Legislative updates

House Bankruptcy Bill Would Impact Retirement Plans

H.R. 7370, the Protecting Employees and Retirees in Business Bankruptcies Act of 2020, has been introduced by Rep. Jerrold Nadler (D-NY). This bill would modify provisions related to Chapter 11 bankruptcy, including expanding claims and priorities for payment of benefits for employees and retirees, and protections related to reduction or denial of benefits.

Specifically, H.R. 7370 would do the following

  • increase the avenues by which retirement and employee health and welfare benefit plans could be funded after the filing of bankruptcy;
  • discourage the reduction or elimination of employee benefit and retirement plans by employers in bankruptcy;
  • allow those who hold employee stock in a retirement plan to potentially recover losses caused by fraud or breach of fiduciary duty; and
  • prevent employers from later rewarding insiders, executives, and highly paid employees if employee benefits are reduced in bankruptcy.

H.R. 7370 currently resides with the House Committee on the Judiciary, which has held a mark-up session on the bill.


Prospects Questionable for New House of Representatives Pandemic Relief Bill

The House of Representatives on Monday released text of a revised coronavirus (COVID-19) pandemic relief bill, expected to be voted on this week before the House recesses for pre-election campaigning. The bill is based on the previously introduced HEROES Act.

However, the legislation substantially exceeds the level of assistance and cost that the GOP-controlled Senate and the Trump administration have expressed willingness to support. House passage of this estimated $2.2 trillion proposal is seen by some as potentially providing incumbents up for reelection with campaign talking points even if the bill is not taken up in the Senate.

In addition to general provisions that include financial aid to state and local governments and schools, direct cash payments to taxpayers, extended unemployment benefits, and aid to struggling employers, the bill contains the following benefits-related provisions.

  • Targeted small business loan relief and other revisions of the Paycheck Protection Program
  • Coverage for COVID-19-related treatment with no cost sharing
  • Amendments to the Emergency Paid Leave Act
  • Relief for struggling union pension plans
  • Relief for single-employer pension plans
  • Extension of the deadline to roll over waived 2019 and 2020 RMDs
  • Clarification of the CARES Act’s application to money purchase pension plans
  • Grants to assist low-income women and victims of domestic abuse in obtaining QDROs
  • Technical corrections to SECURE Act provisions regarding funding for community newspaper pension plans
  • Creation of a union “composite plan” consisting of 401(k) and defined benefit plan provisions

Washington Pulse: IRS Provides Additional SECURE Act Guidance

At the end of 2019, the President signed the most comprehensive retirement reform package in over a decade: the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is one of multiple bills that were included in the Further Consolidated Appropriations Act, 2020 (FCAA).

The SECURE Act’s primary goals include expanding retirement savings, simplifying existing rules, and preserving retirement income. As with any major legislation, the SECURE Act created numerous outstanding questions. And while the IRS has previously provided some answers, no SECURE Act guidance has been as detailed as the recently released IRS Notice 2020-68. In addition to providing guidance on the SECURE Act, this Notice provides guidance on the Bipartisan American Miners Act, which is also part of FCAA.

 

SECURE Act Guidance

Qualified charitable distributions and the repeal of the Traditional IRA contribution age limit

Effective for 2020 and later taxable years, taxpayers with eligible compensation can make Traditional IRA contributions at any age, not just for years before reaching age 70½. Notice 2020-68 states that financial organizations that accept such contributions must amend their Traditional IRA plan agreements and disclosure statements and provide the amended documents to IRA owners.

Although most financial organizations  are likely to adopt the relaxed eligibility requirements, Notice 2020-68 states that they are not required to accept such contributions. Keeping the old contribution limitation—or delaying implementing the new rule—may benefit organizations who face possible programming concerns.

The Notice confirms that, because IRA contributions and required minimum distribution (RMDs) are reported as two separate transactions, IRA owners may not offset their RMD amount for a taxable year by the amount of contributions made for the same year. So while Traditional IRA owners may contribute past age 70½ (if they are otherwise eligible), they may also have to take an RMD for the same year.

In addition to allowing individuals to make contributions after age 70½, the SECURE Act made changes to qualified charitable distributions (QCDs). Beginning at age 70½, IRA owners and beneficiaries may donate—while satisfying their RMDs—up to $100,000 of IRA assets tax-free to a qualified charity.

The SECURE Act requires that IRA owners age 70½ and older who make deductible Traditional IRA contributions reduce the amount that they can exclude from income when taking a QCD. Notice 2020-68 confirms the formula that IRA owners should use to determine this amount.

Example: In 2020, Mike attains age 70½ and makes a $7,000 deductible contribution to his Traditional IRA. Mike also takes a $9,000 distribution payable directly to his church, which is a qualified charity. How much of the $9,000 QCD can Mike exclude from income?

Excludable QCD amount = A – (B – C)

A = the QCD amount for a year before any reduction

B = the aggregate deductible contributions made for all tax years beginning with Mike’s 70½ year

C = prior year income exclusion reductions made as a result of the SECURE Act

Excludable QCD amount = $2,000, which is $9,000 – ($7,000 – $0)

NOTE: In future years, deductible contributions made after age 70½ will continue to lessen the amount by which QCDs will be excluded from income. Contributions that reduced the excludable QCD amount in previous years are ignored; contributions that have not reduced prior-year excludable QCD amounts are aggregated with current-year deductible contributions to determine what amount of the current QCD is included in income.

 Participation of long-term, part-time employees in 401(k) plans

Effective for 2021 and later plan years, employees who have three consecutive 12-month periods with at least 500 hours of service (and who satisfy the plan’s minimum age requirement) generally must be allowed to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive, eligibility rules could continue to be applied to other contribution sources (such as matching contributions) and to ADP/ACP safe harbor plans. Employers may also exclude such part-time employees from coverage, nondiscrimination, and top-heavy test rules. The SECURE Act states that no 12-month period that begins before January 1, 2021, is considered when determining the three years of service for eligibility.

Notice 2020-68 confirms that an employer can apply the new eligibility rule to employer contributions that are subject to vesting requirements. But then for vesting purposes, the employer must generally consider each 12-month period for which the employee has at least 500 hours of service starting from the employee’s date of hire—including periods of service incurred before January 1, 2021. An employer may, however, continue to exclude periods of service described in Internal Revenue Code Section (IRC Sec.) 411(a)(4) (such as periods of service incurred before age 18 or before the plan was established).

It may be difficult for some employers to determine the correct periods of service for an employee who was previously excluded from the employer’s plan. As a result, the IRS is seeking comments on how to reduce possible administrative concerns related to counting years of vesting service beginning before January 1, 2021.

Small-employer automatic-enrollment tax credit

The SECURE Act created a new tax credit for small employers that include an eligible automatic contribution arrangement (EACA) feature in their new or existing qualified employer plan. A “qualified employer plan” includes a 401(a) plan, a 403(a) plan, a simplified employee pension (SEP) plan, and a savings incentive match plan for employees of small employers (SIMPLE) plan. To be eligible for the credit, employers must have had 100 or fewer employees who earned at least $5,000 in compensation during the previous calendar year. The maximum annual tax credit is $500 for each of the first three years that the employer includes an EACA in a qualified employer plan. This provision is effective for 2020 and later taxable years.

Notice 2020-68 clarifies that employers may receive a credit for each year during a single three-year period, starting in the first year that an employer adds an EACA. In addition, employers that maintain more than one qualified employer plan must offer an EACA in the same qualified employer plan for each year of the three-year period. For example, an employer that maintains two different 401(k) plans cannot receive a tax credit in 2021 if it adds an EACA to Plan A in 2020, amends to remove the EACA from Plan A in 2021, and then amends to add the EACA to Plan B in 2021.

Notice 2020-68 also clarifies that each eligible employer that participates in a multiple employer plan (MEP) may receive the tax credit. The three-year period begins with the first taxable year that an eligible employer includes an EACA under a MEP. An employer will continue to be eligible for the credit even if it spins off and establishes its own single-employer plan.

Qualified birth or adoption distributions (QBADs)

As of January 1, 2020, distributions taken within 12 months of the birth of a child or adoption of an “eligible adoptee” are exempt from the 10 percent early distribution penalty tax. An eligible adoptee is a child under the age of 18 or an individual who is physically or mentally incapable of self-support. An eligible adoptee does not include a child of the individual’s spouse. Each parent may distribute up to $5,000 in aggregate, per birth or adoption event, from an IRA, a 401(a) defined contribution plan, a 403(a) or 403(b) annuity plan or contract, or a governmental 457(b) plan.

Individuals may repay these amounts to an IRA or eligible retirement plan. While there is currently no stated deadline for repaying a QBAD, the Treasury Department plans to issue regulations under IRC Sec. 72(t) that will address recontribution rules, including rules related to the timing of recontributions.

Notice 2020-68 clarifies that individuals are “physically or mentally incapable of self-support” if they meet the disability definition found in IRC Sec. 72(m)(7). According to this definition, an individual is disabled if he “is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.”

In addition, the Notice addresses several other matters.

  • Individuals may receive a QBAD for each birth and each adoption. For example, an individual who gives birth to twins may distribute $10,000 from her IRA and treat the entire amount as a QBAD.
  • A QBAD is not treated as an eligible rollover distribution for purposes of the direct rollover rules, the IRC Sec. 402(f) notice requirement, and the 20 percent mandatory withholding requirement.
  • A QBAD is an optional distributable event, so employers are not required to add the feature to their plans.
  • A plan administrator may rely on a reasonable representation that the individual is eligible for a QBAD, unless the administrator has actual knowledge to the contrary.
  • An eligible retirement plan must accept QBAD recontributions if 1) the retirement plan permits QBADs, 2) the individual received a QBAD from that plan, and 3) the individual is otherwise eligible to make a rollover contribution to that plan at the time he wishes to recontribute the QBAD to the plan.
  • A QBAD that is recontributed to an eligible retirement plan is deemed to be an eligible rollover distribution that meets the 60-day rollover rule.
  • A participant who receives an in-service distribution from a plan that does not offer QBADs may still claim that distribution as a QBAD on her income tax return and recontribute the amount to an IRA.

Difficulty-of-care compensation eligible for IRA contributions

Certain foster care providers receive payments that are not includable in taxable income and therefore were not considered to be compensation. As a result, such individuals may not have been able to contribute to a retirement plan. Now such after-tax “difficulty-of-care payments” will qualify as eligible compensation for IRAs and defined contribution plans. This provision is effective for IRA contributions made after December 20, 2019, and for contributions made to defined contribution plans in 2016 and later plans years.

Notice 2020-68 confirms that difficulty-of-care payments to an employee must be made by the employer in order to be treated as eligible compensation. Employers that make difficulty-of-care payments to their employees must amend their retirement plans to include difficulty-of-care payments in their plan’s definition of compensation. Notice 2020-68 also notes that the IRS will release future guidance to address whether the six percent penalty tax will apply to excess IRA contributions that are based on difficulty of care payments.

 

Bipartisan American Miners Act Guidance

Under IRC Sec. 401(a)(36), pension plans could allow in-service distributions at age 62. Effective for 2020 and later plan years, the Bipartisan American Miners Act allows in-service distributions at age 59½ to participants in governmental 457(b) plans and 401(a) pension plans.

Notice 2020-68 verifies that allowing participants to take in-service distributions starting at age 59½ does not solely affect the plan’s normal retirement age. A pension plan’s definition of normal retirement age must still meet the requirements of Treas. Reg. 1.401(a)-1(b)(2), which states that a plan’s normal retirement age may not be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. A normal retirement age that is age 62 or later is deemed to satisfy the reasonably representative requirement. Notice 2020-68 also states that employers may continue to rely on the proposed regulations that were issued in 2016 for governmental pension plans. Employers are not required to offer the age 59½ in-service distribution.

 

Amendment Guidance

To help synchronize amendment deadlines for the SECURE Act, the Bipartisan Miners Act, and the Coronavirus Aid, Relief, and Economic Security Act, Notice 2020-68 states that employers with qualified retirement plans and 403(b) plans that are not maintained by a public school will have until the last day of the first plan year beginning on or after January 1, 2022, to amend their plans for the SECURE Act and the Bipartisan American Miners Act. This is a change from the Bipartisan Miners Act, which gave employers until the end of their 2020 plan year to amend their plan documents. Those employers with qualified governmental plans under IRC Sec. 414(d), collectively bargained (union) plans, and 403(b) plans maintained by a public school have until the last day of the first plan year beginning on or after January 1, 2024.

Governmental 457(b) plan administrators must amend their documents for the SECURE Act and the Bipartisan American Miners Act by the later of the last day of the first plan year beginning on or after January 1, 2024, or if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the IRS that the plan was administered in a manner that is inconsistent with the requirements of IRC Sec. 457(b).

Notice 2020-68 provides long awaited IRA amendment guidance. The Notice states that financial organizations must amend their IRA plan agreements and disclosure statements for the SECURE Act by December 31, 2022, or a later date as prescribed by the Treasury Secretary. The IRS expects to issue revised model IRA documents and an updated Listing of Required Modifications (LRMs). The LRMs will contain sample language that document providers may use when updating their IRA prototype documents. Employers must amend their deemed IRA documents based on the deadline applicable to the retirement plan under which the deemed IRA is established.

 

Next Steps

If they haven’t already, employers and financial organizations should educate themselves and their staff on the new requirements and determine whether they will offer any of the optional provisions. They should also start considering the amendment process for their retirement plan and IRA documents.

The IRS is requesting comments on the topics covered in Notice 2020-68—especially on the provision relating to long-term, part-time employees. Comments must be submitted on or before November 2, 2020, and should refer to Notice 2020-68. The Treasury Department and IRS are still expected to provide further guidance—including new regulations—on the SECURE Act and Bipartisan American Miners Act.

Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

Click here for a printable version of this issue of the Washington Pulse.


Legislation Introduced to Expand HSA Access

Senator Rand Paul (R-KY) has introduced the Health Savings Accounts for All Act of 2020 (S.4367). The legislation is intended to expand access and reduce restrictions on health savings accounts (HSAs).

According to details of Senator Paul’s press release, the bill proposes to eliminate the annual limit on tax-deductible contributions to HSAs by individuals and their employers. The requirement to be enrolled in a high deductible health plan in order to contribute to an HSA would also be eliminated. Additionally, HSA balances could be used for the payment of health insurance premiums, direct care service arrangements, and expenses incurred during the prior or current tax year before the establishment of the HSA. Another provision would allow for the tax-free transfer of HSAs upon death to certain family members.


Senate Bill Introduced to Provide COBRA Subsidization

Senator Martha McSally (R-AZ), along with Senators John Cornyn (R-TX), Steve Daines (R-MT), and Dan Sullivan (R-AK) have introduced S. 4329, the Continuous Health Coverage for Workers Act, in order to provide premium assistance for COBRA continuation coverage for individuals whose jobs have been impacted by COVID-19. The language of the bill is intended to be included in the overall Senate response under the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act.

Notably, the Senate proposal would provide employers with up to an 85 percent premium reimbursement for COBRA continuation coverage—beginning with the first month after the Act’s enactment, and ending on December 31, 2020. This subsidy would allow qualified beneficiaries who have not terminated voluntarily to maintain employer-sponsored health coverage at a cost that is more affordable to those who have been made newly unemployed or have had hours reduced.

Other details are provided below.

  • The Act requires group health plans to provide various notices—including special enrollment, extension of election period, furlough, and expiration of premium assistance. These notices contain specific content requirements, including information related to the Exchange. Samples will be drafted and issued by the Department of Labor within 30 days following the Act’s enactment.
  • Individuals not enrolled in COBRA but who would be eligible for premium assistance may elect COBRA continuation coverage starting after the Act’s enactment, and ending 60 days after the date the group health plan provides the required notice of the extended election period. The group health plan must provide this notice within 60 days of the Act’s enactment.
  • If permitted by the plan sponsor, a qualified beneficiary that is eligible for premium assistance may, within 90 days after receipt of a notice from the group health plan, enroll in different coverage offered by the plan sponsor so long as the coverage does not exceed the premium of coverage initially enrolled in, and the different coverage elected does not provide only ancillary medical benefits.
  • If a qualified beneficiary is denied premium assistance by a group health plan, the qualified beneficiary is entitled to an expedited review of the denial to be performed by the Secretary of Labor within 15 business days following the receipt of the application.
  • The termination of premium assistance will be a qualifying event. The group health plan must also provide a notice to individuals regarding the expiration of premium assistance 15-45 days before the expiration date.
  • If an assistance eligible individual becomes eligible for another group health plan or Medicare, he must notify the group health plan that he is no longer eligible for premium assistance in a period to be specified by the Departments of Labor, Treasury, and Health and Human Services. Failure to notify the group health plan may result in a penalty assessed to the individual equal to the greater of $250 or 110 percent of the premium assistance.
  • The coverage extends to certain church plans, which are generally exempt from COBRA.

Additional details based on further analysis will be forthcoming as warranted. The timeline for negotiation and enactment of further COVID-19 pandemic relief is short, as both the House and Senate are expected—barring a deviation from their schedules—to leave for a month-long district work period in early August.


Senate Releases Details of Next Round of Pandemic Relief

The U.S. Senate yesterday released details of additional relief it is proposing in response to the coronavirus (COVID-19) pandemic. It builds upon the March 2020 enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This legislative package is formally being described as the Health, Economic Assistance, Liability, and Schools (HEALS) Act. It contains provisions for a second round of direct payments to Americans, a modified version of the CARES Act unemployment compensation subsidy, liability protection for businesses and schools that re-open, and numerous other provisions.

The House of Representatives previously passed its version of more COVID-19 relief, H.R. 6800, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. Senate and House approaches and magnitude differ markedly. If the current Senate package is approved it will require significant compromise between the House and Senate for another round of COVID-19 relief to become law.

Among the HEALS Act provisions of note in this multi-bill Senate package are the following.

 

Money Purchase Pension Plan Relief

The CARES Act granted penalty-free early withdrawals from retirement savings arrangements, permitted taxpayers to pay the associated tax over three years, allows taxpayers to recontribute withdrawn funds, and increased to $100,000 the maximum limit on retirement plan loans. The CARES Act excluded money purchase pension plans from this relief. This Senate package retroactively adds these provisions for such plans.

 

Employee Certification of Enhanced Plan Loan Eligibility

The CARES Act allows employer retirement plans to rely on an employee self-certification that he or she qualifies for a coronavirus-related distribution (CRD) from a retirement plan, which provides a distribution trigger to an individual who would otherwise not be eligible for a distribution. The CARES Act did not directly address employee self-certification of eligibility for an enhanced retirement plan loan. The HEALS Act would codify this clarification, which was previously made in regulatory guidance under IRS Notice 2020-50.

 

Payments of Single-Employer DB Pension Plans

The HEALS Act would clarify the due date—delayed for 2020 by the CARES Act—by which certain minimum required contributions to single-employer defined benefit (DB) plans must be made.

 

Paycheck Protection Program

The HEALS Act would make modifications and provide for a second round of loans under the Small Business Administration’s Paycheck Protection Program (PPP), a CARES Act creation designed to help small businesses retain employees during the pandemic with low-interest, potentially forgivable loans. Loan proceeds may be used for such payroll-related expenses as retirement and health benefit costs.

The HEALS Act would allow businesses with 300 or fewer employees to receive a second PPP loan if their first or second quarter 2020 revenue declined by 50 percent or more compared to the same time period in 2019. The HEALS Act would also permit certain nonprofits—including chambers of commerce and trade associations—to receive PPP loans.

 

FSA Carryover

The HEALS Act would allow up to $2,750 in unused health and dependent care flexible spending arrangement (FSA) benefits in 2020 because of the pandemic to be rolled over and used in 2021. Unused health FSA balances above $500 generally cannot be carried over and are forfeited; dependent care FSA balances of any amount have heretofore not been eligible for carryover. Both could be carried over from 2020 to 2021 under HEALS Act provisions.

The timeline for negotiation and enactment of further COVID-19 pandemic relief is short, as both the House and Senate are expected—barring a deviation from their schedules—to leave for a month-long district work period in early August.


House Bill Would Extend, Expand Tax Benefits for CRDs

Rep. Sean Maloney (D-NY) has introduced H.R. 7645, legislation that would extend the time period for taxpayers to withdraw coronavirus-related distributions (CRDs) from retirement savings arrangements and receive the special tax benefits that CRDs provide. Certain withdrawals could be tax-free under the legislation.

CRDs, as defined in the Coronavirus Aid, Relief and Economic Security (CARES) Act, are eligible for the following tax benefits for withdrawn amounts up to $100,000 (currently, only for withdrawals in 2020).

  • Three-year taxation on amounts withdrawn
  • Exemption from the 10 percent excise tax for early (pre-59½) distributions
  • The option to repay such withdrawn amounts within three years

Included in the bill is expected to be a provision that would make CRDs tax-free if the taxpayer qualifies as a first-time home buyer. “Expected,” because neither bill text nor a summary is available at this time. Details of legislative intent are being inferred from the bill’s description at the official congressional web site:

To extend the time period for making coronavirus-related distributions from retirement plans and to provide an exclusion from gross income of coronavirus-related distributions which are first-time homebuyer distributions.”

H.R. 7645 has been referred to the House Ways and Means Committee.


Senate Passes Bill to Extend PPP Small Business Loan Application Deadline

On Tuesday, the United States Senate passed by unanimous consent a bill to extend from June 30, 2020, to August 8, 2020, the deadline for businesses to apply for a Paycheck Protection Program (PPP) loan administered by the federal Small Business Administration.

PPP loans were created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, targeted to businesses with no more than 500 employees. The purpose of the program is to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. More than $130 billion of the $669 billion appropriated for the program had not been applied for as the June 30th deadline approached.

If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60% of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group health care coverage, including payment of insurance premiums.

As this is reported, the House of Representatives had yet to approve the bill, which is required—in addition to signing by President Trump—for the application deadline to be extended.

 


IRS Issues Tax-Related Deadline Relief for Tornado Victims in Parts of South

The IRS has issued News Release IR-2020-126, announcing an extension of time to complete filing of returns and making tax payments as a result of April tornadoes, severe storms, and flooding that took place in parts of Mississippi, Tennessee, and South Carolina. At this time, areas included are Clarke, Covington, Grenada, Jasper, Jefferson Davis, Jones, Lawrence, Panola, and Walthall counties in Mississippi; Bradley and Hamilton counties in Tennessee; and Aiken, Barnwell, Berkeley, Colleton, Hampton, Marlboro, Oconee, Orangeburg, and Pickens counties in South Carolina. Under this guidance, certain tax-related acts with deadlines falling on or after April 12, 2020, have been extended to October 15, 2020. (This guidance is in addition to the nationwide coronavirus-related relief already available to taxpayers for time-sensitive tax act completions that are due on or after April 1, 2020, and before July 15, 2020, which are extended through July 15.

IR-2020-126 specifically notes that this extension applies to IRA contributions. This news release, however, does not specifically appear to address or include other time-sensitive acts described in Treasury Regulation 301.7508A-1(c)(1), such as completion of rollovers, recharacterizations, or correction of excesses., that have been granted in other disaster relief. Additional guidance with respect to these tax-related acts may be forthcoming.

This relief applies 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.

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.