Industry & Regulatory News

Legislation to be Introduced to Suspend RMDs for 2020, Exempt Social Security Income from Taxation

Sen. Ed Markey (D-MA) has proposed legislation (S. 3527) to suspend for 2020 the obligation to withdraw required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs in response to investment market volatility accompanying the coronavirus (COVID-19) pandemic. Sen. Markey has also announced plans to introduce another bill to exempt Social Security benefits received in 2020 from taxation. (Taxation of Social Security benefits generally is means-tested, with amounts exceeding $25,000—$32,000 for married couples—subject to income tax.)

Retirement plan withdrawals generally are required annually for those who reached age 70½ in 2019 or a prior year, or who reach age 72 in 2020 or a later year (some who are still employed after these ages can further delay withdrawals from certain retirement plan).

In a news release issued Wednesday, March 18, Sen. Markey noted that the formula used to calculate these annual RMDs—which is based on December 31, 2019, values that preceded the recent markets downturn—would consume a disproportionate share of these individuals’ retirement savings. Thus, this reflects the importance of this 2020 RMD suspension.

The legislation based on S. 3527 bill text at Sen. Markey’s website, and which has bipartisan support, would do the following.

  • Suspend otherwise-required 2020 RMDs from qualified retirement plans, 403(b) plans, governmental 457(b) plans, and individual retirement arrangements (IRAs).
  • 2020 will be disregarded for purposes of the 5-year period for required depletion of an inherited IRA or retirement plan account.
  • Mandatory withholding (e.g., 20%) would not be applied to 2020 amounts withdrawn from these retirement savings arrangements, exempt up to such amount(s) that would represent RMDs if not for the 2020 exemption.
  • Retirement plans may operationally comply with these provisions, but must amend for the changes by the last day of 2022 plan years (2023 plan years for governmental plans).
  • An individual’s required beginning date for RMDs (generally April 1 of the year after attainment of RMD age or, if later, the year of retirement) would not be altered by a 2020 suspension.

 


Lawmakers Introduce Bill to Ensure COVID-19 (Coronavirus) Testing Costs Not Borne by Patients

Reps. Diana DeGette (D-CO) and Donna Shalala (D-FL) have introduced the Covering Coronavirus Test Act of 2020 (H.R. 6173). This legislation is intended to prevent health insurance companies from requiring those being tested for COVID-19 (coronavirus) to pay for the testing.

Based on H.R. 6173 legislative text obtained through Rep. DeGette, this very brief bill would amend the federal Public Health Service Act to do the following.

  • Require health insurers to cover the full cost of COVID-19 tests for any American with health insurance obtained through their employer, or individually purchased through an Affordable Care Act (ACA) exchange. (Medicare has announced that it will fully cover the cost of a COVID-19 test ordered by a physician. Coverage for the testing of those receiving Medicaid benefits will be a state-by-state decision, according to Rep. DeGette’s news release.)
  • Add COVID-19 testing to the list of ACA “preventive health services” required to be covered at no cost to patients.
  • Exempt COVID-19 testing from the one-year waiting period that new preventive services must undergo before insurers are required to cover them cost-free under the ACA.

This legislation does not currently have a companion Senate bill. It has been referred to the House Energy and Commerce Committee. The bill’s sponsors have indicated that—if not enacted separately—they hope to have these provisions added to any coronavirus legislation that is considered by Congress.

Rep. DeGette News Release


IRS Provides Guidance on HSAs and Associated HDHPs, and Coverage of COVID-19 Testing

The IRS has issued Notice 2020-15, addressing requests made to the agency for health savings account (HSA)-related guidance as the nation responds to the challenges of the COVID-19 (coronavirus) outbreak in the U.S. and worldwide.

The IRS was asked for confirmation that a high deductible health plan (HDHP) associated with an HSA could cover the cost of COVID-19 patient testing with no deductible—or a lower deductible—first being paid, and still remain an HSA-eligible health plan. An HDHP must generally meet certain plan deductible requirements in order for an individual to make HSA contributions. There are certain exceptions that allow health plan coverage without satisfying the plan deductible. One of these is for preventive care costs. There has been uncertainty as to whether COVID-19 testing would be considered preventive care.

In Notice 2020-15, the IRS states, “Until further guidance is issued, a health plan that otherwise satisfies the requirements to be a high deductible health plan (HDHP) under section 223(c)(2)(A) of the Internal Revenue Code (Code) will not fail to be an HDHP under section 223(c)(2)(A) merely because the health plan provides health benefits associated with testing for and treatment of COVID-19 without a deductible, or with a deductible below the minimum deductible (self only or family) for an HDHP. Therefore, an individual covered by the HDHP will not be disqualified from being an eligible individual under section 223(c)(1) who may make tax-favored contributions to a health savings account (HSA).”


IRS Priority Guidance Plan Update Includes Retirement Items

The IRS has issued its semi-annual update to the agency’s 2019-2020 Priority Guidance Plan, in which it describes guidance projects in the current fiscal year. Many have been on the Priority Guidance Plan for some time. A number of the guidance items deal with retirement savings arrangements, including the following.

  • Final regulations on withholding when payments are made to a non-U.S. address (proposed regulations issued in May 2019)
  • Comprehensive IRA regulations
  • Final regulations updating life expectancy and distribution period tables for required minimum distributions; a notice of proposed rulemaking was issued in November 2019
  • Final hardship distribution regulations (proposed regulations issued November 2018)
  • Guidance on student loan payments and their interplay with qualified retirement plans and 403(b) plans
  • Guidance related to several IRS Tax-Exempt and Government Entities programs, including the EPCRS plan correction program, pre-approved plan program, and determination letter program
  • Regulations on the definition of “governmental plan”
  • Final regulations on normal retirement age under governmental plans (proposed regulations issued January 2016)
  • Regulations on church plans
  • Regulations on aggregation of affiliated service groups (Internal Revenue Code Section (IRC Sec.) 414(m)
  • Final regulations updating minimum-present-value requirements for defined benefit pension plans (proposed regulations issued in November 2016)
  • Regulations updating rules for service credits and vesting (IRC Sec. 411)
  • Hybrid defined benefit plan regulations addressing annuity conversion factors and interest credits

 


IRS Fact Sheet and Website Posting Highlight SECURE Act Changes, Appear to Clarify Issues

The IRS issued news release IR-2020-50, which contains links to several resources that describe changes contained in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, an element of the Further Consolidated Appropriations Act (FCAA), 2020, signed into law in December 2019. Included is IRS Fact Sheet FS-2020-04, a web page entitled “New law helps people save for retirement; other retroactive changes impact many taxpayers,” as well as links to the latest versions of IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The FS-2020-04 recaps SECURE Act changes that many are already familiar with, but also provides clarity where there was some uncertainty.

 

Traditional IRA Contributions at Any Age

Persons age 70½ and older may now make contributions to Traditional IRAs for 2020 and later tax years, not including contributions for the 2019 tax year made in 2020.

 

New RMD Age 72, Not 70½

Prior to the SECURE Act, age 70½ was the age to begin required minimum distributions (RMDs) from non-Roth IRAs and (with some exceptions) employer retirement plans. Now, persons who turn age 70½ in 2020 and later years need not begin RMDs until reaching age 72. Those reaching age 70½ in 2019 or a prior year cannot delay RMDs to age 72.

 

Qualified Birth or Adoption Penalty Exception

Taxable distributions from IRAs and employer plans before age 59½ are generally subject to a 10 percent excise tax, with limited exceptions. The SECURE Act provides a new exception to the excise tax for a qualified birth or adoption distribution. Up to $5,000 may be distributed from an IRA or employer plan—or both in combination—for the birth or adoption of a child. Such distributions may be recontributed. FS-2020-04 language makes it appear that such recontributions may be made at any time to an IRA or employer plan, and will be treated as rollovers no matter how long after the time of distribution.

 

More Rapid Payouts for Nonspouse Beneficiaries

Prior to the SECURE Act, all nonspouse primary beneficiaries of IRA or employer-sponsored retirement plan balances had the ability to stretch payouts over their own lifetime. For IRA owner or plan participant deaths in 2019 or earlier years, this option remains in place. But for deaths in 2020 and later years, most nonspouse beneficiaries must deplete the inherited account within 10 years. Exceptions (those still allowed to pay out over their lifetime) include the disabled, those chronically ill, those no more than 10 years younger than the decedent, and minor children. Minor children must begin the 10-year payout period upon reaching the age of majority.

 

The SECURE Act statutes and FS-2020-04 do not specify an age of majority, which may vary from state to state. However, under the heading, “Retirement Topics—Required Minimum Distributions (RMDs),” at the IRS website, the IRS identifies a uniform age of 18 when this 10-year distribution period must begin. It’s important to note that IRS website postings generally do not provide the same level of reliance as official guidance.

 

529 Plan Changes

The SECURE Act also created two new qualified—thus, tax-free—withdrawals from qualified tuition programs, also known as 529 plans. This change is retroactive to 2019. Amounts withdrawn from 529 plans may be used to pay for expenses of certain registered and certified apprenticeship programs. Also, up to $10,000—a lifetime limit—may be withdrawn and used to pay student loan principal or interest of the 529 plan’s designated beneficiary or the designated beneficiary’s sibling.


IRS Issues Tax-Related Deadline Relief for Tennessee Storm Victims

The IRS has issued news release TN-2020-01, announcing an extension of time to complete certain time-sensitive tax-related acts as a result of tornadoes, storms, straight-line winds, and flooding events in Tennessee. At this time, the only area to which the relief applies is Davidson, Putnam, and Wilson Counties. Certain tax-related acts with deadlines falling on or after March 3, 2020, and before July 15, 2020, are extended through July 15, 2020.

TN-2020-01 specifically notes that this extension applies to IRA contributions, as well as to the numerous time-sensitive acts described in Treasury Regulation 301.7508A-1(c)(1). These acts include completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

This relief applies specifically to residents of the identified area, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who is injured or killed as a result of the events is also entitled to deadline relief.

Affected taxpayers who reside, or have a business located, outside the covered disaster area are required to call the IRS disaster hotline at 1-866-562-5227 to request relief.


IRS Issues 2020 Cumulative List for Pre-Approved DB Plan Documents

The IRS has issued Notice 2020-14, in which the IRS provides the 2020 Cumulative List of Changes in plan qualification requirements that must be reflected in pre-approved defined benefit (DB) pension plan documents.

The 2020 Cumulative List enumerates specific items that the IRS has identified for review when determining whether a DB plan that is filing for an opinion letter has been properly updated. The IRS notes that the 2020 Cumulative List includes statutory changes enacted and regulatory provisions issued between October 1, 2012, and December 1, 2019.


GAO Says IRS Could Better Help IRA Owners with Unconventional Assets Avoid Compliance Problems

The U.S. Government Accountability Office (GAO) has published a study of IRAs that include so-called “unconventional” investments, examples being real estate, virtual currency, precious metals, etc. The study focused on both the guidance that is available to owners of such IRA investments, and the IRS’ effectiveness in enforcing compliance when unconventional assets are held in IRAs. The GAO concluded that the IRS could do a better job on both fronts, as evidenced by the study’s title: IRS Could Better Inform Taxpayers about and Detect Noncompliance Related to Unconventional Assets.

Investing in unconventional assets within an IRA can present compliance challenges.  Challenges include potential investor conflicts of interest, which lead to IRA-disqualifying prohibited transactions, and determining such assets’ value, the reporting of which is an annual, ongoing responsibility for IRA trustees and custodians. Compliance issues also include specifically barred investments, and income generated within some investments that is taxable on a current-year basis.

The following GAO conclusions are worthy of special note.

  • IRS-provided information on unconventional assets in IRAs is generally limited to the agency’s Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), and is sparse in these publications. The GAO recommends more robust IRS resources, potentially to include web-based specialized information on such investments and their compliance requirements.
  • The GAO noted that “fragmented responsibility among IRS divisions creates challenges for examiners who need to share expertise and collaborate on IRA enforcement.” The IRS contended in its response to the GAO that limited information on unconventional assets now reported on information returns (IRS Form 5498, IRA Contribution Information) may be inadequate for audit selection in enforcement actions.

The IRS noted that roughly 2 million IRAs reported having such unconventional assets in 2016 (the latest tax year data available). Of these—as reported on IRS Form 5498—only about three-fourths provided valuations for these assets.