IRS Guidance

IRS Extends Tax Filing and Payment Deadlines for Oregon Wildfire Victims

The IRS has issued news release IR-2020-215, announcing a tax filing and payment deadline extension for certain persons and businesses affected by recent wildfires and straight-line winds that began September 7, 2020, in the state of Oregon.

The relief postpones tax filing and payment deadlines that occurred starting on September 7, 2020. As a result, affected individuals and businesses will have until January 15, 2021, to file returns and make certain payments that were originally due during this period.

The news release specifically notes that affected individuals or businesses with an extended tax return filing deadline of October 15, 2020, will have until January 15, 2021, to complete those tax filings. Certain actions that are tied to a tax filing deadline, like establishing a simplified employee pension (SEP) plan, or making certain employer contributions to a retirement plan, would similarly be extended. However, no reference is made in the news release to the Treasury regulation that permits postponement of numerous other time-sensitive tax-related acts, such as the completion of rollovers, filing Form 5500, etc.

At this time, the areas of the State of Oregon identified as eligible for the relief include the counties of Clackamas, Douglas, Jackson, Klamath, Lane, Lincoln, Linn, and Marion. The IRS notes that “taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.”


Washington Pulse: IRS Provides Additional SECURE Act Guidance

At the end of 2019, the President signed the most comprehensive retirement reform package in over a decade: the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is one of multiple bills that were included in the Further Consolidated Appropriations Act, 2020 (FCAA).

The SECURE Act’s primary goals include expanding retirement savings, simplifying existing rules, and preserving retirement income. As with any major legislation, the SECURE Act created numerous outstanding questions. And while the IRS has previously provided some answers, no SECURE Act guidance has been as detailed as the recently released IRS Notice 2020-68. In addition to providing guidance on the SECURE Act, this Notice provides guidance on the Bipartisan American Miners Act, which is also part of FCAA.

 

SECURE Act Guidance

Qualified charitable distributions and the repeal of the Traditional IRA contribution age limit

Effective for 2020 and later taxable years, taxpayers with eligible compensation can make Traditional IRA contributions at any age, not just for years before reaching age 70½. Notice 2020-68 states that financial organizations that accept such contributions must amend their Traditional IRA plan agreements and disclosure statements and provide the amended documents to IRA owners.

Although most financial organizations  are likely to adopt the relaxed eligibility requirements, Notice 2020-68 states that they are not required to accept such contributions. Keeping the old contribution limitation—or delaying implementing the new rule—may benefit organizations who face possible programming concerns.

The Notice confirms that, because IRA contributions and required minimum distribution (RMDs) are reported as two separate transactions, IRA owners may not offset their RMD amount for a taxable year by the amount of contributions made for the same year. So while Traditional IRA owners may contribute past age 70½ (if they are otherwise eligible), they may also have to take an RMD for the same year.

In addition to allowing individuals to make contributions after age 70½, the SECURE Act made changes to qualified charitable distributions (QCDs). Beginning at age 70½, IRA owners and beneficiaries may donate—while satisfying their RMDs—up to $100,000 of IRA assets tax-free to a qualified charity.

The SECURE Act requires that IRA owners age 70½ and older who make deductible Traditional IRA contributions reduce the amount that they can exclude from income when taking a QCD. Notice 2020-68 confirms the formula that IRA owners should use to determine this amount.

Example: In 2020, Mike attains age 70½ and makes a $7,000 deductible contribution to his Traditional IRA. Mike also takes a $9,000 distribution payable directly to his church, which is a qualified charity. How much of the $9,000 QCD can Mike exclude from income?

Excludable QCD amount = A – (B – C)

A = the QCD amount for a year before any reduction

B = the aggregate deductible contributions made for all tax years beginning with Mike’s 70½ year

C = prior year income exclusion reductions made as a result of the SECURE Act

Excludable QCD amount = $2,000, which is $9,000 – ($7,000 – $0)

NOTE: In future years, deductible contributions made after age 70½ will continue to lessen the amount by which QCDs will be excluded from income. Contributions that reduced the excludable QCD amount in previous years are ignored; contributions that have not reduced prior-year excludable QCD amounts are aggregated with current-year deductible contributions to determine what amount of the current QCD is included in income.

 Participation of long-term, part-time employees in 401(k) plans

Effective for 2021 and later plan years, employees who have three consecutive 12-month periods with at least 500 hours of service (and who satisfy the plan’s minimum age requirement) generally must be allowed to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive, eligibility rules could continue to be applied to other contribution sources (such as matching contributions) and to ADP/ACP safe harbor plans. Employers may also exclude such part-time employees from coverage, nondiscrimination, and top-heavy test rules. The SECURE Act states that no 12-month period that begins before January 1, 2021, is considered when determining the three years of service for eligibility.

Notice 2020-68 confirms that an employer can apply the new eligibility rule to employer contributions that are subject to vesting requirements. But then for vesting purposes, the employer must generally consider each 12-month period for which the employee has at least 500 hours of service starting from the employee’s date of hire—including periods of service incurred before January 1, 2021. An employer may, however, continue to exclude periods of service described in Internal Revenue Code Section (IRC Sec.) 411(a)(4) (such as periods of service incurred before age 18 or before the plan was established).

It may be difficult for some employers to determine the correct periods of service for an employee who was previously excluded from the employer’s plan. As a result, the IRS is seeking comments on how to reduce possible administrative concerns related to counting years of vesting service beginning before January 1, 2021.

Small-employer automatic-enrollment tax credit

The SECURE Act created a new tax credit for small employers that include an eligible automatic contribution arrangement (EACA) feature in their new or existing qualified employer plan. A “qualified employer plan” includes a 401(a) plan, a 403(a) plan, a simplified employee pension (SEP) plan, and a savings incentive match plan for employees of small employers (SIMPLE) plan. To be eligible for the credit, employers must have had 100 or fewer employees who earned at least $5,000 in compensation during the previous calendar year. The maximum annual tax credit is $500 for each of the first three years that the employer includes an EACA in a qualified employer plan. This provision is effective for 2020 and later taxable years.

Notice 2020-68 clarifies that employers may receive a credit for each year during a single three-year period, starting in the first year that an employer adds an EACA. In addition, employers that maintain more than one qualified employer plan must offer an EACA in the same qualified employer plan for each year of the three-year period. For example, an employer that maintains two different 401(k) plans cannot receive a tax credit in 2021 if it adds an EACA to Plan A in 2020, amends to remove the EACA from Plan A in 2021, and then amends to add the EACA to Plan B in 2021.

Notice 2020-68 also clarifies that each eligible employer that participates in a multiple employer plan (MEP) may receive the tax credit. The three-year period begins with the first taxable year that an eligible employer includes an EACA under a MEP. An employer will continue to be eligible for the credit even if it spins off and establishes its own single-employer plan.

Qualified birth or adoption distributions (QBADs)

As of January 1, 2020, distributions taken within 12 months of the birth of a child or adoption of an “eligible adoptee” are exempt from the 10 percent early distribution penalty tax. An eligible adoptee is a child under the age of 18 or an individual who is physically or mentally incapable of self-support. An eligible adoptee does not include a child of the individual’s spouse. Each parent may distribute up to $5,000 in aggregate, per birth or adoption event, from an IRA, a 401(a) defined contribution plan, a 403(a) or 403(b) annuity plan or contract, or a governmental 457(b) plan.

Individuals may repay these amounts to an IRA or eligible retirement plan. While there is currently no stated deadline for repaying a QBAD, the Treasury Department plans to issue regulations under IRC Sec. 72(t) that will address recontribution rules, including rules related to the timing of recontributions.

Notice 2020-68 clarifies that individuals are “physically or mentally incapable of self-support” if they meet the disability definition found in IRC Sec. 72(m)(7). According to this definition, an individual is disabled if he “is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.”

In addition, the Notice addresses several other matters.

  • Individuals may receive a QBAD for each birth and each adoption. For example, an individual who gives birth to twins may distribute $10,000 from her IRA and treat the entire amount as a QBAD.
  • A QBAD is not treated as an eligible rollover distribution for purposes of the direct rollover rules, the IRC Sec. 402(f) notice requirement, and the 20 percent mandatory withholding requirement.
  • A QBAD is an optional distributable event, so employers are not required to add the feature to their plans.
  • A plan administrator may rely on a reasonable representation that the individual is eligible for a QBAD, unless the administrator has actual knowledge to the contrary.
  • An eligible retirement plan must accept QBAD recontributions if 1) the retirement plan permits QBADs, 2) the individual received a QBAD from that plan, and 3) the individual is otherwise eligible to make a rollover contribution to that plan at the time he wishes to recontribute the QBAD to the plan.
  • A QBAD that is recontributed to an eligible retirement plan is deemed to be an eligible rollover distribution that meets the 60-day rollover rule.
  • A participant who receives an in-service distribution from a plan that does not offer QBADs may still claim that distribution as a QBAD on her income tax return and recontribute the amount to an IRA.

Difficulty-of-care compensation eligible for IRA contributions

Certain foster care providers receive payments that are not includable in taxable income and therefore were not considered to be compensation. As a result, such individuals may not have been able to contribute to a retirement plan. Now such after-tax “difficulty-of-care payments” will qualify as eligible compensation for IRAs and defined contribution plans. This provision is effective for IRA contributions made after December 20, 2019, and for contributions made to defined contribution plans in 2016 and later plans years.

Notice 2020-68 confirms that difficulty-of-care payments to an employee must be made by the employer in order to be treated as eligible compensation. Employers that make difficulty-of-care payments to their employees must amend their retirement plans to include difficulty-of-care payments in their plan’s definition of compensation. Notice 2020-68 also notes that the IRS will release future guidance to address whether the six percent penalty tax will apply to excess IRA contributions that are based on difficulty of care payments.

 

Bipartisan American Miners Act Guidance

Under IRC Sec. 401(a)(36), pension plans could allow in-service distributions at age 62. Effective for 2020 and later plan years, the Bipartisan American Miners Act allows in-service distributions at age 59½ to participants in governmental 457(b) plans and 401(a) pension plans.

Notice 2020-68 verifies that allowing participants to take in-service distributions starting at age 59½ does not solely affect the plan’s normal retirement age. A pension plan’s definition of normal retirement age must still meet the requirements of Treas. Reg. 1.401(a)-1(b)(2), which states that a plan’s normal retirement age may not be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. A normal retirement age that is age 62 or later is deemed to satisfy the reasonably representative requirement. Notice 2020-68 also states that employers may continue to rely on the proposed regulations that were issued in 2016 for governmental pension plans. Employers are not required to offer the age 59½ in-service distribution.

 

Amendment Guidance

To help synchronize amendment deadlines for the SECURE Act, the Bipartisan Miners Act, and the Coronavirus Aid, Relief, and Economic Security Act, Notice 2020-68 states that employers with qualified retirement plans and 403(b) plans that are not maintained by a public school will have until the last day of the first plan year beginning on or after January 1, 2022, to amend their plans for the SECURE Act and the Bipartisan American Miners Act. This is a change from the Bipartisan Miners Act, which gave employers until the end of their 2020 plan year to amend their plan documents. Those employers with qualified governmental plans under IRC Sec. 414(d), collectively bargained (union) plans, and 403(b) plans maintained by a public school have until the last day of the first plan year beginning on or after January 1, 2024.

Governmental 457(b) plan administrators must amend their documents for the SECURE Act and the Bipartisan American Miners Act by the later of the last day of the first plan year beginning on or after January 1, 2024, or if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the IRS that the plan was administered in a manner that is inconsistent with the requirements of IRC Sec. 457(b).

Notice 2020-68 provides long awaited IRA amendment guidance. The Notice states that financial organizations must amend their IRA plan agreements and disclosure statements for the SECURE Act by December 31, 2022, or a later date as prescribed by the Treasury Secretary. The IRS expects to issue revised model IRA documents and an updated Listing of Required Modifications (LRMs). The LRMs will contain sample language that document providers may use when updating their IRA prototype documents. Employers must amend their deemed IRA documents based on the deadline applicable to the retirement plan under which the deemed IRA is established.

 

Next Steps

If they haven’t already, employers and financial organizations should educate themselves and their staff on the new requirements and determine whether they will offer any of the optional provisions. They should also start considering the amendment process for their retirement plan and IRA documents.

The IRS is requesting comments on the topics covered in Notice 2020-68—especially on the provision relating to long-term, part-time employees. Comments must be submitted on or before November 2, 2020, and should refer to Notice 2020-68. The Treasury Department and IRS are still expected to provide further guidance—including new regulations—on the SECURE Act and Bipartisan American Miners Act.

Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

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IRS Seeks More Information on Forms 5500, Public Comments Invited

The IRS has published in today’s Federal Register a notice offering the general public and other federal agencies the opportunity to comment on proposed changes to the information the agency collects on Form 5500, Annual Return/Report of Employee Benefit Plan, and the other returns in this series, Form 5500-SF, and Form 5500-EZ.

The IRS is proposing to add to these returns a checkbox to indicate if the plan was retroactively adopted under Section 201 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It is also proposing to add checkboxes to Form 5500-EZ to indicate if the plan return was filed under an automatic extension or under a special extension.

Written comments must be received by November 2, 2020, to be considered.


IRS Expands Circumstances for Extending Discretionary Amendment Deadlines

The IRS has issued Revenue Procedure 2020-40, which makes a minor modification to Revenue Procedures 2016-37 and 2019-39. Revenue Procedure (Rev. Proc.) 2016-37 sets forth procedures for obtaining determination or opinion letters for pre-approved qualified plans, while Rev. Proc. 2019-39 sets forth procedures for obtaining opinion and advisory letters for pre-approved 403(b) plans.

Specifically, both revenue procedures were modified to provide that the otherwise applicable deadlines within the revenue procedures apply unless statutory, regulatory, or other guidance is issued that sets forth a deadline that is either earlier or later. Previous verbiage indicated that only an earlier deadline could be prescribed.


IRS Issues SECURE Act and Miners Act Guidance in Q&As

The IRS has issued Notice 2020-68, guidance in question-and-answer (Q&A) format on provisions of legislation enacted in December 2019 that made significant changes to retirement savings arrangements. These changes were found within the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and Bipartisan American Miners Act, both of which were contained within the Further Consolidated Appropriations Act of 2020.

SECURE Act topics addressed in the Notice 2020-68 Q&As include the following.

  • Small employer automatic enrollment tax credit (Sec. 105)
  • Repeal of maximum age for Traditional IRA contributions (Sec. 107)
  • Participation of long-term, part-time employees in 401(k) plans (Sec. 112)
  • Qualified birth or adoption distributions (Sec. 113)
  • Difficulty-of-care compensation eligible for IRA contributions (Sec. 116)

The Notice 2020-68 Q&As also addressed the reduced minimum age for certain retirement plan distributions, part of the Bipartisan American Miners Act (Sec. 104). In addition, it provides guidance on the timing for plans to amend for provisions of the SECURE Act and Bipartisan American Miners Act.


Qualified Plan Loan Offset Rollover Rules Proposed by IRS

The IRS has released a notice of proposed rulemaking that takes into account changes made by the Tax Cuts and Jobs Act (TCJA) with respect to rollover rules for qualified plan loan offset (QPLO) amounts. The TCJA, enacted in December 2017, amended the Internal Revenue Code to extend the timeframe for rolling over QPLO amounts to an eligible retirement plan up to the individual’s tax filing due date (including extensions) for the taxable year in which the offset occurs.

A QPLO amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan to an employee or beneficiary for one of two reasons: 1) the termination of the qualified employer plan, or 2) the failure to meet the repayment terms of the loan from such plan because of the employee’s severance from employment.

The proposed regulations, among other things, clarify the rollover period for plan loan offset amounts, and provide details and examples distinguishing the treatment of a plan loan offset versus a QPLO.

There is a 45-day comment period after publication in the Federal Register.


New Fees in 2021 for Certain Determination and Letter Ruling Requests

In Announcement 2020-14, the IRS provides advance notice of fee increases for certain determination applications, effective January 4, 2021.

  • Form 5300, Application for Determination for Employee Benefit Plan, will increase by $200 to $2,700
  • Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans, will increase by $200 to $1,000
  • Form 5310, Application for Determination Upon Termination, will increase by $500 to $3,500

Letter ruling requests for five-year automatic extension of the amortization period will increase significantly from $1,000 to $6,500. The new fees will be reflected in Revenue Procedure 2021-4, which will be published on January 4, 2021.

 


More IRS Guidance on Funding Single Employer DB Plans, Distribution Notices

The IRS released two Notices providing additional guidance relative to certain provisions under the Coronavirus Aid, Relief, and Economic Security (CARES) and Setting Every Community Up for Retirement Enhancement (SECURE) Acts.

Notice 2020-61 provides guidance on rules related to funding of single employer defined benefit pensions plans and related benefit limitations. The CARES Act extended the deadline for minimum required contributions otherwise due during calendar year 2020 to January 1, 2021. Notice 2020-61 provides details and a lengthy Q&A.

Notice 2020-62 modifies safe harbor explanations (previously issued in Notice 2018-74) that may be used to satisfy distribution notice requirements under Internal Revenue Code Section 402(f). These changes are necessary relative to recent distribution provisions established under the SECURE Act pertaining to qualified birth or adoption distributions and age 72 required beginning date for required minimum distributions


Deadline Relief for Storm and Earthquake Victims Includes Making IRA Contributions

The IRS has issued two news releases that grant extensions of time for completion of certain time-sensitive tax-related acts, to victims of severe storms in Michigan, and an earthquake and after-shocks in Utah.

The extensions in both cases include the completion of numerous time-sensitive tax-related acts described in Treasury Regulation 301.7508A-1(c)(1) and IRS Revenue Procedure 2018-58. Among them are completion of rollovers, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

In both cases—though the timeframes differ—the news releases confirm that the extensions apply to the filing of individual and business tax returns, and to making 2019 IRA contributions (deadlines for which were previously extended to July 15, 2020).

 

Michigan Relief

Relief for the state of Michigan applies to the counties of Arenac, Gladwin, Iosco, Midland, and Saginaw. Deadlines for covered actions that fall on or after May 16, 2020, and before October 15, 2020, are extended to October 15, 2020.

 

Utah Relief

Relief for the state of Utah applies to the counties of Davis and Salt Lake. Deadlines for covered actions that fall on or after March 18, 2020, and before July 31, 2020, are extended to July 31, 2020.


IRS Guidance Provides Limited Relief and Clarification for 401(k) and 403(b) Plans that Suspend or Reduce Safe Harbor Contributions Mid-Year

The IRS has issued Notice 2020-52, guidance that provides sponsors of 401(k) and 403(b) safe harbor plans limited relief from certain otherwise-applicable requirements for mid-year suspension or reduction of safe harbor matching or nonelective contributions.

Notice 2020-52’s temporary relief is being granted as a consequence of the widespread economic challenges facing employers as a result of the coronavirus (COVID-19) pandemic.

 

Requirement for Mid-Year Suspension of Safe Harbor Contributions

In order to suspend safe harbor matching or nonelective contributions mid-year, a sponsoring employer generally must meet one of the following requirements.

  • The employer must be operating at an economic loss.
  • The employer must have given employees timely notice prior to the start of the plan year that the plan might be amended to suspend safe harbor contributions during the coming plan year, and that such suspension would not apply until 30 days after a mid-year supplemental notice is given.

 

Temporary Relief for Mid-Year Reduction or Suspension of Safe Harbor Contributions

Employers that adopt or have adopted between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce 401(k) or 403(b) safe harbor matching or nonelective contributions, will not be considered to have violated the economic loss or pre-plan year notice requirements described above.

 

Temporary Relief for Nonelective Contribution Supplemental Notice

Notice 2020-52 also provides temporary relief for employers that amended or amend their plans for a mid-year reduction or suspension of nonelective contributions, without providing a supplemental notice to employees at least 30 days before the reduction or suspension. This notice requirement will be treated as having been met if the notice is provided to employees by August 31, 2020. This relief is not being extended for a reduction or suspension of safe harbor matching contributions.

 

Clarification on Reduction or Suspension of Contributions for HCEs

Notice 2020-52 also provides further clarity on mid-year amendments to reduce certain contributions to highly compensated employees (HCEs).

In general, a reduction or suspension of safe harbor contributions only for HCEs is not treated as an impermissible reduction, since contributions on behalf of HCEs are not included in the definition of safe harbor contributions. However, Notice 2020-52 clarifies that a notice to HCEs of the reduction or suspension is still required, and a new deferral election opportunity must be given.

Notice 2020-52’s relief provides a degree of assurance that employers will not be violating safe harbor plan rules that pertain to reductions, suspensions, and notices, if they satisfy its conditions. But the guidance does not provide relief from ADP/ACP nondiscrimination testing for the plan year in which such reductions or suspensions have taken place.