Thought Leadership

Insights and announcements from our subject matter experts and Ascensus leadership team

Surveys Show Rising Health Care Costs Affect Retirement Savings—HSAs Are a Solution

Like many Americans, Gavin Smith’s employer is offering only a high deductible health plan (HDHP) next year. Having two active sons and knowing the HDHP has higher out-of-pocket amounts, he is worried about having enough money to pay the medical bills. Gavin decides to reduce the amount he saves for retirement to help free up more money for health care costs.

A recent survey by Employee Benefits Research Institute (EBRI)/Greenwald & Associates shows that Gavin is not the only worker making a choice like this. Some workers are sacrificing their retirement security to meet their potential medical expense obligations. Unfortunately, this only shifts the financial burden from health care to retirement readiness.

While HDHP enrollment continues to grow, some workers and employers may not realize how health savings accounts (HSAs)—a component of HDHPs—can reduce their financial concern. Workers save money using tax-free HSA distributions for qualified medical expenses. And similar to retirement plans, many employers help fund their workers’ HSAs to encourage HDHP enrollment, which is a cost savings for employers and workers alike.

Worker Dissatisfaction

The Employee Benefits Research Institute (EBRI)/Greenwald & Associates recently released the 2016 Health and Voluntary Workplace Benefits Survey (WBS), which shows that some workers are sacrificing their retirement security in response to rising health care costs. The survey included 1,500 workers between ages 21–64. The results show, among other things, that some workers are reducing their retirement plan contributions, taking loans and withdrawals from their retirement savings, or delaying retirement.

  • 28 percent of workers who reported an increase in health plan costs decreased their retirement plan contributions, and 48 percent have decreased their contributions to other savings.
  • 12 percent took a loan or withdrawal from their retirement plan.
  • 30 percent have delayed retirement as a result of rising health care costs.

HSAs Growing

Although the cost of health care seems to be having a negative impact on saving for retirement, it is shedding light on a possible solution—saving with an HSA. The number of HSAs and the amount of HSA contributions are at all-time highs, and are a clear reflection of growing enrollment in HDHPs. And expectations are that this trend will continue if employers continue moving to HDHPs.

Devenir, a national leader of customized investment solutions for HSAs and the consumer-directed healthcare market, conducts annual HSA market surveys of the top 100 HSA providers. Devenir’s 2016 Year-End HSA Market Statistics and Trends report shows that the number of HSAs exceeded 20 million at year-end 2016 (a 22 percent increase over 2015), holding almost $37 billion in assets (a 20 percent increase).

Of a total $25.5 billion HSA contributions made in 2016,

  • 26 percent came from employer contributions ($868 average employer contribution),
  • 46 percent from employees ($1,786 average employee contribution), and
  • 19 percent from individual contributions not associated with an employer ($1,713 average individual contribution).

The survey also shows that health plan partnerships are the largest driver of new account growth in 2016.

  • Health plan referrals account for 37 percent of new accounts opened.
  • Direct employer relationships accounted for 32 percent of new accounts.
  • The remaining drivers are insurance agent referrals (10 percent), administrator/TPA referrals (9 percent), and individuals (5 percent).

While HSA assets are withdrawn every year to cover medical costs, the amount that is retained in HSAs continues to grow every year. When looking at contribution and withdrawal activity, Devenir estimates that 22 percent ($5.7 billion) of HSAs assets were retained at year-end 2016.

HSA Solution

More Americans are moving to HDHPs—by choice or as driven by their employers—and the number of HSAs continues to rise. Employers and individuals should understand the benefits of HSAs.

  • Individuals can pay for current medical expenses or save for future expenses with an HSA—there is no use it or lose it rule.
  • Contributions reduce taxable income.
  • Earnings on the account build tax free.
  • Distributions are tax-free if properly used for qualified medical expenses.
  • Individuals who save on medical expenses may have more money in their budget to focus on other savings needs.

Educating employers and individuals about the tax benefits of an HSA will not only encourage HDHP/HSA participation, but can free up funds for IRA and retirement plan contributions.

HSAs and Medicare: What Savers Should Know

As I travel the country speaking about health savings accounts (HSAs), I am being asked more in-depth questions from financial services personnel on how consumers can benefit from HSAs. Many of our colleagues immediately discuss the triple tax benefit of HSAs: tax-deferred contributions, tax-exempt distributions for qualified expenses, and penalty-free distributions for nonqualified expenses beginning at age 65. These are key points and should continue to be discussed. But we should also expand the discussion by asking the following question.

“Can individuals still contribute to an HSA after age 65 and receive the same benefits?”

The answer is… yes!

HSA Contributions After Age 65

The rules for contributing to an HSA do not change once an individual turns age 65. Thus, an HSA owner

  • must be covered only under a qualified high-deductible health care plan,
  • cannot be eligible to be claimed as a dependent on someone else’s tax return,
  • is eligible for $1,000 catch-up contribution beginning at age 55, and
  • cannot be enrolled in Medicare.

The last bullet causes some confusion, so let’s explore that for a moment.

Medicare Enrollment

In our industry, it is common knowledge that someone in the United States is eligible for Medicare once they reach age 65. What most of us do not fully understand, but make certain assumptions about, is how an individual enrolls in Medicare.

There are essentially two ways individuals can enroll in Medicare.

  1. Automatic enrollment: The Social Security Administration automatically enrolls individuals in Medicare Parts A and B if they draw Social Security (either retirement or disability) benefits or Railroad Retirement benefits before reaching age 65. These individuals are automatically enrolled in the month of their 65th birthday.
  2. Active enrollment: Individuals must actively enroll in Medicare if they reach age 65 but do not draw their ocial Security benefits, or if they elect to delay Social Security benefits beyond their 65th birthday.

HSA owners can contribute a prorated amount to their HSAs based on their actual month of enrollment (assuming they still meet the other qualifying factors).

All of that seems fairly straight forward, but what if someone is still working after age 65? Can he delay Medicare enrollment, maintain his HDHP, and contribute to the HSA as he had before?

Again, the answer is yes.

Delaying Medicare Enrollment

Individuals who do not automatically enroll in Medicare at age 65 can delay enrollment if they meet certain requirements—including having qualified health insurance through their employers. But individuals who delay enrollment without proving they had qualifying health insurance at age 65 and beyond, may have to pay higher Medicare premiums or a “late-enrollment penalty”. In some cases, this penalty may apply for as long as they’re enrolled in Medicare.

Another issue to be aware of occurs when an individual delays enrollment and is covered under a qualified health plan with her employer, but that employer has less than 20 employees. In this case, the individual is treated as though she does not have qualifying coverage and must enroll in Medicare. If she fails to do this, the late-enrollment penalties will apply. The individual may elect to continue coverage under the employer’s plan if it makes financial sense, but once enrolled in Medicare, she can no longer contribute to an HSA.

These scenarios can also apply in unique ways for married couples where one spouse is enrolled in Medicare and one is not. That, however, is a topic best discussed in a separate article.

Now, let’s review one of the main benefits of having an HSA after age 65.

Paying Medicare Premiums

Before we discuss the benefits of having an HSA after age 65, let’s discuss how individuals pay their share of Medicare premiums. If an individual is drawing Social Security benefits while enrolled in Medicare, the premiums are deducted directly from his monthly payment. If an individual is enrolled in Medicare and not drawing Social Security benefits, he can either

  • submit payments (including automatic payments) directly from his bank account,
  • pay by check or money order, or
  • pay by credit or debit card.

So how does the payment of Medicare premiums relate to HSAs? Medicare premiums for Parts A, B, and D are qualified medical expenses for individuals age 65 and older. Medicare HMO premiums and an employee’s share of premiums for certain employer-sponsored health insurance are also qualified expenses after age 65.

To be clear, while Medicare premiums are qualified distributions and tax-exempt, other insurance policies that cover copays and deductibles against Medicare (sometimes referred to as Medigap policies) are not. Any Medigap premiums paid from an HSA are taxable but not penalized after age 65.

The Take Away

HSAs have a wide variety of benefits that most people simply do not know about or fully understand. It is this type of consumer education that can help people of all generations make better decisions both while saving for retirement and using assets wisely in retirement.

Washington Pulse: Budget Bill Broadens Disaster Relief, Rewrites Hardship Rules, and More – Plan Amendments Expected

On February 9, 2018, Congress approved and President Trump signed into law the Bipartisan Budget Act of 2018 (BBA-18). In addition to funding the federal government, it makes important changes to retirement plans. Specifically, it provides expanded tax relief for victims of natural disasters, relaxes the rules for hardship distributions from employer plans, makes slight changes to portability rules, and requires the IRS to create a simplified tax return for filers age 65 or older.

Relief for Victims of California Wildfires

BBA-18 provides relief to California wildfire victims consistent with previous legislation following major natural disasters, dating back to 2005 for Hurricane Katrina and, more recently, to October 2017 for Hurricanes Harvey, Irma, and Maria. The relief is provided to individuals who receive “qualified wildfire distributions.” A qualified wildfire distribution is a distribution to an individual whose principal residence is within the declared disaster area and who has suffered an economic loss as a result of the wildfires. The following relief is granted.

  • Individuals may distribute up to $100,000 from their IRAs and employer plans.
  • Qualified distributions must be received on or after October 8, 2017, and before January 1, 2019.
  • Individuals may evenly spread taxation of their qualified distributions over a three-year period.
  • Qualified distributions are exempt from the 10 percent early distribution penalty tax.
  • Individuals may repay qualified distributions to an employer plan or IRA over a three-year period.
  • Employer plan distributions are not subject to the mandatory 20 percent withholding requirement.
  • Employers may grant up to $100,000 in plan loans (increased from $50,000), and the usual 50 percent-of-vested-balance limitation is increased to 100 percent.
  • Employer plan loan repayments due between October 8, 2017, and December 31, 2018, may be delayed for one year.
  • Participants have until June 30, 2018, to repay hardship distributions taken for home construction suspended because of wildfires.
  • Employers have until the end of their 2019 plan year (2021 for governmental plans) to adopt any applicable amendments.

Softening the Hardship Rules

Participants in employer plans must have a distribution “triggering” event before they can receive a plan distribution. Plan permitting, certain hardship conditions qualify as such an event. BBA-18 alters the following restrictions on hardship distributions. (Effective for 2019 and later plan years.)

  • Elimination of six-month deferral suspension requirement: BBA-18 directs the Treasury Department to write new regulations eliminating the portion of the current safe harbor rule which requires participants to suspend deferrals for at least six months after receiving a hardship distribution.
  • Employer contributions eligible for hardship distributions: Qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs)—and their earnings—are eligible for hardship distributions. In addition, earnings on elective deferrals will be eligible for hardship distribution.
  • Loans need not precede hardship distributions: Participants will not be required to take a plan loan before receiving a safe harbor hardship distribution.

Rollover of Wrongful IRS Levy

The IRS may levy (seize) IRA and employer plan assets in order to collect taxes it is owed. If the Treasury Department determines that a prior levy from an IRA or employer plan should not have occurred and returns assets to the taxpayer, the taxpayer may return the assets to an IRA or employer plan under the following terms. (Applies to amounts returned on or after January 1, 2018.)

  • The amount of money returned to the taxpayer, adjusted for earnings, may be rolled over to an IRA or employer plan (plan permitting).
  • The rollover must occur by the individual’s tax return deadline (not including extensions), for the year in which the amount is returned. For tax purposes, the rollover will be treated as if it occurred in the year the IRS levy resulted in the distribution.
  • A rollover to an IRA will not count towards the one-per-12-month IRA rollover limitation.
  • A non-Roth (generally pretax) amount rolled over to a Roth IRA or designated Roth account will be taxable.
  • Nonspouse beneficiaries with inherited IRAs may roll over returned amounts to such IRAs.

Simplified Tax Form for Seniors

Certain items of income have historically required taxpayers to file an income tax return other than simplified tax returns 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, or 1040R, U.S. Individual Income Tax Return. BBA-18 directs the Treasury Department to draft a new, simplified income tax form (Form 1040SR) that any taxpayer age 65 or older may use.  (Available for 2019 tax year filings.)

  • Form 1040SR is to be as similar to Form 1040EZ as possible.
  • A taxpayer must be age 65 or older in the tax year for which the form is filed.
  • Form 1040SR may be used by individuals whose income includes capital gains and losses, interest or dividends, distributions from most retirement plan arrangements, and Social Security benefits.
  • Income limits will not apply to the use of Form 1040SR.

Solvency of Union Pension Plans and PBGC

BBA-18 establishes a Joint Select Committee on Solvency of Multiemployer Pension Plans. While defined benefit pension plans in general sometimes face solvency issues, the problem has been particularly acute among multiemployer (i.e., union) pension plans. The Committee is to make recommendations and propose legislation to improve the solvency not only of these plans, but also of the Pension Benefit Guaranty Corporation (PBGC). The mandate requires public hearings, approving a report, and proposing legislation by November 30, 2018.

A Foreshadowing of Things to Come?

2018 could be a year of significant legislative action for retirement plans.  As both the tax reform bill and the Bipartisan Budget Act of 2018 have demonstrated, retirement provisions can readily find their way into legislation that does not target them specifically. This appears to be especially true of concepts that are noncontroversial and have bipartisan support. It would not be a great surprise if we see more of the same in the months to come. Ascensus will continue to analyze the changes made by BBA-18 and their effect on retirement products, services, and operations. Visit for the latest developments.

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Washington Pulse: RETIRE Act Promotes Electronic Delivery of Retirement Plan Information

Tax reform legislation grabbed the headlines at the close of 2017. But another year-end bill could significantly change how retirement plans deliver participant and beneficiary communications. The Receiving Electronic Statements To Improve Retiree Earnings (RETIRE) Act would allow plan administrators to use electronic delivery as the default delivery method for virtually any required plan document. Participants and beneficiaries could still opt to receive paper copies of this information.

The bipartisan legislation (H.R. 4610) is sponsored by Representative (Rep.) Phil Roe (R-TN) and Rep. Jared Polis (D-CO), along with 26 Republican and Democratic cosponsors. It was previously introduced in 2015. Electronic-delivery proponents point out that consumers are increasingly handling their financial affairs online: they are more savvy with new technology, and many actually prefer to communicate and transact electronically.

Proponents also expect that electronic delivery will cost far less than printing and mailing paper notices, and these savings could be passed on to participants and beneficiaries. Electronic delivery could also reduce paper waste, create more efficient data storage, and provide greater security.

System Requirements for Using E-Delivery

To use electronic delivery as the default method for providing plan documentation, plan administrators must adhere to these requirements in the RETIRE Act.

  • The system for providing documents must be “designed to result in effective access to the document by the participant, beneficiary, or other specified individual through electronic means.” This can be done through
    • direct delivery of material to the recipient’s electronic address;
    • posting material to a website or other repository to which the recipient has access, if the plan administrator also provides a proper notice of the posting; or
    • “other electronic means reasonably calculated to ensure actual receipt” by the intended recipient.
  • The system must permit the recipient to
    • select from the various electronic methods that the employer makes available,
    • modify that selection at any time, and
    • elect to begin receiving paper versions at no additional direct cost.
  • The system must protect the confidentiality of personal information relating to the recipient’s accounts.

Additional Requirements

While the RETIRE Act streamlines administration through electronic delivery, it also requires safeguards to protect the recipient.

  • Plan administrators must provide a paper notice each year that describes the recipient’s
    • current method of receiving plan notifications, and
    • right to change the method at any time (or to receive free paper versions) and how to make the change.
  • The electronically delivered documents must
    • be provided in a way that reflects the original document (e.g., readability and content), and
    • inform the recipient of the document’s significance.

Effective Date and Plans Types Affected

The opportunity for retirement plans to deliver information electronically under the RETIRE Act method would become effective for plan years starting in 2019 and would apply to retirement plans governed by Title I of ERISA—generally described as “qualified plans”—and to 457 plans.


Plan administrators can currently deliver required plan notices and other information electronically. But the existing methods leave much to be desired: the detailed requirements can place big barriers on the path toward more efficient delivery. So the RETIRE Act would be a step in the right direction, balancing the importance of plan participants and beneficiaries getting important information with the need for employers to save time and money.

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Steve Christenson Explains What Advisors Should Know About HSAs

In a recent video interview​ with PLANADVISER, Steve Christenson explains what financial advisors should know about health savings accounts (HSAs). As the HSA market experiences continuous growth, advisors are looking for the opportunity to incorporate health savings accounts into their practices. “Advisors actually still have a great opportunity to get in, because what we’ve found isabout 1 out of 5 financial organizations actually offer HSAs, so it’s still overall a market that is growing,” notes Christenson.

Retirement Spotlight: How Tax Reform Changed IRA Recharacterizations

The recent tax reform bill made a few changes to IRAs and retirement plans. You may have heard rumblings about one of them involving IRA recharacterizations. The change, which took effect January 1, 2018, reduces the scenarios in which IRA owners may choose to recharacterize a contribution. To help you understand and prepare for this change, let’s take a closer look at both the old and new recharacterization rules.

Old Recharacterization Rules

The recharacterization rules generally allowed you to “undo” certain transactions. You could recharacterize a contribution for any reason as long as it was completed by your tax return due date, plus extensions.

Before January 1, 2018, you could recharacterize a

  1. regular Traditional IRA contribution to a Roth IRA,
  2. regular Roth IRA contribution to a Traditional IRA,
  3. conversion of Traditional or SIMPLE IRA assets back to the original type of IRA, and
  4. retirement plan-to-Roth IRA rollover to a Traditional IRA.

New Recharacterization Rules

Under the new rules, your list of recharacterization options has been trimmed from four to two.

As of January 1, 2018, scenarios 3 and 4 (shown above) do not apply. You may no longer recharacterize a Roth IRA conversion, from any source. It is now a one-way transaction without an “undo” feature.

Options 1 and 2 remain unchanged. You can continue to recharacterize a regular current year IRA contribution by your tax return due date, plus extensions.

The new rules are clear about conversions and retirement plan-to-Roth IRA rollovers that occur in 2018—they cannot be recharacterized. But whether conversions and retirement plan rollovers completed in 2017 can be recharacterized in 2018 is unanswered in the new rules. Ascensus contacted an IRS representative who said that IRS was aware of this issue and that conversions and retirement plan rollovers completed in 2017 may be recharacterized in 2018.

Going Forward

If you are considering a conversion or retirement plan-to-Roth IRA rollover, you’ll want to carefully consider the new recharacterization restrictions. If you completed a conversion or retirement plan-to-Roth IRA rollover in 2017 and wish to recharacterize it in 2018, note that the IRS’ comments were provided in an unofficial, verbal conversation. As a result, you should consider talking to your tax or financial professional beforehand.

Washington Pulse: Rep. Neal Proposes Enhancements to Auto Enrollment, RMD, Lifetime Income, and Other Retirement Plan Rules

Representative (Rep.) Richard Neal (D-MA), Ranking Democrat on the influential House Ways and Means Committee, has introduced the Retirement Plan Simplification and Enhancement Act  of 2017 (RPSEA). The legislation would significantly modify current rules for individual retirement arrangements (IRAs) and employer-sponsored retirement plans. The bill aims to expand retirement plan coverage, preserve retirement income, and simplify retirement plan rules.


Although the 2017 session of Congress has come to an end, the proposals made in this bill have support among both Democrats and Republicans. Given this fact—and the common-sense nature of the bill’s provisions—there is a good possibility that Congress could act upon this legislation or elements of it in 2018. Following are some of RPSEA’s significant provisions.


Changes for Both IRAs and Employer Plans  

Some parts of RPSEA deal exclusively with employer plans. Other elements—like those below—would affect those who save for retirement in either an IRA or an employer plan.



  • Nonspouse beneficiary indirect rollovers: nonspouse beneficiaries of IRAs or employer plans could move assets by indirect (60-day) rollover, rather than only by plan-to-IRA direct rollovers or IRA-to-IRA direct transfers.


  • Nonspouse beneficiary rollovers to employer plans: a nonspouse beneficiary could directly roll over inherited employer plan assets to an employer plan in which the beneficiary is a participating employee. These inherited rollover assets would continue to be distributed under the beneficiary payout rules.


Required Payouts

  • No RMDs for certain individuals: retirement assets in IRAs and employer plans would be exempt from required minimum distributions (RMDs) until an individual’s aggregate balance exceeds $250,000.


  • Increased RMD age: the age when Traditional and SIMPLE IRA owners and retirees and certain owners in employer plans must begin distribution would increase in steps from age 70 ½ to age 73 by the year 2029, and increase thereafter as changes in life expectancy may warrant.


  • Qualifying longevity annuity contract (QLAC) enhancement: longevity annuities begin payout at an advanced age, and are excluded from RMD requirements. Amounts used to purchase such annuities would no longer be limited to 25 percent of retirement assets and the current $125,000 limit would be raised to $200,000, indexed.


  • Lifetime income streams: to encourage greater use of lifetime income investments, RMD rules would be modified to accommodate annuities that offer accelerating distribution options, including lump-sum payments.


Contributions and Credits

  • Saver’s credit and simplified tax filing: taxpayers eligible for the saver’s credit for IRA contributions and deferrals made to an employer plan could claim this credit on Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents, rather than only on the longer Form 1040, S. Individual Income Tax Return.


Employer Plan and IRA Corrections

  • More self-correcting for employer plans: the IRS’ Employee Plans Compliance Resolution System (EPCRS) correction program would be expanded to allow more self-correction options and to include IRAs; changes would include certain RMD, loan, and rollover failures.


  • Grace period for automatic-enrollment failures: employers whose deferral plans have automatic-enrollment or automatic-escalation features would have 9½ months after the end of the plan year to correct failures related to enrolling or increasing employee elective deferrals.


  • New 401(k) safe harbor plan correction option: 401(k) safe harbor plans that use the nonelective contribution formula could correct certain excess contributions by increasing the standard safe harbor nonelective contribution from three percent to four percent.


Traditional IRA Provisions

Individuals with earned income would be allowed to make Traditional IRA contributions after age 70-½ (as with Roth IRAs).


Employer Plan Provisions

The goal of simplifying rules for establishing and maintaining employer retirement plans has been an elusive one, despite widespread agreement that doing so will lead to greater financial security for workers in retirement. Rep. Neal’s bill includes a number of items aimed at simplifying employer plan provisions.


Automatic Enrollment

  • Encourage higher employee deferral rates: the legislation would eliminate the current 10 percent cap on automatically-increased deferral rates of employees who are automatically enrolled in a plan.


  • Simplify notice requirements: the Treasury Department would be required to issue regulations, or other guidance, simplifying the timing for providing notices to automatically-enrolled employees; in particular, in plans that permit immediate participation, or that have multiple payroll systems.


Eligibility and Coverage

  • Covering less-than-fulltime workers: employees who work for three consecutive years with at least 500 hours of service each year would be allowed in an employer plan, but would be excluded from coverage, top-heavy, and nondiscrimination testing.


Incentive to allow early plan entry: When determining the top-heavy status of any of its plans, an employer may exclude participants who have not yet met the minimum age and service requirements (age 21 and 1 year of service) if the employer satisfies the top-heavy minimum contribution separately for those participants.


Miscellaneous Plan Administration

  • More time to set up a plan: most retirement plans must be established by the last day of the business year, though they can be funded later. The deadline for establishing a plan would be extended to the business’ tax return deadline, including filing extensions.


  • Simplified reporting and disclosure: the legislation directs the Secretaries of the Treasury and Labor, as well as the Pension Benefit Guaranty Corporation, to study and report to Congress on opportunities to standardize, consolidate, simplify, and improve reporting and disclosure requirements that apply to retirement plans.


  • Adoption, amending of Safe Harbor 401(k) plans: a 401(k) plan could adopt safe harbor status for a plan year as late as the deadline for distributing excess contributions for such year and without having given a prior-year notice, if the plan provides a nonelective safe harbor contribution to participants.


  • Simplifying 403(b) plan termination: participants in a terminating 403(b) plan could distribute their 403(b) custodial account in-kind and still retain their 403(b) account’s tax-deferred nature if the 403(b) rules continue to be followed.


RPSEA Proposes More Aggressive 401(k) Design

Automatic-enrollment and automatic-increase features in 401(k)-type retirement plans are widely considered important in leading workers to save more, and to be better-prepared for a financially secure retirement. Rep. Neal’s bill builds on existing safe harbor plan designs with the Secured Deferral Arrangement (SDA). Like existing safe harbor designs, an SDA would be exempt from nondiscrimination and top-heavy testing if no other employer contributions are made. Its features include the following.

  • Automatic enrollment beginning at a minimum of 6 percent—but not more than 10 percent—allowing opt-out at any time.
  • No 10 percent cap on automatically-increasing deferral rates.
  • A graduated employer match on deferrals, equaling 4½ percent for those who defer at least 10 percent of pay (but no match on deferrals above 10 percent).



Many on both sides of the political aisle are likely to support some—if not all—of its provisions. But with the 2017 session of the 115th Congress having come to an end, further progress on changes like these will have to await the arrival of the 2018 session.  As always, Ascensus will continue to monitor any and all legislation that could have an effect on IRAs, employer plans, and other tax-advantaged savings arrangements. Visit for the latest developments.

Washington Pulse: President to Sign Tax Reform; IRAs, Qualified Plans, 529s, and Other Savings Arrangements Impacted

On December 20, 2017, the House and Senate passed H.R. 1, the final tax reform bill (the Bill). The Bill will soon be signed into law by President Trump, resulting in fulfillment of one of the GOP’s major 2016 campaign promises. The Bill will affect retirement and other tax-advantaged savings arrangements and, in some cases, will become effective as soon as it is signed. Highlights of the changes made to savings arrangements and their effective dates are described below. In addition, Ascensus has prepared a comparison chart showing the differences between the current rules, the original House and Senate proposals, and the new rules provided in the Bill.

Changes to IRAs, Education Savings, and ABLE Arrangements

Recharacterizing Roth IRA Conversions Eliminated

The Bill eliminates a taxpayer’s ability to recharacterize a conversion to a Roth IRA. As a result, converting non-Roth IRA assets or rolling over employer plan assets to a Roth IRA will be a one-way process. Annual contributions to a Roth IRA can still be recharacterized as Traditional IRA contributions for the same tax year and vice versa. (Effective for tax years beginning after December 31, 2017.)

Slower Cost-of-Living Adjustments for IRAs, HSAs, Archer MSAs, and the Saver’s Credit

The Bill will change the method for calculating adjustments for inflation so that they will occur less frequently than under the current formula. This will apply to IRA, HSA, Archer MSA, and saver’s credit-related adjustments. Annual limitations associated with employer-sponsored retirement plans will generally not be affected. (Effective for tax years beginning after December 31, 2017.)

529 Plans and ABLE Accounts

The Bill makes the following changes to 529 plans and Achieving Better Life Experience (ABLE) accounts.

  • 529 plan assets (up to $10,000 annually) can be used for elementary and secondary school tuition expenses, in addition to those qualified post-secondary education expenses allowed under current law. (Effective for 529 plan distributions made after December 31, 2017.)
  • 529 plan assets can be rolled over to ABLE accounts for special-needs individuals, in amounts up to the annual ABLE contribution limit (e.g., $14,000 for 2017); such rollovers would offset other contributions to that ABLE account for the year. (Effective for 529 plan distributions made after the date of enactment, and rollovers before January 1, 2026.)
  • An ABLE account beneficiary (the special-needs individual) can contribute his earned income even if his contribution, when added to contributions made by others, results in overall contributions above the annual ABLE contribution limit. The ABLE account beneficiary’s contribution amount will be limited to the lesser of his income or the federal single-person poverty limit. The ABLE account beneficiary, or a person acting on his behalf, will be responsible for ensuring compliance with the additional contribution limit. The additional contribution will be unavailable if the ABLE account beneficiary made deferral contributions to a 401(k), 403(b), or governmental 457(b) plan. (Effective for tax years beginning after the date of enactment, and contributions before January 1, 2026.)
  • ABLE account contributions made by the ABLE account beneficiary will be eligible for the saver’s credit. (Effective for taxable years beginning after the date of enactment, and contributions before January 1, 2026.)

Provisions Applying to Employer-Sponsored Retirement Plans

Rollover of Offset Retirement Plan Loans

The Bill extends the 60-day period for rolling over the amount of an “offset” to a plan loan to the tax filing deadline, including extensions, for the tax year in which the offset/distribution occurs. The extension applies to offsets as a result of plan termination or severance from employment. (Effective for loan offsets treated as distributed in tax years beginning after 2017.)

Casualty Loss Provision Could Affect Plan Hardship Distributions

The Bill no longer allows a deduction for casualty losses unless a taxpayer suffering the casualty loss is located in a presidentially-declared disaster area. Deductible casualty losses are also among the “safe harbor” conditions for hardship distributions from employer-sponsored retirement plans under existing Treasury regulations. Unless those regulations are rewritten, casualty losses experienced by certain plan participants may no longer meet the safe harbor condition commonly used in the granting of certain hardship distributions. (Effective for losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2026.)

Taxation of Pass-Through Income

The Bill generally provides owners of businesses that result in pass-through income (e.g., partnerships, s-corporations) with a deduction up to 20 percent of business income. Generous pass-through income tax rules could potentially create a disincentive for employers to establish or maintain retirement plans. But analysis of the new rule suggests that concerns about a disincentive have been minimized or eliminated compared to more generous formulas. (Effective for tax years beginning after December 31, 2017.)

Tax-Advantaged Savings Arrangements in General

Special Relief for 2016 Disaster Areas

The Bill grants retirement plan-related relief to eligible victims of any 2016 presidentially-declared disaster. This relief is basically retroactive and includes the following.

  • Qualifying distributions of up to $100,000 from employer-sponsored retirement plans and IRAs before age 59½ will not be subject to the 10 percent early distribution penalty tax.
  • Repayment of qualifying distributions from employer-sponsored retirement plans and IRAs can be made within three years.
  • Distributions not repaid will generally be taxed ratably over a three-year period, unless electing otherwise.
  • Otherwise-mandatory withholding will be waived for qualifying distributions.
  • Delayed amendment deadlines for employers that grant the relief but without enabling plan provisions; plans can be amended to add such provisions by the end of the first plan year beginning on or after January 1, 2018.

(Effective as of the date of enactment, and applicable to distributions on or after January 1, 2016, and before January 1, 2018.)

Items Eliminated From Prior Senate and House Bills

The following items were among provisions in earlier versions of the House and Senate bills, but subsequently removed either before passage, or by the conference committee that resolved differences between the House and Senate bills.

  • Relaxation of hardship distributions to include qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on these and employee deferrals.
  • Alignment of annual and catch-up deferral contributions among 401(k), 403(b), and governmental 457(b) plans.
  • Alignment of the in-service distribution eligibility age of 59½ as an option for all plans.
  • Adding the assessment of a 10 percent early distribution penalty tax to distributions from governmental 457(b) plans.
  • Creation of a safe harbor formula for employers to determine “independent contractor” vs. “employee” status.
  • Creation of a nondiscrimination testing safe harbor for certain defined benefit pension plans closed to new participants.
  • Creation of a simplified tax return form for taxpayers age 65 and older.

Next Steps

In the context of tax-advantaged savings arrangements, and by comparison to some of the drastic changes that were initially being considered by Congress (e.g., limiting pretax elective deferrals to employer-sponsored retirement plans), the result is a positive one. As is always the case with tax law changes, questions will arise no matter how straightforward some changes seem on the surface. Ascensus will continue to monitor any and all developments resulting from tax reform pertaining to IRAs, employer-sponsored retirement plans, and other tax-advantaged savings arrangements. Visit for the latest developments.



Washington Pulse: Automatic Retirement Plan Act Proposes Mandatory Retirement Plans

Rep. Richard Neal (D-MA), the ranking democrat on the House Ways and Means Committee, recently introduced the Automatic Retirement Plan Act of 2017 (ARPA). The bill, if enacted, would have significant retirement savings plan implications. ARPA is a step beyond Rep. Neal’s past legislative efforts, which have included introducing bills to require employers with no retirement plan to establish automatic enrollment IRA programs.

ARPA would require many employers to maintain an automatic contribution (AC) plan. An AC plan is a 401(k) or 403(b) plan that would be subject to new rules, all of which are intended to expand the number of workers who have access to, and are enrolled in, employer-sponsored deferral plans.

In addition to requiring AC plans, ARPA would enhance employers’ ability to participate in multiple employer plans (MEPs), limit formation of new state-sponsored automatic-enrollment IRA programs, and propose certain other miscellaneous retirement plan provisions.

Highlights of AC Plan Provisions

Employer Mandate

All employers ­— except those with 10 or fewer employees, those in business less than three years, and governmental and church employers — would be required to maintain AC plans for their employees beginning in 2020 (2022 for employers with 100 or fewer employees earning at least $5000 in the prior year). Employers who fail to maintain an AC plan would generally be assessed a $10 per employee-per-day penalty.

Qualified plans, 403(b) plans, simplified employee pension (SEP) plans and savings incentive match plan for employees of small employers (SIMPLE) IRA plans in existence on the date ARPA is signed into law and that have been maintained for at least one year would generally be considered “grandfathered” AC plans. Grandfathered AC plans could continue to be maintained, as is, for six years from the date of enactment (eight years for employers with 100 or fewer employees earning at least $5000 in the prior year). After such period the relaxed eligibility rules and the prohibition against unreasonable fees (both described below) that apply to AC plans would apply to grandfathered AC plans.

General AC Plan Requirements

AC plans would generally be required to

  • include all part time and full time employees—except employees under age 21, nonresident alien and seasonal employees, certain union employees, and employees employed less than one month;
  • include automatic-enrollment beginning with a minimum deferral of six percent (but no more than 10 percent) and include automatic increases;
  • invest plan assets in a QDIA in the absence of a participant investment election; and
  • permit participants to elect to receive at least 50 percent of their account balance in the form of a distribution that guarantees them lifetime income.

The bill would also prohibit charging unreasonable fees to participants because they have small account balances or because the employer was required to establish an AC plan.

Special Rules for Deferral Only AC Plans

AC plans that permit only elective deferrals would be

  • required to limit elective deferrals to $8,000 annually ($9,000 for participants age 50 and older),
  • exempt from ADP testing,
  • treated as not being top-heavy, and
  • eligible—no matter how many employees an employer has—to file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.

ARPA’s Multiple Employer Plan (MEP) Provisions

Until now, regulatory requirements have prevented many employers from taking advantage of the economies of scale offered by MEPs. ARPA would broaden employers’ ability to join together in such plans (called “pooled employer plans” or “PEPs” in the bill), and provide the following.

  • A common ownership or common business purpose would not be required to participate.
  • One employer’s compliance failure would not jeopardize the entire plan.
  • The IRS/Treasury Department would provide a model plan document for such arrangements.
  • The IRS would provide guidance on a common plan administrator’s (pooled plan provider’s) duties.
  • Small employers participating in such PEP arrangements would not be considered fiduciaries.

State Automatic IRA Plan Preemption

ARPA would limit future expansion of state-sponsored automatic IRA plans. Specifically, IRA-based automatic-enrollment plans established by states for private sector workers could continue in operation if their statutes were enacted before enactment of ARPA. Plans established under state statutes enacted after ARPA, or pre-ARPA plans that are later materially changed, would be preempted, and such states’ employers would not be bound by such state laws.

Miscellaneous ARPA Provisions

ARPA makes numerous proposed changes to several other rules. These changes are also designed to expand coverage, encourage automatic contribution features and promote lifetime income features. The most significant changes include the following.

  • The start-up tax credit of up to $500 annually for three years that is available to certain small employers that establish a plan would increase to up to $5,000 annually, for as many as five years. The credit would cover 100 percent of costs for qualifying employers with 25 or fewer employees and 50 percent of plan costs for qualifying employers with more than 25 employees but not more than 100 employees.
  • A small employer maintaining an AC plan (excluding a grandfathered AC plan) plan could claim a $500 credit during a five-year period that begins with plan adoption.
  • The Saver’s Credit would be required to be contributed directly to a Roth IRA or designated Roth account within a plan.
  • The IRS would be authorized to require additional Form 5500 reporting designed to help it determine the effect of nondiscrimination safe harbors on contributions for rank and file employees.
  • 401(k) qualified automatic contribution arrangements could be designed to automatically increase elective deferrals more rapidly, and rise above 10 percent.
  • All safe harbor 401(k) plans could provide a matching contribution on elective deferrals above six percent.
  • Plans that cease to offer lifetime income or managed-account investments would be allowed to offer a direct rollover option for such investments.


Rep. Neal has long been an active and avid supporter of enhancing retirement saving opportunities, as demonstrated by numerous past bills introduced during his tenure in Congress. As for immediate prospects for ARPA, there is little time left in the 2017 congressional session, and with Congress preoccupied with tax reform Rep. Neal and those who support his legislation will likely be looking to consider it during 2018. Ascensus will continue to monitor this legislation. Visit for the latest developments.