 2021, the IRS issued final regulations further explaining how the 60-day period is to be determined and clarifying the term “federally declared disaster.”  The final regulations, however, negated the automatic nature of the mandatory 60-day period by requiring that the Treasury Secretary first exercise discretionary authority to extend deadlines. On the heels of the final regulations, the Act restores the automatic application of the mandatory 60-day period, further tweaks the requirements for the mandatory 60-day extension, and adds “significant fire” as an event for which the IRS can issue relief under IRC Sec.7508A. These changes to the disaster relief are effective for federally declared disasters that occur after November 15, 2021.

  • What if there are multiple disaster declarations issued? If there are multiple disaster declarations issued relating to a disaster area within a 60-day period, then a separate mandatory 60-day period will be determined for each declaration.
  • When does the 60-day postponement period begin and end? The mandatory 60-day postponement period currently begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends on the date that is 60 days after the latest incident date. The newly enacted changes to IRC Sec. 7508A(d) provide that the 60-day period will now end 60 days following the later of the earliest incident date or the date that FEMA announces a federal disaster declaration, possibly resulting in a longer 60-day period.
  • Are taxpayers entitled to relief when affected by a significant fire? Taxpayers affected by a “significant fire” are now entitled to the same tax-related deadline extensions as those who are affected by a federally declared disaster area. The term “significant fire” means any fire with respect to which assistance is provided under section 420 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

New Digital Reporting Requirements

The definition of “broker” now includes those who, in exchange for compensation, regularly make transfers of digital assets (e.g., “crypto” currencies) for investors. The Act expands IRS reporting requirements to include digital asset transactions regularly performed by brokers. Brokers performing digital asset transactions must now identify clients and report their digital asset activity each year to the IRS.

Takeaways

Although the legislation changes certain aspects of the disaster relief provisions, including extending the minimum 60-day period and adding “significant fire” to the list of events for which the IRS can delay tax deadlines, the IRS has already been postponing deadlines for more than 60 days and has granted relief for past wildfires. Taxpayers and businesses should continue to refer to the IRS website for the latest disaster relief information.

The other major changes allow sponsors of single employer defined benefit plans to have interest rate relief through 2034 and create a new reporting requirement for brokers filing returns in 2024 and later years. Ascensus will analyze and share any further developments related to this guidance. Visit ascensus.com for the latest information.

 

Click here for a printable version of this issue of the Washington Pulse.


President Signs Infrastructure Bill Into Law

The President has signed into law the Infrastructure Investment and Jobs Act. The legislation contains the following noteworthy provisions.

  • Extends by five years the minimum and maximum “corridor” for determining interest rates for single employer pension funding, relief initially granted by the American Rescue Plan
  • Modifies disaster tax relief by ensuring that taxpayers will have at least a minimum 60-day time frame to complete certain tax-related acts following a “federally declared disaster”
  • Amends the Internal Revenue Code definition of “broker” to include anyone responsible for regularly providing services effectuating transfers of digital assets (cryptocurrency)

2022 Inflation-Adjusted Amounts Released for Health and Welfare Benefits

The IRS has issued Revenue Procedure (Rev. Proc.) 2021-45, which contains cost-of-living adjustments for taxable years beginning in 2022 for over 60 tax provisions, including the following health and welfare benefits.

Cafeteria Plans

The dollar limitation under Internal Revenue Code Section (IRC Sec.) 125(i) on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,850 ($2,750 for 2021). For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570 ($550 for 2021).

Qualified Transportation Fringe Benefit

The monthly limitation under IRC Sec. 132(f)(2)(A) for the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $280 ($270 for 2021). The monthly limitation under IRC Sec. 132(f)(2)(B) for the fringe benefit exclusions amount for qualified parking is $280 ($270 for 2021).

Qualified Small Employer Health Reimbursement Arrangement

To qualify as a qualified small employer health reimbursement arrangement under IRC Sec. 9831(d), the arrangement must provide that the total amount of payments and reimbursements for any year cannot exceed $5,450 or $11,050 for family coverage ($5,300 or $10,700 for family coverage for 2021).

For additional information on the 2022 inflation-adjusted limits for other tax provisions, see Rev. Proc. 2021-45.


Committee Leaders Introduce Retirement Legislation in House

Leadership from the House Committee on Education and Labor and its Subcommittee on Health, Employment, Labor and Pensions have introduced the Retirement Improvement and Savings Enhancement (RISE) Act to expand worker access to a secure retirement.

The proposed legislation includes several noteworthy provisions.

  • Establishes an online, searchable “Retirement Lost and Found” database at the Department of Labor (DOL) to help workers locate savings as they move from job to job
  • Increases the force-out threshold for rollovers from retirement accounts to IRAs from $5,000 to $7,000
  • Allows 403(b) plans to participate in multiple employer plans (MEPs) and pooled employer plans (PEPs)
  • Enables employers to provide small financial incentives, such as low-dollar gift cards, to incentivize workers’ participation in retirement plans
  • Directs the DOL to update guidance regarding benchmarking investments (such as target date funds)
  • Clarifies that a named fiduciary is responsible for implementing written contribution collection procedures and collecting contributions in a PEP
  • Requires the DOL to review the current interpretive bulletin governing pension risk transfers and report to Congress on its findings
  • Simplifies and clarifies retirement-related disclosure requirements
  • Reduces the long-term, part-time eligibility requirements set forth under the SECURE Act from three to two consecutive 12-month periods during which the employee has at least 500 hours

The House Committee on Education and Labor is scheduled to hold a markup session for the bill on November 10.


Infrastructure Bill Heads to President for Signature

The much-anticipated Infrastructure Investment and Jobs Act (the Act) has passed the House of Representatives months after its approval in the Senate. The legislation contains the following noteworthy provisions.

  • Extends by five years the minimum and maximum “corridor” for determining interest rates for single employer pension funding, relief initially granted by the American Rescue Plan (ARPA)
  • Modifies disaster tax relief by ensuring that taxpayers will have at least a minimum 60-day time frame to complete certain tax-related acts following a “federally declared disaster”
  • Amends the Internal Revenue Code definition of “broker” to include anyone responsible for regularly providing services effectuating transfers of digital assets (cryptocurrency)

The bill awaits President Biden’s signature for enactment.


IRS Postpones Requirement to Use Updated Forms W-4P and W-4R Until 2023

The IRS has issued a fourth draft of the 2022 Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments. In it, the IRS indicates that while final versions of the redesigned Form W-4P and Form W-4R will be released for 2022, based on comments received on prior drafts from stakeholders, the IRS will postpone requirements to begin using the redesigned forms until January 1, 2023. Payors should update their system programming for these new forms but may otherwise continue to use the 2021 Form W-4P.

As previously announced, the revised Form W-4P will only be used to withhold federal income tax from periodic retirement plan and IRA payments. Periodic payments are installment payments at regular intervals generally over a period of more than one year. New Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, will be used for nonperiodic and rollover distributions. Nonperiodic distributions are subject to a 10 percent withholding rate unless a different rate is elected. Eligible rollover distributions are subject to a mandatory 20 percent withholding rate on the taxable amount of the distribution unless a higher rate is elected.

This current draft of Form W-4P states that included computational steps should not change and can be relied upon for system programming purposes.