IRS Guidance

Retirement Spotlight: IRS Provides Welcome Relief From High VCP Fees

The retirement industry received a gift on April 19, 2019: Revenue Procedure (Rev. Proc.) 2019-19. This revenue procedure updates the Employee Plans Compliance Resolution System (EPCRS) by expanding the availability of self-correction options for more kinds of plan failures. The IRS anticipates that this expanded guidance will increase plan compliance and reduce some costs for employers.

 

A Step in the Right Direction

Expanding the options available through the IRS’s Self-Correction Program (SCP) will benefit employers that face increased fees if they correct plan failures under the Voluntary Correction Program (VCP). Under the VCP, an employer submits an application for correction to the IRS, and—if approved—has assurance that the failure will not result in greater sanctions or plan disqualification.

In January 2018, the IRS announced a new VCP fee structure based on plan assets, rather than on the number of plan participants. This fee structure eliminated several exceptions—including amendment or loan failures—that used to carry a fixed or reduced general fee. As a result, many employers face significantly higher fees to correct operational failures under the VCP. But the IRS also allows more employers to fix plan failures through self-correction, perhaps as a result of the vigorous criticism about higher fees.

 

New Plan Failures Available for Self-Correction

The SCP process requires that employers follow specific IRS correction steps. If properly completed and documented, the SCP gives employers assurance of plan compliance. But with the SCP, the IRS neither reviews the employer’s actions nor issues a “compliance statement,” which documents the IRS’s approval.  Rev. Proc. 2019-19 expands self-correction in three primary areas: plan document failures, operational failures, and loan failures.

 

Plan Document Failures
The revised procedure allows employers to self-correct many plan document failures—other than the initial failure to adopt a qualified plan or 403(b) plan document timely—as long as the plan has a favorable letter at the time of correction. The EPCRS generally considers plan document failures as “significant” failures. So to qualify for self-correction, an employer needs to correct the failure by the end of the second plan year following the year the failure occurred.

 

Operational Failures
The EPCRS now allows employers to retroactively amend their plans when they have failed to follow the terms of their plan documents. Through this process, an employer can conform the terms of the plan document to the way the employer actually ran the plan. Employers can retroactively amend these operational failures if they meet the following three conditions.

  • The plan amendment would result in an increase of a benefit, right, or feature.
  • The increase in the benefit, right, or feature applies to all eligible employees.
  • The increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the EPCRS general correction principles.

As with plan document failures, employers must amend their plans for significant operational failures by the end of the second plan year following the year that the failure occurred.

 

Loan Failures
Employers may now self-correct a defaulted loan by 1) requiring the participant to make a corrective payment, 2) re-amortizing the outstanding balance of the loan, or 3) dictating some combination of these two options. Previously, employers could use these options only when filing through the VCP. The revised revenue procedure also allows an employer to

  • report a deemed loan distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in the year of the SCP correction (instead of for the year in which the failure occurred);
  • obtain after-the-fact spousal consent if the employer failed to obtain spousal consent at the time of the plan loan; and
  • retroactively amend the plan for exceeding the number of outstanding loans specified in the document.

Although the EPCRS has greatly expanded the availability of self-correction for loan failures, some restrictions do apply. According to Rev. Proc. 2019-19, the Department of Labor (DOL) will provide a no-action letter only to those employers who correct loan default failures through the VCP. Employers concerned about receiving the DOL’s no-action letter may wish to spend the additional time and money required to correct the failure under the VCP.

Another restriction applies to failures arising from loans that violate the statutory loan provisions. This includes loans that exceed the maximum loan limit, loans that exceed the maximum repayment period, and loans that were not subject to level amortization. These types of loan failures do not qualify for self-correction.

 

More Guidance to Come?

While Rev. Proc. 2019-19 provides employers with additional self-correction options, more clarification is needed. The IRS has indicated that it may provide additional examples of insignificant operational failures in the Correcting Plan Errors section of its website. Ascensus will continue to monitor the IRS’s website for new guidance. Watch Ascensus.com News for any significant developments that may emerge.

 

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

 

 

 


IRS Reveals Plans to Enable Electronic Filing of Form 5500-EZ

The IRS has informally revealed that it intends to enable owner-only retirement plans to file Form 5500-EZ electronically through the web-based EFAST2 Electronic Filing System. Form 5500-EZ, Annual Return/Report of One-Participant Retirement Plan or a Foreign Plan (form title revised to reflect foreign plans) is a simplified plan return that can be filed by sole proprietors and spouses or partners and spouses that have no common law employees.

At present, however, Form 5500-EZ can only be filed with the IRS in hard copy form. Employers that wish to file electronically must submit their plan information on Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. This form is longer than Form 5500-EZ.

In a May 7 Federal Register posting requesting continued authority to gather information on Form 5500 series forms, the IRS noted that it “…plans to make the Form 5500-EZ available on the EFAST2 system for direct electronic filing instead of using Form 5500-SF.” The IRS further indicates that paper filing of Form 5500-EZ still will be possible after the electronic filing option is in place. No proposed timing for the electronic filing option was revealed.


New IRS Guidance Expands Retirement Plan Self-Correction Program

The IRS released an updated version of the Employee Plans Compliance Resolution System (EPCRS) in Revenue Procedure 2019-19 on April 19, 2019. The revised system expands the availability of self-correction options for correcting certain plan failures in three primary areas: plan document failures, operational failures, and loan failures. The IRS anticipates that this expanded guidance will increase plan compliance and reduce the costs and burdens associated with maintaining plan compliance.

Plan Document Failures
The revised procedure allows for the self-correction of certain plan document failures, other than the initial failure to adopt a qualified plan or 403(b) plan document timely, as long as the plan has a favorable letter at the time of correction. The EPCRS generally considers plan document failures as “significant” failures, meaning the failure would need to be corrected by the end of the second plan year following the year the failure occurred to qualify for self-correction.

Operational Failures
The EPCRS now allows for the self-correction of operational failures by retroactive plan amendment when a plan sponsor fails to follow the terms of its plan document. This allows a plan sponsor to conform the terms of the plan document to the prior operations. Self-correcting these operational failures by retroactive amendment can occur if these three conditions are met.

  1. The plan amendment would result in an increase of a benefit, right, or feature.
  2. The increase in the benefit, right, or feature is available to all eligible employees.
  3. Providing the increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the EPCRS general correction principles.

Loan Failures
The EPCRS allows a defaulted loan to be self-corrected by either the participant making a lump-sum payment, re-amortizing the outstanding balance of the loan, or some combination of the two options. Previously these options were only available when filing through the voluntary correction program (VCP). The revised procedure also allows for a deemed loan to be reported on Form 1099-R in the year of correction through the self-correction program (SCP).

Additionally, EPCRS now provides for the self-correction of a plan loan failure where spousal consent was not obtained (if the plan required it), by obtaining spousal consent after the fact.

The revised procedure now allows for the self-correction of a plan exceeding its document-specified number of loans outstanding. Plan sponsors can retroactively amend their plans to increase the number of loans allowed under the plan document.

While the EPCRS has greatly expanded the availability of self-correction for loan failures, some restrictions do apply. Revenue Procedure 2019-19 states that in order to receive a no-action letter through the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP), loan default failures would still need to be corrected under VCP. Finally, loan failures arising from loans that exceed the statutory loan limits—those that exceed the maximum period or that were not subject to level amortization—do not qualify for self-correction.


IRS Issues FAQs for Qualified Business Income Deduction

The IRS has published on its website a list of frequently asked questions relating to the qualified business income (QBI) deduction. The deduction was created by the 2017 Tax Cuts and Jobs Act, under Internal Revenue Code Section 199A. It permits noncorporate taxpayers to deduct up to 20 percent of QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Individuals and some trusts and estates with QBI, qualified real estate investment trust dividends, or qualified publicly traded partnership income may be eligible for the deduction.

The IRS explains in the FAQs that deductible contributions that the taxpayer makes to a qualified retirement plan, savings incentive match plan for employees of small employers (SIMPLE) IRA plan, or simplified employee pension (SEP) plan are accounted for when determining QBI.


Several Retirement and IRA Topics on IRS’ Priority Guidance Plan List

The Department of the Treasury and IRS have released a second quarter update to the 2018-2019 fiscal year Priority Guidance Plan (PGP). The PGP lists items of regulatory guidance that the IRS is—or hopes to be—working on during the fiscal year. A high priority item highlighted in the update is the release of guidance to implement provisions of the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December of 2017. Some items of guidance have remained on the PGP over several fiscal years.

Following are the pending guidance items related to employee benefits.

  • Regulations under Internal Revenue Code Section (IRC Sec.) 401(a)(9) updating life expectancy and distribution period tables for purposes of the required minimum distribution (RMD) rules
  • Guidance on hardship distributions from employer-sponsored retirement plans (in response to the Balanced Budget Act of 2018 provisions)
  • Guidance on missing retirement plan participants
  • Final regulations on minimum present value requirements for defined benefit (DB) pension plans
  • Guidance updating regulations on service credit and vesting
  • Hybrid DB pension plan interest credit and annuity conversion factor guidance
  • Multiple employer plan guidance
  • Church plan guidance
  • Guidance on Traditional and Roth IRAs, Including contributions and excise taxes
  • Affiliated service group guidance
  • Additional guidance on lifetime income payments from employer plans and IRAs
  • Regulations on deferred vested benefit reporting requirements
  • Final regulations on various issues for nonqualified plans subject to IRC Sec. 409A
  • Final regulations on “ineligible” nonqualifed plans under IRC Sec. 457(f)
  • Regulations for qualified ABLE programs (proposed regulations issued in 2015)
  • Updated guidance on use of truncated taxpayer identification numbers (SSNs); proposed regulations issued in 2017

Tax-Related Deadline Relief Granted for Alabama Disaster Victims

The IRS has issued news release AL-2019-01, announcing an extension of time to complete certain time-sensitive tax-related acts as a result of tornadoes, storms, and straight-line wind events in Alabama. At this time, the only area to which the relief applies is Lee County, but the IRS periodically updates the disaster relief to include other areas.

News release AL-2019-01 provides that certain tax-related acts with deadlines falling on or after March 3, 2019, and on or before July 31, 2019, are extended to July 31, 2019. It notes that this extension applies to IRA contributions, as well as to the numerous time-sensitive acts described in Treasury Regulation Section 301.7508A-1(c)(1). These acts include completion of rollovers,  recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.

This relief applies specifically to residents of the identified area, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who is injured or killed as a result of the events is also entitled to deadline relief.

Affected taxpayers who reside or have a business located outside the covered disaster area are required to call the IRS disaster hotline at 866-562-5227 to request relief.


IRS Letter Expands Circumstances When Employers May Recover HSA Contributions

The IRS has released for publication an information letter that provides details on circumstances allowing an employer to request the return of Health Savings Account (HSA) contributions made on behalf of its employees. The IRS describes in Information Letter 2018-0033 certain contribution recovery circumstances that go well beyond the previous guidance found in IRS Notice 2008-59, which has served as a primary source of information on HSA issues and administrative procedures.

Notice 2008-59

Notice 2008-59 described limited circumstances under which an employer may seek the return of HSA contributions by an HSA custodian or trustee. These limited circumstances included contributions made on behalf of employees who were never HSA-eligible, and contributions in excess of the annual statutory contribution limit.

Information Letter 2018-0033

The information letter lists the following additional circumstances as examples of errors that also may be corrected.

  • HSA contribution exceeded an employee’s payroll withholding election
  • Amount was mistakenly contributed to an employee due to an “incorrect spreadsheet” or “similar names … confused with one another”
  • Contribution was incorrectly entered by a payroll administrator (in-house or third-party)
  • Additional contribution was received due to a duplicate payroll file transmission
  • Over-contribution resulted from delayed processing of a payroll withholding change for an employee
  • Over-contribution resulted from disparity between elected annual contribution and actual number of pay periods
  • Incorrect contribution resulted from misplaced decimal point

As is evident in these itemized reasons, the IRS has now gone well beyond the limited circumstances for employer recoupment of HSA contributions that were authorized by Notice 2008-59, the most detailed guidance on the subject available prior to Information Letter 2018-0033.

While an Information Letter is not considered as elevated in the IRS guidance hierarchy as a notice, revenue ruling, or revenue procedure, it nevertheless can be considered to express the agency’s intent for how other guidance—such as Notice 2008-59—may be interpreted. Perhaps most telling in the letter is the statement that the previously-issued Notice 2008-59 “was not intended to provide an exclusive set of circumstances in which an employer may request the return of contributed amounts.”

 


Updated IRA Publication Notes Conversion Changes and Revised Form 1040 Reporting

The IRS has released the 2018 version of Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs). This publication describes taxpayer rules for IRA distributions and is one of two IRA-specific IRS publications—Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), is the second. The 2018 version of Publication 590-A was released in December 2018.

The What’s New section of Publication 590-B notes that it is no longer possible to recharacterize a Roth IRA conversion or a rollover of non-Roth employer-sponsored retirement plan assets to a Roth IRA. It also notes that Form 1040, U.S. Individual Income Tax Return, has been redesigned, and that Forms 1040A and 1040-EZ and some miscellaneous itemized tax deductions are no longer available.

Rules associated with IRA-based employer-sponsored retirement plans, including SIMPLE IRA or SEP plans, generally are not part of these publications, but are covered in Publication 560, Retirement Plans for Small Business.


IRS Releases Guidance on Tax Reform’s Pass-Through Income Provisions

The Treasury Department and Internal Revenue Service have issued several elements of guidance for pass-through income taxation provisions of the Tax Cuts and Jobs Act (TCJA) of 2017. Many of the legislation’s provisions took effect for 2018 tax years. In addition to significantly reducing the corporate tax rate, TCJA provided special tax treatment for certain taxpayers who receive what is known as “pass-through income.” This includes sole proprietors and partners. Also some S-Corporation businesses generate pass-through income.

Pass-through income is “passed through” to a recipient’s individual income tax return and taxed at their individual tax rate, which under changes wrought by TCJA may now range from 10 to 37 percent. This taxable pass-through income may be reduced, however, by a Qualified Business Income Deduction. Calculation of this deduction is highly complex, but considering several potential variables, including payment of W-2 income to employees, it generally is not greater than 20 percent of Qualified Business Income. (While W-2 income does have a bearing on the magnitude of a retirement plan contribution in many cases, it has particular relevance in determining the general business income deduction available to pass-through businesses.)

Of significant concern during the TCJA legislative process was whether new pass-through income taxation rules might create a disincentive for those who receive such income to establish—or continue to maintain—an employer-sponsored retirement plan. By all indications, such disincentives have not materialized. In fact, under certain circumstances, it can be highly advantageous for a pass-through business owner to establish and contribute to a retirement plan, and thereby qualify for a greater Qualified Business Income Deduction.

Following are four pieces of guidance released by the IRS affecting pass-through income taxation. Note that the final and proposed regulations below are released in pre-published form, and minor editorial changes could be made when the final versions are released in the Federal Register (no publication date has been announced).

Final Regulations on Qualified Business Income Deduction
These final regulations provide guidance on the deduction for Qualified Business Income under TCJA’s new pass-through taxation rules. They are effective upon publication in the Federal Register, and generally apply to taxable years ending after their publication. However, the guidance further states that they—or the proposed version issued in August of 2018—generally can be relied upon for tax years ending in calendar year 2018.

Proposed Regulations for Those With Mutual Fund or Trust Interests, etc.
These new proposed regulations provide guidance on deductions available to pass-through income recipients with interests in certain regulated investment companies (mutual funds) or certain trusts, and for certain “previously suspended losses” considered Qualified Business Income. They amend certain elements of the August 2018 proposed regulations and provide anti-avoidance guidance relevant to applying TCJA’s new pass-through income taxation rules. These new proposed regulations generally are applicable for taxable years ending after their publication in the Federal Register, but may be relied upon until finalized. Public comments on these new proposed regulations and requests for a public hearing must be received within 60 days of their publication in the Federal Register.

IRS Revenue Procedure 2019-11
Revenue procedure 2019-11 provides a method for calculating W-2 wages paid by an employer—a factor that influences taxable Qualified Business Income. It generally is effective for 2018 and later tax years.

IRS Notice 2019-07
Notice 2019-07 is narrow, special-purpose guidance that addresses real estate rentals that may qualify as trades or businesses for pass-through income taxation purposes. It is effective for 2018 and later tax years.


2019 Form 8950 Instructions Updated to Match New EPCRS Guidance

The IRS has released a January 2019 version of the Instructions for Form 8950, Application for Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution System (EPCRS).

This form is used by retirement plans that have elected to apply to the IRS requesting written approval of a correction under VCP. With the release of Revenue Procedure 2018-52 early in October, the IRS updated the EPCRS to require that, as of April 1, 2019, all VCP submissions (including Form 8950) and payments must be made electronically at the pay.gov website.