IRS Guidance

IRS Issues Guidance on New UBTI Calculation With Potential Effects on IRAs and Other Tax-Advantaged Savings Arrangements

The IRS has issued Notice 2018-67 that describes a change in the calculation and reporting of unrelated-business taxable income (UBTI). This change is a consequence of the Tax Cuts and Jobs Act, tax reform legislation enacted in 2017.

The impact on IRAs and other tax-advantaged savings accounts is likely to be limited because only those accounts that have an ownership interest in a revenue-generating business enterprise are subject to current-year taxation of that income as UBTI.

Prior to the tax law change, taxable current-year earnings and losses from multiple UBTI-generating businesses could be “netted,” meaning earnings from one business could be offset with losses from another includable business. In general, if the net UBTI was less than the $1,000 reporting threshold, no filing was required of Form 990-T, Exempt Organization Business Income Tax Return. The change in effect for 2018 and future taxable years requires that UBTI be reported when taxable business earnings reach $1,000, but is not offset by net losses of one or more UBTI-generating lines of business—in this case, UBTI-generating business interests held within an IRA or other tax-advantaged account.

Note however, that only such accounts that hold interests in multiple businesses generating UBTI would potentially be affected.  Such business interests are among the less common IRA or other tax-advantaged account investments, and generally are held in such accounts administered by nonbank trustees or by trust departments.


IRS Extends Temporary Nondiscrimination Relief for Closed Defined Benefit Pension Plans

The IRS this week released Notice 2018-69, Extension of Temporary Nondiscrimination Relief for Closed Defined Benefit Plans Through 2019. This guidance extends relief granted to certain defined benefit (DB) pension plans that was set to expire at the end of 2018 plan years.

Certain DB plans that continue to accrue benefits for existing participants, but are closed to the entry of new participants, could otherwise face nondiscrimination failures if not for this relief. The situation commonly involves sponsoring organizations that are enrolling new eligible employees in a defined contribution plan, but allowing existing DB plan participants to continue to accrue those benefits.

The nondiscrimination relief is available for plan years beginning before 2020 if conditions outlined in Notice 2014-5 are satisfied. The IRS notes that this extension is provided in anticipation of the issuance of final amendments to the IRC Section 401(a)(4) regulations.


IRS PLR Addresses Retirement Plan Contributions Tied to Student Loan Repayment

The IRS has issued private letter ruling (PLR) 201833012, responding to a request for a ruling on a proposed employer 401(k) plan feature to be associated with employees’ student loan repayments. After review, the IRS approved the request and added explanation of why the facts as presented will not violate retirement plan laws and regulations. While this is a private letter ruling to be relied upon by the requestor, it is not a new concept as it has been proposed in at least one federal bill introduced by a member of Congress and has been a subject of discussion within the retirement plan industry.

PLR Request

Under the 401(k) plan of the employer on whose behalf the PLR application was submitted, matching contributions are now received by those participating employees who defer their salary into the plan. The PLR request proposes to amend the plan to add an element tied to student loan repayment. Under the arrangement proposed, if an employee affirmatively elects to participate in the employer’s student loan benefit program, and during a pay period makes a student loan repayment equal to at least 2 percent of his compensation, the employer would make a “student loan repayment nonelective contribution” of 5 percent of that pay period’s compensation to the employee’s 401(k) plan account.

This nonelective contribution formula, incidentally, is identical to the plan’s matching contribution formula for those employees who defer their salary into the 401(k) plan. That is, all eligible employees who defer at a rate of at least 2 percent earn a “matching contribution” of 5 percent.  Furthermore, it would not be an either/or situation. An employee who participates in the student loan benefit program could simultaneously defer salary into the 401(k) plan, and if deferring at least 2 percent, also earn the plan’s 5 percent matching contribution.

The PLR notes that under the proposal the student loan repayment nonelective contribution would be “subject to all the applicable plan qualification requirements, including, but not limited to, eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing.”

IRS Position

The IRS specifically notes that the employer’s contribution under the student loan repayment program will not be treated as a matching contribution, thereby avoiding conflict with the “contingent benefit prohibition” of 401(k) plans. If the employer’s contribution associated with the student loan benefit program were to be considered a matching contribution received for an employee’s action outside the scope of the plan, such as making student loan repayments, the rule would be violated. Though it may seem only a semantic distinction, the fact that the benefit would be considered a nonelective contribution rather than a matching contribution is what led to the IRS to approve this PLR submission.

A plan contribution such as that proposed in this PLR might not be available in every plan document, and even with a document that would allow a special allocation approach such as described here, it bears repeating the PLR’s emphasis that all applicable plan qualification requirements must be met.

Note that a PLR may only be relied upon by the party to whom it is issued, though it generally is recognized that a PLR may reflect IRS policy and ruling inclinations for similar or identical fact patterns.


IRS Extends DC Plan Restatement Submission Period by 3 Months

The IRS has issued Revenue Procedure 2018-42, announcing a three-month extension in the submission period for opinion letters for pre-approved defined contribution (DC) retirement plans.

The submission period for on-cycle submissions in this remedial amendment cycle (the third six-year remedial amendment cycle) was scheduled to expire October 1, 2018. Revenue Procedure 2018-42 now extends that submission period through December 31, 2018.

This remedial amendment cycle combines the formerly separate master and prototype and volume-submitter programs into a single unified opinion letter program.


IRS Issues Final Regulations Approving Forfeitures to Fund QNECs, QMACs

The IRS and Department of the Treasury have issued final regulations amending the definitions of qualified nonelective contribution (QNEC) and qualified matching contribution (QMAC), settling the issue of whether participant forfeitures can be used to fund QNECs and QMACs.

QNECs and QMACs are types of employer contributions to qualified retirement plans commonly used to correct certain contribution testing failures in 401(k)-type plans. Unless certain safe harbor exemptions apply, 401(k) plans generally must satisfy rules that limit the disparity between the average deferrals of highly compensated employees (HCEs) and nonhighly compensated employees (nonHCEs). Similarly, in nonsafe harbor situations, 401(k) plans must satisfy rules that limit the disparity between average matching contributions of HCEs and nonHCEs. To correct testing failures under these rules, employers can make QNECs and QMACs.

These final regulations finalize the proposed regulations issued by the IRS in January 2017, which first altered the definitions of QNEC and QMAC to allow the use of forfeitures in funding QNEC and QMAC contributions. Before 2017, the IRS and Treasury Department interpreted the 401(k) regulations in a manner that did not permit the use of participant forfeitures to fund these employer contributions.

The final regulations are scheduled to be published as early as July 20 in the Federal Register, and will take effect on that publication date.


IRS Releases 2018 Detailed Instructions for IRA Reporting

The IRS has released the 2018 tax year Instructions for Forms 1099-R and 5498. This release was much anticipated because of tax law changes resulting from the Tax Cuts and Jobs Act in December 2017 and the Bipartisan Budget Act in February 2018. The release of these detailed instructions was delayed substantially from prior years.

The following changes are included in the 2018 Instructions.

  • No recharacterizing of 2018 or later Roth IRA conversions, or 2018 or later retirement plan-to-Roth IRA rollovers
  • Special rules for victims of 2016 and 2017 natural disasters
  • New Form 1099-R reporting code for a qualified plan loan offset distribution due to severance from employment or termination of a plan
  • New Form 5498 reporting code for rollover of offset retirement plan loans
  • Special reporting for U.S. Armed Forces in designated combat zones

Although the IRS previously released the 2018 version of Form 5498, IRA Contribution Information, as of this writing, the IRS had not released the 2018 version of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.


IRS Releases 2018 Form 5498 for IRA Contribution Reporting and Updates General Instructions

The IRS has released the finalized version of the 2018 tax year Form 5498, IRA Contribution Information. The separate instructions for the 2018 form—Instructions for Forms 1099-R and 5498—had not yet been released at the time of this writing. The IRS also released an updated version of the 2018 General Instructions for Certain Information Returns.

Form 5498

Form 5498 is used by IRA custodians, trustees and issuers to report IRA contributions, rollovers, conversions, recharacterizations, fair market value, and other IRA contribution-related information. In addition to date and deadline changes, this 2018 version was updated with changes to Box 13a, now titled “Postponed/late contrib.” The form instructions indicate the following changes for Box 13c, Code. Both revisions were a result of changes made by the Tax Cuts and Jobs Act of 2017.

  • Code FD, PL115-97 for the Sinai Peninsula of Egypt, has been added as a code for late contributions made by individuals who serve in this qualified hazardous duty area.
  • Code PO is a new code to use for retirement plan participants who make rollovers of qualified retirement plan loan offsets.

General Instructions for Certain Information Returns

The 2018 General Instructions for Certain Information Returns was first released in late January, but was updated further and rereleased on July 5. The General Instructions are update every year for dates, limitations, and IRS penalties for incorrect reporting. Also see the “What’s New” section for additional revisions.

As of this writing, the IRS had not released the 2018 versions of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or the detailed instructions for the Forms 1099-R and 5498.