IRA

Senator Introduces “Automatic IRA Act of 2019”

Congress may be officially in recess, but bills continue to appear during the state and district work period for senators and representatives. Sen. Sheldon Whitehouse (D-RI) has introduced the Automatic IRA Act of 2019 (S. 2370). The legislation would mandate that most employers that do not offer their employees another type of retirement plan, establish an automatic enrollment, payroll deduction program with contributions withheld from employee pay and contributed to an IRA or retirement bond. The legislation is intended to address the lack of a workplace retirement savings program for many private sector employees. Estimates vary, but suggest that between 33 and 40 percent of this workforce has no workplace plan.

Much more comprehensive retirement legislation has already been passed this year by the U.S. House of Representatives—the Setting Every Community Up for Retirement Security (SECURE) Act—and is pending in the Senate. Nevertheless, this legislation too will be monitored when Congress returns in September for the remainder of the 2019 session.

Provisions

In many respects, S. 2370 resembles automatic enrollment IRA legislation introduced in several prior sessions of Congress by fellow Democrat Richard Neal (D-MA), the House Ways and Means Committee Chairman. It contains the following provisions.

  • Most employers that do not offer a retirement plan, and had more than 10 employees earning at least $5,000 in the preceding calendar year, would be required to offer a “qualifying automatic IRA arrangement.” Also exempt would be certain new businesses, government entities, and churches.
  • Employers with existing retirement plans that are frozen, have had no contributions for three plan years, or provide only discretionary contributions, would not be exempt by virtue of maintaining such plans.
  • In general, employers that are required to participate in a qualifying state-facilitated retirement program for private sector workers would not be required to establish this federal automatic IRA plan.
  • The employees of multi-state employers would be covered under the rules of respective qualifying state-facilitated programs, or under the federal program in the case of a state with no such program. Such multi-state employers could instead irrevocably elect to have their employees in all states covered under the federal program.
  • Qualifying state programs could be multi-state consortiums.
  • As an alternative to automatically enrolling all eligible employees, an employer could request affirmative elections to contribute, but automatically enroll those who do not make an election.
  • Certain employees need not be covered under such an arrangement, including those under age 18, those who have worked less than three (3) months for the employer, certain collectively-bargained or nonresident alien employees, and—in the case of certain employers that operate an exempting plan—employees that have not yet met eligibility requirements to participate in that employer’s 403(b), SEP, or SIMPLE IRA plan.
  • A $100 penalty would be imposed on a covered employer for each otherwise eligible employee not enrolled, unless due to reasonable cause and corrected within 90 days.
  • Amounts withheld and contributed under the automatic IRA program would be at a rate of three percent of compensation, or other initial percentage as specified in future regulations by the Secretary of the Treasury, but not less than two percent or greater than six percent.
  • Amounts withheld would be invested in a Roth IRA or Traditional IRA; Roth IRA unless otherwise elected.
  • The Secretary of the Treasury may issue regulations providing for automatic deferral increases.
  • Automatically withheld amounts would be required to be placed in certain classes of investments, including target date or life cycle funds, principal preservation funds, guaranteed lifetime income investments, a qualifying retirement bond, or “certain other funds determined by the Secretary.”
  • Such automatic IRA arrangements would not be considered ERISA-governed pension plans if the Act’s provisions are met.
  • Employees who elect-out of the arrangement and have automatic IRA contributions distributed to them within 90 days would not be subject to the 10 percent early distribution penalty tax.
  • Automatic IRA contributions would be required to be remitted by the last day of the month following the month of withholding, or if later, by a deadline prescribed under Treasury regulations, but in no case later than the deadline for income tax withholding for the period. Fiduciary liability would apply for failure to meet this requirement.
  • Notice and election period requirements would apply, generally including notification at least 30 days before the beginning of a year, or 30 days before an employee becomes eligible.
  • An annual account statement would be required, much like all IRAs.
  • In general, all IRA rules would apply.
  • Small employers (100 or fewer employees) could be eligible for a tax credit for maintaining an automatic enrollment IRA arrangement for up to six years; to a maximum of $750 for the first year, and a maximum of $500 for the following years.
  • The small employer retirement plan start-up credit would increase from a current maximum of $500 per year to a maximum of $5,000.
  • Any state laws in conflict with H.R. 2035’s provisions would be preempted.
  • The effective date, in general, would be 2021 and later years.

 

 


Service Provider’s Auto-Portability Proposal Receives DOL Blessing

The Department of Labor’s Employee Benefit Security Administration (EBSA) has published in the Federal Register a prohibited transaction exemption (PTE) granted to a service provider that has proposed what it describes as an automatic portability program for retirement plan assets.

This exemption—PTE 2019-02—was considered necessary so that Retirement Clearinghouse (RCH) could receive fee compensation in connection with the services it intends to provide in this automatic portability program. In general, receipt of such fees would be considered a prohibited transaction, but the EBSA will approve individual applications for exemptions when they meet certain criteria. PTE 2019-02 is granted to RCH for a period of five years.

The RCH program contains essentially two elements.

  • Based on agreements between RCH, participating employer plans, and participating third-party recordkeepers, certain retirement plan small balance cash-out amounts and terminating plan accounts would be automatically rolled over to an “RCH default IRA,” or to a “default IRA” of a participating recordkeeper; this would occur unless the plan participant affirmatively elected otherwise.
  • Subsequently, RCH would—by means of data matching searches—determine whether the IRA owner is participating in another employer plan that accepts rollovers. If the default IRA owner does not affirmatively consent or object, the IRA balance would be automatically rolled over to that new employer’s plan.

 

Process Began With EBSA Advisory Opinion

In November 2018, RCH applied to EBSA for an advisory opinion that would address not the receipt of fees, but instead asked EBSA to address the fiduciary status of RCH and other parties to the auto-rollover program.

The EBSA answered RCH’s inquiry on fiduciary status in Advisory Opinion 2018-01A, published in the November 5, 2018, Federal Register. EBSA simultaneously published in the Federal Register a notice of proposed prohibited transaction exemption (PTE), and invited comments on this PTE request, which it accepted through December 24, 2018.

In its granting of PTE 2019-02 now to RCH, the EBSA noted that there were several commenters who objected to an exemption, these stating that there are multiple reasons why such asset transfers should be done only as affirmative actions on the part of an account owner.

In explaining its decision to grant PTE 2019-02, the EBSA noted that its regulations permit fiduciaries to transfer small account balances to default IRAs “only if protective conditions are met,” and that the exemption now being granted contains “additional conditions applicable for [such] transfers … under the RCH program.”

PTE 2019-02 also prescribes the following.

  • A plan fiduciary that is independent of RCH must review the terms of the RCH program and determine, consistent with its duties under Section 404 of ERISA, that the plan’s participation in the RCH program is prudent.
  • All fees must be approved by the responsible plan fiduciary of the old employer plan.
  • RCH has no authority to unilaterally change these fees, and all fees under the RCH program must not exceed reasonable compensation.

Congressmen Introduce “IRA Preservation Act of 2019”

Although members of the House of Representatives have officially begun their annual August recess, among bills that have recently been introduced and referred to committee is H.R. 4117, the “IRA Preservation Act of 2019.” Its chief co-sponsors are Reps. Ron Kind (D-WI) and Mike Kelly (R-PA). The bill’s main thrust is expanding the IRS Employee Plans Compliance Resolution System (EPCRS) to cover certain errors under individual retirement plans, and providing for reduced penalties for certain self-corrections.

The bill has been referred to the House Ways and Means Committee.  The House of Representatives’ 2019 session resumes on September 9.

Key provisions of H.R. 4117—based on bill text provided by Rep. Kind’s office—include the following.

  • Require the Treasury Department to provide public education materials on IRA contribution and deduction limits, rollovers, required minimum distributions (RMDs), prohibited transactions, the 10 percent early distribution excise tax, and common IRA errors.
  • Reduce the IRA excess contribution penalty from six percent to three percent if corrected within a specified time window.
  • Reduce the penalty for failure to fully distribute an RMD from 50 percent to 10 percent of the undistributed amount if corrected within a specified time window (no reference is made to the existing procedure by which a full waiver of this penalty can be obtained).
  • Exempt earnings withdrawn in a timely IRA excess contribution correction from the 10 percent excise tax on early distributions (which generally applies to those under age 59½)
  • Eliminate the IRA prohibited transaction (PT) consequence of complete IRA disqualification; H.R. 4117 would apply the same rule to HSA, Archer MSA, and Coverdell ESA PTs.
  • Liability for an IRA, HSA, MSA, or ESA PT would be the general 15 percent (primary) and 100 percent (secondary) tax on the PT amount, unless the infraction is a pledging of assets within the account, in which case—while no excise tax—the pledged portion of the account would be deemed distributed and subject to normal taxation consequences.
  • A three-year statute of limitations on PT tax liability would apply.
  • Expand the IRS’s EPCRS program to allow IRA custodians, trustees, and issuers to self-correct errors “for which the owner of an IRA was not at fault;” to include, “but not limited to,” failure to complete a rollover within 60 days, and allow indirect rollover by a nonspouse beneficiary who had reason to believe that due to service provider error, an indirect rollover was permissible.
  • Permit self-correction of “inadvertent” RMD failures in retirement plans (those subject to EPCRS) and IRAs—presuming the existence of practices and procedures designed to prevent such failure—within 180 days; for an IRA owner, “inadvertent” to mean “due to reasonable cause.”
  • The effective date, in general, is as of the date of enactment, with transition provisions; the education elements required of the Treasury Department are to occur “as soon as reasonably practicable after the enactment,” but no later than one year following the date of enactment.

 

 


Peg Creonte Discusses Advisor Opportunity Presented by CalSavers

In a recent Wealth Management article​, Peg Creonte, SVP of business development for Ascensus Government Savings, discusses how the recently launched CalSavers retirement program offers advisors the opportunity to engage a larger pool of business owners and prospective clients​. “Ultimately, as these [auto-IRA] programs grow, these could be an opportunity for advisors, both for the participants, who are starting to accumulate assets, and also for employers who grow into a 401(k),” said Peg Creonte, “Both on the employer side and the participant side, there’s a lot of potential for advisors.”


House-Passed Financial Services Bill Would Block SEC Investment Guidance

The U.S. House of Representatives this week approved legislation to provide appropriations for funding various financial services provided by federal agencies. Added to the bill before its passage was an amendment by House Financial Services Committee Chair Maxine Waters (D-CA) that would block federal funding for administration and enforcement of guidance recently issued by the Securities and Exchange Commission (SEC). The vote was largely along party lines in the Democrat-controlled House.

Targeted by this amendment was the SEC’s recently finalized Regulation Best Interest and accompanying guidance, which provide standards of conduct for broker-dealers in making investment recommendations to retail customers. Elements of the guidance also impact registered investment advisors. In addition to retail investment accounts, the SEC guidance also applies to investment recommendations made for an individual’s own account in an employer-sponsored retirement plan, or an IRA, health savings account (HSA), Archer medical savings account (MSA), IRC Sec. 529 plan, or Coverdell education savings account (ESA).

Rep. Waters and others have criticized the SEC guidance as allegedly being insufficient to protect investor interests. This guidance generally is considered less restrictive than Department of Labor fiduciary investment advice guidance that was vacated by an appeals court in June of 2018.

Because appropriations bills must be identical in House and Senate versions, and there is a Republican majority in the Senate, many feel that de-funding the SEC investment guidance is unlikely to ultimately occur. The Senate has not yet taken up financial services appropriations.


Washington Pulse: SEC Approves Regulation Best Interest Guidance

On June 5, 2019, the Securities and Exchange Commission (SEC) released a guidance package for broker-dealers and investment advisers who provide investment recommendations and investment advisory services to clients.  By releasing this guidance package, the SEC is enhancing the broker-dealer standard to meet retail customers’ expectations, and also confirming and clarifying the standard of conduct for investment advisers.

The SEC first proposed this guidance in April 2018, almost nine years after a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the SEC to do so. The SEC’s rulemaking and interpretation guidance package contains the following items.

  • The Regulation Best Interest (Reg. BI), which establishes a new standard of conduct under the Securities and Exchange Act of 1934 for broker-dealers when making recommendations to retail customers.
  • A final rule requiring investment advisers and broker-dealers to provide a client relationship summary (known as Form CRS) to retail investors.
  • An interpretation of the standard of conduct for investment advisers.
  • An interpretation of the “solely incidental” prong—under the Investment Advisers Act of 1940—which excludes certain broker-dealers from the definition of “investment adviser.”

 

How Did Reg. BI Change From the Proposed Guidance?

Before releasing the final guidance package, the SEC modified some of the proposed Reg. BI provisions.

  • BI now defines “account recommendations” to include recommendations to move assets between different types of accounts or to roll over an employer plan distribution to an IRA.
  • Broker-dealers must disclose whether they will provide account-monitoring services—and the scope of those services. Hold recommendations, whether explicit or implicit, are subject to Reg. BI. For example, an implicit hold recommendation occurs when a broker-dealer reviews a customer’s account under an account monitoring agreement and does not communicate any recommendations.
  • Broker-dealers must adopt policies and procedures designed to “eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.”
  • Investment cost considerations are now explicitly required both in a broker-dealer’s Care Obligation and in the Disclosure Obligation.
  • Broker-dealers must create and enforce policies and procedures that are designed to achieve compliance with all of Reg. BI.

 

What Is the Standard of Conduct for Broker-Dealers?

Reg. BI establishes a standard of conduct for broker-dealers when they make a recommendation to a retail customer regarding any securities transaction or any investment strategy involving securities.

Specifically, Reg. BI requires broker-dealer action.

  • Broker-dealers must act in the retail customer’s best interest at the time the recommendation is made, without placing the broker-dealer’s financial or other interest ahead of the retail customer’s interests. (This “General Obligation” requirement is discussed in more detail below.).
  • Broker-dealers must address conflicts of interest by establishing and enforcing policies that are designed to identify and fully disclose facts about conflicts of interest. In instances where the SEC has determined that the disclosure is insufficient to reasonably address the conflict, broker dealers must mitigate or eliminate the conflict.

The SEC rule does not expressly define “best interest,” nor does it establish a “safe harbor” for complying with the best interest standard. Rather, the specific obligations under Reg. BI are mandatory, and compliance with the letter and spirit of these obligations will be determined by considering all of the facts and circumstances.

The SEC’s Reg. BI is not the same as the Department of Labor’s (DOL’s) Best Interest Contract, which was part of the now vacated fiduciary investment advice final rule. Unlike the DOL’s guidance, the SEC’s guidance applies only to securities transactions; it does not apply to traditional bank and credit union products (e.g., certificates of deposit).

Compared with the DOL’s fiduciary investment advice regulations, the SEC’s final investor protection rules cover a larger pool of investors. Reg. BI is not specific to retirement savers, but instead covers general retail investors. In this final version of Reg. BI, the SEC modifies the definition of a “retail investor” to include any natural person—including an individual retirement plan participant—who receives a recommendation from the broker-dealer. This would apply to any recommendations for the natural person’s own account—but not for an account of a business that she works for (for example, where an individual is seeking investment services for a small business).

Reg. BI also narrows the pool of investment-recommendation providers covered by the guidance, as the SEC final rules apply only to broker-dealers and “associated persons” of a broker-dealer. The guidance does not typically apply to personnel of banking or insurance organizations.

 

General Obligation

The General Obligation requires that broker-dealers act in the retail customer’s best interest—without placing their own interests ahead of the customer’s interests. The General Obligation is satisfied only if the broker-dealer complies with four specific component obligations.

 

Disclosure Obligation

The Disclosure Obligation requires broker-dealers to disclose, in writing, all material facts about their relationship with a customer. The broker-dealer must disclose any conflicts of interest associated with the recommendation (e.g., conflicts associated with proprietary products or payments from third parties).

 

Care Obligation

The Care Obligation requires a broker-dealer to exercise reasonable diligence, care, and skill when making a securities-related recommendation. The broker-dealer must also understand the recommendation’s potential risks, rewards, and costs and consider those factors in light of the customer’s investment profile. The broker-dealer must reasonably believe that the recommendation is in the customer’s best interest.

 

Conflict of Interest Obligation

Under the Conflict of Interest Obligation, broker-dealers must create and enforce written policies and procedures addressing conflicts of interest associated with their securities-related recommendations to retail customers. When broker-dealers place limitations on recommendations that they make to retail customers (e.g., offering only proprietary funds or another narrow range of products), the policies and procedures must be designed to disclose any limitations and associated conflicts and to prevent the broker-dealer from placing his interests ahead of the customer’s interests.

The broker-dealer’s policies and procedures “must be reasonably designed to identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities” within a limited time period.

 

Compliance Obligation

The Compliance Obligation requires a broker-dealer to create and enforce written policies and procedures designed to achieve compliance with all of Reg. BI. At the time a recommendation is made, key elements of Reg. BI will be similar to key elements of the fiduciary standard for investment advisers.

 

Which Activities Fall Under the SEC Reg. BI guidance?

The SEC guidance package addresses activities with respect to securities investments—such as stocks, bonds, and mutual funds—for retail clients. This includes the purchase, sale, exchange, or holding of such investments. A recommendation that triggers application of Reg. BI is based upon the facts and circumstances of the particular situation. Factors include whether the communication “reasonably could be viewed as a ‘call to action’” and “reasonably would influence an investor to trade a particular security or group of securities.”  The more individually tailored the communication to a specific customer or a targeted group of customers, the greater likelihood it would be viewed as a “recommendation.”

Account recommendations generally include recommendations involving securities, recommendations to roll over or transfer assets from one type of account to another (e.g., employer plan to IRA), and recommendations involving employer plan loans.

The following broker-dealer communications are not considered “recommendations.”

  • General financial and investment information
  • Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan
  • Asset allocation models and related interactive investment materials
  • Requirement to take an RMD, as long as there is no discussion of which assets to liquidate
  • Communications on making or increasing retirement plan contributions, as long as there is no discussion of how the assets should be invested or allocated

The SEC guidance covers retirement plan participants receiving direct investment recommendations for their own account, but excludes employer plans as a business-purpose exception. The guidance also covers investors in individual tax-advantaged accounts such as IRAs, health savings accounts, Archer medical savings accounts, 529 plans, and Coverdell education savings accounts.

 

How does Form CRS Affect Broker-Dealers and Investment Advisors?

While the SEC guidance is primarily directed to broker-dealers and the securities recommendations they make, the client relationship summary (known as Form CRS) disclosure requirement applies both to broker-dealers and to investment advisers. Broker-dealers and investment advisers must provide Form CRS, in a standardized Q & A format, to retail clients at the beginning of their relationship. (For existing clients or customers, certain disclosures still have to occur when recommendations are made.)

Some of the information Form CRS should contain includes

  • information about services, fees, and costs; conflicts of interest; standards of conduct; and whether there has been any disciplinary history with the financial professional or firm;
  • a link or information on how to access the SEC’s gov website; and
  • key questions a retail investor may want to ask (for example, Form CRS should provide greater detail about services provided or specific fees).

The SEC’s intent of multiple disclosures (including Form CRS and Disclosure Obligation communications) is to layer disclosures to customers so that they have appropriate information either before or at the time a recommendation is made. In general, the SEC advises representatives to be direct and clear about their status as a broker-dealer or investment adviser—or dual status—and to refrain from using language or terms formally or informally that may mislead a customer. Form CRS is subject to SEC filing and recordkeeping requirements.

 

What is the Standard of Conduct for Investment Advisers?

While the fiduciary standard is not new for investment advisers, the SEC has never before adopted a formal interpretation of its fiduciary obligations. The SEC has now defined the fiduciary standards of conduct for investment advisers, which include the following duties.

Duty of Care

  • Duty to provide advice that is in the customer’s best interest
  • Duty to seek best execution
  • Duty to provide advice and monitoring over the course of the relationship

Duty of Loyalty

  • Duty not to subordinate the clients’ interests to their own
  • Duty to make full and fair disclosure of all material facts relating to the investment adviser’s relationship with the client
  • Duty to eliminate (or at least expose, through full and fair disclosure) all conflicts of interest

 

What is the SEC’s New Interpretation of “Solely Incidental”?

Broker-dealer advisory services are excluded from the scope of the Investment Advisers Act of 1940 and the definition of “Investment Adviser” (the “broker-dealer exclusion”) only if the following requirements are met.

  • The services must be solely incidental to the broker-dealer’s regular business as a broker-dealer (the “solely incidental” prong).
  • The broker-dealer cannot receive special compensation for those advisory services.

In response to comments, as part of its final guidance package, the SEC has published an interpretation to confirm and clarify its position with respect to the solely incidental prong of the broker-dealer exclusion.

Specifically, the SEC interprets the language to mean that a broker-dealer who provides advice is acting “consistent with the solely incidental prong if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.”

Whether the solely incidental prong is satisfied is based on the facts and circumstances of the broker-dealer’s business, the services offered by the broker-dealer, and the broker-dealer’s relationship with the customer.

 

Other Items of Interest

  • Broker-dealers must maintain a record of all information pertinent to, and provided by, a customer that shows compliance with Reg. BI for six years. The records must also include the identity of all individuals associated with the broker-dealer who are responsible for the account. Broker-dealers must retain originals of all communications received from a customer and copies of all communications sent to the customer for three years; these communications must be retained “in an easily accessible place” for two years.
  • Some states have adopted their own rules governing the relationship between regulated entities and their customers. Whether Reg. BI preempts such state laws would be determined in future judicial proceedings, based on the specific language and effect of that state law.
  • The SEC does not believe Reg. BI creates any new private right of action or right of rescission, nor does the SEC intend such a result.

 

Effective Dates

Reg. BI and the Form CRS requirements will become effective 60 days after they are published in the Federal Register, and include a transition period until June 30, 2020, in order to give firms sufficient time to come into compliance. The “standard of conduct” interpretation and the “solely incidental” interpretation become effective upon publication in the Federal Register. More guidance is expected—the DOL has indicated its intent to release a new proposed fiduciary rule by the end of this year. Stay tuned to ascensus.com for the latest developments.

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SEC Approves Long-Awaited Investment Advising Regulation and Accompanying Guidance

The Securities and Exchange Commission (SEC) today approved by a 3-1 vote its guidance package for broker-dealers and investment advisers who provide investment advisory services to retail clients. This guidance was first proposed in April 2018, the impetus being a directive contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In the interim following Dodd-Frank’s enactment, the Department of Labor (DOL) proposed and finalized guidance on investment advice standards that were to apply to retirement investors, but this guidance was later overturned by a federal court.

The Commission’s vote today adopts the full package of its investment fiduciary advice guidance.

Included in Guidance Package

  • Regulation Best Interest, which establishes a standard of conduct for broker-dealers when making recommendations to retail customers
  • A requirement for investment advisers and broker-dealers to provide a client relationship summary (Form CRS) to retail investors
  • An interpretation of the standard of conduct for investment advisers
  • An interpretation of the “solely incidental” prong of the Investment Advisers Act of 1940

Notable Changes

  • The scope of Regulation Best Interest is modified to include account recommendations, including rollovers or transfers from workplace retirement plan accounts to IRAs and recommendations to take a plan distribution.
  • Regulation Best Interest would require broker-dealers to disclose whether monitoring will be provided and the scope of that service.
  • Regulation Best Interest would specifically require broker-dealers to adopt policies and procedures designed to eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.
  • The consideration of cost is explicitly required as part of a broker-dealer’s care obligation.
  • More flexibility in describing a firm’s offerings on Form CRS will be allowed.
  • Broker-dealers must establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.

Effective Date

  • Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register, and include a transition period until June 30, 2020, to give firms sufficient time to come into compliance.
  • The interpretations under the Advisers Act become effective upon publication in the Federal Register.

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%