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.
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 www.Ascensus.com for the latest developments.