IRA

Appellate Panel Finds Retirement Assets Acquired in Divorce Not Protected in Bankruptcy

A three-judge panel of the United States Bankruptcy Appellate Court for the Eighth Circuit has ruled that 401(k) plan and IRA assets acquired by a former spouse in a divorce proceeding are not retirement funds that qualify as exempt under federal law.

Qualified retirement plan assets generally are fully shielded from most bankruptcy creditors, and IRA-originating assets are shielded up to $1 million—that figure indexed upward since 2005 to $1.28 million.

In this litigation, Brian A. Lerbakken, Debtor-Appellant, v. Sieloff and Associates, a bankruptcy court had initially ruled that the 401(k) and IRA assets acquired in a civil court-approved divorce settlement were not exempt from the alternate payee’s (recipient’s) bankruptcy estate.  Lerbakken appealed, and the three-judge appellate panel affirmed the bankruptcy court’s ruling that these assets must be included in the Lerbakken bankruptcy estate; thus accessible to creditors.

The panel cited as precedent Clark v. Rameker, in which tax-qualified retirement assets inherited by a nonspouse beneficiary were found not to be retirement assets intended for that individual, and thus not shielded from creditors in bankruptcy.  The appellate panel acknowledged that Lerbakken did not acquire these assets “in the identical manner as the IRA account addressed in Clark,” but declared that “this distinction is not material.”

Lerbakken had contended that the 401(k) and IRA assets acquired from his former spouse had been “saved for their joint retirement,” and thus, he should be granted the same bankruptcy-shielding protection they had while in her possession.


Hurricane Michael Disaster Relief Expanded to More Counties in Florida, Georgia

The IRS has added more Florida counties to those initially identified as eligible for tax-related deadline relief in the wake of Hurricane Michael.  Newly added is similar relief for identified counties in Georgia.

IRS News Releases FL-2018-04 and GA-2018-04 describe the relief provided in Treasury Regulation 301.7508A-1(c)(1) that applies to various tax-related acts whose deadlines can be extended by a disaster declaration. These include, for example, completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under the above-described regulation.

See the news releases for the counties that currently are included in the tax-deadline relief. The IRS often updates the disaster news releases for new counties that get added to the relief. The IRS has indicated that if the Hurricane Michael disaster declaration is further broadened by the Federal Emergency Management Agency (FEMA) to include other areas, the same relief will apply there.

For those covered by the Florida guidance, covered tax-related deadlines that fall on or after October 7, 2018, and before February 28, 2019, are extended to February 28, 2019.  In Georgia, deadlines that fall on or after October 9, 2018, and before February 28, 2019, are extended to February 28, 2019.

The automatic relief applies to residents of the identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area that is injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster areas are required to call the IRS disaster hotline at 1-866-562-5227 to request relief.


IRS Issues Proposed Rules on Safe Harbor De Minimis Reporting Errors

The IRS has issued proposed regulations on a safe harbor for relatively minor—de minimis—errors in providing certain information returns filed with the IRS and payee statements provided to taxpayers.

These returns and statements, which include such IRS forms as 1099-R, 5498, and others in these series, report information on such tax-advantaged savings arrangements as IRAs, employer-sponsored retirement plans, Coverdell education savings accounts (ESAs), and 529 plans.

Penalties can be assessed against custodians, trustees, or issuers for failure to timely file correct information returns or payee statements, unless reasonable cause can be shown. However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 created an exception to certain of these penalties when the reporting errors are within stated tolerances; examples include dollar amount errors that do not exceed $100, or when income tax withholding amount errors do not exceed $25.

The IRS is asking for public comments on all aspects of the proposed regulations. Details on comment submissions can be found in the Addresses section of the proposed regulations.


Tax-Related Deadline Relief for Hurricane Michael Victims

The IRS has released a pair of news releases describing tax-related deadline relief available to victims of Hurricane Michael, including those automatically eligible for that relief. News Release FL-2018-04 describes the relief provided in Treasury Regulation 301.7508A-1(c)(1)) that applies to various tax-related acts whose deadlines can be extended by a disaster declaration. This includes completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under the above-described regulation.

Currently, the announced deadline relief applies only to the Florida counties of Bay, Franklin, Gulf, Taylor, and Wakulla. However, the IRS indicates that if the Hurricane Michael disaster declaration is broadened by the Federal Emergency Management Agency (FEMA) to include other areas of Florida or other states, the same relief will apply there. Under this guidance, covered tax-related deadlines that fall on or after October 7, 2018, and before February 28, 2019, are extended to February 28, 2019.

The automatic relief applies to residents of the identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who was injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster areas are required to call the IRS disaster hotline at 1-866-562-5227 to request relief.

The second guidance item, News Release IR-2018-199, specifically addresses tax returns, including business income tax return filing deadlines and tax payments; the same extended deadline applies.

 


Taxable Wage Base Increases for 2019

The Social Security Administration has announced an increase for the 2019 taxable wage base (TWB). The TWB for 2019 is $132,900, a $4,500 increase over 2018.

The TWB represents the level of taxpayer income that is subject to taxation for purposes of Social Security’s Old Age, Survivors and Disability Insurance (OASDI) program. Taxpayer earnings above this level do not generate additional Social Security OASDI benefits for such taxpayers.

The same TWB figure is used in some integrated retirement plan contribution allocation formulas, commonly referred to as a “Social Security integration” formula. This may include profit sharing and simplified employee pension (SEP) plan allocations.

The release of the Social Security TWB figure typically coincides closely with the IRS release of the cost-of-living-adjusted (COLA) retirement plan limitations for the coming year. Watch this ascensus.com News for the 2019 retirement plan and IRA limitations expected soon.


Hurricane Florence Tax Deadline Relief Expanded to South Carolina

The IRS has issued News Release SC-2018-01, in which the Service announces that an extension of time to file certain returns and complete certain time-sensitive tax-related acts has been expanded to include parts of South Carolina. The counties included in this relief at this time include Chesterfield, Dillon, Horry, Marion and Marlboro.

Treasury Regulation 301.7508A-1(c)(1)) describes various deadlines that can be extended following a disaster declaration. These include such things as completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation. Under this IRS guidance for South Carolina, covered tax-related deadlines that fall on or after September 8, 2018, and on or before January 31, 2019, are extended to January 31, 2019.

The relief applies specifically to residents of the identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who was injured or killed as a result of the events is also entitled to relief. Affected taxpayers who reside, or have a business located outside the covered disaster areas are required to call the IRS disaster hotline at 866-562-5227 to request relief.


IRS Releases Rollover Guidance Addressing Plan Loan Offsets, Self-Certification for Late Rollovers

The IRS has issued Notice 2018-74 that modifies existing safe harbor language for rollover option explanations required of retirement plans when a participant requests a distribution. Internal Revenue Code Section 402(f) requires that participants in these plans receive a notice of rollover options and tax treatment at such times.

The safe harbor language modifications now provided in Notice 2018-74 take into account the new extended rollover period for plan loan amounts that are offset when a plan is terminated, or when a participant ceases being employed by the sponsor of the retirement plan. Under such circumstances, an affected individual may make up and roll over such offset loan amount up to, and including, his individual income tax return deadline for the distribution year, including filing extensions.  This option was provided by the Tax Cuts and Jobs Act, which is tax reform legislation enacted in December 2017.

Also addressed in Notice 2018-74 is the ability of an individual to self-certify their right under special circumstances to an extension of the normal 60-day time period to complete an indirect rollover from their plan to an IRA or to another employer plan.

 


IRS Releases Tax-Related Deadline Extension for Hurricane Florence Victims

The IRS has released two news items—News Release IR-2018-187 and a Help for Victims of Hurricane Florence webpage—describing tax-related deadline relief available to victims of Hurricane Florence, including those automatically eligible for that relief.

Currently, the announced deadline relief applies only to the North Carolina counties of Beaufort, Brunswick, Carteret, Craven, New Hanover, Onslow, Pamlico and Pender. But the IRS postings indicate that if the relief is extended to other areas, the same privileges will apply. Under this guidance, covered tax-related deadlines that fall on or after September 7, 2018, and on or before January 31, 2019, are extended to January 31, 2019.

The relief applies specifically to residents of the identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who was injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster areas are required to call the IRS disaster hotline at 866-562-5227 to request relief.


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.

Conclusion

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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