IRS Guidance

IRS Seeks Comments on Spousal, Annuity Rights for In-Kind 403(b) Distributions of Terminating Plans

The IRS has issued Notice 2020-80, which requests comments on spousal and annuity rights that may potentially apply to 403(b) custodial accounts that are distributed to participants in-kind upon termination of a 403(b) plan.

The request in Notice 2020-80 was issued in conjunction with IRS Revenue Ruling (Rev. Rul.) 2020-23, which describes the status and tax treatment of in-kind distributions to participants of 403(b) custodial accounts in the event of a plan termination. Rev. Rul. 2020-23 states that if such custodial accounts comply with certain conditions after an in-kind distribution, they will retain their tax-deferred status as 403(b) custodial accounts until such time as the assets are paid out of the account to the participant or a beneficiary.

Notice 2020-80 points out that, while 403(b) plans in general are not subject to the annuity and spousal rights provisions of the Internal Revenue Code, those 403(b) plans that are subject to ERISA requirements—e.g., plans providing employer contributions—must comply with parallel annuity and spousal rights provisions of ERISA Section 205.

Notice 2020-80 specifically requests comments on the following.

  • Information on current practices with respect to termination of ERISA-governed 403(b) plans that are funded through custodial accounts.
  • Administrative or other burdens that might be associated with annuity or spousal rights when applied to such in-kind distributions.
  • Timing for applying a requirement that protects annuity or spousal rights, such as, upon a plan’s termination versus when an account is ultimately distributed.
  • Whether—as an alternative to in-kind distribution—custodial accounts of terminating 403(b) plans subject to spousal and annuity requirements should instead be forwarded to the Pension Benefit Guaranty Corporation defined contribution plan missing participants program.
  • Transition relief that could aid in protecting spousal and annuity rights of terminating 403(b) plans funded through custodial accounts.

Comments in response to Notice 2020-80’s request must be received by the IRS on or before February 3, 2021, preferably submitted by electronic means.


Updated Life Expectancy Tables Published

Today’s Federal Register includes IRS final regulations providing updated life expectancy tables. These tables are to be used when calculating required minimum distributions (RMDs) from IRAs and other tax-qualified retirement savings arrangements, such as 401(k) plans. Those affected will include IRA owners, plan participants, beneficiaries, and employer-sponsored retirement plan administrators.

These final regulations take effect today, with publication in the Federal Register, but the life expectancy tables they contain will not be used for calculations until distribution calendar years beginning January 1, 2022.

The purpose of these new life expectancy and distribution tables is to ensure that future required payments from retirement savings arrangements better reflect actual life expectancies of those who receive such payments.


IRS Issues Updated Life Expectancy and Distribution Tables for Determining RMDs

The IRS has issued a pre-publication version of final regulations containing guidance and life expectancy tables to be used in the calculation of required minimum distributions (RMDs) from IRAs and other tax-qualified retirement savings arrangements, such as 401(k) plans. Those affected will include IRA owners, plan participants, beneficiaries, and employer-sponsored retirement plan administrators.

These final regulations will take effect on the date of their publication in the Federal Register, and the life expectancy tables they contain are to be used for calculations for distribution calendar years beginning January 1, 2022. The purpose for providing these updated life expectancy and distribution tables is to ensure that future required payments from retirement savings arrangements better reflect actual life expectancies of those who receive such payments.


IRS Issues Guidance on In-Kind Distribution of 403(b) Custodial Accounts of Terminating 403(b) Plans

The IRS has issued Revenue Ruling (Rev.Rul.) 2020-23, which describes the status and tax treatment of certain 403(b)(7) custodial accounts belonging to participants or beneficiaries of terminating 403(b) plans. Briefly, Rev. Rul. 2020-23 states that if such in-kind-distributed custodial accounts comply with the conditions in this guidance, they will retain their tax-deferred status as 403(b) custodial accounts, until such time as the assets they contain are actually paid out to the participant or beneficiary to whom they belong.


IRS Announces Louisiana Hurricane-Related Deadline Extensions

The IRS has issued Announcement LA-2020-05, which describes the postponement of deadlines for victims of Hurricane Delta, damage from which began on October 6, 2020. In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.

The parishes included in the relief include Acadia, Calcasieu, Cameron, Jefferson Davis, and Vermilion. Taxpayers in other locations will automatically be added to the relief if the disaster area is further expanded.

Affected taxpayers with a covered deadline occurring on or after October 6, 2020, and on or before February 16, 2021, will have until February 16, 2021, to complete the act. “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 hurricane, may contact the IRS at 866-562-5227 to request the relief.


IRS Updates California Wildfire-Related Deadline Extensions

The IRS has updated previously-issued Announcement CA-2020-07, which describes the postponement of deadlines for victims of California wildfires that began on September 4, 2020. In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.

The counties included in the relief now include Fresno, Los Angeles, Madera, Mendocino, Napa, San Bernardino, San Diego, Shasta, Siskiyou, and Sonoma counties. Taxpayers in other locations will automatically be added to the relief if the disaster area is further expanded.

Affected taxpayers with a covered deadline occurring on or after September 4, 2020, and on or before January 15, 2021, will have until January 15, 2021, to complete the act. “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 wildfires, may contact the IRS at 866-562-5227 to request the relief.


2021 Retirement Savings Limitations Released

The IRS has issued Notice 2020-79, which contains the following 2021 retirement savings plan limitations.

  • Annual additions under Internal Revenue Code Section (IRC Sec.) 415(c)(1)(A) for defined contribution plans: $58,000 ($57,000 for 2020)
  • Annual additions under IRC Sec. 415(b)(1)(A) for defined benefit pension plans: $230,000 (unchanged)
  • Annual deferral limit (402(g) limit) for 401(k), 403(b) and 457(b) plans: $19,500 (unchanged)
  • Catch-up contributions to 401(k), 403(b), and 457(b) plans: $6,500 (unchanged)
  • Annual deferral limit for SIMPLE IRA and SIMPLE 401(k) plans: $13,500 (unchanged)
  • Catch-up contributions for SIMPLE IRA and SIMPLE 401(k) plans: $3,000 (unchanged)
  • IRC Sec. 401(a)(17) compensation cap: $290,000 ($285,000 for 2020)
  • Highly compensated employee (HCE) definition income threshold: $130,000 (unchanged)
  • Top-heavy determination key employee definition income threshold: $185,000 (unchanged)
  • SEP plan employee income threshold for benefit eligibility: $650 ($600 for 2020)
  • Qualifying longevity annuity contract (QLAC) amount excludible from required minimum distribution determinations: $135,000 (unchanged)

IRA Contribution and Taxpayer Contribution Credit Amounts
Annual limitations for IRA contributions, deductibility for those who are active participants in employer-sponsored retirement plans, and those seeking an income tax credit for retirement saving contributions, have slightly different indices than are used for determining cost-of-living adjustments (COLAs) in employer plans. Following are the limitations for 2021.

  • Traditional and Roth IRA contributions: $6,000 (unchanged)
  • Traditional and Roth IRA catch-up contributions: $1,000 (not subject to COLA adjustments)
  • IRA deductibility phase-out for single taxpayers participating in employer plans rises to $66,000 to $76,000 (was $65,000 to $75,000)
  • IRA deductibility phase-out for married joint filing taxpayers participating in employer plans rises to $105,000 to $125,000 (was $104,000 to $124,000)
  • IRA deductibility phase-out for married with spouse an active participant in employer plan rises to $198,000 to $208,000 (was $196,000 to $206,000)
  • Roth IRA income limitation for determining maximum contribution for married joint filers: phase-out range rises to $198,000 to $208,000 (was $196,000 to $206,000)
  • Roth IRA income limitation for determining maximum contribution for single filers and heads-of-households: phase-out range rises to $125,000 to $140,000 (was $124,000 to $139,000)

Taxpayers who make contributions to IRAs or deferral-type employer-sponsored retirement plans of up to $2,000 may be eligible for a special income tax credit, the “saver’s credit,” of 10, 20, or 50 percent of the amount contributed, depending on their income.

For joint filers, the maximum adjusted gross income level for

  • the 50 percent tax credit is $39,500;
  • the 20 percent tax credit is $43,000; and
  • the 10 percent tax credit is $66,000.

For head of household filing status, the maximum adjusted gross income level for

  • the 50 percent tax credit is $29,625;
  • the 20 percent tax credit is $32,250; and
  • the 10 percent tax credit is $49,500.

For all other filing statuses, the maximum adjusted gross income level for

  • the 50 percent tax credit is $19,750;
  • the 20 percent tax credit is $21,500; and
  • the 10 percent tax credit is $33,000.

 

 

 


IRS Publishes Guidance on Withholding and Reporting of Retirement Plan Accounts Escheated to Unclaimed Property Funds

The IRS has issued Revenue Ruling 2020-24, guidance for qualified retirement plans that pay or “escheat” certain accounts of unresponsive or missing participants or beneficiaries to state unclaimed property funds. The guidance addresses the issues of tax withholding and reporting when such amounts are escheated.

In Revenue Ruling 2020-24, the IRS poses an escheatment scenario for illustration purposes, and describes what is required under this fact pattern.

  • The balance in the account being escheated is $900 (an amount beneath the threshold that would require an automatic rollover to an IRA).
  • The account does not include employer securities, nondeductible employee contributions, designated Roth amounts, or accident or health plan benefits.
  • There is no withholding election with respect to this account.
  • It is being paid to a state unclaimed property fund from which the owner can later make a claim.

Withholding

An amount as described in the Revenue Ruling 2020-24 example is a “designated distribution” (not wages, not a payment to a nonresident alien or corporation, or dividends on employer securities), and is therefore subject to withholding under Internal Revenue Code Sec. 3405.

Reporting

Qualified retirement plans must report such a payment on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The distribution amount is reported in Box 1, and the federal withholding amount (e.g., 20%) is reported in Box 4.

The date by which qualified retirement plans must comply with this guidance is the earlier of the following.

  • The date it becomes “reasonably practicable” to comply
  • A payment date occurring on or after January 1, 2022