IRS

IRS Issues Final Regulations for Mandatory Deadline Postponements Related to Federally Declared Disasters

The IRS has released final regulations regarding the mandatory 60-day postponement of deadlines for certain time-sensitive, tax-related acts in circumstances of federally declared disasters, implemented under the Further Consolidated Appropriations Act of 2020.

The tax-related acts covered by this guidance are defined in Internal Revenue Code Section 7508A. This is the authority cited for postponement of deadlines in cases of localized disaster declarations. Such localized relief is announced by the IRS in news release form, describing the area affected—generally on a county-by-county basis—and describing the length of the deadline postponements.

The final regulations clarify the definition of “federally declared disaster” for purposes of deadline extensions to include both a major disaster declared under section 401 of the Stafford Act and an emergency declared under section 501 of the Stafford Act.

Additionally, the guidance provides details of the 60-day mandatory postponement period.

  • If the Treasury Secretary does not exercise her discretion to postpone a time-sensitive act, it cannot be postponed under the mandatory extension.
  • Time-sensitive acts specifically postponed include making contributions to a qualified retirement plan or IRA, withdrawing excess IRA contributions, recharacterizing IRA contributions, and completing rollovers.
  • The mandatory 60-day postponement period begins on the earliest incident date specified in a disaster declaration and ends on the date that is 60 days after the latest incident date.
  • In no event will the mandatory 60-day postponement period exceed one year.
  • The extension will not apply when there is no specified initial incident date.

The definition of “federally declared disaster” is applicable today with final publication in the Federal Register. The clarifications to the mandatory 60-day postponement period apply to disasters declared on or after December 21, 2019.


IRS Provides Additional COBRA Premium Subsidy Guidance

On May 18, the IRS issued Notice 2021-31, which provides guidance affecting COBRA premium assistance pursuant to the American Rescue Plan Act of 2021 (ARPA). The notice includes 86 questions that clarify the application of the premium assistance to group health plans, employee eligibility, determination of the premium subsidy amount, and the advance payment or quarterly offset of taxes for employers.

 

Eligibility (Questions 1–20)

Notice 2021-31 clarifies that an assistance eligible individual (AEI) is an individual who experiences an original qualifying event of reduction in hours or involuntary termination of employment. If the AEI experiences an extension of COBRA continuation coverage period due to disability, a second qualifying event, or state mini-COBRA extension, he will be eligible for the subsidy to the extent that his additional period of coverage falls during the subsidy period. Finally, an AEI is no longer eligible for premium assistance if he is eligible for another group health plan or Medicare. An AEI is considered eligible for another group health plan if enrolled or eligible to enroll during the period April 1 to September 30, 2021.

Operationally, employers are not required to obtain an attestation or certification from the employee’s eligibility status to provide premium assistance. However, employers are required to maintain information used to make a determination, including any attestations or certification, if applicable.

 

Reduction in Hours (Questions 21–23)

An employee’s reduction in hours causes the qualified beneficiary to be eligible for premium assistance, regardless of whether the reduction in hours is voluntary or involuntary. In addition, furlough or strikes generally constitute reduction-in-hour events.

 

Involuntary Termination of Employment (Questions 24–34)

These questions and answers provide examples of what is and what is not considered an involuntary termination. In general, involuntary termination is the severance from employment due to the independent unilateral exercise of authority by an employer where the employee was otherwise willing to continue employment.

The following constitute involuntary termination.

  • Employer’s action to terminate employment because of the employee’s absence from work due to illness or disability
  • Termination for cause unless gross misconduct
  • Resignation due to material change in the geographic location of employment
  • Window termination (i.e., employees facing impending termination are offered a severance to terminate in a specified period of time)
  • Employee-initiated termination because of concerns about workplace safety if the circumstances amounted to constructive termination (i.e., the employer failed to provide reasonable accommodation)
  • Employee-initiated termination in response to reduction in hours
  • Failure of an employer to renew an employment contract

The following constitute voluntary termination.

  • Retirement
  • Employee-initiated termination due to concerns about workplace safety
  • Employee-initiated termination because child is unable to attend school or childcare facility because of COVID-19. However, if the leave is temporary and an employee-employer relationship exists, the qualifying event may be reduction in hours
  • Death of an employee

 

Coverage Eligible for Premium Assistance (Questions 35–42)

Premium assistance is available for group health plan coverage that includes medical, vision, or dental-only plans, health reimbursement arrangement (whether integrated or stand-alone), and retiree health plans (if available to active employees that are similarly situated). The premium assistance is not available for qualified small employer health reimbursement arrangements or health flexible spending arrangements.

 

Premium Assistance Period (Questions 43–46)

The premium assistance is available for the period April 1 to September 30, 2021, and the employee is eligible to receive premium assistance beginning the first period of coverage beginning on or after April 1, 2021. However, an employee is not required to elect the first period of coverage beginning on or after April 1, 2021, and may instead choose any prospective period of coverage within the available period (April 1 to September 30, 2021).

 

End of COBRA Premium Assistance Period (Questions 47–50)

COBRA coverage will continue for the AEI at the end of the subsidy period, but premiums must be timely paid for subsequent periods of coverage.

 

Extended Election Period (Questions 51–55)

An AEI will be able to have a second opportunity to elect coverage during the extended election period even if she had previously declined certain coverage while electing others (e.g., enrolling in continuation coverage for dental and vision but declining health coverage). Or if an employee had elected self-only continuation coverage, her spouse or dependent child, who would also qualify as an AEI, would also have a second election opportunity.

 

Extensions Under the Emergency Relief Notices (Questions 56–59)

Individuals must elect or decline retroactive coverage within 60 days of receipt of the election notice. Individuals will not have a second opportunity to elect coverage. The one-year extended period due to the pandemic continues to apply for premium payment outside the April 1 to September 30, 2021, period.

 

Payments to Insurers Under Federal COBRA (Question 60)

Insurers may be liable for excise taxes if they fail to treat an AEI as having made a full payment of the premium. The employer will be responsible for making a payment to the insurance carrier.

 

Comparable State Continuation Coverage (Questions 61–62)

State continuation programs will not fail to provide comparable coverage under ARPA if the programs provide different maximum periods of coverage, different qualifying events, or different qualified beneficiaries. However, a qualified beneficiary is eligible only if the individual meets the definition under COBRA.

 

Calculation of Premium Assistance (Questions 63–70)

The credit for the premium assistance is equal to the amount of COBRA premium costs not paid by the AEI plus any administrative costs otherwise allowed (generally, 102 percent). Notice 2021-31 clarifies that an amount subsidized by the employer would not be eligible for a credit.

 

Claiming the COBRA Premium Assistance Credit (Questions 71–86)

Regarding payment of the premium assistance to the plan sponsor, Notice 2021-31 clarifies that employers are eligible for the credit if subject to COBRA or self-insured and insurers are eligible for the credit for insured plans subject to mini-COBRA.

Notice 2021-31 also clarifies that the IRS and the Department of the Treasury are aware of additional issues concerning COBRA premium assistance that have not been addressed. They are continuing to consider the issues and may issue further subsequent guidance.


IRS Issues Deadline Relief for Alabama Victims of Severe Storms and Tornadoes

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for Alabama victims of severe storms, straight-line winds, and tornadoes. The tax relief postpones various tax filing and payment deadlines that occurred starting on March 25. The areas included in the relief are Bibb, Calhoun, Clay, Hale, Jefferson, Perry, Randolph, and Shelby counties.

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 March 25, 2021, and before August 2, 2021, will have until August 2, 2021, to complete the act(s). 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.

“Affected taxpayer” automatically includes any individuals who live, and any businesses whose principal place of business is located, in the covered disaster area. 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 Issues Deadline Relief for Kentucky Severe Storms Victims

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for Kentucky victims of severe storms, flooding, landslides, and mudslides. The tax relief postpones various tax filing and payment deadlines that occurred starting on February 27. The areas included in the relief are Boyd, Breathitt, Carter, Casey, Clay, Cumberland, Elliott, Estill, Floyd, Franklin, Jackson, Johnson, Knott, Knox, Lawrence, Lee, Lincoln, Magoffin, Marion, Martin, Mason, Morgan, Ohio, Pike, Powell, Rockcastle, and Wolfe counties.

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 27, 2021, and before June 30, 2021, will have until June 30, 2021, to complete the act(s). This includes the May 17 deadline for filing 2020 individual income tax returns and paying any tax due. Taxpayers also have until June 30 to make 2020 IRA contributions.


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.


Adeyemo Confirmed as Deputy Secretary of the Treasury

Wally Adeyemo has been confirmed as Deputy Secretary of the Treasury after the Senate approved him in a bipartisan voice vote. The Senate Finance Committee unanimously approved his nomination in March before the Senate floor vote.

The deputy secretary plays a primary role in the formulation and execution of Treasury policies and programs in all aspects of the department’s activities. Adeyemo has previously served as deputy director of the White House National Economic Council and deputy national security adviser during the Obama administration. He also served in several senior management positions at the Department of Treasury—including senior advisor and chief of staff. Before this appointment, Adeyemo was a senior advisor at Black Rock.


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.


Retirement Spotlight: IRS Regulations Address Tax on Unrelated Businesses in Plans

The IRS has released final regulations on computing unrelated business taxable income (UBTI) for a tax-exempt organization. This guidance may affect only a relatively small portion of tax-exempt retirement plans. For those plans that invest in certain types of assets, however, knowing the rules will be important. As explained later, these final regulations may help simplify administration and reporting requirements for what are usually considered to be more complex investments.

The final regulations pertain to Internal Revenue Code Section (IRC Sec.) 512(a)(6), added by the Tax Cuts and Jobs Act of 2017. The regulations are generally effective for taxable years starting on or after December 2, 2020. Tax-exempt organizations may choose to apply the final regulations to taxable years that start on or after January 1, 2018. Alternatively, they may rely on a “reasonable, good-faith interpretation” of IRC Sec. 512(a)(6) for such taxable years.

Rationale for the Unrelated Business Tax

IRC Sec. 501(c) contains the list of exempt organizations that receive special tax benefits. Perhaps most familiar to many are IRC Sec. 501(c)(3) entities, which are organized and operated for religious, charitable, scientific, educational, and other similar purposes. Because of the societal benefits that these organizations confer, they are exempt from federal taxation. Hence the name “exempt organizations”.

Because these exempt entities operate free from most taxation, they can devote more of their resources to their purpose. Some organizations own or operate businesses outside this purpose, usually to raise money to further the organization’s goals. But this could allow them to have an advantage over for-profit organizations conducting the same kind of business.

  • Example: Misty Meadows Arboretum is an IRC 501(c)(3) exempt organization whose primary purpose is to educate the community about various ecosystems. It relies primarily on charitable contributions from its members. It always has a spring plant sale, which is open to the public and brings in a modest profit. Misty Meadows’ new director sees potential in creating a larger plant sale. Eventually, the arboretum builds multiple greenhouses to meet the huge demand. Before long, the annual plant sale is by far Misty Meadows’ biggest revenue source. Unfortunately, Misty Meadows’ director wasn’t aware that the arboretum was prohibited from using its tax-exempt status to run the almost year-round plant-sales operation without paying any tax.

Exempt organizations that operate a business enterprise outside their tax-exempt purpose are required to pay taxes on profits from that enterprise. This levels the playing field so that not-for-profit entities do not have an unfair advantage, which would be contrary to public policy.

Retirement Plans as Exempt Organizations

In addition to the UBTI rules applying to IRC 501(c)(3) organizations, they also apply to trusts under IRC Sec. 401(a). This includes pension plans, profit sharing plans, and 401(k) plans. The IRS also applies the UBTI rules to IRAs.

In the vast majority of plans and IRAs, UBTI will not be a factor. Generally, most assets in these types of plans are invested in mutual funds or time deposits (i.e., certificates of deposit). Even participants in plans that permit greater investment latitude will often invest in individual securities. Only those plans that permit true investment self-direction will normally become subject to the UBTI rules. The plans most often associated with unrelated taxable businesses are truly self-directed owner-only 401(k) plans and IRAs. These types of accounts are referred to as self-directed accounts or SDAs. And while some financial organizations may permit SDA owners to place assets in investments that generate UBTI, many SDA investments (e.g., precious metals, promissory notes) do not.

How Does the Tax on UBTI work?

The rules on UBTI can be complex, but here are some of the basics.

  • Annual income of $1,000. Form 990-T: Exempt Organization Business Income Tax Return, must be filed for plans with gross income of $1,000 or more from an unrelated trade or business. Form 990-T must normally be filed for qualified plans and IRAs by the trust’s tax return due date (generally April 15 for calendar-year tax filers).
  • Tax rates. A filer gets a $1,000 “specific deduction.” So an IRA with exactly $1,000 in gross income from an unrelated business would have to file Form 990-T, but it doesn’t pay tax on the income unless there is UBTI after the $1,000 deduction (and any other deduction) is applied. The tax rate schedule for trusts then applies for any taxable unrelated business income. This rate starts at 10 percent—but quickly rises to 37 percent (on taxable income over $12,950).
  • Filing Form 990-T. This is one of the biggest concerns surrounding SDAs: who is responsible for actually filing Form 990-T? The Form 990-T instructions state that the exempt organization (e.g., the 401(k) plan) and the trustee or custodian of the IRA must file. Practically, the financial organization may address this requirement by clarifying (in a service agreement) that the account owner must prepare any Form 990-T that is needed, while the financial organization (as trustee or custodian) will file it with the IRS. It is important that both parties understand their roles. The financial organization may not know enough of the details about the underlying investments to prepare Form 990-T, but the account owner may assume that, because the financial organization is allowing self-directed investments, it is also taking care of every aspect of such investments. Unless financial organizations are charging for providing this service, it is unlikely that they will volunteer to do it. And if they agree to prepare Form 990-T, they must have access to sufficient information. This is but one reason that financial organizations must carefully consider whether they wish to offer self-directed accounts. If they do, they should ensure that their clients clearly understand their respective roles and duties.

NOTE: Any financial organization allowing—and any individual owning—retirement plan investments that require Form 990-T filing should consult with a competent tax adviser.

Specific Provisions in the Final Regulations

The regulations contain provisions that may affect how unrelated businesses operate within a retirement plan.

  • Multiple unrelated businesses are treated separately. The final regulations require an exempt organization subject to the unrelated business income tax—if it has more than one unrelated trade or business—to calculate UBTI separately for each one. But the rule also prohibits offsetting the income of one unrelated business with the net operating loss of another. Using the example above, let’s consider how the new rules would dictate how the arboretum would report UBTI if it decided to build and operate a restaurant to increase its income.

The final regulations require an exempt organization to identify each separate business using the first two digits of the North American Industry Classification System (NAICS) code. The NAICS code (pronounced “nākes”) is a six-digit system that classifies over one thousand industries. The first two digits identify the general sector of the business (e.g., construction, manufacturing, education). Each successive digit narrows the business definition. In our example, for instance, the arboretum’s greenhouse operation could be classified with the first two digits “45,” which identifies “Retail Trade”; the restaurant would be classified under “Accommodation and Food Service,” which is “72.” If multiple businesses have the same first two digits, they are not considered separate businesses of the exempt organization. If the digits are different, they must file a separate Form 990-T schedule for each business with gross income of at least $1,000. In addition, one unrelated business cannot reduce its tax obligation by using the net operating loss (NOL) of another. So if the arboretum’s greenhouse made a profit, it could not reduce its taxes by using the restaurant’s NOL. Each “separate” unrelated business must stand on its own.

  • Unrelated businesses in the nature of investments. An exempt organization may be permitted to treat various investments that are subject to UBTI as one distinct unrelated trade or business. This allows the organization to invest in multiple unrelated businesses that can be combined for UBTI purposes into one “business” classified as investment activity. The regulations limit such investments to
    • qualifying partnership interests (QPI),
    • qualifying S corporation interests (QSI), and
    • debt-financed properties.

An exempt organization may identify “investment activities” on its Form 990-T (Schedule A)—using a six-digit non-NAICS code rather than the two-digit NAICS code. But it can classify multiple unrelated investments as investment activity on one Schedule A only if each of the investments is one of the types just mentioned. The organization has a QPI in an unrelated trade or business if the organization

  • is not a general partner in the partnership, and
  • either holds no more than a 2 percent interest in the profits or capital, or holds no more than 20 percent of the capital interest and does not significantly participate in the partnership.

The regulations contain similar rules for a QSI. But instead of using the term “profits or capital interest,” the tern “stock ownership” is used. So for investments in both partnerships and S corporations, exempt organizations with limited ownership and involvement can combine such investments into one unrelated business classified as “investment activity.” This approach gives exempt organizations more investment flexibility by reducing their need to obtain information from entities they invest in—information that may be harder for a small investor to readily obtain.

Debt-financed properties are likely to be included in this investment activity category because special UBTI rules already apply to such properties. Grouping other investments together may be a practical way for the IRS to simplify Form 990-T filing, thus ensuring greater compliance.

Practical Impact on Retirement Plans

The only specific plan provision in the final regulations—adopted without change from the proposed regulations—merely codified a rule that the IRS has operated under for years. This addition clarifies that the definition of unrelated trade or business for trusts (such as qualified retirement plan trusts) also applies to IRAs.

Other than that, the effects on plans, if they apply at all, are likely minor. But they are still important. Consider a self-directed account owner, for example, who has invested in a debt-financed rental property and has also bought (at arm’s length) a very small interest in a partnership (a QPI). Historically, if each investment generated at least $1,000 in gross income, each would be reported as a separate business (with a separate Form 990-T schedule). Now it is clear that multiple investments can be more easily grouped into one classification: investment activities. And to the extent that different investments in a plan can be aggregated, there is less concern about the new limitation on NOLs reducing profits in another unrelated business. Most SDAs will simply require a Form 990-T with a single Schedule A that accounts for all their unrelated business investments.

Conclusion

Although these regulations may have little effect on retirement plans, those who work with self-directed retirement plans should consider the following questions.

  • Do any of my plans contain investments that may generate UBTI?
  • If so, do I know who is responsible for filing IRS Form 990-T? While a financial organization that operates in the self-directed account sector may file this form routinely (when needed), it may be worth verifying what the trust agreement or other controlling documents state.
  • Does the entity filing Form 990-T know about the details of the final regulation? While the implications of the final regulations are relatively minor, knowing the details can still be helpful.

The IRS has released a draft version of the updated Form 990-T (and instructions), which contain details on the filing requirements mentioned in the final regulations.

Please visit ascensus.com for the latest news and developments.

 

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


IRS Details Additional Temporary Guidance for Cafeteria Plans

The IRS has issued Notice 2021-15, providing additional guidance and flexibility to employee benefit plans offering health FSA and dependent care arrangements. Because of COVID-19, employees participating in these programs are more likely to have unused amounts in these accounts as a result of changes in anticipated expenses during the pandemic. To qualify as a cafeteria plan under IRC Section 125, funds remaining at the end of the plan year generally cannot be carried over to future plan years, and restrictions apply when modifying elections after the start of the plan year.

While initial temporary relief was made available for 2020, the Consolidated Appropriations Act of 2021, enacted in December 2020, provides the following additional flexibility for 2021 and 2022 plan years.

  • Permits post-termination reimbursements through the end of the plan year that participation ceased for health and dependent care FSAs.
  • Creates special rule for dependent care programs, allowing the plan to substitute “under age 14” for “under age 13” as the maximum age for qualifying dependents.
  • Provides carryover of unused funds into the subsequent plan year from the 2020 and 2021 plan years.
  • Allows health and dependent care FSAs to offer a grace period extension of 12 months after the end of the plan year.
  • Permits mid-year election changes by plan participants of health and dependent care FSAs for plan years ending in 2021 without a change in status.

Notice 2021-15 provides illustrative examples of these provisions, details on interaction with COBRA continuation coverage, and timing of plan amendments. The notice also provides additional relief that allows employers to retroactively amend their

  • cafeteria plans to permit mid-year election changes for employer-sponsored health coverage, and
  • health reimbursement arrangements to permit reimbursement of over-the-counter drugs without a prescription and menstrual care products.