IRA

House Passes Senate’s Coronavirus Response Bill Unchanged, President Trump Signs Into Law

The House of Representatives today passed—by an expedited procedure—the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was passed by the Senate late on Wednesday, March 25. This afternoon, President Trump signed the legislation into law.

The CARES Act has many elements intended to aid businesses and workers, and to assist the U.S. healthcare system in dealing with the coronavirus (COVID-19) pandemic. As noted in a prior announcement, it also contains the following key provisions that would affect retirement savings arrangements, health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and health flexible spending arrangements (FSAs).

 

Retirement Savings Provisions

  • (As originally drafted, this legislation extended the income tax return filing deadline from April 15, 2020, to July 15, 2020. Prior to its enactment, however, the Treasury Department issued guidance extending the deadline and clarified other acts that are extended—including the ability to make IRA, HSA, and certain employer plan contributions—to July 15 for tax year 2019.)
  • Up to $100,000 in coronavirus-related distributions (CRDs) can be withdrawn by an individual from eligible retirement plans. These distributions will be exempt from the 10 percent early distribution penalty tax.
    • A CRD is defined as any distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual, defined as
      • an individual (or the spouse or a dependent of that individual) who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test; or
      • an individual who suffers related adverse financial consequences, or suffers from other factors as determined by the Secretary of the Treasury.

Plan administrators can rely on plan participants’ certification that they meet these requirements.

    • An eligible retirement plan is defined as a qualified retirement plan (e.g., a 401(k) plan), 403(a) plan, 403(b) plan, governmental 457(b) plan, or an IRA.
    • CRDs will be treated as meeting retirement plan distribution requirements, so long as all distributions from one employer—including members of a controlled group—do not exceed $100,000 to an individual.
    • There will be a three-year repayment period beginning the day after distribution, during which one or more repayments may be made, not to exceed, in aggregate, the amount distributed. Taxpayers can recontribute these amounts to an eligible retirement plan or IRA.
    • CRDs that are recontributed within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs will be taxed ratably over a three-year period, unless an individual elects otherwise.
    • CRDs are not considered statutory “eligible rollover distributions” for purposes of 20 percent mandatory withholding, the notice provided to recipients of distributions eligible for rollover (i.e., “402(f) notice”) and direct rollover requirements (but do remain eligible for rollover).
  • The retirement plan loan maximum for a qualified individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described above) will increase to the lesser of $100,000, or 100 percent of a participant’s vested balance.
    • Retirement plan loan repayment dates that occur between the date of enactment and December 31, 2020, can be delayed for one year. Due dates of subsequent payments (payments after those that may be delayed one year) and the five-year amortization period will be adjusted accordingly.
  • Plan sponsors will generally be required to amend their retirement plans for these provisions by the last day of the 2022 plan year (government plans will have an additional two years), or such other date as the Secretary of the Treasury may prescribe, with operational compliance during the interim period.
  • Individuals, including beneficiaries, will not be required to take their 2020 required minimum distributions (RMDs) from their defined contribution plans or IRAs. This RMD waiver would also apply to individuals who turned 70½ in 2019 but did not take their RMD before January 1, 2020).
  • The 2020 year will not be counted for purposes of a five-year payout period for a beneficiary. (This provision will not alter a required beginning date for years after 2020.)
  • Single employer defined benefit pension plan minimum required contributions due during 2020 can be delayed to January 1, 2021 (adjusted for interim earnings). This provision will also provide an option to use an alternative funding target percentage.
  • This legislation adds “public health emergency” to those events that allow the Department of Labor to postpone certain deadlines governed by ERISA Section 518.

Health Savings Arrangement-Related Provisions 

  • For plan years before 2022, health insurance plans can pay for telehealth and remote care services without first satisfying HSA-qualifying deductible conditions.
  • A medicine or drug need not be obtained by prescription to be a qualified medical expense for HSA, HRA, MSA, and health FSA purposes. This includes over-the-counter menstrual care products.

Further developments, including any clarifying guidance issued by the IRS or other governing agencies, will be shared on ascensus.com.

 


Senate Approves Massive Coronavirus Response Bill, with Significant Retirement Savings and Health Elements

On Wednesday night, March 25, shortly before midnight, Eastern Time, the U.S. Senate cleared lingering objections of both Democrat and Republican members and unanimously passed H.R. 748, the Coronavirus Aid, Relief and Economic Security, or CARES Act. The legislation has many elements intended to aid businesses and workers, and assist the U.S. health care system in working through the coronavirus (COVID-19) pandemic. It also contains multiple provisions that would affect retirement savings arrangements, health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and flexible spending arrangements (FSAs).

The next move is up to the U.S. House of Representatives, where a strategy known as “unanimous consent” could speed up passage of the legislation there, resulting in quicker delivery to President Trump for his signature. If there are objections to that strategy by House members, that body—currently in recess—may have to be recalled to the Capitol for a vote. Following are key provisions that would impact tax-favored retirement and health savings arrangements.

Retirement Savings Provisions

  • This legislation would extend the income tax return filing deadline from April 15, 2020, to July 15, 2020. (The Treasury Department has already extended the deadline as described above and clarified other acts that are extended as a result—including the ability to make IRA, HSA, and certain employer plan contributions by July 15 for tax year 2019.)
  • Up to $100,000 in coronavirus-related distributions (CRDs) could be withdrawn by an individual from eligible retirement plans. These distributions would be exempt from the 10 percent early distribution penalty tax.
    • A CRD is defined as any distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual, defined as
      • an individual (or the spouse or a dependent of that individual) who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test; or
      • an individual who suffers related adverse financial consequences, or suffers from other factors as determined by the Secretary of the Treasury.

Plan administrators could rely on plan participants’ certification that they meet these requirements.

    • An eligible retirement plan is defined as a qualified retirement plan (e.g., a 401(k) plan), 403(a) plan, 403(b) plan, governmental 457(b) plan, or an IRA.
    • CRDs would be treated as meeting retirement plan distribution requirements, so long as all distributions from one employer—including members of a controlled group—do not exceed $100,000 to an individual.
    • There would be a three-year repayment period beginning the day after distribution, during which one or more repayments may be made, not to exceed, in aggregate, the amount distributed. Taxpayers could recontribute these amounts to an eligible retirement plan or IRA.
    • CRDs that are recontributed within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs would be taxed ratably over a three-year period, unless an individual elects otherwise.
    • CRDs are not considered statutory “eligible rollover distributions” for purposes of 20 percent mandatory withholding, the notice provided to recipients of distributions eligible for rollover (i.e., “402(f)” notice) and direct rollover requirements (but do remain eligible for rollover).
  • The retirement plan loan maximum for a qualified individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described above) would increase to the lesser of $100,000, or 100 percent of a participant’s vested balance.
    • Retirement plan loan repayment dates that occur between the date of enactment and December 31, 2020, could be delayed for one year. Due dates of subsequent payments (payments after those that may be delayed one year) and the five-year amortization period would be adjusted accordingly.
  • Plan sponsors would generally be required to amend their retirement plans for these provisions by the last day of the 2022 plan year (government plans would have an additional two years), or such other date as the Secretary of the Treasury may prescribe, with operational compliance during the interim period.
  • Individuals would not be required to take their 2020 required minimum distributions (RMDs) from their defined contribution plans or IRAs. This RMD waiver would also apply to individuals who turned 70½ in 2019 but did not take their RMD before January 1, 2020).
  • The 2020 year would not be counted for purposes of a five-year payout period for a nonperson beneficiary. (This provision would not alter a required beginning date for years after 2020.)
  • Single employer defined benefit pension plan minimum required contributions due during 2020 could be delayed to January 1, 2021 (adjusted for interim earnings). This provision would also provide an option to use an alternative funding target percentage.
  • This legislation would add “public health emergency” to those events that would allow the DOL to postpone certain deadlines governed by ERISA Section 518.

Health Savings Arrangement-Related Provisions 

  • For plan years before 2022, health insurance plans could pay for telehealth and remote care services without first satisfying HSA-qualifying deductible conditions.
  • A medicine or drug need not be prescribed to be a qualified medical expense for HSA, HRA, MSA, and health FSA purposes. This includes over-the-counter menstrual care products.

Further progress of this legislation will be monitored and developments shared on ascensus.com

 


IRS FAQs Confirm July 15, 2020, Deadline to Make 2019 IRA, HSA, and Certain Employer Retirement Plan Contributions

The IRS has updated the frequently-asked-question (FAQ) information at its website, confirming that IRA, HSA, and certain retirement plan contributions otherwise due by April 15, 2020, can be made as late as July 15, 2020. This aligns with the three-month tax return filing deadline extension the IRS announced in Notice 2020-18, issued on March 20, 2020.

While Notice 2020-18 addressed the three-month tax return deadline extension, it did not address contribution deadlines that generally align with the year’s tax filing deadline. Nor did Notice 2020-18 cite other guidance—such as natural disaster declarations—that are sometimes relied on to confirm extension of contribution deadlines.

The posting of these new FAQ items, #17, #20, and #21, give the guidance that has been awaited. IRA and HSA contributions for 2019, and employers wanting to make retirement plan contributions aligned with a business tax filing deadline of April 15, 2020, have an extended deadline of July 15, 2020, to make these contributions.

 


GOP Legislative Package Would Alter Retirement Plan and HSA Provisions as Part of COVID-19 Pandemic Response

Senate Republican coronavirus response legislation—the Coronavirus Aid, Relief and Economic Security, or CARES Act—has been proposed in order to assist Americans affected by the COVID-19 pandemic. The proposal has multiple provisions that would affect retirement savings arrangements and health savings accounts (HSAs). This legislative proposal is being monitored closely, and further developments will be shared as warranted.

Retirement Savings Provisions

  • Would extend the income tax return filing deadline from April 15, 2020, to July 15, 2020. (The IRS has since issued Notice 2020-18, which officially delayed the deadline to July 15, 2020.)
  • Would exempt up to $100,000 withdrawn from an Eligible Retirement Plan from the 10% early distribution penalty tax for Coronavirus-Related Distributions (CRDs).
    • A CRD is defined as a distribution made on or after the date of enactment and before December 31, 2020, to a Qualified Individual, defined as
      • an individual (or the spouse of the individual) who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test;
      • an individual who suffers related adverse financial consequences, or suffers from other factors as determined by the Secretary of the Treasury.
    • An Eligible Retirement Plan is defined as a qualified retirement plan, including a 403(b) plan, governmental 457(b) plan, SEP plan, SIMPLE IRA plan, or an IRA.
    • CRDs would be treated as meeting retirement plan distribution requirements, so long as all distributions from one employer—including members of a controlled group—do not exceed $100,000.
    • There would be a 3-year repayment period, in one or more repayments, not to exceed the amount distributed. Taxpayers could recontribute these amounts to any retirement plan or IRA that the Internal Revenue Code permits.
    • CRDs that are recontributed within the 3-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs would be taxed ratably over a 3-year period, unless a taxpayer elects otherwise.
    • CRDs are not considered eligible rollover distributions. Plan sponsors will need to adjust their 402(f) statements to explain that these distributions are not subject to the mandatory 20% withholding and direct rollover rules (though they are still eligible for rollover).
  • The retirement plan loan maximum for a Qualified Individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described above) would increase to the lesser of $100,000, or 100% of a participant’s vested balance.
  • Retirement plan loan repayment dates between the date of the legislation’s enactment and December 31, 2020, could be delayed for 1 year, with the amortization period—including the 5-year repayment deadline—adjusted accordingly.
  • Retirement plan amendments for these provisions would generally be required by the last day of the 2020 plan year (government plans would have an additional two years), or such other date as the Secretary of the Treasury may prescribe, with operational compliance during the interim period.

HSA-Related Provisions

  • Telehealth and remote care services associated with the coronavirus pandemic could be paid by a health insurance plan without first satisfying a deductible, and would not be treated as violating HSA requirements.
  • Certain “direct primary care” arrangements for services between health care providers and clients would be treated as not violating HSA requirements.
  • Over-the-counter menstrual care products would be considered qualified medical expenses for HSA purposes.

 


Treasury Secretary Announces Tax Return Deadline Extension; Expected to Extend Contribution Deadlines

Treasury Secretary Steven Mnuchin has announced in a Twitter message this morning that the April 15, 2020, tax return filing deadline will be extended 90 days, to July 15, 2020. Formal guidance confirming this is expected. It is further expected that the deadline to make certain contributions to tax-advantaged savings arrangements—such as IRAs—will be similarly extended. This has been the case with certain previous federally-declared natural disasters. More information, including confirmation in formally-issued guidance, will be provided in a future communication.


Ascensus SECURE Act Video Series: Beneficiary Option Changes

Ascensus is excited to present the SECURE Act Video Series. This multi-video series will provide a snapshot of retirement-related SECURE Act provisions, included in the Further Consolidated Appropriations Act, 2020.

For more coverage from our experts on the SECURE Act and its implications, check out our latest news.

For more coverage from our experts on the SECURE Act and its implications, check out our latest news.


Legislation to be Introduced to Suspend RMDs for 2020, Exempt Social Security Income from Taxation

Sen. Ed Markey (D-MA) has proposed legislation (S. 3527) to suspend for 2020 the obligation to withdraw required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs in response to investment market volatility accompanying the coronavirus (COVID-19) pandemic. Sen. Markey has also announced plans to introduce another bill to exempt Social Security benefits received in 2020 from taxation. (Taxation of Social Security benefits generally is means-tested, with amounts exceeding $25,000—$32,000 for married couples—subject to income tax.)

Retirement plan withdrawals generally are required annually for those who reached age 70½ in 2019 or a prior year, or who reach age 72 in 2020 or a later year (some who are still employed after these ages can further delay withdrawals from certain retirement plan).

In a news release issued Wednesday, March 18, Sen. Markey noted that the formula used to calculate these annual RMDs—which is based on December 31, 2019, values that preceded the recent markets downturn—would consume a disproportionate share of these individuals’ retirement savings. Thus, this reflects the importance of this 2020 RMD suspension.

The legislation based on S. 3527 bill text at Sen. Markey’s website, and which has bipartisan support, would do the following.

  • Suspend otherwise-required 2020 RMDs from qualified retirement plans, 403(b) plans, governmental 457(b) plans, and individual retirement arrangements (IRAs).
  • 2020 will be disregarded for purposes of the 5-year period for required depletion of an inherited IRA or retirement plan account.
  • Mandatory withholding (e.g., 20%) would not be applied to 2020 amounts withdrawn from these retirement savings arrangements, exempt up to such amount(s) that would represent RMDs if not for the 2020 exemption.
  • Retirement plans may operationally comply with these provisions, but must amend for the changes by the last day of 2022 plan years (2023 plan years for governmental plans).
  • An individual’s required beginning date for RMDs (generally April 1 of the year after attainment of RMD age or, if later, the year of retirement) would not be altered by a 2020 suspension.

 


IRS Priority Guidance Plan Update Includes Retirement Items

The IRS has issued its semi-annual update to the agency’s 2019-2020 Priority Guidance Plan, in which it describes guidance projects in the current fiscal year. Many have been on the Priority Guidance Plan for some time. A number of the guidance items deal with retirement savings arrangements, including the following.

  • Final regulations on withholding when payments are made to a non-U.S. address (proposed regulations issued in May 2019)
  • Comprehensive IRA regulations
  • Final regulations updating life expectancy and distribution period tables for required minimum distributions; a notice of proposed rulemaking was issued in November 2019
  • Final hardship distribution regulations (proposed regulations issued November 2018)
  • Guidance on student loan payments and their interplay with qualified retirement plans and 403(b) plans
  • Guidance related to several IRS Tax-Exempt and Government Entities programs, including the EPCRS plan correction program, pre-approved plan program, and determination letter program
  • Regulations on the definition of “governmental plan”
  • Final regulations on normal retirement age under governmental plans (proposed regulations issued January 2016)
  • Regulations on church plans
  • Regulations on aggregation of affiliated service groups (Internal Revenue Code Section (IRC Sec.) 414(m)
  • Final regulations updating minimum-present-value requirements for defined benefit pension plans (proposed regulations issued in November 2016)
  • Regulations updating rules for service credits and vesting (IRC Sec. 411)
  • Hybrid defined benefit plan regulations addressing annuity conversion factors and interest credits

 


IRS Fact Sheet and Website Posting Highlight SECURE Act Changes, Appear to Clarify Issues

The IRS issued news release IR-2020-50, which contains links to several resources that describe changes contained in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, an element of the Further Consolidated Appropriations Act (FCAA), 2020, signed into law in December 2019. Included is IRS Fact Sheet FS-2020-04, a web page entitled “New law helps people save for retirement; other retroactive changes impact many taxpayers,” as well as links to the latest versions of IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The FS-2020-04 recaps SECURE Act changes that many are already familiar with, but also provides clarity where there was some uncertainty.

 

Traditional IRA Contributions at Any Age

Persons age 70½ and older may now make contributions to Traditional IRAs for 2020 and later tax years, not including contributions for the 2019 tax year made in 2020.

 

New RMD Age 72, Not 70½

Prior to the SECURE Act, age 70½ was the age to begin required minimum distributions (RMDs) from non-Roth IRAs and (with some exceptions) employer retirement plans. Now, persons who turn age 70½ in 2020 and later years need not begin RMDs until reaching age 72. Those reaching age 70½ in 2019 or a prior year cannot delay RMDs to age 72.

 

Qualified Birth or Adoption Penalty Exception

Taxable distributions from IRAs and employer plans before age 59½ are generally subject to a 10 percent excise tax, with limited exceptions. The SECURE Act provides a new exception to the excise tax for a qualified birth or adoption distribution. Up to $5,000 may be distributed from an IRA or employer plan—or both in combination—for the birth or adoption of a child. Such distributions may be recontributed. FS-2020-04 language makes it appear that such recontributions may be made at any time to an IRA or employer plan, and will be treated as rollovers no matter how long after the time of distribution.

 

More Rapid Payouts for Nonspouse Beneficiaries

Prior to the SECURE Act, all nonspouse primary beneficiaries of IRA or employer-sponsored retirement plan balances had the ability to stretch payouts over their own lifetime. For IRA owner or plan participant deaths in 2019 or earlier years, this option remains in place. But for deaths in 2020 and later years, most nonspouse beneficiaries must deplete the inherited account within 10 years. Exceptions (those still allowed to pay out over their lifetime) include the disabled, those chronically ill, those no more than 10 years younger than the decedent, and minor children. Minor children must begin the 10-year payout period upon reaching the age of majority.

 

The SECURE Act statutes and FS-2020-04 do not specify an age of majority, which may vary from state to state. However, under the heading, “Retirement Topics—Required Minimum Distributions (RMDs),” at the IRS website, the IRS identifies a uniform age of 18 when this 10-year distribution period must begin. It’s important to note that IRS website postings generally do not provide the same level of reliance as official guidance.

 

529 Plan Changes

The SECURE Act also created two new qualified—thus, tax-free—withdrawals from qualified tuition programs, also known as 529 plans. This change is retroactive to 2019. Amounts withdrawn from 529 plans may be used to pay for expenses of certain registered and certified apprenticeship programs. Also, up to $10,000—a lifetime limit—may be withdrawn and used to pay student loan principal or interest of the 529 plan’s designated beneficiary or the designated beneficiary’s sibling.


GAO Says IRS Could Better Help IRA Owners with Unconventional Assets Avoid Compliance Problems

The U.S. Government Accountability Office (GAO) has published a study of IRAs that include so-called “unconventional” investments, examples being real estate, virtual currency, precious metals, etc. The study focused on both the guidance that is available to owners of such IRA investments, and the IRS’ effectiveness in enforcing compliance when unconventional assets are held in IRAs. The GAO concluded that the IRS could do a better job on both fronts, as evidenced by the study’s title: IRS Could Better Inform Taxpayers about and Detect Noncompliance Related to Unconventional Assets.

Investing in unconventional assets within an IRA can present compliance challenges.  Challenges include potential investor conflicts of interest, which lead to IRA-disqualifying prohibited transactions, and determining such assets’ value, the reporting of which is an annual, ongoing responsibility for IRA trustees and custodians. Compliance issues also include specifically barred investments, and income generated within some investments that is taxable on a current-year basis.

The following GAO conclusions are worthy of special note.

  • IRS-provided information on unconventional assets in IRAs is generally limited to the agency’s Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), and is sparse in these publications. The GAO recommends more robust IRS resources, potentially to include web-based specialized information on such investments and their compliance requirements.
  • The GAO noted that “fragmented responsibility among IRS divisions creates challenges for examiners who need to share expertise and collaborate on IRA enforcement.” The IRS contended in its response to the GAO that limited information on unconventional assets now reported on information returns (IRS Form 5498, IRA Contribution Information) may be inadequate for audit selection in enforcement actions.

The IRS noted that roughly 2 million IRAs reported having such unconventional assets in 2016 (the latest tax year data available). Of these—as reported on IRS Form 5498—only about three-fourths provided valuations for these assets.