Washington Pulse: Tax Reform 2.0 Continues Lawmakers’ Push for Savings Enhancements

Attracting attention is something that lawmakers in Washington, D.C., are known for, and legislation revealed September 11th by the House Ways and Means Committee does nothing to change that image. The Committee has approved a trio of bills which—taken together—are being referred to as Tax Reform 2.0. The name is a nod to the Tax Cuts and Jobs Act of 2017, tax reform legislation signed into law by President Trump in December 2017. Many lawmakers up for re-election this November are looking for positive talking points—or what they hope will be—in advance of the midterm elections.

In keeping with the Tax Reform 2.0 title, the first bill in the legislative package would make permanent the individual tax cuts in the 2017 legislation; the corporate tax cuts are already permanent. A second bill—perhaps the most likely to receive favorable reviews—proposes many potentially popular changes to tax-advantaged savings arrangements. The third bill is aimed at promoting “business innovation.”

Can Consensus Be Achieved?

Some of the most sweeping tax cuts in more than 30 years were contained in the Tax Cuts and Jobs Act of 2017. They’re applauded by some and panned by others. Regardless, some components of the new legislative package—specifically those found in the second bill, titled The Family Savings Act of 2018 (FSA 2018)—enjoy bipartisan support. FSA 2018 is an eclectic mix of changes that would affect IRAs, employer-sponsored retirement plans, and 529 plans.

Divide and Conquer?

A vote on Tax Reform 2.0 by the full House chamber is expected by the end of September. It should be emphasized, however, that passage in the Senate in identical form is required. Under Senate rules, a simple majority would not suffice, which makes enactment of the total legislative package an uncertain outcome, at best.

The best chance for enactment of changes proposed in FSA 2018 may lie in the possibility that this element of Tax Reform 2.0 could be split off and voted upon independently. It is not impossible to imagine a compromise in which lawmakers of all political persuasions consider the benefits of enacting something popular before the November midterm elections.

Savings Enhancements in FSA 2018

Following are brief descriptions of the savings arrangement enhancements in FSA 2018 (i.e., the second bill), with currently proposed effective dates.

Employer-Sponsored Retirement Plans

  • Multiple employer plans (MEPs) – Also referred to as “pooled employer plans,” the legislation would enhance the ability of employers to jointly participate in a common plan, the purpose being to reduce administrative burden and expense. The provision would apply to “qualified plans” as defined by Internal Revenue Code (IRC) Section (Sec.) 401, and IRA-based plans. Effective for plan years beginning after December 31, 2019.
  • More time to establish a plan – An employer would have until the business’ tax return deadline—including extensions—to establish a plan, rather than the last day of the business’ tax year; this grace period would not apply to adding a 401(k) component to a qualified plan. The provision would apply to profit sharing, stock bonus, defined benefit, and annuity-based plans. Effective for plans adopted for taxable years beginning after December 31, 2018.
  • Extend the period to adopt safe harbor design – Plans wishing to use safe harbor testing designs could elect safe harbor status after the plan year begins if the employer makes nonelective contributions to all eligible employees (versus matching contributions) and satisfies simplified safe harbor notice requirements. Effective for plan years beginning after December 31, 2018.
  • Prohibition on retirement plan credit card loans – Loans from employer plans that are taken under a credit card arrangement would be considered a deemed distribution for tax and other purposes. Effective for loans taken after the date of enactment.
  • Relief for closed defined benefit (DB) plans – Nondiscrimination rules would be modified so that a business could continue to operate a DB pension plan that is closed to new employees; such employers typically offer a defined contribution (DC) plan to new employees instead. Effective generally as of the date of enactment.
  • Armed Forces Ready Reserve contributions – Would allow members of the Armed Forces Ready Reserve to make certain additional elective deferrals—both basic and catch-up (all deferral-type plans)—beyond the limitation in Internal Revenue Code Section 402(g). Effective for plan years beginning after December 31, 2018.
  • Government employer contributions – Would clarify rules for certain “government pick-up” retirement plan contributions for new and existing employees. Effective for plan years beginning after the date of enactment.
  • 403(b) participation by employees of qualifying church controlled organizations (QCCOs) – The legislation would clarify which employees of such organizations are eligible to participate in their employer’s Retirement Income Account plan. Effective (retroactively) for plan years beginning after December 31, 2008.
  • PBGC DB insurance program evaluation – A study of the PBGC’s pension plan insurance program and its premiums would be required; to be completed by an independent organization. The study to begin no later than six months after date of enactment.

IRA, or Employer-Sponsored Retirement Plan/IRA “Crossover”

  • Traditional IRA contributions at any age – Anyone with earned income (or with spouse’s earned income) could make Traditional IRA contributions; no longer limited to those under age 70½. Effective for contributions for tax years beginning after December 31, 2018.
  • Exempt small balances from required minimum distribution (RMD) rules – The annual requirement to receive an RMD would be waived for any year if a taxpayer’s aggregate balance is at, or below, $50,000 (indexed). Would combine balances in IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans. Effective for calendar years beginning more than 120 days after enactment.
  • Grad student IRA eligibility – Graduate student stipend or fellowship payments would qualify as compensation for IRA contribution purposes. Effective for tax years beginning after December 31, 2018.
  • Birth or adoption excise tax exemption – Would exempt from the 10 percent early distribution excise tax (for those plans subject to it) up to $7,500 for expenses related to the birth or adoption of a child. Such amounts withdrawn could be repaid. Effective for distributions made after December 31, 2018.
  • Portability of lifetime income investments – Would allow an employer plan participant to distribute and roll over to an IRA or another employer plan a lifetime income investment—even in the absence of a distribution triggering event—if the investment is no longer available under the plan. Applies to IRC Sec. 401(a) “qualified plans.” Effective for plan years beginning after December 31, 2018.
  • 403(b) custodial accounts to become IRAs with plan termination –  A current obstacle to 403(b) plan termination—liquidating accounts to complete the termination process—would be overcome for certain plans by deeming 403(b) custodial accounts to be IRAs. Effective for plan terminations after December 31, 2018.

Miscellaneous Provisions

  • Universal Savings Accounts – Would create an account similar to a Roth IRA (no tax deduction, tax-free earnings) with the ability to remove any amount at any time for any reason, tax free (no ordering rules or qualified distribution rules as in a Roth IRA); $2,500 per year maximum contribution. Effective for tax years beginning after December 31, 2018.
  • Expansion of 529 Plans – Would amend the definition of qualified expenses to include those related to apprenticeship programs and homeschooling. Would also allow up to $10,000 (total) to be used to repay student loan debt, and would expand the definition of qualified expenses for K-12 education (currently limited to tuition). Effective for distributions made after December 31, 2018.

Conspicuously Absent

FSA 2018 was preceded by the March 2018 introduction of the Retirement Enhancement and Savings Act (RESA), whose chief sponsors in the Senate were Orrin Hatch (R-UT) and Ron Wyden (D-OR). An equivalent RESA bill has been introduced in the House of Representatives by Rep. Mike Kelly (R-PA). Some provisions are shared by RESA and FSA, though RESA was more comprehensive in terms of retirement simplification and provisions intended to encourage retirement plan formation and employee participation. It is not beyond possibility that some of those provisions could resurface if FSA 2018 progresses to the point of passage in the House of Representatives and the Senate takes up the bill. Following are some notable differences between the two bills.

  • Expanded small plan start-up and auto-enrollment tax credit – RESA would have raised the maximum small plan start-up credit from $500 to $5,000 per year, and created a credit for adding automatic enrollment to a plan. FSA 2018 has no such provision.
  • Raise the deferral cap on automatic enrollments – RESA would have lifted the 10 percent cap on deferrals of automatically-enrolled plan participants; FSA 2018 does not.
  • Annuity selection safe harbor – RESA prescribed an annuity selection “safe harbor” for plans that make lifetime income investments available, to encourage the use of lifetime income investments; FSA 2018 does not.
  • Lifetime income projections – To make savers more aware of what their current plan balance could generate throughout retirement, RESA required periodic projections of lifetime income; FSA 2018 does not.
  • Beneficiary lifetime vs. five-year payout – RESA would have required most nonspouse beneficiaries to deplete inherited IRA or employer plan accounts within five years; FSA 2018 has no such requirement.


As noted above, the best chance for enactment of changes proposed in FSA 2018 (i.e., the second bill) may rest on the possibility that this component of Tax Reform 2.0 could be considered separately—on its own merits—by the U.S. Senate and House of Representatives. The provisions described here are likely to have significant bipartisan support. Ascensus will continue to monitor the progress of this legislation. Visit ascensus.com for the latest developments.


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