Legislative updates

Washington Pulse: House Version of “Build Back Better” Act Contains Retirement Plan and Benefits Provisions

On November 19, 2021, the U.S. House of Representatives passed H.R. 5376, the Build Back Better Act (“BBB Act” or “the Act”). Following quickly on the heels of the Infrastructure Investment and Jobs Act, the BBB Act contains several retirement and benefits provisions that may affect financial organizations, service providers, and consumers. This bill has gone through numerous revisions as it made its journey to the House floor for a vote. It will now go to the Senate, which will likely make further revisions. So the Act’s final version—if passed by both the House and Senate—may be different from the current version.

Retirement Plan Provisions

  • Moving after-tax assets from eligible plans to a Roth IRA would be prohibited. In 2010, Congress removed the income thresholds that prevented high-income individuals from converting Traditional IRA assets to Roth IRAs. But income limits still applied to annual Roth IRA contributions: so individuals who earned too much couldn’t contribute to a Roth IRA. They could, however, make after-tax contributions to a Traditional IRA, and then convert the assets to a Roth IRA. (Detailed pro rata distribution rules applied to such conversions.) Effective January 1, 2022, the BBB Act would eliminate these “back door Roth” contributions.This proposed change would affect more than Roth IRA conversions. It would also prohibit employer plan rollovers of after-tax assets to designated Roth accounts or to Roth IRAs (sometimes called “mega back door Roths”).Effective January 1, 2032, the BBB Act would also prohibit any Roth IRA conversions and in-plan Roth rollovers for the following high-income individuals. (Income limits would be indexed for inflation.)
    • Single filers with modified adjusted gross income (MAGI) over $400,000.
    • Joint filers with MAGI over $450,000.
    • Heads of households with MAGI over $425,000.
  • High-income individuals with large retirement balances could not contribute to an IRA. To avoid subsidizing taxpayers with large IRA balances, this provision would disallow IRA contributions for those with combined IRA and defined contribution plan balances exceeding $10 million. This change would apply only to those whose annual income exceeds certain (indexed) amounts.
    • Single filers with modified adjusted gross income (MAGI) over $400,000.
    • Joint filers with MAGI over $450,000.
    • Heads of households with MAGI over $425,000

    Certain types of “annual additions” would not be considered IRA contributions, and so would be unaffected by this provision. They would, however, be used to determine whether an individual’s balance exceeds $10 million.

    • Contributions to SEP and SIMPLE plans.
    • Rollovers from other eligible plans.
    • IRA assets received as the beneficiary of an eligible retirement plan.
    • IRA assets received through a valid divorce or separation agreement.

    Ineligible individuals who make IRA contributions would be subject to the six percent excess contribution penalty tax if they fail to remove the excess contribution by their tax return due date, plus extensions. This provision would also require defined contribution plan administrators to report to the IRS any participant or beneficiary balances of at least $2.5 million (indexed). This restriction on contributions for those with higher incomes and plan balances would not be effective until tax years beginning on or after January 1, 2029.

  • Additional RMDs would be required for high-income individuals with large retirement balances. Using the same income limitations found in the previous two provisions, the BBB Act would require high-income individuals with retirement balances exceeding certain thresholds at the end of the preceding year to take additional required minimum distributions (RMDs) for the current year, irrespective of their age. This provision is intended to reduce the transfer of significant wealth through retirement plans and would limit tax-advantaged accounts to an amount that reflects more reasonable retirement needs. The proposed formula for these increased RMDs is a bit complicated.Individuals with combined IRA and defined contribution balances that exceed the “applicable dollar amount” would need to distribute 50% of the excess as an RMD. The applicable dollar amount would start at $10 million and would be indexed for inflation. Further, if the balance exceeded 200% of the applicable dollar amount (initially $20 million), an individual would need to satisfy the RMD by first distributing the lesser of
    • the amount needed to bring the total balance in all accounts down to $20 million (indexed), or
    • the aggregate balance in the Roth IRAs and then the aggregate balance in the designated Roth accounts.

    Once the initial distribution is made, the individual would then distribute 50% of the aggregate balance that exceeds $10 million. This second part of the distribution would be reduced by any amount that was distributed from the Roth accounts (under the previous step). In this second step, the individual could determine the accounts from which to take RMDs in order to fulfill the RMD requirement. The individual would also need to take the normal RMD—calculated without regard to the new provision.

    This increased RMD requirement would apply to all those with retirement balances exceeding the applicable dollar amount, even those not normally subject to RMDs (i.e., those under age 72). Individuals may have to take distributions for several years in order to whittle large balances down toward the $10 million (indexed) limit.

    There are some other notable details of this provision.

    • Mandatory 35% withholding would apply to the increased RMD amounts.
    • As with other RMDs, these additional RMDs would not be eligible for rollover treatment.
    • Employee Stock Ownership Plan balances—if invested in stock that is not readily tradable—would not be considered when calculating the special RMD.
    • Required Roth IRA or designated Roth account distributions would be treated as qualified (that is, tax free) distributions.
    • The 10% early distribution penalty tax would not apply (for affected individuals under age 59½).

    This provision would apply to taxable years beginning on or after January 1, 2029.

  • Statute of limitations would increase to six years for IRA noncompliance. This BBB Act provision would lengthen the current three-year statute of limitations to six years. The increase in the time that the IRS could continue to examine IRAs would apply to substantial errors (willful or otherwise) in reporting the value of investments and to the imposition of any tax associated with prohibited transactions under Internal Revenue Code (IRC) Section 4975. The six-year window would apply to taxes to which the current three-year period ends after December 31, 2021. Additionally, the new rule would allow taxes to be assessed up to six years after a return was actually filed, even if it was filed late.
  • IRA owners would be treated as disqualified persons under prohibited transaction rules. This provision clarifies that, when determining whether an entity or individual has engaged in a prohibited transaction under IRC Sec. 4975, a disqualified person would include the IRA owner and those who inherit the IRA after the owner’s death. This provision would apply to transactions occurring on or after January 1, 2022.
  • Prohibited transaction provision would be added for certain IRA investments. Although this provision may affect few individuals, it would preclude an “investment, at the direction of a disqualified person, by an individual retirement account in an interest in a DISC or FSC that receives any . . . payment from an entity [that is] owned by the individual for whose benefit the account it maintained.”A DISC is a Domestic International Sales Corporation, and an FSC is a Foreign Sales Corporation. These business entities were created to promote U.S. exports—and they were given substantial tax incentives. If an IRA owned (all or a portion of) a DISC or FSC, the IRA would not only reap significant tax benefits each year for the business, but the IRA would also accrue tax-deferred (or tax-free) growth.Because of the potential for an IRA owner or other disqualified person to structure these types of investments in a way that was not originally intended, the BBB Act would prohibit this transaction, effective for stock or other interests acquired or held on or after December 31, 2021.
  • Rules would be modified to limit losses from wash sales of certain assets. Wash sales rules limit the deduction that a taxpayer can take for an investment loss if the taxpayer (or the spouse) acquires the same or similar assets within 30 days of selling the original assets. While these rules have typically been applied to stock transactions, the BBB Act would specifically include “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” In addition, this definition “include[s] contracts or options to acquire or sell, or notional principal contracts in respect of, any specified assets.”Presumably, this new rule was designed to reduce the tax advantages of speculating in such assets as cryptocurrencies and nonfungible tokens (NFTs). The BBB Act would also preclude “related parties” from conducting wash sale transactions on a taxpayer’s behalf. These parties would specifically include (among others) the taxpayer’s IRAs, HSAs, 529 plans, and qualified retirement plans (such as 401(k) plans).This provision would apply to sales, dispositions, and terminations of assets on or after January 1, 2022.

Other BBB Act Provisions

  • Four weeks of paid leave for all workers. Currently, public entities and private companies with 50 or more employees must offer up to 12 weeks of time off under the Family and Medical Leave Act (FMLA). This, however, is unpaid time off. The BBB Act would provide paid Eligible individuals could receive up to four weeks of paid leave in a 52-week period. This leave provision would be paid directly through a new federal program or through each state (or employer), which would be reimbursed for most of the costs. The following details would also apply.
    • Payment amounts would vary depending on a worker’s weekly income, from approximately 90% of pay down to 53% of pay. Lower-paid worker would receive the higher percentage, and the benefit percentage would shrink for those with higher weekly pay. No amounts would be paid based on wages that exceed $1,192 weekly (1/52 of $62,000 in 2024, subject to indexing).
    • Unlike the FMLA, all workers would be eligible for the BBB Act’s paid leave, including self-employed business owners.
    • As with the FMLA, leave could be taken for events such as the birth or adoption of a child, the worker’s own serious health condition, or to care for a family member with a serious health condition. The BBB Act would also expand the definition of “family members” to those whose care would qualify for paid leave.

    This provision would become effective January 1, 2024.

  • Fringe benefits for bicycle commuting. The Tax Cuts and Jobs Act of 2017 repealed employer-provided benefits for workers who commute by bicycle. The BBB Act would reinstate and expand this benefit. Employers could once again reimburse employees’ expenses associated with the purchase, lease, rental, improvement, repair, or storage of bicycles that are used to commute from home to work or to a mass transit facility. Based on the projected adjustment for 2022, the reimbursement could go up to approximately $80 per month.

Takeaways

The Build Back Better Act is advancing through the budget reconciliation process, which allows the Senate to pass the bill with a simple majority. The Senate will likely make changes to the House version, meaning that the two chambers of Congress will have to reconcile their bills’ differences so that they can vote on identical bills. If the House and Senate can agree to terms, we expect that the final bill will contain at least some of the provisions discussed above. Because Congress must address other pressing legislative matters, such as a defense spending bill and the national debt ceiling, the BBB Act may not receive immediate attention. However Congress acts, Ascensus will continue to follow this bill. Visit ascensus.com for the latest developments.

 

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Build Back Better Bill Passes House, Moves to Senate

The House of Representatives passed the $1.9 trillion Build Back Better bill in a 220-213 near party line vote. The House-passed version of the bill contains several IRA provisions, including

  • limiting contributions and requiring additional minimum distributions for high-income taxpayers with aggregate retirement account balances over $10 million, beginning in 2029,
  • closing the “back-door” Roth IRA loophole by eliminating conversions of after-tax IRA and employer-sponsored retirement plan contributions for all taxpayers, beginning in 2022, and
  • eliminating conversions of pretax IRA and employer-sponsored retirement plan contributions for high-income taxpayers, beginning in 2032.

Additionally, the bill provides for four weeks of federally-funded, paid family and sick leave for all workers. Currently, it appears that this provision may be removed in the Senate version of the bill.

The bill now heads to an evenly divided Senate where it is anticipated that amendments will be made. All 50 members of the Senate Democratic caucus must agree to support the bill in order for it to pass under the budget reconciliation process, as opposed to the 60 votes necessary for other legislation.


Washington Pulse: Infrastructure Act Includes Additional Pension Funding Relief, Disaster Relief Changes, and New Digital Asset Reporting Requirements

The Infrastructure Investment and Jobs Act (the Act), signed by President Biden on November 15, 2021, includes extensions to the single employer pension funding relief originally provided in the American Rescue Plan Act of 2021 (ARPA). Other provisions include modifications to the mandatory 60-day postponement period, which grants relief to taxpayers for certain tax-related acts due to federally declared disasters and new reporting requirements for transactions involving digital assets. The effective dates vary—pension funding relief provisions apply to plan years beginning after December 31, 2021; the disaster relief changes are effective for federally declared disasters that occur after November 15, 2021; and the new reporting requirements for digital assets apply to information reports required to be filed after December 31, 2023.

Extension of Single Employer Pension Relief

The Act would extend by five years the relief granted by ARPA. Segment rates based on corporate bond yields are used to determine the applicable interest rate for calculating plan contributions. ARPA provided funding relief for single employer defined benefit plans by modifying the minimum and maximum “corridor” for segment rates through 2029, and applying a minimum five percent floor to the average segment rate for any 25-year period. The Act extends ARPA’s pension smoothing corridor to 2034.

Changes to Mandatory 60-Day Postponement Period for Disasters

Originally added in December 2019 by the Taxpayer Certainty and Disaster Tax Relief Act of 2019, new Internal Revenue Code Section (IRC Sec.) 7508A(d) requires the IRS to automatically postpone for 60 days certain time-sensitive, federal tax-related deadlines—including those related to retirement savings plans—in response to “federally declared disasters.” The 60-day extension applies to qualified taxpayers, which include individuals whose principal residence or principal place of business is located in a “disaster area.”

Although the IRS typically extends deadlines for more than 60 days, the provision ensures that affected taxpayers will have at least a minimum 60-day time frame to complete certain tax-related acts following a disaster. In June 2021, the IRS issued final regulations further explaining how the 60-day period is to be determined and clarifying the term “federally declared disaster.”  The final regulations, however, negated the automatic nature of the mandatory 60-day period by requiring that the Treasury Secretary first exercise discretionary authority to extend deadlines. On the heels of the final regulations, the Act restores the automatic application of the mandatory 60-day period, further tweaks the requirements for the mandatory 60-day extension, and adds “significant fire” as an event for which the IRS can issue relief under IRC Sec.7508A. These changes to the disaster relief are effective for federally declared disasters that occur after November 15, 2021.

  • What if there are multiple disaster declarations issued? If there are multiple disaster declarations issued relating to a disaster area within a 60-day period, then a separate mandatory 60-day period will be determined for each declaration.
  • When does the 60-day postponement period begin and end? The mandatory 60-day postponement period currently begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends on the date that is 60 days after the latest incident date. The newly enacted changes to IRC Sec. 7508A(d) provide that the 60-day period will now end 60 days following the later of the earliest incident date or the date that FEMA announces a federal disaster declaration, possibly resulting in a longer 60-day period.
  • Are taxpayers entitled to relief when affected by a significant fire? Taxpayers affected by a “significant fire” are now entitled to the same tax-related deadline extensions as those who are affected by a federally declared disaster area. The term “significant fire” means any fire with respect to which assistance is provided under section 420 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

New Digital Reporting Requirements

The definition of “broker” now includes those who, in exchange for compensation, regularly make transfers of digital assets (e.g., “crypto” currencies) for investors. The Act expands IRS reporting requirements to include digital asset transactions regularly performed by brokers. Brokers performing digital asset transactions must now identify clients and report their digital asset activity each year to the IRS.

Takeaways

Although the legislation changes certain aspects of the disaster relief provisions, including extending the minimum 60-day period and adding “significant fire” to the list of events for which the IRS can delay tax deadlines, the IRS has already been postponing deadlines for more than 60 days and has granted relief for past wildfires. Taxpayers and businesses should continue to refer to the IRS website for the latest disaster relief information.

The other major changes allow sponsors of single employer defined benefit plans to have interest rate relief through 2034 and create a new reporting requirement for brokers filing returns in 2024 and later years. Ascensus will analyze and share any further developments related to this guidance. Visit ascensus.com for the latest information.

 

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Committee Leaders Introduce Retirement Legislation in House

Leadership from the House Committee on Education and Labor and its Subcommittee on Health, Employment, Labor and Pensions have introduced the Retirement Improvement and Savings Enhancement (RISE) Act to expand worker access to a secure retirement.

The proposed legislation includes several noteworthy provisions.

  • Establishes an online, searchable “Retirement Lost and Found” database at the Department of Labor (DOL) to help workers locate savings as they move from job to job
  • Increases the force-out threshold for rollovers from retirement accounts to IRAs from $5,000 to $7,000
  • Allows 403(b) plans to participate in multiple employer plans (MEPs) and pooled employer plans (PEPs)
  • Enables employers to provide small financial incentives, such as low-dollar gift cards, to incentivize workers’ participation in retirement plans
  • Directs the DOL to update guidance regarding benchmarking investments (such as target date funds)
  • Clarifies that a named fiduciary is responsible for implementing written contribution collection procedures and collecting contributions in a PEP
  • Requires the DOL to review the current interpretive bulletin governing pension risk transfers and report to Congress on its findings
  • Simplifies and clarifies retirement-related disclosure requirements
  • Reduces the long-term, part-time eligibility requirements set forth under the SECURE Act from three to two consecutive 12-month periods during which the employee has at least 500 hours

The House Committee on Education and Labor is scheduled to hold a markup session for the bill on November 10.


Infrastructure Bill Heads to President for Signature

The much-anticipated Infrastructure Investment and Jobs Act (the Act) has passed the House of Representatives months after its approval in the Senate. The legislation contains the following noteworthy provisions.

  • Extends by five years the minimum and maximum “corridor” for determining interest rates for single employer pension funding, relief initially granted by the American Rescue Plan (ARPA)
  • Modifies disaster tax relief by ensuring that taxpayers will have at least a minimum 60-day time frame to complete certain tax-related acts following a “federally declared disaster”
  • Amends the Internal Revenue Code definition of “broker” to include anyone responsible for regularly providing services effectuating transfers of digital assets (cryptocurrency)

The bill awaits President Biden’s signature for enactment.


Proposed Bill Would Create Portable Retirement Accounts

Representative Jim Himes (D-CT) and Senator Mark Warner (D-VA) have announced legislation to establish universal, portable retirement accounts. The Portable Retirement and Investment Account (PRIA) Act of 2021 would create such accounts for every American at birth, in conjunction with the issuance of a Social Security number.

The child of any taxpayer who received the earned income tax credit in the tax year prior to establishment of the account would also receive a $500 contribution. Any individual will be permitted to make contributions to their own account throughout their life, except during years in which they are an active participant in an employer-sponsored retirement plan. Annual aggregate contributions will be limited to an amount comparable to the IRA contribution limit imposed under Internal Revenue Code Section 219(b) and catch-up contributions for those age 50 or older.

Employers will be permitted to make direct deposits, apply automatic contribution and automatic escalation features, and make contributions to the accounts of their eligible employees. These employees are limited to anyone

  • whose employer does not maintain a qualified retirement plan,
  • whose employment consists of work (whether or not as an employee) through mobile platforms, or
  • who is not eligible to participate in their employer’s qualified retirement plan.

 

The bill was referred to the House Committee on Ways and Means.


Proposed House Budget Reconciliation Amendment Includes IRA Restrictions

The House Ways and Means Committee has released additional legislative text as part of its tax portion of the anticipated $3.5 trillion budget reconciliation bill. If enacted, the proposal would impose several restrictions on IRAs.

  • Creates a prohibition on Roth or Traditional IRA contributions if aggregate IRA and defined contribution balances exceed $10M, and generally applies to individuals making more than $400–$450k (depending on filing status)
  • For account balances exceeding $10M, provides for a required distribution equal to 50 percent of the amount by which the prior year aggregate balance exceeds $10M—again, for individuals making more than $400–$450K. If the aggregate value exceeds $20M, then the excess is required to be distributed first from Roth IRAs and designated Roth accounts to bring the value to $20M (or deplete Roth assets) after which the individual can choose which accounts to distribute from to satisfy the remaining RMD resulting from having a balance exceeding $10M.
  • Closes the “back-door” Roth loophole by eliminating conversions of all after-tax IRA and after-tax employer plan contributions
  • Eliminates pretax conversions and rollovers to Roth from non-Roth accounts for those making $400–$450k (beginning in 2032)
  • Extends statute of limitations from three years to six years after a return containing an error was filed to allow IRS to pursue IRA noncompliance

The legislation also imposes restrictions on certain types of investments as follows.  Such investments that exist in IRAs at the time of enactment would be required to be divested from the IRA by December 31, 2023.

  • Prohibits investment of IRA assets in a security if the issuer of the security (or other person specified by the Treasury Department) requires the account owner to either
    • have a specified minimum amount of income or assets,
    • have completed a specified level of education, or
    • hold a specific license or credential
  • Prohibits investment of IRA assets in entities in which the owner has a substantial interest (10 percent or more) or is an officer or director of the entity. Constructive ownership of family members applies (spouse, ancestor, lineal descendant, and spouse of lineal descendant).

Other retirement provisions included in the Ways and Means Committee’s portion of the bill were announced last week. After nearly 40 hours of debate and 66 amendments over the course of four days, the legislation was approved by the Ways and Means Committee in a near party-line vote. It now moves to the House Budget Committee for markup.


Early House Budget Reconciliation Text Includes Retirement Reform

The House Ways and Means Committee has released draft legislative text as part of what is currently planned to be a $3.5 trillion tax and spending package. The proposal would require employers without an employer-sponsored retirement plan to automatically enroll their employees in an automatic IRA plan or other retirement arrangement at a rate of at least 6 percent and increasing annually to 10 percent of compensation beginning in 2023. Representative Richard Neal (D-MA) previously proposed such legislation under the Automatic Retirement Plan Act of 2017. The current proposal exempts employers with 5 or fewer employees earning at least $5,000, or those that have been in business for less than 2 years from these requirements. The legislation includes enhancements to credits for small employers to offset plan costs and imposes an excise tax of $10 per participant per day to employers that fail to provide an automatic arrangement.

Additionally, the proposal would modify the saver’s credit to create a refundable tax credit or “saver’s match” of up to $500 (adjusted for inflation), based on a percentage of the contributions made by the taxpayer to a retirement account. The taxpayer would designate on his or her tax return an eligible retirement account for the credit to be funded. Similar proposals have been introduced by Senator Ron Wyden (D-OR) with the Encouraging Americans to Save Act of 2021, and also by Senator’s Ben Cardin (R-MD) and Ron Portman (R-OH) as part of the Retirement Security and Savings Act of 2021.

The House Ways and Means Committee is scheduled to hold markup sessions this week to debate the legislation.


Bill Would Provide Permanent Retirement Distribution Relief for Federal Disasters

Senators Bill Cassidy (R-LA) and Robert Menendez (D-NJ) have introduced legislation that would make permanent certain rules for distributions and loans from retirement plans and IRAs in connection with federally declared disasters. This legislation is intended to aid victims by providing consistent treatment of and improving response times associated with disaster relief.

The proposal follows previous disaster distribution guidance and provides for a waiver of the 10 percent early withdrawal penalty tax on distributions of up to $100,000 per disaster made to those who have a primary residence in the affected area and have sustained an economic loss. The relief would apply to distributions on or after the first day of the incident period of the disaster and within 180 days after the later of either the incident period, the date of enactment, or the applicable disaster declaration. The proposal also allows the taxpayer to treat the distribution as income ratably over a three-year period, as well as to recontribute the distribution to a plan or IRA within three years.

Additionally, the bill would allow recontributions of withdrawals for home purchase or construction in the event that the assets were not used for that purpose. The maximum amount available for a plan loan would also be increased to the lesser of $100,000 or the greater of $10,000 or 100 percent of the nonforfeitable benefit of the participant. A one-year extension of loan repayments would also be permitted for loan payments due on or after the first incident date of the disaster and within the subsequent 180-day period.

The bill was referred to the Senate Committee on Finance. It will be monitored for further developments.


Series of Retirement Security Bills Reintroduced

Senators Cory Booker (D-NJ) and Todd Young (R-IN) reintroduced four bills in the Senate this week designed to address retirement security.

The Refund to Rainy Day Savings Act, originally proposed by Senator Booker in 2019, would permit taxpayers to defer 20 percent of their income tax refund into a “Rainy Day Fund” established by the Secretary of the Treasury. Representative Bonnie Watson Coleman (D-NJ-12) is introducing a companion bill in the House of Representatives.

Senator Booker also introduced the Strengthening Financial Security Through Short-Term Savings Accounts Act of 2021, which was previously proposed by various Senators in prior sessions of Congress. This bill would permit employers to establish stand-alone, short-term savings accounts with automatic contribution arrangements. The account balance will not be permitted to exceed $10,000, adjusted for inflation, and employers will be permitted to establish these accounts in conjunction or coordination with their tax-qualified plan or arrangement.

The Retirement Security Flexibility Act of 2021, previously proposed by Senator Young in 2019, creates additional options for small employers offering nonelective and matching contributions in their 401(k) plans. The bill also makes changes to automatic-enrollment and automatic-increase rules.

The Commission on Retirement Security Act of 2021 would establish an executive branch commission to conduct a comprehensive study of the state of retirement security in the United States and, within two years, submit a report to Congress with recommendations on how to improve or replace existing private retirement programs.

The Retirement Security Flexibility Act of 2021 has been referred to the Senate Committee on Finance, while the other bills have been referred to the Senate Health, Education, Labor, and Pensions Committee.