IRA

SBA Rule Allows Schedule C Tax Filers to Use Gross Income for PPP Loans

The Small Business Administration (SBA) has issued an interim final rule effective March 4, 2021, that would allow business owners who file an IRS Form 1040, Schedule C, to use gross income rather than net earnings from self-employment in determining payroll costs for Paycheck Protection Program (PPP) loans. Previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C, as payroll costs (if there are employees) plus net profits, which is net earnings from self-employment.

This change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very little or negative net profit, many of which are located in underserved communities. Business owners with employees can use either net profit or gross income minus certain employee benefit and wage expenses.

PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group healthcare coverage, including payment of insurance premiums.

To mitigate the risk of fraud or abuse, if a borrower that is Schedule C filer elects to use gross income to calculate his or her loan amount on a First Draw PPP Loan and more than $150,000 in gross income was reported on the Schedule C that was used to calculate the loan amount, the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith. The borrower may be subject to a certification review by the SBA.

The interim final rule also removes exclusions for small business owners with prior non-fraud felony convictions and those struggling to make student loan payments from participating in the program. Unless extended, the PPP is currently set to expire on March 31, 2021.


Retirement Spotlight: IRS Regulations Address Tax on Unrelated Businesses in Plans

The IRS has released final regulations on computing unrelated business taxable income (UBTI) for a tax-exempt organization. This guidance may affect only a relatively small portion of tax-exempt retirement plans. For those plans that invest in certain types of assets, however, knowing the rules will be important. As explained later, these final regulations may help simplify administration and reporting requirements for what are usually considered to be more complex investments.

The final regulations pertain to Internal Revenue Code Section (IRC Sec.) 512(a)(6), added by the Tax Cuts and Jobs Act of 2017. The regulations are generally effective for taxable years starting on or after December 2, 2020. Tax-exempt organizations may choose to apply the final regulations to taxable years that start on or after January 1, 2018. Alternatively, they may rely on a “reasonable, good-faith interpretation” of IRC Sec. 512(a)(6) for such taxable years.

Rationale for the Unrelated Business Tax

IRC Sec. 501(c) contains the list of exempt organizations that receive special tax benefits. Perhaps most familiar to many are IRC Sec. 501(c)(3) entities, which are organized and operated for religious, charitable, scientific, educational, and other similar purposes. Because of the societal benefits that these organizations confer, they are exempt from federal taxation. Hence the name “exempt organizations”.

Because these exempt entities operate free from most taxation, they can devote more of their resources to their purpose. Some organizations own or operate businesses outside this purpose, usually to raise money to further the organization’s goals. But this could allow them to have an advantage over for-profit organizations conducting the same kind of business.

  • Example: Misty Meadows Arboretum is an IRC 501(c)(3) exempt organization whose primary purpose is to educate the community about various ecosystems. It relies primarily on charitable contributions from its members. It always has a spring plant sale, which is open to the public and brings in a modest profit. Misty Meadows’ new director sees potential in creating a larger plant sale. Eventually, the arboretum builds multiple greenhouses to meet the huge demand. Before long, the annual plant sale is by far Misty Meadows’ biggest revenue source. Unfortunately, Misty Meadows’ director wasn’t aware that the arboretum was prohibited from using its tax-exempt status to run the almost year-round plant-sales operation without paying any tax.

Exempt organizations that operate a business enterprise outside their tax-exempt purpose are required to pay taxes on profits from that enterprise. This levels the playing field so that not-for-profit entities do not have an unfair advantage, which would be contrary to public policy.

Retirement Plans as Exempt Organizations

In addition to the UBTI rules applying to IRC 501(c)(3) organizations, they also apply to trusts under IRC Sec. 401(a). This includes pension plans, profit sharing plans, and 401(k) plans. The IRS also applies the UBTI rules to IRAs.

In the vast majority of plans and IRAs, UBTI will not be a factor. Generally, most assets in these types of plans are invested in mutual funds or time deposits (i.e., certificates of deposit). Even participants in plans that permit greater investment latitude will often invest in individual securities. Only those plans that permit true investment self-direction will normally become subject to the UBTI rules. The plans most often associated with unrelated taxable businesses are truly self-directed owner-only 401(k) plans and IRAs. These types of accounts are referred to as self-directed accounts or SDAs. And while some financial organizations may permit SDA owners to place assets in investments that generate UBTI, many SDA investments (e.g., precious metals, promissory notes) do not.

How Does the Tax on UBTI work?

The rules on UBTI can be complex, but here are some of the basics.

  • Annual income of $1,000. Form 990-T: Exempt Organization Business Income Tax Return, must be filed for plans with gross income of $1,000 or more from an unrelated trade or business. Form 990-T must normally be filed for qualified plans and IRAs by the trust’s tax return due date (generally April 15 for calendar-year tax filers).
  • Tax rates. A filer gets a $1,000 “specific deduction.” So an IRA with exactly $1,000 in gross income from an unrelated business would have to file Form 990-T, but it doesn’t pay tax on the income unless there is UBTI after the $1,000 deduction (and any other deduction) is applied. The tax rate schedule for trusts then applies for any taxable unrelated business income. This rate starts at 10 percent—but quickly rises to 37 percent (on taxable income over $12,950).
  • Filing Form 990-T. This is one of the biggest concerns surrounding SDAs: who is responsible for actually filing Form 990-T? The Form 990-T instructions state that the exempt organization (e.g., the 401(k) plan) and the trustee or custodian of the IRA must file. Practically, the financial organization may address this requirement by clarifying (in a service agreement) that the account owner must prepare any Form 990-T that is needed, while the financial organization (as trustee or custodian) will file it with the IRS. It is important that both parties understand their roles. The financial organization may not know enough of the details about the underlying investments to prepare Form 990-T, but the account owner may assume that, because the financial organization is allowing self-directed investments, it is also taking care of every aspect of such investments. Unless financial organizations are charging for providing this service, it is unlikely that they will volunteer to do it. And if they agree to prepare Form 990-T, they must have access to sufficient information. This is but one reason that financial organizations must carefully consider whether they wish to offer self-directed accounts. If they do, they should ensure that their clients clearly understand their respective roles and duties.

NOTE: Any financial organization allowing—and any individual owning—retirement plan investments that require Form 990-T filing should consult with a competent tax adviser.

Specific Provisions in the Final Regulations

The regulations contain provisions that may affect how unrelated businesses operate within a retirement plan.

  • Multiple unrelated businesses are treated separately. The final regulations require an exempt organization subject to the unrelated business income tax—if it has more than one unrelated trade or business—to calculate UBTI separately for each one. But the rule also prohibits offsetting the income of one unrelated business with the net operating loss of another. Using the example above, let’s consider how the new rules would dictate how the arboretum would report UBTI if it decided to build and operate a restaurant to increase its income.

The final regulations require an exempt organization to identify each separate business using the first two digits of the North American Industry Classification System (NAICS) code. The NAICS code (pronounced “nākes”) is a six-digit system that classifies over one thousand industries. The first two digits identify the general sector of the business (e.g., construction, manufacturing, education). Each successive digit narrows the business definition. In our example, for instance, the arboretum’s greenhouse operation could be classified with the first two digits “45,” which identifies “Retail Trade”; the restaurant would be classified under “Accommodation and Food Service,” which is “72.” If multiple businesses have the same first two digits, they are not considered separate businesses of the exempt organization. If the digits are different, they must file a separate Form 990-T schedule for each business with gross income of at least $1,000. In addition, one unrelated business cannot reduce its tax obligation by using the net operating loss (NOL) of another. So if the arboretum’s greenhouse made a profit, it could not reduce its taxes by using the restaurant’s NOL. Each “separate” unrelated business must stand on its own.

  • Unrelated businesses in the nature of investments. An exempt organization may be permitted to treat various investments that are subject to UBTI as one distinct unrelated trade or business. This allows the organization to invest in multiple unrelated businesses that can be combined for UBTI purposes into one “business” classified as investment activity. The regulations limit such investments to
    • qualifying partnership interests (QPI),
    • qualifying S corporation interests (QSI), and
    • debt-financed properties.

An exempt organization may identify “investment activities” on its Form 990-T (Schedule A)—using a six-digit non-NAICS code rather than the two-digit NAICS code. But it can classify multiple unrelated investments as investment activity on one Schedule A only if each of the investments is one of the types just mentioned. The organization has a QPI in an unrelated trade or business if the organization

  • is not a general partner in the partnership, and
  • either holds no more than a 2 percent interest in the profits or capital, or holds no more than 20 percent of the capital interest and does not significantly participate in the partnership.

The regulations contain similar rules for a QSI. But instead of using the term “profits or capital interest,” the tern “stock ownership” is used. So for investments in both partnerships and S corporations, exempt organizations with limited ownership and involvement can combine such investments into one unrelated business classified as “investment activity.” This approach gives exempt organizations more investment flexibility by reducing their need to obtain information from entities they invest in—information that may be harder for a small investor to readily obtain.

Debt-financed properties are likely to be included in this investment activity category because special UBTI rules already apply to such properties. Grouping other investments together may be a practical way for the IRS to simplify Form 990-T filing, thus ensuring greater compliance.

Practical Impact on Retirement Plans

The only specific plan provision in the final regulations—adopted without change from the proposed regulations—merely codified a rule that the IRS has operated under for years. This addition clarifies that the definition of unrelated trade or business for trusts (such as qualified retirement plan trusts) also applies to IRAs.

Other than that, the effects on plans, if they apply at all, are likely minor. But they are still important. Consider a self-directed account owner, for example, who has invested in a debt-financed rental property and has also bought (at arm’s length) a very small interest in a partnership (a QPI). Historically, if each investment generated at least $1,000 in gross income, each would be reported as a separate business (with a separate Form 990-T schedule). Now it is clear that multiple investments can be more easily grouped into one classification: investment activities. And to the extent that different investments in a plan can be aggregated, there is less concern about the new limitation on NOLs reducing profits in another unrelated business. Most SDAs will simply require a Form 990-T with a single Schedule A that accounts for all their unrelated business investments.

Conclusion

Although these regulations may have little effect on retirement plans, those who work with self-directed retirement plans should consider the following questions.

  • Do any of my plans contain investments that may generate UBTI?
  • If so, do I know who is responsible for filing IRS Form 990-T? While a financial organization that operates in the self-directed account sector may file this form routinely (when needed), it may be worth verifying what the trust agreement or other controlling documents state.
  • Does the entity filing Form 990-T know about the details of the final regulation? While the implications of the final regulations are relatively minor, knowing the details can still be helpful.

The IRS has released a draft version of the updated Form 990-T (and instructions), which contain details on the filing requirements mentioned in the final regulations.

Please visit ascensus.com for the latest news and developments.

 

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


New Withholding Form to Be Used for 2022

The IRS has made available a 2022 tax year draft Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, and indicates that the form will be split into two forms. Form W-4P will continue to be used, but only to withhold federal income tax from periodic retirement plan and IRA payments. Periodic payments are installment payments at regular intervals generally over a period of more than one year.

A 2022 tax year draft of new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, has also been released and will be used for nonperiodic and rollover distributions beginning in that tax year. Nonperiodic distributions are subject to a 10 percent withholding rate unless a different rate is elected. Eligible rollover distributions are subject to a mandatory 20 percent withholding rate on the taxable amount of the distribution unless a higher rate is elected. A revised draft of Form W-4R is expected to be made available shortly.


IRS Issues Deadline Relief for Texas Victims of Winter Storms

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for Texas winter storm victims. The tax relief postpones various tax filing and payment deadlines that occurred starting on February 11. The entire state of Texas is included in this relief. Additionally, taxpayers in other locations will automatically be added to this relief if the disaster area is further expanded.

In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.

Affected taxpayers with a covered deadline on or after February 11, 2021, and on or before June 15, 2021, will have until June 15, 2021 to complete the act(s). “Affected taxpayer” automatically includes anyone who resides or has a business located within the designated disaster area. Those who reside or have a business located outside the identified disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request the relief.


Retirement Spotlight: Missing Participants – Prevention is the Best Cure

When employers start a retirement plan, they may ask who should be eligible to participate, what kind of contributions should be made, and how and when can employees access their account balances? Unfortunately, many employers don’t consider how to handle missing participants’ account balances—or more importantly—how to prevent losing track of participants in the first place.

The DOL did provide guidance for locating missing participants in 2014 with the issuance of Field Assistance Bulletin (FAB) 2014-01. Although FAB 2014-01 is helpful, it deals mainly with terminated defined contribution plans.

In January 2021, the DOL released three pieces of new guidance: Missing Participants – Best Practices for Pension Plans, Compliance Assistance Release No. 2021-01, and FAB 2021-01. The first piece in this package gives practical guidance on concerns to watch out for and actions to consider. The second piece sheds some light on the DOL investigative process for defined benefit plans. And the third piece gives temporary enforcement relief for terminating defined contribution plans that transfer missing participant benefits to the PBGC. This article will focus on the main points of this guidance and the steps that a plan fiduciary (typically the employer) can take to address concerns related to missing and unresponsive participants.

Tips for Reducing Missing Participant Issues

The DOL’s Missing Participants – Best Practices for Pension Plans identifies practical steps that plan fiduciaries can take to resolve problems created by missing participants. Plan fiduciaries should determine which reasonable, cost-effective practices will yield the best results considering the circumstances—such as the amount of accrued benefits and the cost of various search methods.

  • Maintain accurate census information. Although plan fiduciaries may obtain accurate contact information for new employees, there may be little follow-up afterwards. This often leads to inaccurate contact information, which makes it harder to distribute plan assets once the participant incurs a distributable event. The DOL lists several steps that fiduciaries can take to help ensure that participants’ information is up-to-date.
    • Periodically contact current participants, retired participants, and beneficiaries to verify that the correct contact information is on file. This information may include individuals’ home and business phone numbers and addresses, social media contact information, and emergency contact information.
    • Provide a contact information change request form when sending out other plan communications. Use these communications to encourage participants to notify the plan fiduciary when there is a change in contact information.
    • Offer a secure online portal that participants can use to update their contact information. In addition to offering an online portal, have messages or prompts appear when individuals log into the plan’s website. These messages or prompts should be linked to the online portal and should ask participants and beneficiaries to verify their contact information.
    • Identify uncashed checks and undeliverable mail or email. Once these items are identified, consider how to address and prevent these occurrences in the future.
    • During a merger, acquisition, or the hiring of a new record keeper, ensure that relevant employment records are provided to appropriate parties.

In addition to taking these steps, plan fiduciaries should also continually monitor census information and promptly correct any errors.

  • Create good communication procedures. The DOL suggests that plan fiduciaries take the following steps to ensure that participants are fully informed of their rights and benefits under the plan.
    • When sending correspondence to participants, include the plan sponsor’s name within the communication, and if delivered by mail, on the envelope that it’s delivered in. Clearly state why the participant is receiving the information. Plan fiduciaries should also ensure that their non-English-speaking participants get help in interpreting the correspondence.
    • Provide specific communications to new employees and to participants who are retiring or leaving the company. These communications should stress the importance of providing correct contact information. For example, the communications should explain that this information helps determine when participants can receive their benefits and what amount they’re eligible to receive.
    • Inform participants about their options to consolidate accounts from other employer plans and IRAs.
    • Make it easy for participants to ask questions about their plan benefits by explaining how to access the plan sponsor’s toll-free phone number and website.
  • Use reliable, extensive search methods. Sometimes, despite having good communication and audit procedures in place, plan fiduciaries lose track of their participants. When this happens, plan fiduciaries need to demonstrate that they’ve regularly taken sufficient measures to locate the missing individual, including these DOL-approved search methods.
    • Search all employer records (e.g., payroll records or group health plan records) for more accurate contact information, including email addresses, phone numbers, and social media.
    • Ask the participant’s beneficiaries, emergency contacts, or former colleagues for updated contact information.
    • Try to locate the participant through free online search engines, public databases, social media, commercial locator services, certified mail, or private delivery services.
    • Add participants to pension registries, such as the National Registry of Unclaimed Retirement Benefits, and publicize the registries (e.g., through email or newsletters) to current and former employees and union members.
  • Document steps taken to locate missing individuals. To help with compliance, plan fiduciaries should adopt clear, concise policies—and follow them. And they should document everything they do to locate the missing participant. For example, fiduciaries may develop a checklist of search methods that captures the result of each attempt to find a participant. Plan fiduciaries that use third-party administrators (TPAs) should identify and remedy any communication or recordkeeping concerns and should ensure that the TPA is performing all services that it has agreed to perform.

The DOL emphasizes that, when missing participants’ assets are forfeited under the terms of the plan, plan fiduciaries must still keep records of these participants’ accounts in order to distribute their benefits when due.

Issues the DOL Looks for During an Investigation

Several years ago, the DOL’s Employee Benefits Security Administration’s Regional Offices started a compliance initiative called the “Terminated Vested Participants Project (TVPP).” While this project is aimed at identifying defined benefit plan compliance problems, the DOL may look for similar problems in defined contribution plans. Similar fiduciary obligations apply regardless of the plan type. The Compliance Assistance Release No. 2021-01 (the second piece of the DOL’s guidance package) explains which types of noncompliance may cause the DOL to investigate a defined benefit plan. The DOL also explains that this guidance will help ensure a consistent investigative process for TVPP audits. For example, the DOL considers certain problems (such as missing or incorrect data, undeliverable mail, or uncashed benefit checks) “red flags” that could hint at more serious systemic failures. This guidance may help plan fiduciaries develop a checklist to formalize procedures that help keep track of participants.

  • Reasons for defined benefit plan investigations. The DOL may investigate a plan that appears to have systemic administration problems—especially those related to plan distributions and terminated participants’ vested benefits. Such problems increase with business bankruptcies or with mergers or acquisitions that result in the loss of participant data.
  • Information the DOL may ask for during an investigation. Once a defined benefit plan investigation starts, the DOL will typically seek documents that
    • relate to the plan’s distribution requirements;
    • contain demographic and participant information, such as actuarial reports, participants’ contact information, and employment status; and
    • describe communication and locating procedures: specifically, how the plan fiduciary communicates to individuals who are entitled to benefits and how internal policies dictate the steps taken to locate missing or unresponsive terminated participants.
  • Errors the DOL looks for during an investigation. Inadequate procedures, especially those used to identify and contact missing participants and their beneficiaries, will likely be on the DOL’s radar. For example, when reviewing plan communications, the DOL may examine whether the fiduciary repeatedly sends communications to a known “bad address” without seeking the correct address. Incomplete census data, including the use of placeholders (such as 01/01/1900 birth dates or “John Doe participants”) may also indicate procedural deficiencies.

Once the DOL completes the investigation, it will work with the plan fiduciary to correct any identified issues.

Don’t Forget About the PBGC

DOL regulations provide a safe harbor both to plan fiduciaries of terminating defined contribution plans and to qualified termination administrators (QTAs) of abandoned plans. This safe harbor generally permits plan fiduciaries and QTAs to roll over missing participants’ and beneficiaries’ assets to an IRA. And in certain cases, the assets can be placed in a federally insured bank account or a state’s unclaimed property fund.

In December 2017, the Pension Benefit Guaranty Corporation (PBGC) created a new program for terminating defined contribution plans. This program allows fiduciaries of terminating defined contribution plans to transfer missing participants’ and beneficiaries’ assets to the PBGC. This option helps plan fiduciaries complete the termination process—while making the plan assets accessible to missing individuals.

The DOL envisions expanding the safe harbor to include the transfer of missing individuals’ assets to the PBGC. FAB 2021-01 (the third piece of the DOL’s guidance package) states that, pending the expansion of the safe harbor, the DOL will not penalize plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans if they transfer plan assets to the PBGC. This temporary DOL policy provides another option when handling abandoned assets. Before transferring plan assets, however, the plan fiduciary or QTA must take all necessary steps to identify and locate the missing individual.

The DOL released FAB 2021-01 in part because it believes that the coronavirus pandemic may make it harder for plan fiduciaries and QTAs to stay in contact with former employees and their beneficiaries. Transferring assets to the PBGC could be a reasonable alternative to moving plan assets to an IRA, transferring the assets to a federally insured bank account, or escheating the account to the state.

The Takeaway

Plan fiduciaries should develop, document, and regularly review procedures that integrate best practices relative to missing participants. Taking decisive steps now may help prevent problems later—and may ensure that plan participants and their beneficiaries receive their proper benefits.

As always, visit ascensus.com for the latest news and information.

 

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


Retirement Spotlight: IRS Aims to Clarify 60-Day Postponement Rule for Federally Declared Disasters

At the end of 2019, the Internal Revenue Code (IRC) was amended to create a mandatory 60-day postponement for certain federal tax-related deadlines in the event of a disaster. This new provision was designed to ensure that affected taxpayers would have guaranteed relief while recovering from a natural disaster or other emergency. But this measure didn’t seem to affect how the IRS had already been responding to such events. In fact, the new law created some ambiguity. In an effort to address this uncertainty, the IRS has released proposed regulations. These regulations provide more information about

  • what time-sensitive tax acts are covered;
  • how the 60-day postponement is determined; and
  • how the phrase, “federally declared disaster,” is defined for purposes of this 60-day period.

These regulations make it clear that the practical applicability of the automatic 60-day rule still ultimately depends on the IRS’s granting of deadline relief when disasters happen. And because the IRS has already been doing this—typically granting more than 60 days—there may not be a noticeable change.

60-Day Postponement Rule

The mandatory 60-day postponement rule was added (as IRC Sec. 7508A(d)) by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. (This act was part of the Further Consolidated Appropriations Act, which also contained the SECURE Act.) It requires the IRS to automatically postpone for 60 days certain time-sensitive, federal tax-related deadlines—including those related to retirement savings plans—in response to federally declared disasters that occur on or after December 21, 2019.

The rule applies to taxpayers

  • who reside in or were injured or killed in a disaster area,
  • who have principal places of business in the disaster area,
  • who are relief workers providing assistance in a disaster area, or
  • whose tax records necessary to meet a tax deadline are located in a disaster area.

The IRS already had the authority under IRC Sec. 7508A to extend certain tax-related deadlines for up to one year in response to presidentially declared disasters or terroristic or military actions. The IRS typically makes disaster declarations through news releases, describing the counties affected and the length of the deadline postponement. Extensions typically are 120 days. Some are less. But the 60-day postponement rule ensures at least a minimum time to complete the acts covered by the guidance.

Time-Sensitive Tax Acts

The 60-day postponement statute contains a list of specific time-sensitive, tax-related acts. Those that pertain to retirement plans are

  • making IRA or retirement plan contributions,
  • removing excess IRA contributions,
  • recharacterizing IRA contributions, and
  • completing rollovers.

The proposed regulations point to other time-sensitive acts—specified under IRC Sec. 7508, Treasury Regulations, and IRS Revenue Procedure 2018-58—such as filing IRS Form 5500 for retirement plans and making retirement plan loan payments. Thus, the proposed regulations do not limit the mandatory 60-day postponement to only those acts listed in new IRC Sec. 7508A(d). Instead, they reinforce the IRS’s discretion in identifying which tax-related acts will be postponed.

So, despite the seemingly automatic nature of the new 60-day extension, individuals must still wait for the IRS to grant relief that applies to a specific disaster and to a specific area. If the IRS decides not to postpone a time-sensitive act, the 60-day postponement statute simply doesn’t apply. On the other hand (for disasters with incident dates), if the IRS postpones an act, the postponement must be for at least 60 days.

60-Day Postponement Period

The mandatory 60-day postponement period generally begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends on the date that is 60 days after the latest incident date. For example, consider a hurricane battering a coastal state for several days. FEMA announces a disaster declaration that is approved by the president. It specifies the earliest incident date for the affected counties as August 15 and the latest incident date (when the flooding ends) as August 19. The deadline postponement begins on August 15 and ends 60 days from August 19.

Under the 60-day postponement statute, however, it is unclear how the 60-day period is calculated when the disaster declaration either does not contain an incident end date or does not contain any incident dates. This happened with the president’s March 13, 2020, emergency coronavirus declaration: no incident date was specified, and no latest incident date has yet been determined. The proposed regulations simply state that in such a case no mandatory postponement period applies. Rather, the IRS will determine the postponement period—under its discretionary authority under IRC Sec. 7508A(a)—not to exceed one year.

Federally Declared Disaster

The 60-day postponement statute uses the phrases “disaster area” and “federally declared disaster” and cites the definitions found in IRC Sec. 165(i)(5). There, “federally declared disaster” is defined as ‘‘any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.’’ But the words “federally declared disaster” are not used in the Stafford Act. Instead, the Stafford Act uses the terms ‘‘emergency,’’ ‘‘major disaster,’’ and ‘‘disaster (used to refer to both emergencies and major disasters).”

This language difference between IRC Sec. 165(i)(5) and the Stafford Act has led to some misunderstanding. For this reason, the IRS has also amended the regulations under IRC Sec. 165 to clarify that the term “federally declared disaster” includes references to both “major disaster” and “emergency,” as defined in the Stafford Act.

The Takeaway

The IRS is accepting comments on all aspects of the proposed regulations before they are adopted as final. Written or electronic comments and requests for a public hearing must be received by March 15, 2021.These regulations—when made final—may clarify the interplay between the new mandatory 60-day postponement rule and existing disaster relief. But practically, not much is likely to change. The IRS will continue to exercise its considerable authority to postpone tax-related deadlines. Postponements will generally continue to exceed 60 days. And individuals will still rely on the IRS to identify which disasters and tax-related items will qualify for deadline postponement.

Visit ascensus.com for further developments on this and other guidance.

 

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Public Hearing Announced for Proposed Regulations on Postponements Due to Federally Declared Disasters

Published in the Federal Register is an IRS notice of public hearing on proposed regulations for automatic 60-day postponement of certain deadlines following federally declared disasters. (The proposed regulations were published January 13, 2021, in the Federal Register.)

The public hearing is scheduled for March 23, 2021. Oral comments at the hearing can be made by telephone. Speakers outlines must be received by the IRS by March 15, 2021. The notice contains details on how to submit outlines and to receive an agenda prepared by the IRS. If no outlines are received, the hearing will be cancelled.

The tax-related acts covered by these proposed regulations are defined in Internal Revenue Code Section 7508A. This is the authority historically cited for postponement of deadlines in cases of local or regional disaster declarations. These postponements typically have a duration of as much as 120 days, though some are less. The new proposed regulations would create an automatic 60-day postponement in cases of federally declared disasters, ensuring that there would be at least 60 days to complete the tax-related acts covered by the guidance.

In addition to extending certain tax filing and tax payment deadlines, the postponements addressed in this guidance include completion of the many time-sensitive, tax-related acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.


2021 Could See More Retirement and Health Legislation

Despite political partisanship that has marked much of the 116th Congress in 2019 and 2020, there have been some notable exceptions with bipartisan outcomes. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 proved that cooperation is a possibility. That legislation, enacted in December 2019, made significant enhancements to tax-advantaged savings arrangements.

Enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 was a unified response to the pandemic that has disrupted many Americans’ lives in both economic and health terms. And, in December 2020, Congress was able to put aside differences in crafting legislation combining additional pandemic relief with needed last-minute federal agency appropriations.

What 2021 will bring is yet to be determined. The Democratic majority in the House of Representatives narrowed in the 2020 general election, and control of the U.S. Senate shifted to Democratic control by the narrowest of margins. A Democrat also now resides in the White House. His legislative agenda has yet to be revealed in detail, but—based on campaign messaging—may include the broadly-defined goal of “equalizing benefits across the income scale.”  This ambition aside, it can be difficult for any president to accomplish legislative objectives with such a narrowly divided Congress.

Unless, that is, these objectives align with those of a majority of lawmakers. Fortunately, tax-advantaged savings legislation has a history of being able to gather bipartisan support. It has win-win dimensions that tend to unify, rather than divide.  For this reason, there is optimism that one or more savings-focused bills could be enacted in 2021. Several introduced during the past two years will likely be re-introduced in the 117th Congress.

Securing a Strong Retirement Act

This legislation—called SECURE 2.0 by some, in reference to 2019’s SECURE legislation—is a further example of bipartisanship. It is jointly sponsored by House Ways and Means Committee Chairman, Representative (Rep.) Richard Neal (D-MA)— and GOP Ranking Member Kevin Brady (R-TX). Due to the prominence of these sponsors, the legislation is considered to have favorable prospects. It includes the following provisions.

  • Require employers—with exceptions for certain new and small businesses—to establish an automatic enrollment deferral-type retirement plan, such as a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

  • Provide an enhanced small employer plan start-up tax credit for such new plans.

  • Enhance the “saver’s credit” for IRA contributions and for deferral-type employer plan contributions, such as those made to a SIMPLE IRA plan.

  • Exempt up to $100,000 of accumulated IRA and employer-sponsored retirement plan assets from required minimum distribution (RMD) calculations.

  • Increase the RMD onset age from 72 to 75.

  • Reduce penalties for RMD failures.

  • Provide a second (age 60), higher IRA catch-up contribution limit.

  • Index IRA catch-up contributions for inflation.

  • Increase the limit for IRA and retirement plan assets that are exempt from RMD calculations under qualifying longevity annuity contract (QLAC) rules.

  • Reduce certain IRA error penalties and permit more self-correction.

  • Permit matching contributions, e.g., to SIMPLE IRAs—based on student loan payments.

Automatic IRA Act

It is widely accepted that up to 40 percent of American workers do not have access to a workplace retirement plan. A concept that dates back more than a decade proposes universal, automatic saving to an IRA through a worker’s place of employment, if no other retirement plan is available. This is the concept embodied in the Automatic IRA Act, legislation that has been introduced in several previous sessions of Congress.

In the absence of action at the federal level, many states have acted on their own to establish automatic IRA-based saving programs, which—while beneficial for those who are covered—has left geographic gaps, and a patchwork with differing program rules. A uniform national automatic IRA program could close these gaps and address differences.

  • Employers in business less than 2 years or employing fewer than 10 employees would be exempt.

  • Employees would be automatically enrolled and contributions withheld from pay, but they would be able to opt out.

  • Accounts would be Roth IRAs unless a Traditional IRA was elected.

  • Contributions would likely begin at 3 percent of pay, but with latitude to range between 2 percent and 6 percent.

  • Investments would include balanced, principal preservation, and target-date funds, as well as guaranteed insurance contracts.

 Past sponsors of automatic IRA legislation have included Rep. Richard Neal (D-MA) and U.S. Senator Sheldon Whitehouse (D-RI).

HSA Enhancements

Affordable health insurance for Americans continues to be an extremely challenging goal. One increasingly common option—an alternative to the comprehensive “major medical” health insurance model—is a high deductible health insurance plan linked to a savings and spending account known as a health savings account, or HSA.

This approach is intended to offer a path to lower health insurance premiums, and to allow individuals to save in a tax-advantaged manner for expenses that are below their health plan deductible, and for co-pay amounts they owe. What initially began as a temporary test program under medical savings account (MSA) nomenclature later evolved into the HSA we know today.

With many U.S. employers offering employees an HSA-based program as one—or perhaps the only—health insurance option, much focus has been on how the HSA might be tweaked to improve its usefulness. Following are some of the proposed HSA modifications, a composite of provisions from several bills introduced in the 116th Congress. Some, or all, could be proposed again in the 117th Congress that has just been sworn in.

  • Increase maximum annual HSA contributions; some have proposed doubling the limits.

  • Expand the treatments for which a plan’s high deductible need not be met before benefits commence, such as chronic care services and more medications, including nonprescription drugs.

  • Permit care at onsite employer or retail clinics without forfeiting HSA contribution eligibility.

  • Treat costs of participating in a fixed-fee primary care arrangement as HSA-eligible expenses.

  • Allow coverage of offspring under a parent’s HSA-compatible health plan to age 26; would mirror the Affordable Care Act (ACA).

  • Define ACA bronze-level and certain catastrophic health insurance plans as HSA-compatible.

  • Treat a defined portion of HSA accumulations spent for “fitness and health” as HSA-eligible expenses.

  • Allow a fixed amount from health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs) remaining at year’s end to be rolled over to an HSA.

  • Allow Medicare-eligible individuals enrolled only in Part A (Medicare-provided hospital care) to remain HSA contribution-eligible.

Other Legislative Ambitions

Beyond the possibilities noted above, other initiatives that may be in play in the 117th Congress could include getting closer to universal availability of 401(k)-type workplace retirement plans and addressing the solvency of under-funded defined benefit pension plans. These could be more contentious, carrying as they might the stigmas of “mandate,” and “bailout,” both of which draw resistance from a substantial number of lawmakers.

Stay tuned for more details on proposed legislation and regulatory updates that stand to impact the savings plan landscape. In the meantime, check out our latest analysis on industry and regulatory news here on ascensus.com.


IRS Proposes Regulations for Automatic Deadline Postponements for Federally Declared Disasters

The IRS has released a pre-publication version of proposed regulations that would create an automatic 60-day postponement of deadlines for certain time-sensitive, tax-related acts in circumstances of federally-declared disasters.

The tax-related acts covered by this guidance are defined in Internal Revenue Code Section 7508A. This is the authority that historically has been cited for postponement of deadlines in cases of localized disaster declarations. Such localized relief is announced by the IRS in news release form, describing the area affected—generally on a county-by-county basis—and describing the length of the deadline postponements.

These individually designated postponements may have a duration of as much as 120 days. Some are less. The new proposed regulations would create an automatic 60-day postponement in cases of federally declared disasters, ensuring that there would be at least 60 days to complete the tax-related acts covered by the guidance. The proposed regulations also define what that term “federally-declared disaster” will mean for purposes of this 60-day period.

In addition to extending certain tax filing and tax payment deadlines, the postponements addressed in this guidance include completion of the many time-sensitive, tax-related acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.

A period of 60 days for submitting comments on the guidance, or to request a public hearing, will begin upon publication in the Federal Register.


Paycheck Protection Program to Re-Open Next Week

The Department of Treasury and Small Business Administration have jointly announced the reopening of the Paycheck Protection Program the week of January 11. Community financial institutions will begin offering First Draw PPP Loans Monday, January 11, and Second Draw PPP Loans starting Wednesday, January 13. Loans will be available to all participating lenders soon after.

Included in the announcement is new guidance that seeks to remove barriers for minority, underserved, veteran, and women-owned business, as well as interim final rules on amendments to the PPP and terms of Second Draw PPP Loans. Those available for a Second Draw PPP Loan generally include borrowers that

  • previously received a first draw PPP loan and will or have used the full amount only for authorized uses;
  • have no more than 300 employees; and
  • can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020.