Legislative updates

Legacy IRA Act Would Increase Tax-Free IRA Qualified Charitable Distributions (QCDs)

Senator Kevin Cramer (R-SD) has introduced the Legacy IRA Act (S. 1257), a bill that would significantly increase the maximum IRA qualified charitable distribution (QCD) now available to certain federal taxpayers. Under current law, taxpayers age 70½ or older can withdraw from an IRA and contribute tax-free up to $100,000 per year if such amounts are given directly to certain qualified charitable entities. The donor cannot retain authority or control over the disposition or use of the donated assets. A qualified charity is generally an entity that a taxpayer of any age can make tax-deductible contributions to. The difference is that an IRA QCD is 100% excludable from taxable income, rather than partially deductible, as are charitable donations in general.

Senator Cramer’s bill would do the following.

  • Raise the taxpayer QCD limit for any tax year from $100,000 to $400,000
  • Limit the qualifying QCD amount paid to any single recipient to $100,000 per year
  • Treat IRA amounts donated to charitable remainder trusts, unitrusts, and charitable gift annuities (collectively called split-interest entities) as QCD-eligible
  • Grant QCD eligibility for split-interest donations at age 65, rather than age 70½

This bill has been referred to the Senate Finance Committee for consideration; no action has yet been taken by that committee.


Senators Portman, Cardin Add Their Bill to the Retirement Legislation Mix

If there were any doubts that enhancing retirement saving opportunity is a high congressional priority, one need not look beyond immediate events for evidence. In a week when the Senate Finance Committee held a hearing on retirement security, and the House of Representatives is preparing to begin consideration of comprehensive retirement legislation, two familiar senators are re-introducing their own bill with similar purpose.

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have renewed a legislative partnership that began more than two decades ago as congressmen in the U.S. House of Representatives, before both were elected to the U.S. Senate. The Retirement Security and Savings Act of 2019 is a re-introduction of legislation the senators introduced in December 2018, during the final days of the 115th Congress. Limited changes have been made to that legislation, whose provisions include the following.

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans, with higher contribution levels
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide a small employer tax credit for implementing automatic enrollment
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the Saver’s credit for contributions to employer plans and IRAs, and make it refundable and payable to a retirement account
  • Require that certain long-term, less-than-fulltime employees be allowed to participate in deferral-type retirement plans, but apply nondiscrimination benefits testing and top-heavy testing separately to such employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to beneficiary IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) in IRAs or defined contribution plans from required minimum distributions (RMDs); the 2019 version does not apply to beneficiaries
  • Increase the RMD age in stages to age 75
  • Reduce the excise tax for RMD failures from 50% to 25%
  • Reduce—under certain circumstances—the excise tax for IRA excess contributions from 6% to 3%

Student Loan Repayment Bill Is Re-Introduced

Senator Ron Wyden (D-OR) has re-introduced the Retirement Parity for Student Loans Act, a bill intended to allow employers to make contributions to 401(k), 403(b), and SIMPLE IRA plans in amounts that have a matching relationship to an employee’s student loan debt repayments.

The legislation was previously introduced in December 2018, in the last days of the 115th Congress. Though the conditions are not identical, the legislation may in part be a response to a 2018 IRS private letter ruling on an employer request to make retirement plan contributions based on employees having made student loan debt repayments.

Some of the bill’s key provisions are as follows.

  • Only employees’ higher education loan repayments (not loans for private secondary or elementary expenses) would qualify for such employer contributions.
  • Employer contributions matched to employee student loan debt repayments could not exceed the annual deferral limit appropriate to the employer’s plan (e.g., 401(k) vs. SIMPLE IRA plan deferral limit), reduced by such employee’s elective deferrals into the retirement plan; all amounts together must not exceed the employee’s compensation.
  • Only employees eligible to defer into the employer’s retirement plan may receive student loan matching contributions.
  • All employees who are eligible to receive retirement plan matching contributions must be eligible to receive student loan matching contributions.
  • For purposes of satisfying nondiscrimination requirements in providing retirement plan benefits, rights, and features, those who have no student loan debt—and, therefore, would not receive student loan matching contributions—would not be considered as having been denied a benefit, right, or feature.
  • The Secretary of the Treasury would be directed to issue regulations governing such arrangements.
  • As proposed, the legislation would be effective for 2020 and later years (plan year was not specified).

 

 


Disaster Tax Relief Act of 2019 Introduced in House

Tom Rice (R) of South Carolina introduced the Disaster Tax Relief Act of 2019 (H.R. 2145) in the United States House of Representatives. The purpose of this proposed legislation is to provide tax-related relief to victims of presidentially declared disasters that occurred after January 1, 2018 and before the enactment date this Act.

Tax relief specific to retirement savings arrangements include the following and applies to distributions taken from IRAs and tax-qualified employer-sponsored retirement plans.

  • Qualified disaster distributions would include amounts not to exceed the excess (if any) of $100,000, over the aggregate of any qualified disaster distributions received by the individual in all prior taxable years, received by an individual whose principal residence was located in a qualified disaster area and who suffered economic loss as a result.
  • Qualified distributions would include those taken on or after the date the qualified disaster incident began and on or before December 31 of the year after the year in which the qualified disaster incident began.
  • The 10 percent excise tax for early distributions would not apply to qualified disaster distributions.
  • Such distributions could be repaid over a three-year period, beginning on the day after the distribution was received.
  • Qualified disaster distributions from employer plans would not be subject to mandatory 20 percent withholding.
  • Inclusion in income of qualified disaster distributions would be done ratably over a three-year period, unless a taxpayer chose otherwise.
  • Certain retirement plan distributions taken for purchase of a principal residence, but not used due to disaster events, could be recontributed.
  • Loan amounts up to $100,000 could be taken from an eligible employer retirement plan.
  • Plan loan repayments following disaster events could be delayed up to a year; this delay would not alter loan amortization (in effect, lengthening a five-year amortization period).
  • A plan amendment necessary to comply with these provisions could be made up to and including the last day of the 2020 plan year, or a later date if prescribed by the Secretary of the Treasury (governmental plans two years later).

The bill was referred to the House Committee on Ways and Means following its introduction. The prospect of enactment is unclear at this time. Watch the news at ascensus.com for progress of this legislation, as warranted.


Washington Pulse: Will RESA Succeed This Time?

No other legislation in recent memory is more deserving of the label “survivor” than the Retirement Enhancement and Savings Act (RESA). Since 2016, multiple versions of RESA have been championed by high-profile lawmakers (both past and present). This legislation has offered many innovative ideas to expand retirement savings opportunities and has served as a model for other retirement reform bills.

RESA 2019 has now been introduced by Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). Its introduction came just one day before the House Ways and Means Committee gave unanimous approval to nearly identical legislation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (for more information on the SECURE Act of 2019, see Ascensus’ prior Washington Pulse). With this apparent unanimity in the Senate and House, hopes are high that 2019 may be a year for major retirement savings enhancement. The RESA 2019 provisions are described below.

Simplify, Create Incentives for New Plan Creation

The following RESA 2019 provisions are intended to reduce the complexity of establishing and enhancing retirement plans and offer tax incentives to do so.

  • Reform multiple employer plans (MEPs): Relax current rules for employer participation in a MEP and create a new variation to be known as a “pooled employer plan,” or PEP. Both allow consolidation of administrative responsibility and expense (effective for 2023 and later plan years).
    • Multiple participating businesses with a common interest would generally be administered as MEPs
    • Multiple participating businesses without a common interest would generally be considered to be part of a PEP
    • Simplified Form 5500-SF plan reporting would be allowed for smaller MEPs or PEPs
    • Compliance failures by one or more participating employers would not jeopardize the qualified status of the entire MEP or PEP (ends the “one bad apple” rule)
  • Allow more time to establish a plan: Permit qualified plans (e.g., profit sharing or pension plans) to be established as late as the sponsoring employer’s tax return deadline, including extensions. Certain plan options—like employee deferrals—would not be eligible for the extension (effective for 2020 and later taxable years).
  • Increase plan start-up credit for small employers: Increase the small employer retirement plan start-up credit from $500 to a maximum of $5,000 per year, available for three years beginning with the year the plan is established (effective for 2020 and later taxable years).
  • Create automatic enrollment credit: Provide a tax credit of up to $500 per year for small employers (100 or fewer employees) that implement automatic enrollment in existing or new 401(k) or SIMPLE IRA plans. The credit would be available for three years beginning with the year that automatic enrollment is allowed   (effective for 2020 and later taxable years).
  • Extend period for electing safe harbor 401(k) design: 401(k) plans could elect testing safe harbor designs without prior notice if an employer nonelective (vs. employer match) contribution is made; the deadline would be at least 31 days before the end of the plan year with a three percent contribution, or up to the deadline for removing excess contributions for a plan year—the close of the following plan year—if a four percent contribution is made (effective for 2020 and later plan years).
  • Create annuity selection safe harbor: Provide a new safe harbor for a plan fiduciary’s selection of an annuity provider—deemed to satisfy the “prudent expert” standard—when offering lifetime income plan investments (no specified effective date).

Promote Greater Saving in Employer Plans

RESA 2019 would encourage broader employee participation, greater employee saving, and clearer participant understanding of retirement savings adequacy.

  • Remove the cap on deferrals in safe harbor 401(k) plans: Eliminate the 10 percent maximum deferral rate in a 401(k) plan that employs automatic enrollment and automatic deferral increases in a qualified automatic contribution arrangement (QACA) after the initial period (effective for 2020 and later plan years).
  • Require new lifetime income disclosure: Defined contribution plan sponsors would be required to provide, at least annually, a projection of a lifetime income stream that could be generated by a participant’s accrued benefit; employers would not be held liable for the projection (Effective for benefit statements provided more than 12 months after the DOL issues 1) interim guidance, 2) the interest assumptions to be used, and 3) a model disclosure).

General Provisions Affecting Employer Plans

RESA 2019 would make targeted changes to employer plans in order to encourage asset preservation, simplify plan administration, and enhance compliance.

Provide lifetime income portability: Allow participants in a qualified plan, 403(b), or governmental 457(b) plan to roll over lifetime income investments to an IRA or another retirement plan without an otherwise available distribution event if the employer’s plan no longer offers such investments (effective for 2020 and later plan years).

Allow distributions of terminating 403(b) plans: Allow the plan administrator or custodian of a 403(b) plan to distribute such accounts in-kind to a participant or beneficiary when the 403(b) plan is being terminated (enabling guidance to be issued within six months of enactment).

Prohibit credit card loans: Treat as distributed and subject to taxation a retirement plan loan enabled through a credit card or similar program. Existing loans provided through credit card systems in place as of September 21, 2016 are considered “grandfathered” unless one of the following conditions apply (effective for 2020 and late plan years).

  • The loan is for $1,000 or less.
  • The loan is used for gambling or for the purchase of certain items such as liquor.

Permit shared Form 5500 filing: Allow employers that sponsor defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options to file a common Form 5500 (effective for 2022 and later plan years).

Allow nondiscrimination relief for closed defined benefit plans: Provide nondiscrimination testing relief for defined benefit pension plans that are closed to new participants; such employers generally offer a defined contribution plan to new employees (effective generally upon enactment, or—if elected—for 2014 and later plan years).

Increase penalties for plan reporting failures: Retirement plan information reporting failures would result in the following penalties (effective for returns, statements, and notices required January 1, 2020, and thereafter).

  • Form 5500, $100 per day, up to a maximum of $50,000
  • Form 8955-SSA (deferred benefit reporting), $2 per participant per day, up to a maximum of $10,000 for failing to file, $2 per day, up to a maximum of $5,000 for failing to file of notification of change
  • Withholding notice, $100 per failure, up to a maximum of $50,000

Clarify church retirement plan rules: Clarify which employees are eligible to participate in retirement plans sponsored by church-controlled organizations (effective for all years (i.e., years beginning before, on, or after the date of enactment).

Lower premiums for pension plans of cooperatives and charities: Reduce Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans of certain cooperatives and charities to $19 per participant for fixed-rate premiums, and $9-per-$1,000 of under-funded vested benefits for variable rate premiums (effective for 2019 and later plan years).

Changes Affecting Employer Plans and IRAs

These RESA 2019 provisions would affect employer plans and IRAs.

Require quicker payout to beneficiaries: With limited exceptions, most nonspouse beneficiaries of IRAs, qualified defined contribution, 403(b), and governmental 457(b) plans would be required to distribute inherited amounts within five years. New reporting requirements to ensure compliance would apply (effective for plan participant/IRA owner deaths occurring in 2020 or later, and to beneficiary reporting beginning with the 2021 calendar year).

Exceptions include the following.

  • Aggregate inherited IRA and employer plan balances that do not exceed $400,000
  • The disabled
  • The chronically ill
  • Beneficiaries not more than 10 years younger than the deceased participant or IRA owner
  • Minors (a 5-year payout period would begin upon reaching the age of majority)

Enhance IRA Contributions

RESA 2019 would significantly expand Traditional IRA contribution eligibility.

Permit Traditional IRA contributions at any age: Similar to Roth IRA owners, Traditional IRA owners with earned income could make IRA contributions at any age, not just before age 70½ (effective for 2020 and later taxable years).

Allow graduate student IRA contributions: Certain fellowship, stipend, and similar payments to graduate students and postdoctoral students would be treated as earned income for IRA contribution purposes (effective for 2020 and later taxable years).

Permit IRAs and S Corporation bank shares: IRAs would be permitted to hold shares of S Corporation banking entities (effective January 1, 2020).

Will RESA 2019 Become a Reality?

With apparent bipartisan support in both the House and Senate, there seems to be growing momentum that could result in 2019 being the year in which we see significant retirement legislation get passed. Ascensus will continue to monitor the progress of RESA 2019 and its counterpart legislation in the House, the SECURE Act. Visit Ascensus.com for the latest developments.

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Senate and House Democrats Propose Novel Retirement Program With Required Employer Contributions

Democratic lawmakers in the U.S. Senate and House of Representatives have jointly introduced the “Saving for the Future Act,” which is legislation modeled on the United Kingdom’s National Employment Savings Trust (NEST) program. The bill is sponsored in the Senate by Sens. Amy Klobuchar (D-MN) and Chris Coons (D-RI), and in the House by Reps. Lisa Blunt Rochester (D-PA), Scott Peters (D-CA), and Lucy McBath (D-GA).

This legislation includes the following provisions.

  • Automatic employee enrollment at a deferral rate of 4 percent, automatic deferral increase to as much as 10 percent, optional employee deferral choice or opt-out
  • First $2,500 would reside in an “UP-Savings” account for nonretirement, nonroutine expenses (e.g., medical event, unemployment, accident, etc.), and amounts above in an “UP-Retirement” account (employee may elect to have all contributions paid to UP-Retirement account)
  • Mandatory employer contributions of 50 cents per hour worked for two years, 60 cents per hour thereafter (employers with 10 or fewer employees could opt out of employer contributions, and their employees to receive a tax credit)
  • Optional employer contributions above the minimum paid to UP account or to another retirement plan
  • Maximum employee deferrals at one-half the 401(k)/403(b)/457(b) annual amount (e.g., $9,500 without catch-up for 2019)
  • Distribution options include lifetime income, term-certain payments, or percentage of balance payments (lump sum does not appear available)
  • Employer tax credit of 50 percent of minimum contributions paid to accounts of the first 15 full-time equivalent employees, 25 percent of contributions paid to accounts of next 15 (no credit for contributions above 30 employees), and tax-exempt employers eligible for a refund
  • Oversight by a board similar to the Federal Thrift Investment Board (governs federal Thrift Savings Plan program), but administration to be contracted-out to the private sector
  • Investments to include “products that allow[s] for diversification across stocks and bonds, including low-fee index funds,” defaults to “fully diversified fund” or target-date type fund
  • Portability when changing jobs to be achieved by tying a worker’s balance to the board/private sector administered program, not to an employer plan’s trust

This legislation’s concept and features differ markedly from the current U.S. defined contribution plan structure. That, along with the fact that it contrasts with pending bills that build on the current savings framework and that the legislation has no Republican sponsors, make it likely that the Saving for the Future Act will face an uphill climb to achieve acceptance


Newly Introduced Retirement Reform Bill Has Better Chance of Progressing

Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) have announced the introduction of the Retirement Enhancement and Savings Act (RESA) of 2019.

This legislation is a version of similar legislation introduced several times dating back to 2016. This year, however, the prospect of enacting major retirement enhancement legislation seems especially promising, given indications of bipartisan support in both the House and Senate.

RESA 2019 includes these retirement changes and enhancements.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Remove the 401(k) automatic enrollment safe harbor deferral cap entirely (now 10 percent)
  • Simplify 401(k) safe harbor rules and give employers more flexibility in electing to implement a safe harbor design
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for implementing automatic enrollment in 401(k) and SIMPLE IRA plans
  • Treat taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Permit IRAs to hold shares of S Corporation banking entities
  • Generally prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) participants to retain individual tax-favored custodial accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined Form 5500 reports for certain similar plans
  • Require benefit statements to defined contribution plan participants to include an annual lifetime income disclosure based on participant balance
  • Provide a fiduciary safe harbor to employers for selection of a lifetime income provider
  • Protect older, longer service employees in defined benefit plans by providing nondiscrimination relief to plans that are closed to new participants
  • Modify the Pension Benefit Guaranty Corporation premiums for single-employer, multi-employer, and cooperative and small employer charity (CSEC) plans
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 5 years of the death of the account owner; would not apply to the first $400,000 of inherited balances
  • Increase penalties for failure to file certain information returns and IRS Form 5500
  • Allow the IRS to share certain returns and return information with other governmental agencies for tax administration purposes

Congress Set to Act on Major Retirement Legislation

The House Ways & Means Committee is expected to mark up proposed tax legislation on April 2. The bills to be marked up include the SECURE Act and an open multiple employer plan (MEP) bill. The SECURE Act is based on previously introduced legislation known as the Retirement Enhancement and Savings Act (RESA) and also includes several additional provisions from other bills that have been added to garner bipartisan support.

The RESA bill did not advance in the House during the 115th Congress due to a lack of support at the senior leadership level. The Secure Act and open MEP bills, however, are said to have bipartisan senior leadership sponsors in the House. Bipartisan leadership support is also expected for upcoming Senate versions of the bills, anticipated to be released today (April 1). Consequently, though there are many steps in the legislative process, it appears more likely than in the past that these bills could advance.

The SECURE Act includes the following provisions. Watch Ascensus News for detailed analysis of the bills as they are released.

  • Increase the 401(k) automatic enrollment safe harbor deferral cap from 10 percent to 15 percent
  • Simplify 401(k) safe harbor rules
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for including automatic enrollment in new 401(k) and SIMPLE IRA plans
  • Treat taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) participants to retain individual custodial 403(b) accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Allow long-term part-time workers to participate in 401(k) plans
  • Allow penalty-free retirement arrangement withdrawals in the event of birth or adoption of a child
  • Increase the age to begin required minimum distributions from 70½ to age 72
  • Provide pension funding relief to certain community newspapers that sponsor defined benefit pension plans
  • Treat tax-free “difficulty of care” payments received by home healthcare workers as compensation for retirement plan contribution purposes
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined Form 5500 reports for certain similar plans
  • Require benefit statements to defined contribution plan participants to include an annual lifetime income disclosure based on participant balance
  • Provide a fiduciary safe harbor to employers for selection of a lifetime income provider
  • Protect older, longer service employees in closed defined benefit plans
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Expand 529 plans to cover the cost of apprenticeships, homeschooling, attendance at private elementary, secondary and religious schools, and up to $10,000 of student loan repayments for a student or his/her siblings
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 10 years of the death of the account owner
  • Increase penalties for failure to file certain information returns and IRS Form 5500
  • Allow the IRS to share certain returns and return information with other governmental agencies for tax administration purposes