Legislative updates

Despite Some Confusion, December 30, 2020, Remains the Deadline for Special Tax Benefits of CARES Act Retirement Plan Distributions

Today is the last day for eligible taxpayers to take IRA and employer-sponsored retirement plan distributions that qualify for special tax benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This legislation was enacted in March 2020 as a response to the coronavirus (COVID-19) pandemic. There has been some industry and media confusion over whether more recent pandemic relief legislation has provided an extended opportunity to qualify for such benefits, but it has not.

The following retirement plan-related CARES Act provisions apply to eligible coronavirus-related distributions (CRDs).

  • Exemption of up to $100,000 of retirement plan withdrawals from the 10% penalty tax for early withdrawals from retirement plans.
  • Three-year ratable taxation of such withdrawals, with a period of three tax years to return such withdrawal to a qualifying retirement account.

Just after Christmas, President Trump signed into law the Consolidated Appropriations Act (CAA), 2021, which provided federal agency funding, limited additional coronavirus (COVID-19) pandemic relief, and limited disaster relief. Among its provisions was the granting of the above-described tax benefits to victims of certain regional natural disasters, if such disaster events began  during the period beginning December 28, 2019, and the declaration ended within 60 days after CAA’s date of enactment, December 27, 2020. For those eligible for this new benefit, retirement account withdrawals may be made for up to 180 days after CAA’s enactment.

In March 2020, President Trump had declared that all 50 states would be considered disaster zones as a result of the COVID-19 pandemic. This appears to be the source of the recent confusion, and what some have believed to be the eligibility of all Americans to make retirement account withdrawals that qualify as CRDs and eligibility for these above-described tax benefits.

However, the CAA provision that may have contributed to the confusion actually excludes disasters that are declared solely in response to the COVID-19 pandemic. Thus, President Trump’s COVID-19 disaster declaration of March 2020 covering the entire U.S. does not extend to all Americans the above-described tax benefits. (These individuals may, however, qualify for other benefits, such as extended deadlines for certain tax filings, and other tax-related transactions.)


Washington Pulse: Spending Bill Contains Coronavirus Relief

On December 21, 2020, Congress passed additional measures to provide relief from the widespread economic effects of the coronavirus pandemic. On December 27, 2020, the president signed the bill into law. While both houses of Congress have been working on various provisions since the CARES Act was enacted last March, no agreements were reached until now. The coronavirus provisions are contained in a larger spending bill that funds the federal government through next September. The bill, entitled the Consolidated Appropriations Act, 2021 (CAA), contains relief for various industries, small businesses, and individuals. Although there is no broad employee benefit relief, the items discussed below may interest those that work with employers and with employer-sponsored plans.

Paycheck Protection Program Relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided significant relief to businesses adversely affected by the pandemic. The Paycheck Protection Program (PPP) allowed qualifying entities to borrow money through approved lenders, which are subject to the Small Business Administration’s (SBA’s) rules and oversight. Demand for the PPP funds was so great that last spring Congress approved a further infusion of federal aid to keep the program running. Employers who borrow PPP assets may have the loan forgiven if they follow the program rules, which generally include using the funds for payroll and certain other expenses, including funding a business’s retirement plan.

The CAA infuses nearly $300 billion of additional funding into the PPP to support small businesses. These are some of the significant provisions.

  • A second round of forgivable loans is available.
    • Businesses with 300 or fewer employees that have experienced at least a 25 percent revenue loss in any quarter of 2020—versus the same quarter in 2019—are eligible.
    • In addition to most payroll costs, expenses can now also include supplier costs and the cost of providing coronavirus protection (e.g., adding drive-through service or upgrading air filtration).
    • Business expenses paid with PPP loans are tax deductible.
    • There is a new simplified loan forgiveness process for PPP loans of $150,000 or less.
  • Funding is included for independent live-venue operators, including certain movie theaters and museums that were affected by COVID-19 restrictions.

Medical Expense Deduction Floor Reduced

The annual amount of unreimbursed medical expenses that individuals must incur in order to get a deduction has been permanently reduced from 10 percent of adjusted gross income to 7.5 percent. This provision applies to taxable years beginning on or after January 1, 2021.

Disaster Relief: Distributions and Loans

The CAA provides relief for those who have experienced an economic loss because of a “qualified disaster” and whose principal residence is located in a presidentially declared disaster area. This provision does not apply to any disaster declarations that are made only because of COVID-19. But this relief closely mirrors the coronavirus-related distribution (CRD) rules found in the CARES Act.

  • Individuals can distribute up to $100,000 for disasters that begin on or after December 28, 2019, and that end on or before December 27, 2020 (the date the CAA was signed into law). The disaster distribution must be taken within 180 days of December 27, 2020. If an individual is affected by multiple disasters, this dollar limit applies separately to each disaster.
  • As with CRDs, these disaster distributions
    • are not subject to a 10 percent early distribution penalty tax,
    • are taxed equally over 3 years (unless the taxpayer chooses taxation in the distribution year), and
    • may be repaid within 3 years of the distribution date.
  • Individuals can take distributions from IRAs and employer-sponsored retirement plans. Distributions from 401(k), 403(b), governmental 457(b), and money purchase plans are not treated as “eligible rollover distributions” for certain purposes: specifically, they are not subject to 20 percent withholding or to Internal Revenue Code (IRC) Sec. 402(f) notification.
  • Individuals who meet the following requirements may repay hardship distributions or first-time homebuyer distributions taken to purchase or construct a principal residence.
    • The individual received the distribution 180 days before the disaster (defined by FEMA) to 30 days after the disaster ended.
    • The principal residence is in the disaster area.
    • The individual did not use the distribution because of the disaster.
  • Loans may be taken for up to $100,000 or the participant’s vested account balance, whichever is less. This increased limit is available to eligible participants to who take a loan within 180 days following December 27, 2020.
  • Loan repayments may generally be delayed for a year (or if later, 180 days after December 27, 2020). But subsequent payments must reflect any interest accrued during the delay. This extended deadline applies to loan repayments that are due within the period beginning on the first day of the disaster and ending 180 days following December 27, 2020.

Although new disaster distributions or loans may be hard to process because the CAA was enacted so late in the year, these provisions may provide relief for qualified individuals who have already taken distribution or loans in 2020. As with CRDs, these disaster-related provisions are also optional for employer-sponsored retirement plans.

Money Purchase Plans May Offer Coronavirus-Related Distributions

The CARES Act authorized qualified individuals to take CRDs from IRAs and certain defined contribution retirement plans by December 30, 2020. Specifically, the CARES Act created a permissible distribution trigger for eligible retirement plans, including 401(k) plans, 403(a) and (b) plans, governmental 457 plans, profit-sharing plans, and IRAs. But this relief did not include money purchase pension plan assets, which are subject to in-service distribution restrictions. So the CAA amended the CARES Act to include money purchase pension plans in the types of plans that are treated as meeting the plan distribution requirements of IRC Sec. 401(a). This provision allows employers with money purchase pension plans to permit eligible participants to take CRDs as if such plans were originally included in the CARES Act.

Partial Plan Termination Relief

The coronavirus pandemic has caused countless employers to lay off or furlough portions of their workforce. Many of these employers took this action to preserve their businesses, hoping that they could rehire those workers once the economy started to recover. But under current rules, a partial plan termination generally occurs when there is a workforce reduction of more than 20 percent. This results in 100 percent vesting for the affected workers. To avoid treating all such temporary workforce reductions as partial plan terminations, the CAA changes the rules to give employers additional time to rehire workers. If the active participant count as of March 31, 2021, is at least 80 percent of the active participant count at the time the coronavirus national emergency was declared (March 13, 2020), a plan will not be treated as having a partial plan termination.

Qualified Future Transfer Elections

The CAA provides relief for certain defined benefit plan excesses transferred to health benefit accounts. This relief allows employers to make an election to end an existing transfer period if the election is made by December 31, 2021. Qualified future transfers allow excess pension assets to be transferred to health benefit accounts to pay for health or life insurance costs if certain requirements are met—including a minimum funding requirement.

Healthcare Provisions

Flexible spending and dependent care accounts. The CAA gives employers greater flexibility in permitting employees to carry over unused amounts in both their health flexible spending arrangements (FSAs) and their dependent care FSAs. All leftover amounts from 2020 can be carried forward to 2021. Employees can also carry over 2021 amounts to 2022. This is in addition to the CAA extending the normal grace period from 2½ months to 12 months for plan years ending in 2020 and 2021. Employees who stop participating in either kind of plan during calendar year 2020 or 2021 can continue to receive reimbursements through the end of the plan year in which they stopped. And finally—in addition to other minor changes—for plan years ending in 2021, participants in health and dependent care FSAs may modify their contributions without a change in status. Employers who choose to implement these optional provisions must operationally comply with them until they amend their plans to reflect the change.

Preventing surprise medical billing. A group health plan or a health insurance issuer that offers group or individual health insurance coverage to cover emergency services is required to provide such services without the need for prior authorization or other limitations, even if the healthcare provider is not considered a participating (in-network) provider. Any limitation that a plan or coverage contains cannot be more restrictive than requirements that apply to emergency services received from participating providers and facilities.

Other healthcare provisions. The CAA contains several other healthcare-related changes that may benefit employers or employees.

  • Families First Coronavirus Response Act (paid sick and family leave credit) extended This credit was set to expire on December 31, 2020, but the CAA extends this credit until March 31, 2021. The CAA also makes other minor changes.
  • Paid family and medical leave employer credit extended – This employer credit was also due to expire on December 31, 2020. The CAA extends the credit to December 31, 2025.

Education-Related Provisions

  • The CARES Act permitted employers to provide tax-free student loan repayment benefits of up to $5,250 to employees through 2020. The CAA now extends this benefit through December 31, 2025.
  • The CAA simplifies the Free Application for Federal Student Aid (FAFSA) program to make the application process easier and to make financial aid more predictable.
  • The CAA increases the income that individuals can earn and still receive the Lifetime Learning Credit—while repealing the deduction for qualified tuition and related expenses.

Looking Ahead

At nearly 5,600 pages, Ascensus will continue to analyze the bill for items pertinent to providers of retirement, healthcare, and education products and services. In addition, while the current Congressional session is winding down, many lawmakers have suggested that more coronavirus relief is needed. Ascensus will continue to monitor legislative activity pertaining to such relief. Visit ascensus.com for the latest information.

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


Congress Approves Additional COVID Relief as Part of Government Funding Package

Following lengthy, intense negotiations that delayed the pre-Christmas adjournment of the 116th Congress, the U.S. Senate and House of Representatives have reached agreement and passed legislation on a new round of economic relief for victims of the coronavirus (COVID-19) pandemic. The relief provisions are combined with a larger omnibus spending package that includes funding for federal government agencies. Due to the massive size of the bill and the extra time needed to print and prepare it for signature, President Trump has until December 28 to sign the combined legislation into law.

The primary focus of the pandemic relief is an extension of unemployment benefits, direct economic stimulus payments to American taxpayers, support for small businesses, and funding for schools and the COVID-19 vaccination. There are limited provisions that directly affect tax-advantaged savings or health and welfare arrangements, but among them are the following.

PPP Extension

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, provided financial support to businesses adversely affected by the pandemic. Under the Paycheck Protection Program (PPP) provisions, qualifying businesses could borrow funds for payroll and other specified purposes—including retirement and health benefit funding—through approved lenders, with the potential for forgiveness of these loans. These loans are subject to the Small Business Administration’s rules and oversight.

  • This legislation provides an additional $284 billion for the PPP program, including a second round of potentially forgivable loans, under these conditions.
  • Businesses with 300 or fewer employees that have experienced at least a 25 percent revenue loss in any quarter of 2020 are eligible.
  • Expenses now can include supplier costs and the cost of providing coronavirus protection (e.g., personal protective equipment).
  • Business expenses paid with PPP loans are tax deductible, even if forgiven.
  • The loan forgiveness process for PPP loans of $150,000 or less is simplified.

This legislation includes rescinding approximately $146 billion in unspent allocations for the CARES Act PPP and depositing it into the general fund of the Department of the Treasury.

CRDs for Money Purchase Pension Plans

 The legislation extends to money purchase pension plans the option to permit coronavirus-related distributions (CRDs), which provides an in-service distribution trigger, as well as exemption from the early distribution penalty tax, three-year ratable taxation, and the option to repay such distributions over three years.

Partial Plan Termination Relief

Employers will be provided relief from partial plan terminations that could result from a reduction in workforce due to the COVID-19 pandemic. Under current guidance, a reduction in participant number of 20 percent or more during a plan year generally is considered to be a partial plan termination. The result is full vesting for those employees whose job loss has triggered the partial termination. This legislation would assist employers in avoiding this consequence by granting a grace period to March 31, 2021, to reach a participant count at least 80 percent of the number when the National Emergency was declared in March 2020.

Qualified Future Transfers – Pension Plans

Under the qualified future transfers provision, up to 10 years of retiree health and life benefit costs can be transferred from a defined benefit pension plan to a retiree health benefits account and/or a retiree life insurance account within the pension plan, if certain requirements are met.

Study of DOL Electronic Disclosure Final Regulations 

The Department of Labor (DOL) is directed to complete a comprehensive study and issue a report within one year on the impact of its electronic disclosure final regulations on “individuals residing in rural and remote areas, seniors, and other populations that either lack access to web-based communications or who may only have access through public means.”

Temporary Special Rules for Health FSAs and Dependent Care FSAs

  • For health flexible spending arrangements (FSAs) and dependent care FSAs (DCAPs) for plan years ending in 2020, the plan can permit a carryover of all unused benefits to the plan year ending in 2021.
  • For health FSAs and DCAPs for plan years ending in 2021, the plan can permit a carryover of all unused benefits to the plan year ending in 2022.
  • For health FSAs and DCAPS that have a grace period associated with the plan year that ends in 2020 or 2021, that grace period can be extended for 12 months after the end of the plan year (the normal maximum grace period is 2½ months after the end of the plan year).
  • For health FSAs and DCAPs, a plan can permit an employee who stops participating in the plan mid-year in 2020 or 2021 to continue to receive reimbursements of their unused contributions through the end of the plan year in which their participation ceased (if their plan adopts the 12 month grace period they would also get the extended grace period).
  • For DCAP plans, if the dependent ‘aged-out’ during the pandemic, the plan can substitute age 14 for age 13 (as the maximum age for the child could be considered a qualifying person under the plan), as long as the employee was enrolled in the DCAP for a plan year where the end of the regular enrollment period was on or before January 31, 2020, and the employee had one or more dependents who attained age 13 during the plan year, and the employee had an unused balance for a plan year that will be carried forward to the subsequent plan year.
  • For health FSAs and DCAPs that end in 2021, participants will be permitted to prospectively modify their contribution elections (without regard to a change in status).
  • To adopt the specified relief, health FSAs and DCAPs must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. In the interim, the plan must operate consistent with the terms of the amendment.

Modification to Internal Revenue Code Section 213

The medical expense deduction floor is reduced from 10 percent to 7.5 percent for taxable years beginning after December 31, 2020.

Preventing Surprise Medical Bills

  • A group health plan or a health insurance issuer that offers group or individual health insurance coverage to cover emergency services is required to provide such services without the need for prior authorization or other limitations, whether or not the healthcare provider is a participating provider. Any limitation cannot be more restrictive than requirements that apply to emergency services received from participating providers and facilities with respect to such plan or coverage.
  • A high deductible health plan (HDHP) will not be prevented from being treated as an HDHP if it provides medical care in accordance with this provision. This applies to plan years beginning on or after January 1, 2022.
  • Expand consumer protections through an external review process beginning in 2022 in cases of adverse determinations by group plans and health issuers.

Additional (Non-COVID-Related) Disaster Relief

The legislation provides limited non-COVID-related disaster relief for certain federal disasters declared on or after January 1, 2020, and ending 60 days after enactment of this bill. Relief includes the following.

Qualified Disaster Distributions

Distributions of up to $100,000 (less certain disaster distributions taken in prior tax years) may be taken by those whose principal residence is within the disaster area and who sustained an economic loss due to the disaster.

  • Provides for three-year taxation of the distribution, and three years to repay
  • Provides a distribution trigger for 401(k), 403(b), 457(b), and money purchase pension plans
  • Will not be subject to 20 percent mandatory withholding or 402(f) notice requirements

Hardship or First-Time Homebuyer Distributions

Such distributions that were taken to purchase or construct a principal residence may be repaid if the distribution was taken within the period 180 days before the disaster incident and 30 days after the disaster incident period, and are repaid between the first day of the disaster incident period and no later than 180 days after enactment.

Increased Retirement Plan Loan Limit

Plan loans taken within 180 days following the legislation’s enactment because of a disaster declaration will have an increased loan limit of up to the lesser of $100,000 or the vested account balance, if the borrower’s principal residence is in the disaster area and an economic loss was sustained as a result of the disaster.

Delay in Loan Repayment

Loan payments that are due within the period beginning on the first day of the disaster and ending 180 days after the disaster period may be delayed for one year (or, if later, 180 days after the legislation’s enactment), with the loan’s term extended by the period of the delay.

Amendments to implement these provisions will be required by the end of the 2022 plan year (2024 for governmental plans).

Multiemployer Pension Plan In-Service Distributions

One unanticipated provision is a change to certain multiemployer (union) pension plans that allows for a subset of individuals in the construction industry to take an in-service distribution at age 55 if several service and plan provisions are satisfied. Specifically, it would apply to distributions to individuals who were participants in the plan on or before April 30, 2013, if

  • the trust was in existence before January 1, 1970, and
  • prior to December 31, 2011, in-service distributions were permitted at age 55 when the plan received at least one written IRS determination that the trust in the first bullet constituted a qualified trust.

Because the circumstances are so specific, it is not likely to have broad applicability.

Education Related Provisions

  • A CARES Act provision that permitted employers to provide student loan repayment benefits of up to $5,250 to employees on a tax-free basis has been extended to December 31, 2025.
  • Made changes to the FAFSA program intended to simplify the application process and make aid more predictable
  • Increased the income limitations for phase-out of the lifetime learning credit
  • Repealed the deduction for qualified tuition and related expenses

Legislation Would Allow Tax Benefits for Retirement Distributions Used for LTC Insurance

Senator Patrick Toomey (R-PA), has introduced S. 4820, legislation that would permit tax-free retirement savings distributions of up to $2,500 per year—indexed for inflation—that are used to purchase long-term care insurance. The arrangements to which the legislation applies would include qualified retirement plans, 403(a) and 403(b) plans, governmental 457(b) plans, and IRAs.

These distributions appear to be exempt from the 10 percent early distribution penalty tax by virtue of their being tax-free. The bill would also create new distribution triggers for employee deferral amounts that have been contributed to 401(k), 403(b), and governmental 457(b) plans.


Sequel to SECURE Act Introduced in Final Days Before General Election

House Ways and Means Committee Chairman Richard Neal (D-MA) and GOP Ranking Member Kevin Brady (R-TX) have introduced the Securing a Strong Retirement Act of 2020, legislation that is described as building on major retirement legislation enacted in December 2019. The new legislation is being referred to as “SECURE 2.0,” a reference to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 that preceded it.

It is not generally expected that this legislation will be acted upon before the November 3 elections, or necessarily even during the “lame duck” period between November 3 and the seating of the 117th Congress in January. Instead, it could represent the first attempt at bipartisan retirement legislation to be considered in 2021.

The following provisions are included in the proposed legislation.

  • Require automatic enrollment of eligible employees in 401(k), 403(b) and SIMPLE IRA plans with certain exceptions and grandfathering provisions
  • Further enhance the small retirement plan start-up credit, with a maximum credit of 100% (vs. the current 50%) for employers with no more than 50 employees
  • Increase the amount of, and eligibility for, the “saver’s credit” for taxpayers making IRA contributions or deferral contributions to employer-sponsored retirement plans
  • Exempt up to $100,000 of accumulated retirement account balances from required minimum distribution (RMD) requirements
  • Reduce the penalty for failure to satisfy RMD requirements from 50% to 25%; if an IRA RMD failure is timely corrected, the penalty would be further reduced to 10%
  • Permit 403(b) plans to invest in collective investment trusts
  • Increase the RMD age to 75 from 72 (increased from 70½ to 72 by the SECURE Act)
  • Align ESOP rules of S Corporations with those of C Corporations
  • Provide for indexing of IRA catch-up contributions
  • Provide a second, higher tier of catch-up deferral contributions for those age 60 and older, with indexing provision
  • Permit 403(b) plans to participate in multiple employer plan (MEP) arrangements
  • Permit certain student loan repayments to qualify for employer retirement plan matching contributions
  • Allow a small employer joining a MEP or pooled employer plan (PEP) arrangement to potentially claim a small plan start-up credit during the first three years of the MEP/PEP arrangement’s existence
  • Provide a new small employer tax credit for enhanced plan eligibility for military spouses
  • Enhance options for correcting employee salary deferral errors
  • Increase the qualifying longevity annuity contract (QLAC) RMD exemption
  • Permit increasing payments in IRA and defined contribution plan life annuity benefits
  • Allow retirement plan fiduciaries additional discretion in whether to seek recoupment of accidental overpayments
  • Simplify retirement plan disclosures to non-participating employees
  • Create a national online “lost and found” database to connect individuals with unclaimed retirement account benefits
  • Expand the IRS retirement plan correction program to permit self-correction of certain inadvertent IRA errors
  • Permit tax-free qualified charitable contributions to be made from employer-sponsored retirement plans (now permitted only from IRAs)
  • Make certain technical corrections to SECURE Act provisions

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.

 

 

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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.