Industry & Regulatory News

Retirement Spotlight – IRS Offers First Answers to Post-SECURE Act Reporting Questions

The most extensive changes to retirement saving in more than a decade became law when President Trump signed the Further Consolidated Appropriations Act of 2020 (FCAA) on December 20, 2019. While the main purpose of the FCAA was to fund the federal government for the next fiscal year, Congress also added significant retirement provisions to the FCAA by including the Setting Every Community Up for Retirement Enhancement (SECURE) Act in the broader bill.

Most of the retirement enhancements in the SECURE Act have been well received. But some provisions of the Act took effect mere days after enactment—on January 1, 2020—making implementation more difficult. Industry groups have requested that the IRS expedite guidance on the most pressing questions. This Retirement Spotlight will address the guidance that we have so far: some that is explicit and some that we can glean through draft instructions for required tax reporting.

 

New RMD Age of 72

The SECURE Act raised the age at which required minimum distributions (RMDs) must begin. Starting in 2020, RMDs from non-Roth IRAs and employer-sponsored retirement plans must be taken for the year the account owner turns 72, rather than 70½. On the other hand, those who reached age 70½ by the end of 2019 must take an RMD for 2019 and for all later years. So it is only those who turn 70½ in 2020 or later who will have no RMD until they reach age 72. (Remember that many employer plans permit non-owners to delay RMDs until retirement, an option not offered for IRAs or IRA-based plans.)

If an RMD has to be distributed for a given year, the IRA custodian, trustee, or issuer must inform the IRA owner by January 31. They must also tell the IRS that a taxpayer needs to take an RMD. To do this, the reporting organization simply checks a box on Form 5498, IRA Contribution Information, and files it by May 31 of the year the RMD is due (June 1 for 2020).

 

IRS Relief for Inaccurate IRA Custodian, Trustee, and Issuer Reporting

Because the SECURE Act became law so late in 2019, some organizations have struggled to accommodate the new rules. For example, they may have told IRA owners turning 70½ in 2020 that an RMD is required for 2020. This is incorrect, since RMDs in this case would be required at age 72 instead. Fortunately, IRS Notice 2020-6 grants relief from sanctions that could be assessed for this reporting inaccuracy if the following conditions are met.

  • By April 15, 2020, inform IRA owners who received the inaccurate information that no 2020 RMD is required.
  • Ensure that the 2019 Form 5498 for such clients—filed with the IRS by June 1, 2020—does not have a check mark in Box 11 (“Check if RMD for 2020”).
  • Ensure that the 2019 Form 5498 for such clients has no entries in Box 12a (“RMD date”) or Box 12b (“RMD amount”).

 

Relief for IRA Owners?

It is likely that some IRA owners who turn 70½ in 2020 have taken—or will take—a distribution this year in the mistaken belief that they must take an RMD. This belief may be based on receiving an inaccurate notice from their IRA administrator. They might have chosen not to take a distribution had they been aware that no RMD was required. And some might even wish to return the amount distributed to their IRA. But unless the assets were rolled over to an IRA within 60 days, this could not be done without IRS relief.

  • Notice 2020-6 did not address whether an IRA owner (or plan participant) who received a distribution they believed to be an RMD would be granted an extended period—beyond 60 days—to complete a rollover back into a tax-qualified savings arrangement.
  • The Notice also did not address whether an IRA owner could escape the one-rollover-per-12-month rule. This could be a concern, for example, if an IRA owner had set up systematic or periodic IRA withdrawals that had been calculated to satisfy an anticipated 2020 RMD. Under current rules, only one of these withdrawals would be eligible for rollover.

 

More Guidance Being Considered by IRS

Notice 2020-6 states that the IRS is “considering what additional guidance should be provided . . . including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.” We hope that upcoming IRS pronouncements will provide helpful guidance.

 

IRS Recommends Additional Communication with IRA Owners

Because of the potential for IRA owners to misunderstand the RMD age transition from 70½ to 72, the IRS “encourages all financial institutions . . . to remind IRA owners who turned age 70½ in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020.”

 

Qualified Birth or Adoption Distributions

We have received limited IRS guidance on a second SECURE Act provision, which allows for a “qualified birth or adoption distribution” from an IRA or employer retirement plan. An IRA owner or plan participant may withdraw up to $5,000—for each birth or adoption event—without facing the 10% early distribution excise tax. This provision is effective for 2020 and later years, and certain conditions and options apply.

  • Such distributions must occur within 12 months of the birth or adoption.
  • For adoptions, the adoptee may be a minor or an individual who is incapable of self-support.
  • Amounts withdrawn under this provision may be recontributed to an employer plan or IRA.

 

Tentative Guidance Received

Questions remain on these distributions. But we recently got limited guidance from the IRS through a draft version of the 2020 Instructions for Forms 1099-R and 5498. (Form 1099-R reports distributions from IRAs and employer retirement plans, while Form 5498 reports contributions, rollovers, and other information on IRAs.) While these draft instructions may not be definitive, the IRS’s approach in reporting such amounts is helpful.

  • A withdrawal taken as a qualified birth or adoption distribution is to be reported on Form 1099-R based on the recipient’s age (reported in Box 7, Distribution codes). For a recipient under age 59½, use Code 1, “Early distribution, no known exception.” The reporting entity makes no determination whether the distribution qualifies for the birth or adoption exception; this is the recipient’s responsibility.
  • The draft instructions further indicate that re-contributions of qualified birth or adoption distributions to an IRA must be reported on Form 5498 in Box 2, Rollover contributions, for the tax year received.

 

Many Unanswered Questions on Qualified Birth or Adoption Distributions

We are hoping for IRS guidance on the many open questions pertaining to this feature of the SECURE Act, including the following.

  • Confirmation that this feature is an optional feature for employer plans.
  • Clarification of the steps a plan administrator must take, if any, to substantiate that a distribution qualifies as a birth or adoption distribution.
  • Whether there is a time limit for the taxpayer to repay such distributions to an IRA or employer plan.
  • Clarification of the repayment process, including any tax implications.
  • Whether repayments of amounts distributed from an IRA will be subject to the one-per-12-month IRA-to-IRA rollover limitation.

 

Conclusion

The path to a full understanding of the FCAA and SECURE Act provisions—and their effect on retirement and other tax-advantaged savings arrangements—could be challenging. The IRS has so far given only minimal navigation assistance. More will be forthcoming—and the sooner, the better. Ascensus will continue to assess the effect of this legislation and any related guidance. Visit Ascensus.com for future updates.

 

Click here for a printable version of this issue of the Retirement Spotlight.


Ascensus SECURE Act Video Series: Safe Harbor Plans

Ascensus is excited to present the SECURE Act Video Series. This multi-video series will provide a snapshot of retirement-related SECURE Act provisions, included in the Further Consolidated Appropriations Act, 2020.

For more coverage from our experts on the SECURE Act and its implications, check out our latest news.

For more coverage from our experts on the SECURE Act and its implications, check out our latest news.


Reporting Relief Provided in Light of SECURE Act’s RMD Age Change

The IRS has issued Notice 2020-6, guidance that addresses required minimum distribution (RMD) reporting by IRA custodians, trustees, and issuers. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, contained within the broader Further Consolidated Appropriations Act (FCAA), 2020, altered the age when IRA owners must begin taking mandatory annual distributions, or RMDs. Under a provision of the SECURE Act, those who reach age 70½ in 2020 or a later year can delay beginning RMDs until age 72. Those who reached age 70½ in 2019 or earlier years must continue taking annual RMDs.

IRA custodians, trustees, and issuers are required to inform IRA owners by January 31 if an RMD is required to be taken by them for that year. Because of the timing of the FCAA’s enactment in December of 2019, IRA processing and reporting systems may still be programmed to inform account owners turning 70½ in 2020 that an RMD is required to be taken for this year. This information would be incorrect, as these individuals are not required to begin receiving RMDs from their IRAs until they reach age 72. This would constitute a reporting failure by the IRA custodian, trustee, or issuer.

Notice 2020-6 informs these financial organizations that they will be granted relief for such reporting errors, if—by April 15, 2020—they inform affected IRA owners that no RMD is due for 2020. For IRA owners turning age 70½ in 2020, an IRA custodian, trustee, or issuer reporting information to the IRS on the 2019 Form 5498, IRA Contribution Information, should not include a check in Box 11, Check if RMD for 2020, or make entries in Boxes 12a, RMD date, or 12b, RMD amount.

The IRS further notes that it is “considering what additional guidance should be provided … including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.”

Not addressed in this guidance is whether an IRA owner (or plan participant) who receives such a distribution would be granted an extended period of time—beyond 60 days—to complete a rollover of the distributed amount back into a tax-qualified savings arrangement.


Retirement Spotlight: January 2020 Spotlight on Important SECURE Act Provisions For Financial Advisors

The new year promises to provide plentiful opportunities for financial advisors to gain business and to demonstrate expertise to existing clients. As you likely know, the SECURE Act was signed into law on December 20, 2019. Many of the Act’s provisions took effect on January 1, 2020. Most of them offer real benefits to your clients; other provisions may not be as helpful, but you still need to understand them to provide the best service possible. This Retirement Spotlight focuses on a half-dozen SECURE Act provisions that will make the most significant impact on your retirement plan practice.

Let’s start with three provisions that you will most certainly get questions on.

  1. Traditional IRA owners can now contribute after age 70½. Since they were first available in 1998, Roth IRAs could receive contributions from individuals over 70½ provided that they were otherwise eligible. That is, Roth IRA owners had to have earned income—but not too much Now Traditional IRA owners will enjoy the same benefit. Your clients that continue to work—or that have working spouses—will be able to contribute even after they reach age 70½.

    More of your clients may be working well past the “normal retirement age”; now they can also keep contributing to their Traditional IRAs. Even though they may have to take required minimum distributions at the same time that they contribute to their IRAs, there is a good chance that they will be able to contribute more than they have to distribute each year. So this provision is a great way for your clients to ensure that they have sufficient retirement assets once they stop working.

  2. Traditional IRA required minimum distributions (RMDs) will now start at age 72. Not only can your clients make Traditional IRA contributions past age 70½, but now they can begin taking RMDs later. If your clients turn age 70½ in 2020 or later, they now can wait until age 72 to begin taking RMDs. Specifically, they will have until April 1 of the year following the year they turn 72 to take their first RMD. This year-and-a-half delay is not necessarily the big relief that some in the retirement industry had hoped for. But this change certainly provides some benefit.

    Based on increased life expectancies over the past several decades, Congress could have increased the starting age to 75 or later. There are, however, significant revenue implications for any delay in the RMD starting date. So this age-72 requirement was a bit of a compromise. The important thing to remember is this: if your client already turned age 70½ by the end of 2019, then RMDs cannot be delayed under the new rule. In other words, all of your clients born on or before June 30, 1949, are subject to the old rule, which makes the 70½ year the first distribution year.

  3. “Stretch IRAs” as we now know them are disappearing. For decades, IRA and qualified retirement plan (QRP) beneficiaries were able to take death distributions over their life expectancies. For example, a 20-year-old grandchild could distribute a grandparent’s IRA balance over 63 years. But now this generous provision has been altered to require faster distributions (generally over a 10-year time frame), which is designed to increase federal revenue. Nonspouse beneficiaries of account owners who die on or after January 1, 2020, are subject to this new rule, unless they are
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries who are not more than 10 years younger than the decedent’s age,
    • minor children of the decedent (they must begin a 10-year payout period upon reaching the age of majority), or
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.

    We expect that this change to the distribution rules will create considerable confusion for clients. They may be subject to two separate sets of beneficiary distribution rules, depending on the date of the account owner’s death. Some beneficiaries, such as spouses, will have the same options that we are familiar with; many others will face an accelerated payout. It may take time for the industry to sort through the many questions that will arise. And we may have to wait for definitive guidance from the IRS. But meanwhile, you can assure your clients that, while the beneficiary rules for both IRAs and QRPs have changed considerably, no immediate action is needed.

  4. The second group of changes involves employer-sponsored retirement plans and not IRAs specifically. Still, each of them could provide potential benefits to your clients.

  5. Employers may adopt a qualified retirement plan (QRP) up until their tax return due date, plus extensions. If you have clients that are also business owners, you have probably been asked at year end, “What can I do to reduce my tax burden?” For employers without a retirement plan, establishing such a plan can be a great idea. But QRPs were generally required to be adopted by the end of the employer’s tax year. (SEP and SIMPLE IRA plans have different deadlines.) Trying to quickly establish a new plan at year-end could cause unwanted stress and could lead to hasty decisions and compliance problems. Starting with 2020 tax years, employers may establish a QRP by their tax return due date, plus extensions. For example, unincorporated business owners could establish a plan for the 2020 tax year until October 15, 2021, if they have a filing extension.

    This new rule aligns the deadline for QRP establishment with the current SEP IRA plan adoption deadline. And though we still expect that some of your client employers will wait until the last minute to act, at least this new provision gives them more flexibility and options. Keep in mind, however, that salary deferrals must be made prospectively. So establishing a 401(k)-type “cash or deferred arrangement” will not allow plan participants to defer salary or wages that they have previously earned.

  6. Safe harbor 401(k) plans now have more contribution flexibility. Businesses with employees sometimes struggle to pass certain 401(k) testing requirements. Simply stated, plans are generally not allowed to provide highly compensated employees (including owners) with benefits that disproportionately favor them over the nonhighly compensated employees. One such test compares the salary deferrals of these two groups. To pass this test, owners (especially) often end up with much smaller deferrals than they would like. Fortunately, a “safe harbor” 401(k) provision deems this test to be passed, but only if the plan guarantees a healthy matching or nonelective contribution for rank-and-file employees. Unfortunately, detailed notification and timing requirements made these safe harbor provisions less than user friendly. For example, under one scenario, an employer could have made a three percent nonelective contribution in order to pass the nondiscrimination test—but only if the employer had notified employees, before the plan year started, that she might make this contribution to pass the test. In addition, the employer would have had to amend the plan before 30 days of the plan year end in order to take advantage of the testing relief. Now, employers can get the same testing relief, without a “pre-notice” and with substantially more time to amend the plan: instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a four percent contribution to all eligible employees rather than a three percent contribution.

    All of this is to say that employers now can enjoy much more flexibility when they adopt a safe harbor 401(k) plan. By some credible estimates, 30-40% of 401(k) plans that cover employees (in addition to owners) use this safe harbor feature. Making compliance easier for these plans—and for yet-to-be-adopted plans—is a great benefit. And learning more details about this provision will help you better serve your clients.

  7. Tax credits for small employers may help jump-start retirement plans. The SECURE Act provides two tax credits for small employers: one provision gives a $500/year startup credit for new 401(k) or SIMPLE IRA plans that include an automatic enrollment provision; another provision increases a startup credit (up to $5,000) for any small employer that adopts a qualified plan, SEP, or SIMPLE plan. Both credits are available to employers for three tax years, beginning with the start-up year. While these incentives may not—in and of themselves—convince an employer to adopt a retirement plan, they may take some of the financial sting out of the decision and prove that Congress is serious about increasing retirement plan coverage in America. Letting your clients know about these helpful tax credits can solidify your value in their eyes.

These six new provisions are likely to get a fair amount of coverage in the mainstream media and in the retirement industry. This Retirement Spotlight should help you discuss these changes more effectively with your clients. But keep in mind that the SECURE Act contains the most significant retirement plan changes in 15 years. There are many other provisions that affect IRAs and QRPs—and there are many questions that have already arisen about specific provisions and how certain changes should be implemented. As federal guidance is released, Ascensus will continue to share thoughtful analysis and practical insights.

 

Click here for a printable version of this issue of the Retirement Spotlight


IRS Updates Determination Letter and VCP Submission Information

The IRS has issued Revenue Procedure (Rev. Proc.) 2020-4, which updates 2019 guidance on determination letter and Voluntary Correction Program (VCP) submission procedures. Changes from the prior year Rev. Proc. 2019-4 include the following.

Section 3.04 is revised to state that a determination letter issued regarding the qualified status of a retirement plan will include a determination on the exempt status of any related trust or custodial accounts (does not include an adopting employer of a pre-approved plan).

Section 3.06(2) is revised to change an “Appeals Office” reference in Rev. Proc. 2019-4 to now read “Internal Revenue Service Office of Appeals (Independent Office of Appeals),” with corresponding changes made throughout Rev. Proc. 2020-4.

Section 6.02 is revised to provide a list of applicable documents that should be submitted to enable the Service to more efficiently process determination letter requests.

Section 8.02 notes that determination letter requests for certain hybrid (defined contribution and defined benefit) plans will be accepted through August 31, 2020, and certain individually designed merged plans on an ongoing basis.

Section 9.07 removes a former cautionary statement that a favorable determination for a plan executing a de-risking of its pension obligations by lump sum distribution does not constitute a determination of federal tax consequences.

Sections 30.07 and 31.03 are revised to note that user fees under VCP must be paid electronically using www.pay.gov, and that the Service no longer accepts paper VCP submissions.

Section 31 is revised to update mailing addresses.


Senators Cruz, Braun Introduce Legislation to Expand HSAs

Senators Ted Cruz (R-TX) and Mike Braun (R-IN) have announced the introduction of the Personalized Care Act of 2019. The legislation is intended to make health savings accounts (HSAs) accessible to more Americans, and to enhance HSA provisions. (This legislation has not yet been posted to the official congressional website. The provisions listed below are based on legislative text provided by the office of Sen. Cruz.)

The legislation as released by the senators would do the following.

  • End the restriction that requires health coverage only by a high-deductible health plan (HDHP) in order to make HSA contributions.
  • Permit those participating in Medicare and certain other health care financing programs to contribute to HSAs.
  • Permit use of HSA assets to pay health insurance premiums.
  • Allow HSA assets to be used for direct primary care and certain other direct medical care arrangements.
  • Increase maximum annual HSA contribution limits from $3,550 (2020) to $10,800 for those with individual insurance coverage, and from $7,100 (2020) to $29,500 for those with family coverage.
  • Expand HSA qualified medical expense coverage of over-the-counter (OTC) medicines.
  • Allow HSAs to pay the costs of participation in certain health care sharing ministries.
  • Reduce penalties for use of HSA assets for certain nonqualifying expenses.