IRA

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.


Second Lawsuit Filed Against SEC Investment Advice Rule

On September 11, 2019, XY Planning Network filed a lawsuit against the United States Securities and Exchange Commission (SEC) to invalidate its new fiduciary standards, known as the Regulation Best Interest Rule. The plaintiffs argue that the regulation fails to meet standards imposed under the Investment Advisers Act of 1940, and frustrates the intent of the Dodd-Frank Act.

The lawsuit argues that the SEC rule imposes a different standard of fiduciary responsibility for broker dealers than it does for financial advisers who might be selling the same or similar products. Financial advisers are held to a standard that the advice they provide to clients must be in the client’s best interests, but broker-dealers are not held to this same standard when providing advice. This is because broker-dealers are considered to be in the business of selling financial products rather than financial advice. The plaintiff claims that the new rule makes this distinction less clear, and as a result, “the rule thus circumvents a key goal of Dodd-Frank—leveling the playing field—and increases investor confusion.” The plaintiff claims it will be financially harmed as a result of the rule. The plaintiff represents over 1,000 financial advisers who expect to lose business to broker-dealers who are subject to the less stringent standards.

The lawsuit comes shortly after seven states and the District of Columbia filed a similar case seeking to invalidate the SEC rule. The SEC has yet to file a response in either case.


States File Lawsuit to Invalidate SEC Investment Advice Rule

On September, 9, 2019, seven states and the District of Columbia filed a lawsuit seeking to invalidate the recently announced Securities and Exchange Commission (SEC) investment advice rule. The Regulation Best Interest Rule, which is currently scheduled to be implemented by June 30, 2020, increases disclosures that must be provided to investors, but preserves many existing industry practices, such as the ability for brokers to use a commission-based sales model.

The plaintiffs contend that the rule undermines existing consumer protections because it will permit brokers to market themselves as trusted advisers while actually engaging in conflicts of interest that may harm their clients. The plaintiffs contend that practices such as sales contests, which they argue represent an obvious conflict of interest, are still permissible in many circumstances under the regulations.

Additionally, the plaintiffs argue that the rule causes confusion about which standards might apply when consumers are seeking investment advice. The regulations allow for different standards of advice to apply to investment advisers than those standards that apply to broker-dealers. The plaintiffs cite evidence from an SEC study that retail investors do not understand the difference between these two classifications, and the separate standards to which they are held.

The Dodd-Frank Act required the SEC to study where regulations are weak, and enact necessary changes to improve regulations to protect retail investors where necessary. The legislation also authorized the SEC to create regulations which would ensure uniform standards of investment advice applied to broker-dealers and investment advisers. The plaintiffs argue that the SEC ignored the conclusions of its own study, which demonstrated the need for a more robust regulation than what was actually proposed, and for rules which apply equally to both broker-dealers and investment advisers. For these reasons, the plaintiffs are asking the U.S. District Court for the Southern District of New York to hold the SEC regulation invalid.


Peg Creonte Offers Insight on Advisor Opportunity to Engage Employers Enrolled in State-Facilitated IRA Programs

In Lee Barney’s recent PLANADVISER feature, SVP Peg Creonte offers insight into how state-facilitated auto-IRA programs are helping business owners recognize the value of workplace retirement programs. As these business owners and their employees get more familiar with these programs as offered by the state, they become more informed retirement plan prospects for financial advisors. “We believe that over time, as an employer grows its plan and its employees get more comfortable with setting aside money, they could become a source for financial advisers to pursue selling qualified plans to these businesses,” adds Creonte.


OMB to Review Proposal to Revise RMD and Beneficiary Life Expectancy Tables

The Office of Management and Budget (OMB) has received for review proposed Treasury/IRS regulations that would update life expectancy and distribution period tables used when calculating required minimum distributions (RMDs) from retirement savings arrangements, including required distributions to beneficiaries. According to its website, the OMB reviewed the proposal on August 13. While no legal deadline for completing review of the guidance is listed, it is generally expected that OMB’s review would be completed within 60–90 days, after which the guidance would be expected to be published in the Federal Register.

This proposed update to the life expectancy and distribution period tables is in response to an Executive Order issued by President Trump in August 2018. In that Executive Order, the President directed the Treasury Department and the Department of Labor to seek regulatory avenues for enhancing retirement saving opportunities. Specifically recommended were updating the above-described distribution tables to reflect longer life expectancies (tables last updated in 2002), enhancing opportunities for employers to participate in multiple employer plans (MEPs), and simplifying retirement plan disclosure processes.


Senator Introduces “Automatic IRA Act of 2019”

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

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

Provisions

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

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