IRS Guidance

IRS Fact Sheet and Website Posting Highlight SECURE Act Changes, Appear to Clarify Issues

The IRS issued news release IR-2020-50, which contains links to several resources that describe changes contained in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, an element of the Further Consolidated Appropriations Act (FCAA), 2020, signed into law in December 2019. Included is IRS Fact Sheet FS-2020-04, a web page entitled “New law helps people save for retirement; other retroactive changes impact many taxpayers,” as well as links to the latest versions of IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The FS-2020-04 recaps SECURE Act changes that many are already familiar with, but also provides clarity where there was some uncertainty.

 

Traditional IRA Contributions at Any Age

Persons age 70½ and older may now make contributions to Traditional IRAs for 2020 and later tax years, not including contributions for the 2019 tax year made in 2020.

 

New RMD Age 72, Not 70½

Prior to the SECURE Act, age 70½ was the age to begin required minimum distributions (RMDs) from non-Roth IRAs and (with some exceptions) employer retirement plans. Now, persons who turn age 70½ in 2020 and later years need not begin RMDs until reaching age 72. Those reaching age 70½ in 2019 or a prior year cannot delay RMDs to age 72.

 

Qualified Birth or Adoption Penalty Exception

Taxable distributions from IRAs and employer plans before age 59½ are generally subject to a 10 percent excise tax, with limited exceptions. The SECURE Act provides a new exception to the excise tax for a qualified birth or adoption distribution. Up to $5,000 may be distributed from an IRA or employer plan—or both in combination—for the birth or adoption of a child. Such distributions may be recontributed. FS-2020-04 language makes it appear that such recontributions may be made at any time to an IRA or employer plan, and will be treated as rollovers no matter how long after the time of distribution.

 

More Rapid Payouts for Nonspouse Beneficiaries

Prior to the SECURE Act, all nonspouse primary beneficiaries of IRA or employer-sponsored retirement plan balances had the ability to stretch payouts over their own lifetime. For IRA owner or plan participant deaths in 2019 or earlier years, this option remains in place. But for deaths in 2020 and later years, most nonspouse beneficiaries must deplete the inherited account within 10 years. Exceptions (those still allowed to pay out over their lifetime) include the disabled, those chronically ill, those no more than 10 years younger than the decedent, and minor children. Minor children must begin the 10-year payout period upon reaching the age of majority.

 

The SECURE Act statutes and FS-2020-04 do not specify an age of majority, which may vary from state to state. However, under the heading, “Retirement Topics—Required Minimum Distributions (RMDs),” at the IRS website, the IRS identifies a uniform age of 18 when this 10-year distribution period must begin. It’s important to note that IRS website postings generally do not provide the same level of reliance as official guidance.

 

529 Plan Changes

The SECURE Act also created two new qualified—thus, tax-free—withdrawals from qualified tuition programs, also known as 529 plans. This change is retroactive to 2019. Amounts withdrawn from 529 plans may be used to pay for expenses of certain registered and certified apprenticeship programs. Also, up to $10,000—a lifetime limit—may be withdrawn and used to pay student loan principal or interest of the 529 plan’s designated beneficiary or the designated beneficiary’s sibling.


IRS Issues Tax-Related Deadline Relief for Tennessee Storm Victims

The IRS has issued news release TN-2020-01, announcing an extension of time to complete certain time-sensitive tax-related acts as a result of tornadoes, storms, straight-line winds, and flooding events in Tennessee. At this time, the only area to which the relief applies is Davidson, Putnam, and Wilson Counties. Certain tax-related acts with deadlines falling on or after March 3, 2020, and before July 15, 2020, are extended through July 15, 2020.

TN-2020-01 specifically notes that this extension applies to IRA contributions, as well as to the numerous time-sensitive acts described in Treasury Regulation 301.7508A-1(c)(1). These acts include completion of rollovers or 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 1-866-562-5227 to request relief.


IRS Issues 2020 Cumulative List for Pre-Approved DB Plan Documents

The IRS has issued Notice 2020-14, in which the IRS provides the 2020 Cumulative List of Changes in plan qualification requirements that must be reflected in pre-approved defined benefit (DB) pension plan documents.

The 2020 Cumulative List enumerates specific items that the IRS has identified for review when determining whether a DB plan that is filing for an opinion letter has been properly updated. The IRS notes that the 2020 Cumulative List includes statutory changes enacted and regulatory provisions issued between October 1, 2012, and December 1, 2019.


GAO Says IRS Could Better Help IRA Owners with Unconventional Assets Avoid Compliance Problems

The U.S. Government Accountability Office (GAO) has published a study of IRAs that include so-called “unconventional” investments, examples being real estate, virtual currency, precious metals, etc. The study focused on both the guidance that is available to owners of such IRA investments, and the IRS’ effectiveness in enforcing compliance when unconventional assets are held in IRAs. The GAO concluded that the IRS could do a better job on both fronts, as evidenced by the study’s title: IRS Could Better Inform Taxpayers about and Detect Noncompliance Related to Unconventional Assets.

Investing in unconventional assets within an IRA can present compliance challenges.  Challenges include potential investor conflicts of interest, which lead to IRA-disqualifying prohibited transactions, and determining such assets’ value, the reporting of which is an annual, ongoing responsibility for IRA trustees and custodians. Compliance issues also include specifically barred investments, and income generated within some investments that is taxable on a current-year basis.

The following GAO conclusions are worthy of special note.

  • IRS-provided information on unconventional assets in IRAs is generally limited to the agency’s Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), and is sparse in these publications. The GAO recommends more robust IRS resources, potentially to include web-based specialized information on such investments and their compliance requirements.
  • The GAO noted that “fragmented responsibility among IRS divisions creates challenges for examiners who need to share expertise and collaborate on IRA enforcement.” The IRS contended in its response to the GAO that limited information on unconventional assets now reported on information returns (IRS Form 5498, IRA Contribution Information) may be inadequate for audit selection in enforcement actions.

The IRS noted that roughly 2 million IRAs reported having such unconventional assets in 2016 (the latest tax year data available). Of these—as reported on IRS Form 5498—only about three-fourths provided valuations for these assets.


Reporting Relief Provided in Light of SECURE Act’s RMD Age Change

The IRS has issued Notice 2020-6, guidance that addresses required minimum distribution (RMD) reporting by IRA custodians, trustees, and issuers. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, contained within the broader Further Consolidated Appropriations Act (FCAA), 2020, altered the age when IRA owners must begin taking mandatory annual distributions, or RMDs. Under a provision of the SECURE Act, those who reach age 70½ in 2020 or a later year can delay beginning RMDs until age 72. Those who reached age 70½ in 2019 or earlier years must continue taking annual RMDs.

IRA custodians, trustees, and issuers are required to inform IRA owners by January 31 if an RMD is required to be taken by them for that year. Because of the timing of the FCAA’s enactment in December of 2019, IRA processing and reporting systems may still be programmed to inform account owners turning 70½ in 2020 that an RMD is required to be taken for this year. This information would be incorrect, as these individuals are not required to begin receiving RMDs from their IRAs until they reach age 72. This would constitute a reporting failure by the IRA custodian, trustee, or issuer.

Notice 2020-6 informs these financial organizations that they will be granted relief for such reporting errors, if—by April 15, 2020—they inform affected IRA owners that no RMD is due for 2020. For IRA owners turning age 70½ in 2020, an IRA custodian, trustee, or issuer reporting information to the IRS on the 2019 Form 5498, IRA Contribution Information, should not include a check in Box 11, Check if RMD for 2020, or make entries in Boxes 12a, RMD date, or 12b, RMD amount.

The IRS further notes that it is “considering what additional guidance should be provided … including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.”

Not addressed in this guidance is whether an IRA owner (or plan participant) who receives such a distribution would be granted an extended period of time—beyond 60 days—to complete a rollover of the distributed amount back into a tax-qualified savings arrangement.


IRS Updates Determination Letter and VCP Submission Information

The IRS has issued Revenue Procedure (Rev. Proc.) 2020-4, which updates 2019 guidance on determination letter and Voluntary Correction Program (VCP) submission procedures. Changes from the prior year Rev. Proc. 2019-4 include the following.

Section 3.04 is revised to state that a determination letter issued regarding the qualified status of a retirement plan will include a determination on the exempt status of any related trust or custodial accounts (does not include an adopting employer of a pre-approved plan).

Section 3.06(2) is revised to change an “Appeals Office” reference in Rev. Proc. 2019-4 to now read “Internal Revenue Service Office of Appeals (Independent Office of Appeals),” with corresponding changes made throughout Rev. Proc. 2020-4.

Section 6.02 is revised to provide a list of applicable documents that should be submitted to enable the Service to more efficiently process determination letter requests.

Section 8.02 notes that determination letter requests for certain hybrid (defined contribution and defined benefit) plans will be accepted through August 31, 2020, and certain individually designed merged plans on an ongoing basis.

Section 9.07 removes a former cautionary statement that a favorable determination for a plan executing a de-risking of its pension obligations by lump sum distribution does not constitute a determination of federal tax consequences.

Sections 30.07 and 31.03 are revised to note that user fees under VCP must be paid electronically using www.pay.gov, and that the Service no longer accepts paper VCP submissions.

Section 31 is revised to update mailing addresses.


IRS Proposes No Change for 2020 Retirement Plan Periodic Payment Withholding

The IRS has issued Notice 2020-3, guidance in which the Service is proposing no change for 2020 in a procedure for determining tax withholding on periodic distributions from pensions, annuities, and “certain other deferred income.”

Withholding on nonperiodic or on-demand distributions is generally applied at a 10 percent rate (other than retirement plan-eligible rollover distributions subject to mandatory 20 percent withholding), and can also be waived. Periodic—generally annuitized—payments have withholding applied according to IRS wage withholding tables, with recipients electing the number of withholding allowances or waiving withholding. However, when a withholding election is not made (on IRS Form W-4P), the current default assumption for the 2019 tax year is for the payor to apply withholding as if the recipient is married and has claimed three (3) withholding allowances.

The IRS is proposing in this guidance to retain this assumption for the 2020 tax year for those who make no withholding election for such periodic distributions, but is receiving public comments on this proposal through February 17, 2020.


IRS Extends Final Hardship Regulations Amending Deadline for Pre-Approved Plans

The IRS has issued Revenue Procedure 2020-09, guidance that extends the deadline for pre-approved retirement plans to amend for final IRS hardship regulations published in September 2019. The amending deadline for these plans is extended to December 31, 2021.

Significant changes to hardship distribution requirements were enacted in the Bipartisan Budget Act of 2018 (BBA). Changes contained in the legislation and reflected in the final regulations—applying to 401(k) and 403) plans—included the following.

  • Eliminates the six-month suspension of deferrals and employee after-tax contributions following a hardship distribution.
  • Eliminates the need for available plan loans to be taken before receiving a hardship distribution.
  • Broadens available plan sources from which hardship distributions may be taken, to include (in addition to elective deferrals) earnings on elective deferrals, as well as qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), ADP and QACA safe harbor contributions—and the earnings thereon (certain restrictions on hardship-available sources apply to 403(b) plans).
  • A general standard may be used to determine if a hardship distribution is needed to satisfy a financial need.
  • Other provisions apply to casualty losses and to certain federally declared disasters.

BBA and final regulations provisions must be effective for hardship distributions on or after January 1, 2020, although certain changes could be applied for 2018 and 2019 plan years.


IRS Releases 2019 Required Amendments List for Individually-Designed Qualified and 403(b) Plans

The IRS has issued Notice 2019-64, the 2019 Required Amendments List for drafting individually designed retirement plan documents for plans intended to be qualified under Internal Revenue Code Sections 401(a) (“qualified plans”) and 403(b).

In general, a Required Amendments List includes statutory and administrative changes in requirements that are first effective during the plan year in which the list is published, but does not include guidance that is issued or legislation that is enacted after the list has been prepared.

 

The list is divided into two parts. Part A covers changes in requirements that generally would require an amendment to most plans; or, to most plans of a type that would be affected by the change. Part B includes changes in requirements that the Treasury Department and the IRS anticipate will not require amendments to most plans, but might require an amendment because of an unusual provision in a particular plan.


IRS Grants Filing Extension for Certain Affordable Care Act Reporting

The IRS has issued Notice 2019-63, granting a 30-day extension to file information returns (forms) that report required information on compliance with certain requirements of the Affordable Care Act (ACA). The IRS makes clear that the 30-day extension applies to the deadline for providing the forms to taxpayers; the to-IRS deadlines remain unchanged.

Under Internal Revenue Code Section (IRC Sec.) 6056, certain “applicable large employers” (generally, those with 50 or more full-time-equivalent employees) are required to file with the IRS and distribute to employees information on offers of coverage under—and enrollment in—the employer’s health insurance plan(s). Under IRC Sec. 6055, providers of health coverage are required to report to the IRS and to employees the months that the employee was covered under ACA-defined minimum essential coverage. The information returns used to report this information include Forms 1094-B, 1094-C, 1095-B, and 1095-C.

The deadline for providing these forms to employees and covered individuals is extended from January 31, 2020, to March 2, 2020. The February 28, 2020, paper-copy IRS deadline and March 31, 2020, electronic submission IRS deadlines are not extended.

This notice also extends relief from penalties to reporting entities that report incorrect or incomplete information on the return or statement when these entities can show that they made good-faith efforts to comply with the information-reporting requirements. This relief applies to missing and inaccurate taxpayer identification numbers and dates of birth, as well as other information required on the return or statement.

The Treasury Department and the IRS have requested comments as to whether an extension of the due date for furnishing statements to individuals and the good-faith reporting relief will be necessary for future years and, if so, why.