IRS Guidance

IRS Issues Deadline Relief for Tennessee Storm Victims

The IRS has issued a news release announcing the postponement of tax-related deadlines for Tennessee victims of severe storms, straight-line winds, tornadoes, and flooding. The tax relief postpones various tax filing and payment deadlines that occurred starting March 25. Affected taxpayers with a covered deadline on or after March 25, 2021, and before August 2, 2021, will have until August 2, 2021, to complete certain time-sensitive, tax-related acts. This includes the May 17 deadline for filing 2020 individual income tax returns and paying any tax due. Taxpayers also have until August 2 to make 2020 IRA contributions.

In addition, the relief includes completion of 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, and making retirement plan loan payments.

“Affected taxpayer” automatically includes any individuals who live, and businesses whose principal place of business is located, in the covered disaster area. The areas included in this relief are Campbell, Cannon, Cheatham, Claiborne, Clay, Davidson, Decatur, Fentress, Grainger, Hardeman, Henderson, Hickman, Jackson, Madison, Maury, McNairy, Moore, Overton, Scott, Smith, Wayne, Williamson, and Wilson counties.

Those who reside or have a business located outside the covered disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request relief.


IRS Provides 2022 Amounts for HSAs and HRAs

IRS Revenue Procedure (Rev. Proc.) 2021-25 provides the 2022 inflation-adjusted amounts for health savings accounts (HSAs) and the maximum amount that may be made newly available for expected benefit health reimbursement arrangements (HRAs).

The HSA 2022 calendar year annual limitation on deductions under Internal Revenue Code (IRC) Sec. 223(b)(2) is $3,650 for an individual with self-only coverage under a high deductible health plan (HDHP) and $7,300 for an individual with family coverage under an HDHP.

In calendar year 2022, under IRC Sec. 223(c)(2)(A), an HDHP is a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage. The annual out-of-pocket expenses—deductibles, co-payments, and other amounts (but not premiums)—cannot exceed $7,050 for self-only coverage or $14,100 for family coverage.

Under Pension Excise Tax Regulation Sec. 54.9831-1(c)(3)(vii), the maximum amount that may be made newly available for the plan year for an excepted benefit HRA is $1,800 for plan years beginning in 2022.


IRS Notice Addresses Taxation of Dependent Care Benefits

On May 10, 2021, the IRS released Notice 2021-26, which addresses the taxation of dependent care benefits available during taxable years ending in 2021 or 2022 because of a carryover or extended claims period enacted under the Consolidated Appropriations Act, 2021 (CAA).  This notice clarifies that amounts that would have been excluded in the prior tax year remain excludable from income in the subsequent tax year. In particular, Notice 2021-26 provides three examples to illustrate when amounts carried over or available under an extended claims period are excludable from income, as follows.

Example 1: Calendar Plan Year

For the 2020 plan year, the employee elects to contribute $5,000, but incurs no dependent care expenses. The employee is permitted to carry over $5,000 into the 2021 plan year. For the 2021 plan year, the employee elects to contribute $10,500 to the plan. The employee is reimbursed for $15,500 in expenses during the 2021 plan year. The entire amount, $15,500, is excludable from income.

Example 2: Noncalendar Plan Year (July 1 to June 30)

For the 2020 plan year, the employee elects to contribute $5,000, but incurs no dependent care expenses. The employee is permitted to carry over $5,000 into the 2021 plan year. For the 2021 plan year, the employee elects to contribute $10,500 to the plan. The employee does not incur any dependent care expenses during the 2021 plan year. Beginning on January 1, 2022, the employee has $15,500 in available benefits. For the 2022 tax year, only $10,000 is excludable from income because $5,000 is the maximum carryover and $5,000 is the permitted contribution for the 2022 tax year. The remaining amount, if reimbursed is taxable. The example also includes another piece detailing the two-and-a-half-month grace period.

Example 3: Noncalendar Plan Year (July 1 to June 30)

For the 2020 plan year, the employee does not elect to participate or contribute in the dependent care plan. For the 2021 plan year, the employee elects to contribute $10,500 to the plan. The employee incurs $5,000 in dependent care expenses for the period July 1, 2021, to December 31, 2021. The $5,000 incurred is excludable from income. Beginning January 1, 2022, the employee has $5,500 available, but only $5,000 is excludable from income because $5,000 is the permitted contribution for the 2022 tax year. The remaining $500, if reimbursed, is taxable. The example also includes another piece detailing an additional employee contribution and incurred expenses.

Finally, this notice provides that an amount carried over or available under the extended claims period is not taken into account when determining the applicable limit.

Notice 2021-26 will be published in the Internal Revenue Bulletin 2021-21 on May 24, 2021.


IRS Guidance Affects Employment Taxes and COBRA Premium Subsidy

The IRS issued Notice 2021-24, which provides guidance following the passage of the American Rescue Plan of 2021 (ARPA). The Notice provides information regarding the applicable penalty relief available to an employer under the ARPA for failing to pay employment taxes in anticipation of a credit for COBRA premium assistance paid to assistance-eligible individuals. Notice 2021-24 provides that the credit applies against the employer Medicare taxes for each calendar quarter and is reported on the employer’s return, reporting liability for FICA tax or RRTA tax, as applicable. For most employers, the Form 941 would be used to file quarterly employment taxes and the Form 7200, Advance Payment of Employer Credits Due to COVID-19, would be used to obtain an advance payment of the refundable credit. An employer will not be subject to a penalty for failing to pay quarterly employment taxes if

  • the employer is the person to whom premiums are payable;
  • the amount of employment taxes that is not timely paid is less than or equal to the amount of the employer’s anticipated credits for the quarter; and
  • the employer did not seek an advance credit by filing the Form 7200.

Drafts of the Form 941-X Instructions and Form 7200 have been released by the IRS but will not be finalized until the Office of Management and Budget has reviewed and approved the forms. Usually, once approved, the final forms contain updated instructions and information. As released, the draft Form 7200 contains a line item to include the amount paid by the employer in COBRA premium subsidies. The draft Form 941-X contains outdated instructions applicable to COBRA premium assistance payments between September 2008 and May 2010. The draft Form 941-X section regarding COBRA premium assistance payments will be updated in July 2021 to reflect changes under the ARPA.


IRS Q&A Clarifies Partial Plan Termination During COVID-19 Pandemic

The IRS released a five-part Q&A on the temporary partial plan termination rules for qualified retirement plans in accordance with the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act). Generally, there is a presumption that a partial plan termination has taken place when an employer’s turnover rate is at least 20 percent during the plan year. Partial plan termination requires those participants covered under the portion of the plan that is terminated to be fully vested.

The Act codified that a partial plan termination does not occur “during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.”

The Q&A clarifies the following points.

  • “Active participant covered by the plan” is determined based upon a reasonable, good-faith interpretation of the term, applied in a consistent manner. When only part of the plan year falls between March 13, 2020, and March 31, 2021, the Act “applies to any partial termination determination for that entire plan year.” The IRS provides this example:  “If a plan has a calendar year plan year, the 80% partial termination in [the Act] applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year because both plan years include a part of the statutory determination period of March 13, 2020, to March 31, 2021.”
  • The Act does not require the same individuals to be covered on the beginning and end dates, only that the number counted on March 31, 2021, include all individuals who are active participants covered by the plan on said date.
  • The reduction in the number of active participants is not solely limited to reductions related to the COVID-19 pandemic.

IRS Publication Provides Some Details on Beneficiary Rules and CRD Repayments

The 2020 tax year version of IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs), reflects the following noteworthy updates pursuant to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE), Coronavirus Aid, Relief, and Economic Security (CARES), and Consolidated Appropriations Acts.

10-Year Rule

The publication confirms that designated beneficiaries who are not eligible designated beneficiaries are generally subject to a 10-year payout period. It indicates not to use any of the distribution tables if either the 5-year rule or the 10-year rule apply. The publication also cautions beneficiaries that if the 10-year rule applies, the amount remaining in the IRA, if any, after December 31 of the year containing the 10th anniversary of the owner’s death is subject to the 50 percent excise tax—further validating that the applicability of the 10-year rule is similar to the 5-year rule and no annual minimum distributions would be required, so long as the account was depleted by December 31 of the final year. However, an example within the publication (that was used in previous versions) illustrates a life expectancy calculation for a designated beneficiary where presumably one would not be required, raising questions as to its applicability or whether it was an oversight when the publication was updated.

Additionally, the publication implies that the 10-year rule is not an option for an eligible designated beneficiary if the IRA owner died on or after her required beginning date. Again, this raises questions as to whether this was also an oversight or the IRS is suggesting that the “at least as rapidly” rule would remain for such eligible designated beneficiaries, meaning that life expectancy payments must continue to be disbursed from the IRA once an IRA owner has reached her required beginning date.

Election Deadline for Eligible Designated Beneficiaries

There were outstanding questions on deadlines for making beneficiary elections. The publication states that the deadline for an eligible designated beneficiary making an election is the earlier of

  • December 31 of the year the beneficiary must take his first life expectancy payment or
  • December 31 of the year containing the 10th anniversary year of the owner’s death (or 5th anniversary year of the owner’s death if applicable).

Nonpersons as Beneficiaries

The sections of the publication addressing beneficiaries who are not individuals remain largely unchanged, confirming that pre-SECURE Act rules continue to apply to non-person beneficiaries such as estates, charitable organizations, and nonqualified trusts. Moreover, the sections addressing the “look through” provision for trust beneficiaries also remains unchanged, where there are numerous outstanding questions on how the SECURE Act provisions apply to trust beneficiaries.

CRD Repayments

The publication specifies that a coronavirus-related distribution (CRD) repayment is to be treated as a trustee-to-trustee transfer in that it is not included in income. This suggests that a CRD taken from a Traditional IRA could not be repaid to a Roth IRA, since trustee-to-trustee transfers may only occur between similar account types.

Proposed regulations addressing beneficiary and required minimum distribution rules under the SECURE Act are anticipated soon and should provide additional clarity.


IRS Confirms Tax Filing Extension and Announces Postponed IRA, HSA Contribution Deadline

The IRS has issued Notice 2021-21, in which the IRS makes official the previously announced delay of the April 15, 2021 federal income tax filing due date for individuals for the 2020 tax year to May 17, 2021. This delay is a result of the ongoing COVID-19 Emergency Declaration issued in March 2020.

The tax return due date for an affected taxpayer is automatically postponed to May 17, 2021. An “affected taxpayer” is defined as any person with a federal income tax return or income tax payment filed on a Form 1040, U.S. Individual Income Tax Return, series with an original due date of April 15, 2021. No form, including IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, is required to obtain this relief, and it applies to all schedules, returns, and other forms that are attachments to the Form 1040 series or required to be filed by the Form 1040 series due date.

In conjunction with the Form 1040 series delay, Notice 2021-21 also automatically postpones to May 17, 2021,

  • the time for affected taxpayers to make 2020 contributions to their Traditional IRAs and Roth IRAs, health savings accounts (HSAs), Archer medical savings accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs), and
  • the time for reporting and payment of the 10 percent additional tax on amounts includible in gross income from 2020 IRA or employer-based retirement plan distributions.

The due date for filing and furnishing forms in the Form 5498, IRA Contribution Information, series is postponed to June 30, 2021.

This relief provided for filing federal income tax returns and paying federal income taxes does not apply to businesses or any other type of taxpayer who files federal income tax returns on forms other than the Form 1040 series. Notice 2021-21 further states that “no extension is provided in this notice for the payment or deposit of any other type of federal tax, including federal estimated income tax payments, or for the filing of any federal return other than the Form 1040 series and the Form 5498 series for the 2020 taxable year.”

While this guidance only applies to the filing of federal tax returns, many states have issued similar delays. Individuals are advised to review their state and local regulations to ensure compliance with all 2020 filing deadlines.


IRS Provides Guidance on Personal Protective Equipment as Medical Expense

The IRS has issued Announcement 2021-7, indicating that amounts paid for personal protective equipment (PPE)—such as masks, hand sanitizer, and sanitizing wipes—that are primarily used to prevent the spread of COVID-19, are treated as amounts paid for medical care under Internal Revenue Code Section 213(d). As a result, the amounts are also eligible to be paid or reimbursed under health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs).

Group health plans—including health FSAs and HRAs—may be amended pursuant to this announcement to provide for reimbursement of COVID-19 PPE expenses incurred for any period beginning on or after January 1, 2020. Employers choosing to amend their plans must do so by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. Retroactive amendments are not permitted after December 31, 2022.


IRS Announces Extension to File Tax Return

The Treasury Department and IRS have announced that tax filing due dates for 2020 tax year federal income tax returns, including the federal income tax payment deadline, will be automatically extended from April 15, 2021, to May 17, 2021. No special form must be filed to request the filing extension. The IRS will be providing formal guidance in the coming days.

While the postponement of federal income tax payments seems to suggest that certain other actions tied to the normal April 15, 2021 filing deadline may be extended as well—such as making 2020 IRA and health savings account (HSA) contributions, similar to the extension provided in 2020—it is not clear at this time.


IRS Issues Deadline Relief for Louisiana Victims of Winter Storms

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for Louisiana winter storm victims. The tax relief postpones various tax filing and payment deadlines that occurred starting on February 11. The entire state of Louisiana is included in this relief. 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, and making retirement plan loan payments.

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.