IRA

Disaster Tax Relief Act of 2019 Introduced in House

Tom Rice (R) of South Carolina introduced the Disaster Tax Relief Act of 2019 (H.R. 2145) in the United States House of Representatives. The purpose of this proposed legislation is to provide tax-related relief to victims of presidentially declared disasters that occurred after January 1, 2018 and before the enactment date this Act.

Tax relief specific to retirement savings arrangements include the following and applies to distributions taken from IRAs and tax-qualified employer-sponsored retirement plans.

  • Qualified disaster distributions would include amounts not to exceed the excess (if any) of $100,000, over the aggregate of any qualified disaster distributions received by the individual in all prior taxable years, received by an individual whose principal residence was located in a qualified disaster area and who suffered economic loss as a result.
  • Qualified distributions would include those taken on or after the date the qualified disaster incident began and on or before December 31 of the year after the year in which the qualified disaster incident began.
  • The 10 percent excise tax for early distributions would not apply to qualified disaster distributions.
  • Such distributions could be repaid over a three-year period, beginning on the day after the distribution was received.
  • Qualified disaster distributions from employer plans would not be subject to mandatory 20 percent withholding.
  • Inclusion in income of qualified disaster distributions would be done ratably over a three-year period, unless a taxpayer chose otherwise.
  • Certain retirement plan distributions taken for purchase of a principal residence, but not used due to disaster events, could be recontributed.
  • Loan amounts up to $100,000 could be taken from an eligible employer retirement plan.
  • Plan loan repayments following disaster events could be delayed up to a year; this delay would not alter loan amortization (in effect, lengthening a five-year amortization period).
  • A plan amendment necessary to comply with these provisions could be made up to and including the last day of the 2020 plan year, or a later date if prescribed by the Secretary of the Treasury (governmental plans two years later).

The bill was referred to the House Committee on Ways and Means following its introduction. The prospect of enactment is unclear at this time. Watch the news at ascensus.com for progress of this legislation, as warranted.


Washington Pulse: Will RESA Succeed This Time?

No other legislation in recent memory is more deserving of the label “survivor” than the Retirement Enhancement and Savings Act (RESA). Since 2016, multiple versions of RESA have been championed by high-profile lawmakers (both past and present). This legislation has offered many innovative ideas to expand retirement savings opportunities and has served as a model for other retirement reform bills.

RESA 2019 has now been introduced by Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). Its introduction came just one day before the House Ways and Means Committee gave unanimous approval to nearly identical legislation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (for more information on the SECURE Act of 2019, see Ascensus’ prior Washington Pulse). With this apparent unanimity in the Senate and House, hopes are high that 2019 may be a year for major retirement savings enhancement. The RESA 2019 provisions are described below.

Simplify, Create Incentives for New Plan Creation

The following RESA 2019 provisions are intended to reduce the complexity of establishing and enhancing retirement plans and offer tax incentives to do so.

  • Reform multiple employer plans (MEPs): Relax current rules for employer participation in a MEP and create a new variation to be known as a “pooled employer plan,” or PEP. Both allow consolidation of administrative responsibility and expense (effective for 2023 and later plan years).
    • Multiple participating businesses with a common interest would generally be administered as MEPs
    • Multiple participating businesses without a common interest would generally be considered to be part of a PEP
    • Simplified Form 5500-SF plan reporting would be allowed for smaller MEPs or PEPs
    • Compliance failures by one or more participating employers would not jeopardize the qualified status of the entire MEP or PEP (ends the “one bad apple” rule)
  • Allow more time to establish a plan: Permit qualified plans (e.g., profit sharing or pension plans) to be established as late as the sponsoring employer’s tax return deadline, including extensions. Certain plan options—like employee deferrals—would not be eligible for the extension (effective for 2020 and later taxable years).
  • Increase plan start-up credit for small employers: Increase the small employer retirement plan start-up credit from $500 to a maximum of $5,000 per year, available for three years beginning with the year the plan is established (effective for 2020 and later taxable years).
  • Create automatic enrollment credit: Provide a tax credit of up to $500 per year for small employers (100 or fewer employees) that implement automatic enrollment in existing or new 401(k) or SIMPLE IRA plans. The credit would be available for three years beginning with the year that automatic enrollment is allowed   (effective for 2020 and later taxable years).
  • Extend period for electing safe harbor 401(k) design: 401(k) plans could elect testing safe harbor designs without prior notice if an employer nonelective (vs. employer match) contribution is made; the deadline would be at least 31 days before the end of the plan year with a three percent contribution, or up to the deadline for removing excess contributions for a plan year—the close of the following plan year—if a four percent contribution is made (effective for 2020 and later plan years).
  • Create annuity selection safe harbor: Provide a new safe harbor for a plan fiduciary’s selection of an annuity provider—deemed to satisfy the “prudent expert” standard—when offering lifetime income plan investments (no specified effective date).

Promote Greater Saving in Employer Plans

RESA 2019 would encourage broader employee participation, greater employee saving, and clearer participant understanding of retirement savings adequacy.

  • Remove the cap on deferrals in safe harbor 401(k) plans: Eliminate the 10 percent maximum deferral rate in a 401(k) plan that employs automatic enrollment and automatic deferral increases in a qualified automatic contribution arrangement (QACA) after the initial period (effective for 2020 and later plan years).
  • Require new lifetime income disclosure: Defined contribution plan sponsors would be required to provide, at least annually, a projection of a lifetime income stream that could be generated by a participant’s accrued benefit; employers would not be held liable for the projection (Effective for benefit statements provided more than 12 months after the DOL issues 1) interim guidance, 2) the interest assumptions to be used, and 3) a model disclosure).

General Provisions Affecting Employer Plans

RESA 2019 would make targeted changes to employer plans in order to encourage asset preservation, simplify plan administration, and enhance compliance.

Provide lifetime income portability: Allow participants in a qualified plan, 403(b), or governmental 457(b) plan to roll over lifetime income investments to an IRA or another retirement plan without an otherwise available distribution event if the employer’s plan no longer offers such investments (effective for 2020 and later plan years).

Allow distributions of terminating 403(b) plans: Allow the plan administrator or custodian of a 403(b) plan to distribute such accounts in-kind to a participant or beneficiary when the 403(b) plan is being terminated (enabling guidance to be issued within six months of enactment).

Prohibit credit card loans: Treat as distributed and subject to taxation a retirement plan loan enabled through a credit card or similar program. Existing loans provided through credit card systems in place as of September 21, 2016 are considered “grandfathered” unless one of the following conditions apply (effective for 2020 and late plan years).

  • The loan is for $1,000 or less.
  • The loan is used for gambling or for the purchase of certain items such as liquor.

Permit shared Form 5500 filing: Allow employers that sponsor defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options to file a common Form 5500 (effective for 2022 and later plan years).

Allow nondiscrimination relief for closed defined benefit plans: Provide nondiscrimination testing relief for defined benefit pension plans that are closed to new participants; such employers generally offer a defined contribution plan to new employees (effective generally upon enactment, or—if elected—for 2014 and later plan years).

Increase penalties for plan reporting failures: Retirement plan information reporting failures would result in the following penalties (effective for returns, statements, and notices required January 1, 2020, and thereafter).

  • Form 5500, $100 per day, up to a maximum of $50,000
  • Form 8955-SSA (deferred benefit reporting), $2 per participant per day, up to a maximum of $10,000 for failing to file, $2 per day, up to a maximum of $5,000 for failing to file of notification of change
  • Withholding notice, $100 per failure, up to a maximum of $50,000

Clarify church retirement plan rules: Clarify which employees are eligible to participate in retirement plans sponsored by church-controlled organizations (effective for all years (i.e., years beginning before, on, or after the date of enactment).

Lower premiums for pension plans of cooperatives and charities: Reduce Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans of certain cooperatives and charities to $19 per participant for fixed-rate premiums, and $9-per-$1,000 of under-funded vested benefits for variable rate premiums (effective for 2019 and later plan years).

Changes Affecting Employer Plans and IRAs

These RESA 2019 provisions would affect employer plans and IRAs.

Require quicker payout to beneficiaries: With limited exceptions, most nonspouse beneficiaries of IRAs, qualified defined contribution, 403(b), and governmental 457(b) plans would be required to distribute inherited amounts within five years. New reporting requirements to ensure compliance would apply (effective for plan participant/IRA owner deaths occurring in 2020 or later, and to beneficiary reporting beginning with the 2021 calendar year).

Exceptions include the following.

  • Aggregate inherited IRA and employer plan balances that do not exceed $400,000
  • The disabled
  • The chronically ill
  • Beneficiaries not more than 10 years younger than the deceased participant or IRA owner
  • Minors (a 5-year payout period would begin upon reaching the age of majority)

Enhance IRA Contributions

RESA 2019 would significantly expand Traditional IRA contribution eligibility.

Permit Traditional IRA contributions at any age: Similar to Roth IRA owners, Traditional IRA owners with earned income could make IRA contributions at any age, not just before age 70½ (effective for 2020 and later taxable years).

Allow graduate student IRA contributions: Certain fellowship, stipend, and similar payments to graduate students and postdoctoral students would be treated as earned income for IRA contribution purposes (effective for 2020 and later taxable years).

Permit IRAs and S Corporation bank shares: IRAs would be permitted to hold shares of S Corporation banking entities (effective January 1, 2020).

Will RESA 2019 Become a Reality?

With apparent bipartisan support in both the House and Senate, there seems to be growing momentum that could result in 2019 being the year in which we see significant retirement legislation get passed. Ascensus will continue to monitor the progress of RESA 2019 and its counterpart legislation in the House, the SECURE Act. Visit Ascensus.com for the latest developments.

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Several Retirement and IRA Topics on IRS’ Priority Guidance Plan List

The Department of the Treasury and IRS have released a second quarter update to the 2018-2019 fiscal year Priority Guidance Plan (PGP). The PGP lists items of regulatory guidance that the IRS is—or hopes to be—working on during the fiscal year. A high priority item highlighted in the update is the release of guidance to implement provisions of the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December of 2017. Some items of guidance have remained on the PGP over several fiscal years.

Following are the pending guidance items related to employee benefits.

  • Regulations under Internal Revenue Code Section (IRC Sec.) 401(a)(9) updating life expectancy and distribution period tables for purposes of the required minimum distribution (RMD) rules
  • Guidance on hardship distributions from employer-sponsored retirement plans (in response to the Balanced Budget Act of 2018 provisions)
  • Guidance on missing retirement plan participants
  • Final regulations on minimum present value requirements for defined benefit (DB) pension plans
  • Guidance updating regulations on service credit and vesting
  • Hybrid DB pension plan interest credit and annuity conversion factor guidance
  • Multiple employer plan guidance
  • Church plan guidance
  • Guidance on Traditional and Roth IRAs, Including contributions and excise taxes
  • Affiliated service group guidance
  • Additional guidance on lifetime income payments from employer plans and IRAs
  • Regulations on deferred vested benefit reporting requirements
  • Final regulations on various issues for nonqualified plans subject to IRC Sec. 409A
  • Final regulations on “ineligible” nonqualifed plans under IRC Sec. 457(f)
  • Regulations for qualified ABLE programs (proposed regulations issued in 2015)
  • Updated guidance on use of truncated taxpayer identification numbers (SSNs); proposed regulations issued in 2017

Newly Introduced Retirement Reform Bill Has Better Chance of Progressing

Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) have announced the introduction of the Retirement Enhancement and Savings Act (RESA) of 2019.

This legislation is a version of similar legislation introduced several times dating back to 2016. This year, however, the prospect of enacting major retirement enhancement legislation seems especially promising, given indications of bipartisan support in both the House and Senate.

RESA 2019 includes these retirement changes and enhancements.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Remove the 401(k) automatic enrollment safe harbor deferral cap entirely (now 10 percent)
  • Simplify 401(k) safe harbor rules and give employers more flexibility in electing to implement a safe harbor design
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for implementing automatic enrollment in 401(k) and SIMPLE IRA plans
  • Treat taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Permit IRAs to hold shares of S Corporation banking entities
  • Generally prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) participants to retain individual tax-favored custodial accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined 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 defined benefit plans by providing nondiscrimination relief to plans that are closed to new participants
  • Modify the Pension Benefit Guaranty Corporation premiums for single-employer, multi-employer, and cooperative and small employer charity (CSEC) plans
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 5 years of the death of the account owner; would not apply to the first $400,000 of inherited balances
  • 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

Congress Set to Act on Major Retirement Legislation

The House Ways & Means Committee is expected to mark up proposed tax legislation on April 2. The bills to be marked up include the SECURE Act and an open multiple employer plan (MEP) bill. The SECURE Act is based on previously introduced legislation known as the Retirement Enhancement and Savings Act (RESA) and also includes several additional provisions from other bills that have been added to garner bipartisan support.

The RESA bill did not advance in the House during the 115th Congress due to a lack of support at the senior leadership level. The Secure Act and open MEP bills, however, are said to have bipartisan senior leadership sponsors in the House. Bipartisan leadership support is also expected for upcoming Senate versions of the bills, anticipated to be released today (April 1). Consequently, though there are many steps in the legislative process, it appears more likely than in the past that these bills could advance.

The SECURE Act includes the following provisions. Watch Ascensus News for detailed analysis of the bills as they are released.

  • 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 non-tuition 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) 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 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 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
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Expand 529 plans to cover the cost of apprenticeships, homeschooling, attendance at private elementary, secondary and religious schools, and up to $10,000 of student loan repayments for a student or his/her siblings
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 10 years of the death of the account owner
  • 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

IRS and DOL Issue Deadline Relief Following Iowa, Nebraska, and Alabama Disasters

The IRS has issued two news releases that announce extensions of time for taxpayers to complete certain time-sensitive tax-related acts following severe storms and flooding in Iowa and Nebraska. In addition, the Department of Labor (DOL) issued guidance to employee benefit plans, and to those plans’ participants and beneficiaries, affected by the Iowa and Nebraska events, or by severe storms in Alabama.

The IRS news releases specifically note that these extensions apply to IRA contributions, as well as to the numerous time-sensitive acts described in Treasury Regulation 301.7508A-1(c)(1). These acts include completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

Iowa Deadline Relief
IRS news release IA-2019-02 defines the relief granted for the Iowa counties of Fremont, Harrison, Mills, Monona and Woodbury. Qualifying tax-related acts with deadlines falling on or after March 12, 2019, and on or before July 31, 2019, are extended to July 31, 2019.

Nebraska Deadline Relief
News release NE-2019-02 identifies the Nebraska counties of Butler, Cass, Colfax, Dodge, Douglas, Nemaha, Sarpy, Saunders and Washington as covered under this relief. Qualifying tax-related acts with deadlines falling on or after March 9, 2019, and on or before July 31, 2019, are extended to July 31, 2019.

This relief applies specifically to residents of an identified disaster area, 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 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 a covered disaster area are required to call the IRS disaster hotline at 866-562-5227 to request relief.

DOL Relief for Iowa, Nebraska and Alabama
The DOL has issued a fact sheet (not yet available at the DOL website) for sponsors of employee benefit plans—including employer-sponsored retirement plans—and a document containing frequently-asked questions (FAQs) directed to such plans’ participants and beneficiaries. These DOL documents address the special deadline relief for these states that is available from this agency, which has oversight over ERISA-governed employee benefit plans.


Financial Transaction Tax May Have Little Chance to Become Law

Firms in the financial sector were galvanized into opposition recently when Democrats in the U.S. Senate and House of Representatives introduced the Wall Street Tax Act of 2019. The legislation would impose a tax of 1/10th of 1 percent on securities or derivatives trading transactions to offset the federal budget deficit.

Sponsors include Senators Jeff Merkley (D-OR), Chris Van Hollen (D-MD), Kirsten Gillibrand (D-NY), and Brian Schatz (D-HI), and Representatives Peter DeFazio (D-OR) and Alexandria Ocasio-Cortez (D-NY).  A previous version of this legislation proposed tax credits to offset the tax effects on transactions tied to tax-favored savings accounts, such as IRAs and 401(k) plans, but there appear to be no defined offsets or exemptions for such accounts in this version of the legislation.

Although the highly controversial legislation has received significant publicity, it is given little chance of enactment in this Congress given the Republican majority in the Senate, regardless of what happens in the Democrat-controlled U.S. House of Representatives.


Tax-Related Deadline Relief Granted for Alabama Disaster Victims

The IRS has issued news release AL-2019-01, announcing an extension of time to complete certain time-sensitive tax-related acts as a result of tornadoes, storms, and straight-line wind events in Alabama. At this time, the only area to which the relief applies is Lee County, but the IRS periodically updates the disaster relief to include other areas.

News release AL-2019-01 provides that certain tax-related acts with deadlines falling on or after March 3, 2019, and on or before July 31, 2019, are extended to July 31, 2019. It notes that this extension applies to IRA contributions, as well as to the numerous time-sensitive acts described in Treasury Regulation Section 301.7508A-1(c)(1). These acts include completion of rollovers,  recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

This relief applies specifically to residents of the identified area, 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 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 area are required to call the IRS disaster hotline at 866-562-5227 to request relief.


Senate Tax Extenders Bill Has Disaster Provisions Impacting Retirement Plans

Senate Finance Committee Chairman Charles Grassley (R-IA) has introduced the Tax Extender and Disaster Relief Act of 2019 (S. 617). The primary aim of the legislation is to extend a number of expired or expiring tax provisions, which generally are viewed as tax incentives or as offering special tax options.

This legislative vehicle is also being used to provide tax-related relief to victims of several 2018 natural disaster events. These include presidentially-declared disasters that occurred between January 1, 2018, and March 1, 2019 (this bill’s relief does not include victims of California wildfires, for whom similar relief was provided by Public Law 115-123).

The bill’s following tax relief provisions specific to retirement savings arrangements apply to distributions taken from IRAs and tax-qualified employer-sponsored retirement plans.

  • “Qualified disaster distributions” would include amounts not to exceed $100,000, received by a person whose principal residence was located in a covered disaster area and who suffered economic loss as a result.
  • Qualified distributions would include those taken on or after the first day of the covered disaster period, and before a date 180 days after enactment of this legislation.
  • The 10 percent excise tax for early distributions would not apply to qualified disaster distributions.
  • Inclusion in income of qualified disaster distributions would be done ratably over a three-year period, unless a taxpayer chose otherwise.
  • Such distributions could be repaid over a three-year period.
  • Qualified disaster distributions from employer plans would not be subject to mandatory 20 percent withholding.
  • Certain retirement plan distributions taken for purchase of a principal residence, but not used due to disaster events, could be recontributed.
  • Loan amounts up to $100,000 could be taken from an eligible employer plan.
  • Plan loan repayments following disaster events could be delayed up to one year, or 180 days after this legislation’s enactment, whichever is later; this delay would not alter loan amortization (in effect, lengthening a five-year amortization period).
  • A plan amendment necessary to comply with these provisions could be made up to, and including, the last day of the 2020 plan year, or a later date if prescribed by the Secretary of the Treasury (two years later for governmental plans).

The prospects for this legislation to be enacted are unclear at this time, due in part to differing leadership positions on whether the tax cost of these provisions must be offset with new revenues, offset with spending cuts elsewhere, or enacted without offsets. Progress of this legislation will be monitored closely, and developments reported at this Ascensus.com News as warranted.

 


GAO Recommends Further Guidance for Retirement Assets Escheated to States

The U.S. Government Accountability Office (GAO) has released the findings of a survey conducted to measure the effects transfers from qualified retirement plan sponsors and IRA trustees to state unclaimed property funds.

GAO was asked to study what happens after retirement assets transfer to states and to review IRS and DOL guidance to determine steps that can be taken by either agency to improve these transactions. The survey included responses from 22 states, and a variety of 401(k) service providers and IRA trustees.

GAO found that current guidance has resulted in uneven practices across service providers and trustees. To ensure the consistent administration of benefits, GAO has made three recommendations.

  1. The IRS should clarify if transfers to states are considered distributions subject to taxation and withholding requirements.
  2. The IRS should consider whether a transfer to a state is a permissible reason to extend the 60-day rollover period.
  3. The DOL should specify under what circumstances uncashed distribution checks from active qualified retirement plans may be transferred to a state.

The IRS has responded that it will work to implement the suggestions, while DOL has stated it will consider making the changes but will need to consider input from stakeholders before doing so.

The GAO released a Fast Facts summary, highlights of its findings, and the full report.