Defined contribution plan

GAO Warns That Caregivers Face Special Challenges in Retirement Readiness

The U.S. Government Accountability Office (GAO) has released a report that focuses on difficulties many caregivers face in achieving a financially secure retirement. The GAO notes that, on average, about 10 percent of the U.S. population was engaged in providing care services to a family member or someone outside of their family during the 2011 to 2017 survey period.

Of the 49,000-plus providing such care services, 51 percent were doing so for an elderly parent and 7 percent were caring for a spouse. About one quarter each of the total were providing care services for another family member or for a nonrelative (some provided care to more than one recipient).

The following were among the possible consequences of being a caregiver.

  • More interference with work and career, and, therefore, lower income
  • Smaller retirement accumulations
  • Less Social Security benefits because of employment interruptions

Policymakers’ suggestions to reduce such adverse consequences included the following.

  • Consider providing an enhanced Social Security benefit to those whose income and future retirement security may be compromised by their service as caregivers.
  • Better educate potential caregivers of the financial—and, ultimately, security—impacts of reducing their employment or leaving the workforce to provide such care.

The GAO released both a Fast Facts summary and highlights of its findings.

 

 

 


House Passes the SECURE Act

In a 417-3 vote, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which would significantly overhaul current legislation governing retirement plans. The bill, which is sponsored by Rep. Richard Neal (D-MA), was approved with broad bipartisan support. It must be passed by the Senate and signed by the President before it becomes law.

The legislation went through a few changes shortly before passage. The final bill removed certain provisions that had been included in previous versions which were intended to expand 529 plans to cover the cost of home schooling and attendance at private elementary, secondary, and religious schools. Additionally, the final version included language unrelated to retirement savings, which is intended to fix the 2017 Tax Cuts and Jobs Act provisions that affected military survivor benefits.

The SECURE Act includes the following provisions.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Increase the 401(k) automatic enrollment safe harbor deferral cap from 10 percent to 15 percent
  • Simplify 401(k) safe harbor rules
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for including automatic enrollment in new 401(k) and SIMPLE IRA plans
  • Treat taxable nontuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) plan participants to retain individual custodial 403(b) accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Allow long-term part-time workers to participate in 401(k) plans
  • Allow penalty-free retirement arrangement withdrawals in the event of the birth or adoption of a child
  • Increase the age to begin required minimum distributions from 70½ to age 72
  • Provide pension funding relief to certain community newspapers that sponsor defined benefit pension plans
  • Treat tax-free “difficulty of care” payments received by home healthcare workers as compensation for retirement plan contribution purposes
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined IRS Form 5500 reports for certain similar plans
  • Require benefit statements to defined contribution plan participants to include an annual lifetime income disclosure based on participant balance.
  • Provide a fiduciary safe harbor to employers for selection of a lifetime income provider
  • Protect older, longer service employees in closed defined benefit plans
  • Lower Pension Benefit Guaranty Corporation (PBGC) premiums for pension plans of cooperatives and charities
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Expand 529 plan distribution options to cover the costs of apprenticeships and allow for repayment up to $10,000 of student loan repayments for a student or his or her siblings
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 10 years of the account owner’s death
  • Increase penalties for failure to file certain information returns and IRS Form 5500
  • Allow the IRS to share certain returns and return information with other governmental agencies for tax administration purposes
  • Modify rules relating to the taxation of unearned income of certain children

A nearly identical bill, the Retirement Enhancement and Savings Act (RESA) has been introduced in the U.S. Senate by Sen. Charles Grassley (R-IA) and Sen. Ron Wyden (D-OR). The Senate held hearings on the issue as recently as last week but has not yet scheduled a date to vote on its version of the legislation.

With apparent bipartisan support in both the House and Senate, there seems to be growing momentum that could result in 2019 being the year that significant retirement legislation is passed. Ascensus will continue to monitor the progress of RESA and its counterpart legislation in the House, the SECURE Act.

 

 


Bill for a Commission to Advise Congress on Retirement Issues Is Re-Introduced

Senators Todd Young (R-IN) and Cory Booker (D-NJ) have introduced the Commission on Retirement Security Act of 2019, legislation virtually identical to the 2018 bill these senators introduced. Its purpose is to create a commission that would advise Congress on issues pertaining to retirement security in the United States. The commission would be charged with reviewing existing private retirement benefit programs and drafting a report to Congress that could be useful to lawmakers in improving retirement security.

The following would be among the areas of focus for this commission.

  • Comprehensively review existing U.S. retirement savings vehicles, including the long-term transition from defined benefit pension plans to defined contribution plans
  • Take into consideration social and economic changes that have occurred in the U.S.
  • Examine alternative retirement programs in other countries that could have value or application in the U.S.

A schedule for consideration of the legislation has not been announced.

 

 


Legacy IRA Act Would Increase Tax-Free IRA Qualified Charitable Distributions (QCDs)

Senator Kevin Cramer (R-SD) has introduced the Legacy IRA Act (S. 1257), a bill that would significantly increase the maximum IRA qualified charitable distribution (QCD) now available to certain federal taxpayers. Under current law, taxpayers age 70½ or older can withdraw from an IRA and contribute tax-free up to $100,000 per year if such amounts are given directly to certain qualified charitable entities. The donor cannot retain authority or control over the disposition or use of the donated assets. A qualified charity is generally an entity that a taxpayer of any age can make tax-deductible contributions to. The difference is that an IRA QCD is 100% excludable from taxable income, rather than partially deductible, as are charitable donations in general.

Senator Cramer’s bill would do the following.

  • Raise the taxpayer QCD limit for any tax year from $100,000 to $400,000
  • Limit the qualifying QCD amount paid to any single recipient to $100,000 per year
  • Treat IRA amounts donated to charitable remainder trusts, unitrusts, and charitable gift annuities (collectively called split-interest entities) as QCD-eligible
  • Grant QCD eligibility for split-interest donations at age 65, rather than age 70½

This bill has been referred to the Senate Finance Committee for consideration; no action has yet been taken by that committee.


Senators Portman, Cardin Add Their Bill to the Retirement Legislation Mix

If there were any doubts that enhancing retirement saving opportunity is a high congressional priority, one need not look beyond immediate events for evidence. In a week when the Senate Finance Committee held a hearing on retirement security, and the House of Representatives is preparing to begin consideration of comprehensive retirement legislation, two familiar senators are re-introducing their own bill with similar purpose.

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have renewed a legislative partnership that began more than two decades ago as congressmen in the U.S. House of Representatives, before both were elected to the U.S. Senate. The Retirement Security and Savings Act of 2019 is a re-introduction of legislation the senators introduced in December 2018, during the final days of the 115th Congress. Limited changes have been made to that legislation, whose provisions include the following.

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans, with higher contribution levels
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide a small employer tax credit for implementing automatic enrollment
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the Saver’s credit for contributions to employer plans and IRAs, and make it refundable and payable to a retirement account
  • Require that certain long-term, less-than-fulltime employees be allowed to participate in deferral-type retirement plans, but apply nondiscrimination benefits testing and top-heavy testing separately to such employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to beneficiary IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) in IRAs or defined contribution plans from required minimum distributions (RMDs); the 2019 version does not apply to beneficiaries
  • Increase the RMD age in stages to age 75
  • Reduce the excise tax for RMD failures from 50% to 25%
  • Reduce—under certain circumstances—the excise tax for IRA excess contributions from 6% to 3%

Student Loan Repayment Bill Is Re-Introduced

Senator Ron Wyden (D-OR) has re-introduced the Retirement Parity for Student Loans Act, a bill intended to allow employers to make contributions to 401(k), 403(b), and SIMPLE IRA plans in amounts that have a matching relationship to an employee’s student loan debt repayments.

The legislation was previously introduced in December 2018, in the last days of the 115th Congress. Though the conditions are not identical, the legislation may in part be a response to a 2018 IRS private letter ruling on an employer request to make retirement plan contributions based on employees having made student loan debt repayments.

Some of the bill’s key provisions are as follows.

  • 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), 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, therefore, 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).

 

 


Retirement Spotlight: IRS Provides Welcome Relief From High VCP Fees

The retirement industry received a gift on April 19, 2019: Revenue Procedure (Rev. Proc.) 2019-19. This revenue procedure updates the Employee Plans Compliance Resolution System (EPCRS) by expanding the availability of self-correction options for more kinds of plan failures. The IRS anticipates that this expanded guidance will increase plan compliance and reduce some costs for employers.

 

A Step in the Right Direction

Expanding the options available through the IRS’s Self-Correction Program (SCP) will benefit employers that face increased fees if they correct plan failures under the Voluntary Correction Program (VCP). Under the VCP, an employer submits an application for correction to the IRS, and—if approved—has assurance that the failure will not result in greater sanctions or plan disqualification.

In January 2018, the IRS announced a new VCP fee structure based on plan assets, rather than on the number of plan participants. This fee structure eliminated several exceptions—including amendment or loan failures—that used to carry a fixed or reduced general fee. As a result, many employers face significantly higher fees to correct operational failures under the VCP. But the IRS also allows more employers to fix plan failures through self-correction, perhaps as a result of the vigorous criticism about higher fees.

 

New Plan Failures Available for Self-Correction

The SCP process requires that employers follow specific IRS correction steps. If properly completed and documented, the SCP gives employers assurance of plan compliance. But with the SCP, the IRS neither reviews the employer’s actions nor issues a “compliance statement,” which documents the IRS’s approval.  Rev. Proc. 2019-19 expands self-correction in three primary areas: plan document failures, operational failures, and loan failures.

 

Plan Document Failures
The revised procedure allows employers to self-correct many plan document failures—other than the initial failure to adopt a qualified plan or 403(b) plan document timely—as long as the plan has a favorable letter at the time of correction. The EPCRS generally considers plan document failures as “significant” failures. So to qualify for self-correction, an employer needs to correct the failure by the end of the second plan year following the year the failure occurred.

 

Operational Failures
The EPCRS now allows employers to retroactively amend their plans when they have failed to follow the terms of their plan documents. Through this process, an employer can conform the terms of the plan document to the way the employer actually ran the plan. Employers can retroactively amend these operational failures if they meet the following three conditions.

  • The plan amendment would result in an increase of a benefit, right, or feature.
  • The increase in the benefit, right, or feature applies to all eligible employees.
  • The increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the EPCRS general correction principles.

As with plan document failures, employers must amend their plans for significant operational failures by the end of the second plan year following the year that the failure occurred.

 

Loan Failures
Employers may now self-correct a defaulted loan by 1) requiring the participant to make a corrective payment, 2) re-amortizing the outstanding balance of the loan, or 3) dictating some combination of these two options. Previously, employers could use these options only when filing through the VCP. The revised revenue procedure also allows an employer to

  • report a deemed loan distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in the year of the SCP correction (instead of for the year in which the failure occurred);
  • obtain after-the-fact spousal consent if the employer failed to obtain spousal consent at the time of the plan loan; and
  • retroactively amend the plan for exceeding the number of outstanding loans specified in the document.

Although the EPCRS has greatly expanded the availability of self-correction for loan failures, some restrictions do apply. According to Rev. Proc. 2019-19, the Department of Labor (DOL) will provide a no-action letter only to those employers who correct loan default failures through the VCP. Employers concerned about receiving the DOL’s no-action letter may wish to spend the additional time and money required to correct the failure under the VCP.

Another restriction applies to failures arising from loans that violate the statutory loan provisions. This includes loans that exceed the maximum loan limit, loans that exceed the maximum repayment period, and loans that were not subject to level amortization. These types of loan failures do not qualify for self-correction.

 

More Guidance to Come?

While Rev. Proc. 2019-19 provides employers with additional self-correction options, more clarification is needed. The IRS has indicated that it may provide additional examples of insignificant operational failures in the Correcting Plan Errors section of its website. Ascensus will continue to monitor the IRS’s website for new guidance. Watch Ascensus.com News for any significant developments that may emerge.

 

Click here for a printable version of this issue of the Retirement Spotlight.

 

 

 


IRS Reveals Plans to Enable Electronic Filing of Form 5500-EZ

The IRS has informally revealed that it intends to enable owner-only retirement plans to file Form 5500-EZ electronically through the web-based EFAST2 Electronic Filing System. Form 5500-EZ, Annual Return/Report of One-Participant Retirement Plan or a Foreign Plan (form title revised to reflect foreign plans) is a simplified plan return that can be filed by sole proprietors and spouses or partners and spouses that have no common law employees.

At present, however, Form 5500-EZ can only be filed with the IRS in hard copy form. Employers that wish to file electronically must submit their plan information on Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. This form is longer than Form 5500-EZ.

In a May 7 Federal Register posting requesting continued authority to gather information on Form 5500 series forms, the IRS noted that it “…plans to make the Form 5500-EZ available on the EFAST2 system for direct electronic filing instead of using Form 5500-SF.” The IRS further indicates that paper filing of Form 5500-EZ still will be possible after the electronic filing option is in place. No proposed timing for the electronic filing option was revealed.


IRS Expands Determination Letter Program for Certain Retirement Plans

The IRS issued Revenue Procedure (Rev. Proc.) 2019-20 providing guidance that describes a limited expansion of the agency’s determination program for retirement plans.  An IRS determination letter expresses to the plan sponsor the Service’s opinion regarding the qualified status—the compliance—of the plan’s document. It is not an opinion or affirmation of the plan’s compliance in operation.

Recent Program Changes

In recent years, the IRS determination letter program has moved steadily in the direction of limiting determination letter applications for plans established and operated on pre-approved (prototype or volume submitter) documents. Such plans generally may only apply for an IRS determination at the time of termination. The IRS determination letter program has in practice become limited primarily to individually designed plan documents, with these determinations generally issued at the time a plan is established or is terminated.

New Plan Types Added

The IRS announced the addition of “Plan Mergers” and “Statutory Hybrid Plans” as new categories for which plan sponsors may request determination letters. Specifically, Rev. Proc. 2019-20 describes the following plan types and events that would justify applying for a determination letter at a time other than when the plan is established or terminated.

Individually designed merged plans – Rev. Proc. 2019-20 limits this to the merging of two or more plans of previously unrelated sponsors, in connection with “a corporate merger, acquisition, or other similar business transaction among unrelated entities that each maintained its own plan or plans prior to the plan merger.” Going forward, applications for an IRS determination for such events will be accepted on a continuing basis.

Individually designed “statutory hybrid” plans – These are plans that calculate “accrued benefits by reference to hypothetical account balance or equivalent amounts.” One example is cash balance defined benefit pension plans. Rev. Proc. 2019-20 explains that the most recent remedial amendment cycle for such plans did not include all provisions of final IRS statutory hybrid plan regulations, thus warranting this new application opportunity for existing plans.  Applications by these plans will be accepted only from September 1, 2019, through August 31, 2020.