Industry & Regulatory News

2019 Form 8950 Instructions Updated to Match New EPCRS Guidance

The IRS has released a January 2019 version of the Instructions for Form 8950, Application for Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution System (EPCRS).

This form is used by retirement plans that have elected to apply to the IRS requesting written approval of a correction under VCP. With the release of Revenue Procedure 2018-52 early in October, the IRS updated the EPCRS to require that, as of April 1, 2019, all VCP submissions (including Form 8950) and payments must be made electronically at the website.

IRS Releases 2019 Form 1099-R and 5498 Reporting Instruction

The IRS has released the 2019 Instructions for Forms 1099-R and 5498. These detailed instructions describe the reporting requirements for IRA and employer-sponsored retirement plan distributions, IRA contributions, rollovers, conversions, recharacterizations, and fair market values.

This follows the 2019 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and 2019 Form 5498, IRA Contribution Information, release earlier this month.

In addition to updating years, deadlines, figures, and guidance references, here are a few notable changes.

  • Information on how to report distributions and late rollovers (post 60-day rollovers) of retirement plan loan offset amounts that result from severance from employment or retirement plan termination.
  • Information on how to report IRA payments to state unclaimed property funds (IRA escheatment) on Form 1099-R, applicable on or after January 1, 2019.
  • A note that Forms 1099-R and 5498 can now be completed online to satisfy required reporting to recipients.

Comprehensive Retirement Savings Enhancement Bill Introduced

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have announced joint sponsorship of legislation with retirement plan implications: the Retirement Security and Savings Act of 2018 (yet unnumbered). This bill is their most comprehensive joint legislative effort since teaming up to help advance and enact retirement elements of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006.

A news release issued by Sen. Portman’s office acknowledged that this legislation is intended to establish “a foundation for a broader bipartisan, bicameral retirement policy debate in the next Congress” (2019). The news release further notes that “[t]he senators will continue their efforts to improve this legislation.” It also identifies a wide spectrum of interest groups and retirement industry players whose support the senators claim to have.

Following is a high-level, preliminary summary of this bill’s provisions.

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans with higher contribution levels
  • Provide a small employer tax credit for implementing automatic enrollment
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the saver credit for contributions to employer-sponsored plans and IRAs, and make it refundable and payable to a retirement account
  • Liberalize employer plan eligibility rules for less-than-full-time workers
  • Apply certain retirement plan nondiscrimination tests (e.g., top-heavy) separately to part-time employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to inherited IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) from required minimum distributions (RMDs)
  • Increase the RMD age in stages to age 75
  • Reduce excise tax for RMD failures from 50 percent to 25 percent, and under certain circumstances to as low as 10 percent
  • Reduce, under certain circumstances, the excise tax for IRA excess contributions from six percent to three percent
  • Exempt earnings on timely-removed IRA excess contributions from the 10 percent excise tax on early (pre-59½) distributions
  • Modernize the mortality tables that dictate RMD amounts
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Treat certain student loan repayments as qualifying for employer matching contributions to a retirement plan
  • Treat employer-provided retirement planning services received in lieu of compensation as nontaxable
  • Allow an employer to make additional nonelective contributions to SIMPLE IRA plans
  • Allow self-correction of more inadvertent retirement plan operational failures
  • Expand the investments suitable for 403(b)(7) custodial accounts
  • Allow “de minimis” incentives to employees to contribute deferrals to certain employer-sponsored plans (without being considered to violate the contingent benefit rule)
  • Provide a second, higher catch-up deferral amount for those contributing at age 60 or older (current basic catch-up eligibility begins at age 50)
  • Raise the maximum qualifying longevity annuity contract (QLAC) contribution amount (amount excludable from RMDs) from $125,000 to $200,000
  • Allow certain annuities that feature accelerating payments to satisfy RMD requirements
  • Enhance the ability to partially annuitize retirement benefits
  • Authorize a study and report to Congress on current reporting and disclosure requirements
  • Consolidate certain defined contribution retirement plan notices
  • Simplify retirement plan distribution notice requirements
  • Exempt retirement plans from required recoupment of inadvertent overpayments to participants, and legitimize the rollover of such amounts
  • Allow custodial accounts of terminating 403(b)(7) plans to remain subject to 403(b)(7) rules, rather than requiring distribution from the account to the owner
  • Allow greater flexibility to use base pay for determining retirement benefits (excluding certain overtime pay)
  • Allow Roth-type deferral contributions to be made to SIMPLE IRA plans
  • Permit an employer to apply catch-up deferral eligibility requirements separately to legitimate separate lines of business
  • Liberalize the substantially equal periodic payment rules to allow transfers or rollovers between certain qualified plans if net periodic distributions (e.g., annual) comply with the distribution schedule
  • Enhance the ability of terminating employees to contribute payments for accumulated sick leave, vacation pay, severance or back pay to a deferral-type retirement plan
  • Permit the merger or transfer of plan assets from qualified retirement plans into 403(b) plans
  • Exempt designated Roth accounts in employer-sponsored plans (e.g., Roth 401(k), Roth 403(b)) from RMD requirements
  • Extend the qualified charitable distribution exemption from taxation to include SEP, SIMPLE IRA, qualified retirement, 403(b), and governmental 457(b) plans
  • Permit rollovers from Roth IRAs to employer-sponsored plans, with directive to the Secretary of the Treasury to modify the regulations to permit
  • Permit a spouse beneficiary of an employer-sponsored retirement plan account to elect to be treated as the employee for RMD purposes
  • Address certain interest crediting rates, mortality rates, and PBGC premiums for defined benefit plans

It is likely that the concepts in this bill could influence legislative action in 2019 rather than in the soon-to-end 2018 session of the 115th Congress. After all, this legislation is being introduced against a backdrop of legislative uncertainty as Congress prepares to conclude its 2018 session with a substantially different cast of senators and representatives to convene the 116th Congress in January 2019.

Also looming over the completion of legislative business before the holiday recess is the threat of a partial government shutdown when funding for multiple government functions expires today, December 21. While temporary funding by way of a continuing resolution through February was considered and approved by the Senate, there is significant uncertainty over the ability of Congress and President Trump to reach an agreement that would enable this continued government funding.

Regardless, there appears to be a growing readiness on the part of Congress to consider comprehensive retirement savings reform and enhancement, as indicated by the multitude of bills in the 2018 session with retirement elements. For that reason alone, the Retirement Security and Savings Act of 2018 merits a detailed study for all of its potential implications.



Bill Would Allow Matching Contributions on Student Loan Payments

The Retirement Parity for Student Loans Act (yet unnumbered), introduced by Senators Ron Wyden (D-OR) and Ben Cardin (D-MD), would allow employers to make contributions to 401(k), 403(b), and SIMPLE IRA plans in amounts having a matching relationship to an employee’s student loan debt repayments.

The legislation follows and may in part be a consequence of an August 2018 IRS private letter ruling (PLR) that addressed an employer’s request to make certain retirement plan contributions based on employees’ student loan debt repayments. While some in the industry were confused as to how such contributions would be treated for retirement plan purposes, the PLR’s facts and circumstances made clear that because such contributions were not matched to employee retirement contributions, they were not matching contributions in the traditional retirement plan sense. Such contributions, according to the PLR, could be made to the retirement accounts of qualifying employees as employer contributions of another type (e.g., profit sharing contributions) if plan design permitted, and otherwise-required nondiscrimination testing for the plan could be satisfied.

Senators Wyden’s and Cardin’s bill is intended to make this option broadly available to employers whose employees may be repaying student loan debt. Under the Retirement Parity for Student Loans Act, 401(k), 403(b), and SIMPLE IRA plans—all of which permit salary deferrals by participating employees—could allow employer contributions based on employees’ student loan repayments without special plan design conditions or special IRS approval. While such amounts would not actually match an employee’s deferrals into the 401(k), 403(b), or SIMPLE IRA plan, such employer-paid amounts could be contributed to such plans using their regular matching contribution formula.

Following are some of the bill’s key provisions.

  • Only employees’ higher education loan repayments (not loans for private secondary or elementary expenses) would qualify for such employer contributions.
  • Employer contributions matched to employee student loan debt repayments could not exceed the annual deferral limit appropriate to the employer’s plan (e.g., 401(k) vs. SIMPLE IRA plan deferral limit)—including catch-up contributions, reduced by such employee’s elective deferrals into the retirement plan; all amounts together must not exceed the employee’s compensation.
  • Only employees eligible to defer into the employer’s retirement plan may receive student loan matching contributions.
  • All employees who are eligible to receive retirement plan matching contributions must be eligible to receive student loan matching contributions.
  • For purposes of satisfying nondiscrimination requirements in providing retirement plan benefits, rights, and features, those who have no student loan debt—and, thus, would not receive student loan matching contributions—would not be considered as having been denied a benefit, right, or feature.
  • The Secretary of the Treasury would be directed to issue regulations governing such arrangements.
  • As proposed, the legislation would be effective for 2020 and later years (“plan year” was not specified).

Little time remains in the 2018 session of the 115th Congress. But it is reasonable to expect that—if not acted upon in this session—this bill could be reintroduced in the 116th Congress that will convene in January 2019.


IRS Released 2019 Retirement Reporting Forms and Redesigned 2018 Tax Forms

The IRS has released the 2019 versions of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., and Form 5498, IRA Contribution Information, as well as the 2018 redesigned Form 1040, U.S. Individual Income Tax Return, and related schedules.

Forms 1099-R and 5498

Form 1099-R reports distributions from IRAs and employer-sponsored retirement plans, and direct rollovers between employer plans and IRAs. Form 5498 reports annual IRA, SEP, or SIMPLE IRA plan contributions, as well as rollovers, fair market value, Roth IRA conversions, if required minimum distributions are due for Traditional and SIMPLE IRA owners, and certain other information. The IRS has not yet released the separate 2019 Instructions for Forms 1099-R and 5498.

Form 1040

The IRS has released the 2018 version of Form 1040, U.S. Individual Income Tax Return, along with the 2018 Form 1040 Instructions and other accompanying schedules. Many adjustments to taxable income were formerly accounted for on a comprehensive Form 1040 in previous years, but the IRS has transitioned to a simpler basic Form 1040 with various additional schedules. The instructions indicate that Forms 1040A and 1040-EZ are no longer available for 2018 income tax reporting, and individuals who filed one of these forms in the past may now file the Form 1040.

One retirement-related change on the 2018 Form 1040 is that IRA, pension, and annuity payments, including rollovers, will be reported on Lines 4a and 4b, instead of the former Lines 15 and 16.

The 2018 Form 1040 is supplemented with six new schedules, and the schedule instructions are contained in the Form 1040 Instructions. The following new schedules will be used to claim certain additional income, tax credits, and taxes owed for retirement and other savings accounts.

  • Schedule 1, Additional Income and Adjustments to Income, will be used to claim, among other things, tax deductions for IRAs and health savings accounts (HSAs).
  • Schedule 3, Nonrefundable Credits, will be used to claim, among other things, education credits, the IRA and retirement plan savings contribution credit (saver’s credit), and certain other credits.
  • Schedule 4, Other Taxes, will be used to claim, among other things, the additional penalty taxes owed for the early distributions and excess contributions for IRAs, retirement plans, Coverdell ESAs, Archer MSAs, HSAs, and ABLE accounts.

PBGC Final Regulations Provide New Table to Allocation Assets in Terminating Single-Employer Plans

The Pension Benefit Guarantee Corporation’s (PBGC) released final regulations that provide a new table for determining expected retirement ages for participants who are undergoing distress or involuntary termination in single-employer pension plans. The updated table is used to compute the value of early retirement benefits, which are included in the total value of benefits under a plan.

PBGC was created by ERISA to, in part, ensure timely and uninterrupted payments of pension benefits. The final rule replaces an existing table with the new table, and applies for valuations beginning in 2019.

Specifically, the final rules amend Appendix D, Table I-19 of ERISA Section 4044, which sets forth the methods for valuing retirement benefits of terminating single-employer plans covered under ERISA. Guaranteed benefits and benefit liabilities under a plan that is terminating due to distress, or is underfunded and involuntarily terminating, must be valued in accordance with this table.

The PBGC has decided against allowing a public comment period, due to the fact that the final rule takes effect as of January 1, 2019.

IRS Seeks Comments on SIMPLE IRA Plan Documents and Notice 98-4

The IRS has released very little guidance on SIMPLE IRA plans since the release of Notice 98-4. Scheduled to be published in tomorrow’s Federal Register is an IRS request for comments, in which the IRS seeks public input on the SIMPLE IRA plan documents and Notice 98-4. The document for which it seeks comments are Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution, and Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution.

Notice 98-4 contains SIMPLE IRA plan guidance that answers many general questions. Forms 5304-SIMPLE and 5305-SIMPLE are IRS model employer-level documents used to adopt SIMPLE IRA plans. Employers may elect to use the 5304-SIMPLE when a designated financial institution (i.e., the single organization where all plan contributions are forwarded) is not named, and Form 5305-SIMPLE when one is named. Notice 98-4 provides guidance on SIMPLE plans beyond that contained in Internal Revenue Code section 408(p).

Written comments are due to the IRS on or before February 4, 2019. The request for comments provides details on how to submit the comments.


403(b) Plan Transition Relief for Elective Deferral “Once in, Always in” Rule

The IRS has released Notice 2018-95, which provides transition period relief from the “once in always in” (OIAI) condition for excluding part-time employees (i.e., employees who normally work fewer than 20 hours a week) from making elective deferrals under a 403(b) plan.

The 403(b) plan exclusion rules found under Treasury Regulation 1.403(b)-5(b)(4) state, in part, that an employee may be excluded if the employee is reasonably expected to work less than 1,000 hours in the employee’s first year of employment. For subsequent years, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period. Most crucial is the OIAI rule, which states that once a participant does not meet the conditions for exclusion as previously stated, the employee may no longer be excluded under the part-time exclusion. That is, once eligible to defer, an employee cannot lose this eligibility due to the part-time exclusion, even if he works less than 1,000 hours in a preceding 12-month period.

In Notice 2018-95, the IRS provides transition period relief for 403(b) plans that have not followed the OIAI rule (i.e., have been excluding participants as part-time after they became eligible).

The relief stems from comments related to the pre-approved 403(b) plan Listing of Required Modifications (LRMs). The LRMs address the OIAI rule, stating that “once an Employee becomes eligible to have Elective Deferrals made on his or her behalf under the Plan…the Employee cannot be excluded from eligibility…in any later year under this standard.” Commenters requested transition relief based on this LRMs language, claiming that many employers were not aware that the OIAI rule existed.

The notice provides relief for taxable years beginning after December 31, 2008, and ending on the last day of the last exclusion year that ends before December 31, 2019. During this period, plans will not be treated as failing to satisfy the conditions of the part-time exclusion merely because the plan was not operated in compliance with the OIAI rule. The notice goes on to provide examples, and also establishes a “fresh start” opportunity for plans once the relief period expires, requiring plans to follow the OIAI rule for exclusion years beginning on or after January 1, 2019.