IRA

Reporting Relief Provided in Light of SECURE Act’s RMD Age Change

The IRS has issued Notice 2020-6, guidance that addresses required minimum distribution (RMD) reporting by IRA custodians, trustees, and issuers. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, contained within the broader Further Consolidated Appropriations Act (FCAA), 2020, altered the age when IRA owners must begin taking mandatory annual distributions, or RMDs. Under a provision of the SECURE Act, those who reach age 70½ in 2020 or a later year can delay beginning RMDs until age 72. Those who reached age 70½ in 2019 or earlier years must continue taking annual RMDs.

IRA custodians, trustees, and issuers are required to inform IRA owners by January 31 if an RMD is required to be taken by them for that year. Because of the timing of the FCAA’s enactment in December of 2019, IRA processing and reporting systems may still be programmed to inform account owners turning 70½ in 2020 that an RMD is required to be taken for this year. This information would be incorrect, as these individuals are not required to begin receiving RMDs from their IRAs until they reach age 72. This would constitute a reporting failure by the IRA custodian, trustee, or issuer.

Notice 2020-6 informs these financial organizations that they will be granted relief for such reporting errors, if—by April 15, 2020—they inform affected IRA owners that no RMD is due for 2020. For IRA owners turning age 70½ in 2020, an IRA custodian, trustee, or issuer reporting information to the IRS on the 2019 Form 5498, IRA Contribution Information, should not include a check in Box 11, Check if RMD for 2020, or make entries in Boxes 12a, RMD date, or 12b, RMD amount.

The IRS further notes that it is “considering what additional guidance should be provided … including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.”

Not addressed in this guidance is whether an IRA owner (or plan participant) who receives such a distribution would be granted an extended period of time—beyond 60 days—to complete a rollover of the distributed amount back into a tax-qualified savings arrangement.


Retirement Spotlight: January 2020 Spotlight on Important SECURE Act Provisions For Financial Advisors

The new year promises to provide plentiful opportunities for financial advisors to gain business and to demonstrate expertise to existing clients. As you likely know, the SECURE Act was signed into law on December 20, 2019. Many of the Act’s provisions took effect on January 1, 2020. Most of them offer real benefits to your clients; other provisions may not be as helpful, but you still need to understand them to provide the best service possible. This Retirement Spotlight focuses on a half-dozen SECURE Act provisions that will make the most significant impact on your retirement plan practice.

Let’s start with three provisions that you will most certainly get questions on.

  1. Traditional IRA owners can now contribute after age 70½. Since they were first available in 1998, Roth IRAs could receive contributions from individuals over 70½ provided that they were otherwise eligible. That is, Roth IRA owners had to have earned income—but not too much Now Traditional IRA owners will enjoy the same benefit. Your clients that continue to work—or that have working spouses—will be able to contribute even after they reach age 70½.

    More of your clients may be working well past the “normal retirement age”; now they can also keep contributing to their Traditional IRAs. Even though they may have to take required minimum distributions at the same time that they contribute to their IRAs, there is a good chance that they will be able to contribute more than they have to distribute each year. So this provision is a great way for your clients to ensure that they have sufficient retirement assets once they stop working.

  2. Traditional IRA required minimum distributions (RMDs) will now start at age 72. Not only can your clients make Traditional IRA contributions past age 70½, but now they can begin taking RMDs later. If your clients turn age 70½ in 2020 or later, they now can wait until age 72 to begin taking RMDs. Specifically, they will have until April 1 of the year following the year they turn 72 to take their first RMD. This year-and-a-half delay is not necessarily the big relief that some in the retirement industry had hoped for. But this change certainly provides some benefit.

    Based on increased life expectancies over the past several decades, Congress could have increased the starting age to 75 or later. There are, however, significant revenue implications for any delay in the RMD starting date. So this age-72 requirement was a bit of a compromise. The important thing to remember is this: if your client already turned age 70½ by the end of 2019, then RMDs cannot be delayed under the new rule. In other words, all of your clients born on or before June 30, 1949, are subject to the old rule, which makes the 70½ year the first distribution year.

  3. “Stretch IRAs” as we now know them are disappearing. For decades, IRA and qualified retirement plan (QRP) beneficiaries were able to take death distributions over their life expectancies. For example, a 20-year-old grandchild could distribute a grandparent’s IRA balance over 63 years. But now this generous provision has been altered to require faster distributions (generally over a 10-year time frame), which is designed to increase federal revenue. Nonspouse beneficiaries of account owners who die on or after January 1, 2020, are subject to this new rule, unless they are
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries who are not more than 10 years younger than the decedent’s age,
    • minor children of the decedent (they must begin a 10-year payout period upon reaching the age of majority), or
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.

    We expect that this change to the distribution rules will create considerable confusion for clients. They may be subject to two separate sets of beneficiary distribution rules, depending on the date of the account owner’s death. Some beneficiaries, such as spouses, will have the same options that we are familiar with; many others will face an accelerated payout. It may take time for the industry to sort through the many questions that will arise. And we may have to wait for definitive guidance from the IRS. But meanwhile, you can assure your clients that, while the beneficiary rules for both IRAs and QRPs have changed considerably, no immediate action is needed.

  4. The second group of changes involves employer-sponsored retirement plans and not IRAs specifically. Still, each of them could provide potential benefits to your clients.

  5. Employers may adopt a qualified retirement plan (QRP) up until their tax return due date, plus extensions. If you have clients that are also business owners, you have probably been asked at year end, “What can I do to reduce my tax burden?” For employers without a retirement plan, establishing such a plan can be a great idea. But QRPs were generally required to be adopted by the end of the employer’s tax year. (SEP and SIMPLE IRA plans have different deadlines.) Trying to quickly establish a new plan at year-end could cause unwanted stress and could lead to hasty decisions and compliance problems. Starting with 2020 tax years, employers may establish a QRP by their tax return due date, plus extensions. For example, unincorporated business owners could establish a plan for the 2020 tax year until October 15, 2021, if they have a filing extension.

    This new rule aligns the deadline for QRP establishment with the current SEP IRA plan adoption deadline. And though we still expect that some of your client employers will wait until the last minute to act, at least this new provision gives them more flexibility and options. Keep in mind, however, that salary deferrals must be made prospectively. So establishing a 401(k)-type “cash or deferred arrangement” will not allow plan participants to defer salary or wages that they have previously earned.

  6. Safe harbor 401(k) plans now have more contribution flexibility. Businesses with employees sometimes struggle to pass certain 401(k) testing requirements. Simply stated, plans are generally not allowed to provide highly compensated employees (including owners) with benefits that disproportionately favor them over the nonhighly compensated employees. One such test compares the salary deferrals of these two groups. To pass this test, owners (especially) often end up with much smaller deferrals than they would like. Fortunately, a “safe harbor” 401(k) provision deems this test to be passed, but only if the plan guarantees a healthy matching or nonelective contribution for rank-and-file employees. Unfortunately, detailed notification and timing requirements made these safe harbor provisions less than user friendly. For example, under one scenario, an employer could have made a three percent nonelective contribution in order to pass the nondiscrimination test—but only if the employer had notified employees, before the plan year started, that she might make this contribution to pass the test. In addition, the employer would have had to amend the plan before 30 days of the plan year end in order to take advantage of the testing relief. Now, employers can get the same testing relief, without a “pre-notice” and with substantially more time to amend the plan: instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a four percent contribution to all eligible employees rather than a three percent contribution.

    All of this is to say that employers now can enjoy much more flexibility when they adopt a safe harbor 401(k) plan. By some credible estimates, 30-40% of 401(k) plans that cover employees (in addition to owners) use this safe harbor feature. Making compliance easier for these plans—and for yet-to-be-adopted plans—is a great benefit. And learning more details about this provision will help you better serve your clients.

  7. Tax credits for small employers may help jump-start retirement plans. The SECURE Act provides two tax credits for small employers: one provision gives a $500/year startup credit for new 401(k) or SIMPLE IRA plans that include an automatic enrollment provision; another provision increases a startup credit (up to $5,000) for any small employer that adopts a qualified plan, SEP, or SIMPLE plan. Both credits are available to employers for three tax years, beginning with the start-up year. While these incentives may not—in and of themselves—convince an employer to adopt a retirement plan, they may take some of the financial sting out of the decision and prove that Congress is serious about increasing retirement plan coverage in America. Letting your clients know about these helpful tax credits can solidify your value in their eyes.

These six new provisions are likely to get a fair amount of coverage in the mainstream media and in the retirement industry. This Retirement Spotlight should help you discuss these changes more effectively with your clients. But keep in mind that the SECURE Act contains the most significant retirement plan changes in 15 years. There are many other provisions that affect IRAs and QRPs—and there are many questions that have already arisen about specific provisions and how certain changes should be implemented. As federal guidance is released, Ascensus will continue to share thoughtful analysis and practical insights.

 

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


President Trump Signs SECURE Act Into Law

Late Friday, December 20, President Trump signed into law two spending packages passed by Congress, which avert a government shutdown. One of the packages, the Further Consolidated Appropriations Act, 2020 (FCAA), is comprised of multiple bills—including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which contains several major retirement savings-related provisions. Ascensus’ latest Washington Pulse, released on Friday, discusses these provisions in detail.


Senate Approves Appropriations Bill with SECURE Act and Healthcare Provisions; President’s Signature Expected

The U.S. Senate today voted its approval of the Consolidated Appropriations Act of 2020, as passed by the House of Representatives, with provisions that will fund government operations for the coming fiscal year. Included are provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, as well as healthcare-related changes.

The process is still unfinished, with President Trump’s signature needed to enact the legislation. But given the fact that Trump administration officials were deeply involved in negotiating the bill’s provisions, it is generally considered a formality.

Key elements of the legislation can be found in Tuesday’s ascensus.com Latest News announcement.


Bill Would Allow Tax- and Penalty-Free Retirement Savings Withdrawals for Student Loan and Education Payments

Sen. Rand Paul (R-KY) has introduced legislation that would permit tax-free, penalty-free withdrawals from IRAs and employer-sponsored retirement plans for qualified education expenses or student loan repayment. According to a summary released by Sen. Paul’s office, the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act would do the following.

  • Permit up to $5,250 per year to be distributed from an IRA or employer-sponsored retirement plan, tax-free and exempt from the 10 percent early distribution penalty tax, if used for eligible education expenses or eligible student loan repayments
  • Additionally, permit such tax- and penalty-free distributions for qualifying education expenses of a spouse or dependent
  • Allow employers to make student loan payments of up to $5,250 per year on behalf of an employee, as a tax-free employee benefit
  • Permit employees to elect Roth treatment for employer-made contributions to their retirement plan accounts—contributions that would generate potentially-tax-free earnings (currently, all employer contributions are pretax)
  • Repeal the current-law cap and phase-out of the student loan interest income tax deduction

The bill has been referred to the Senate Finance Committee.


IRS Seeks Continued Information Collection Authority

Today’s Federal Register contains an IRS solicitation of public comments on the agency’s request for continued authority to collect information on use of the Form 8809, Application for Extension of Time to File Information Returns. The form can be used by entities seeking an extension of time to file (with the IRS) certain annual information returns, including those that report transaction and account information for IRAs, employer-sponsored retirement plans, health savings accounts, medical savings accounts, Coverdell education savings accounts, 529 plans, and ABLE accounts.

Public comments on whether the IRS should have continued authority to collect information on use of this form must be received by the agency on, or before, January 31, 2020.


IRS Proposes Updated Life Expectancy Tables for Retirement Arrangement Required Distributions

The IRS has issued a notice of proposed rulemaking and a notice of public hearing for updated life expectancy and distribution tables. The updated tables would be used in determining required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans. RMDs generally must begin when an individual reaches age 70½, or—in the case of some employer-sponsored retirement plans—when an individual retires and separates from service with the sponsoring employer. Beneficiaries may also take required payments based on the life expectancy tables after the death of an IRA owner or retirement plan participant.

The proposed guidance is a response to an August 2018, Executive Order by President Donald Trump directing the Treasury Department and IRS to revise existing guidance on such distributions, taking into account increased life expectancies in the population since final RMD regulations were last issued in 2002. A public hearing has been scheduled for January 23, 2020. Written or electronically-submitted comments must be received by a date 60 days from publication in the Federal Register (currently scheduled for tomorrow, November 8, 2019).

The notice of proposed rulemaking and public hearing can be found here.


2020 Cost-of-Living Adjustments for IRAs and Retirement Plans

The IRS issued Notice 2019-59 containing the 2020 IRA and retirement plan limitations after cost-of-living adjustments (COLAs). Most of the retirement plan limitations increased.

 

2020 IRA Contribution Limitations

  • Traditional and Roth IRA contributions: $6,000 (unchanged)
  • Traditional and Roth IRA catch-up contributions: $1,000 (not subject to COLAs)
  • IRA deductibility phase-out range for single taxpayers that are active participants in retirement plans: $65,000 to $75,000 (was $64,000 to $74,000 for 2019)
  • IRA deductibility phase-out range for married joint filing taxpayers that are active participants in retirement plans: $104,000 to $124,000 (was $103,000 to $123,000 for 2019)
  • IRA deductibility phase-out range for non-active participants who are married to active participants in retirement plans: $196,000 to $206,000 (was $193,000 to $203,000 for 2019)
  • Roth IRA income limit phase-out range for determining contribution eligibility for married joint filers: $196,000 to $206,000 (was $193,000 to $203,000 for 2019)
  • Roth IRA income limit phase-out range for determining contribution eligibility for single filers and heads-of-households: $124,000 to $139,000 (was $122,000 to $137,000 for 2019)

 

2020 Retirement Plan Limitations

  • Annual additions under Internal Revenue Code Section (IRC Sec.) 415(c)(1)(A) for defined contribution plans: $57,000 ($56,000 for 2019)
  • Annual additions under IRC Sec. 415(b)(1)(A) for defined benefit pension plans: $230,000 ($225,000 for 2019)
  • Annual IRC Sec. 402(g) deferral limit for 401(k), 403(b), and 457(b) plans: $19,500 ($19,000 for 2019)
  • Catch-up contributions to 401(k), 403(b), and 457(b) plans: $6,500 ($6,000 for 2019)
  • Annual deferral limit for SIMPLE IRA and SIMPLE 401(k) plans: $13,500 ($13,000 for 2019)
  • Catch-up contributions for SIMPLE IRA and SIMPLE 401(k) plans: $3,000 (unchanged)
  • IRC Sec. 401(a)(17) compensation cap: $285,000 ($280,000 for 2019)
  • Highly compensated employee definition income threshold: $130,000 ($125,000 for 2019)
  • Top-heavy determination key employee definition income threshold: $185,000 ($180,000 for 2019)
  • SEP plan employee income threshold for benefit eligibility: $600 (unchanged)

 

Retirement Savings Tax Credit

Taxpayers who make contributions to IRAs and/or salary deferrals under retirement plans may qualify for an income tax credit if their income is under certain amounts. Contributions of up to $2,000 may be eligible for credits of 10, 20, or 50 percent of the amount contributed. Eligibility is based on income and tax filing status as provided in the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions. The applicable income limits are subject to cost-of-living adjustments as well.

The maximum income thresholds in all categories for this credit will increase for 2020. For 2020, taxpayers with adjusted gross income that exceeds $65,000 for joint filers, $48,750 for head of household, and $32,500 for all other filers will not qualify for a tax credit. See Notice 2019-59 for the specific income limitations based on tax filing status.


2020 Taxable Wage Base Announced

The U.S. Social Security Administration has announced several 2020 benefit amounts that increase according to a cost-of-living-adjustment (COLA) formula. The adjustment that applies to tax-advantaged retirement savings arrangements is the Social Security taxable wage base (TWB), which will rise from $132,900 to $137,700 for 2020.

The TWB is the income level above which amounts are not withheld from earnings for Social Security benefit purposes. The TWB is used in certain retirement plan allocation formulas, notably for the allocation of some profit sharing and simplified employee pension (SEP) plan contributions. Such formulas are often referred to as “integrated” or “permitted disparity” formulas. Their use allows an additional benefit based on employee compensation above an integration level; one of the permitted integration levels is the Social Security TWB.

Potentially significant for other savings arrangements is the fact that IRS COLA-adjusted amounts for IRAs and employer-sponsored retirement plans for the coming year are often released very shortly after the Social Security Administration announces the TWB.