The IRS released proposed amendments in REG-107813-18 to defined contribution retirement plan hardship distribution regulations. These amendments have been drafted to reflect statutory changes contained in the Bipartisan Budget Act of 2018 and the application of hardship rules related to modifications made by the Tax Cuts and Jobs Act.
While the summary introducing these proposed amendments specifically identifies 401(k) plans, it further notes that these amendments “would affect participants in, and beneficiaries of, employers maintaining, and administrators of, plans that contain cash-or-deferred-arrangements, or provide for employee or matching contributions.” This would also include certain 403(b) plans.
The general categories identified in the proposed regulation for changes include the following.
- Deemed Immediate and Heavy Financial Need
- Distribution Necessary to Satisfy Financial Need
- Expanded Sources for Hardship Distributions
- Relief for Victims of Hurricanes Florence and Michael
The IRS is providing a 60-day comment period as described in the proposed regulation document.
Watch ascensus.com news for additional developments.
The Department of Labor (DOL) has proposed regulations to be officially published in tomorrow’s federal register which would allow employers to join together to form “Association Retirement Plans.”
Under the proposed rule, a retirement plan could be sponsored by an employer association or a professional employer organization (PEO). The rule would change the definition of “employer” within the meaning of ERISA Sec. 3(5). The PEO or employer association would be considered an “employer” under the new regulations. An employer association could be formed by employers within a geographic region such as a city, county, state, or metropolitan area, as well as by employers in a particular industry nationwide.
The DOL will be accepting public comments for 60 days from the publication of the proposed rule (expected tomorrow, October 23).
The proposal comes in response to an executive order issued by President Trump on August 31, 2018. The order directed the Department of the Treasury and the Department of Labor to issue regulations that expand access to retirement plans. Among other things, the executive order instructed the Department of Labor to consider regulations that would increase access to multiple employer plans by easing restrictions upon which businesses may join together to create multiple employer plans.
The IRS has released 2019 Form 1099-QA, Distributions From ABLE Accounts. This form is used to report information pertaining to distributions from savings accounts of certain special-needs individuals, accounts created by the Achieving a Better Life Experience (ABLE) Act.
ABLE accounts are intended to allow tax-advantaged saving for future expenses of special-needs individuals. Annual contributions up to the federal gift tax maximum (currently $15,000) can be made to an ABLE account. And, while no federal tax deduction is granted for contributions, qualifying distributions (including earnings) are tax-free, much like the IRC Section 529 state-sponsored education savings accounts after which ABLE accounts are modeled.
As a result of tax reform legislation enacted in 2017, certain 529 plan assets can be rolled over to ABLE accounts, and limited additional ABLE contributions may be made with earnings of a special-needs individual for whom an account was established.
The IRS has released a Program Letter communication, in which the agency shares plans for 2019 initiatives of its Tax Exempt/Government Entities (TEGE) division.
These initiatives will include continuing guidance on the Tax Cuts and Jobs Act, tax reform legislation enacted in December of 2017, some of whose effects are still being fleshed-out.
The communication also states that TEGE will be focused on compliance efforts that are cost-effective and limited in their intrusiveness when possible, including “educational efforts, soft letter compliance reviews, compliance checks, and correspondence or field examinations.” The letter further notes that TEGE will continue to refine its examination strategies to focus on the highest priority compliance areas.
More information on the TEGE division’s plans and accomplishments can be found in the Program Letter.
The Pension Benefit Guaranty Corporation (PBGC) issued final regulations, published in the October 3, 2018, Federal Register, regarding limitations on guaranteed benefits to be paid to owner-participants by this insuring agency. PBGC provides partial benefits in the event that certain defined benefit (DB) pension plans are unable to pay participants their promised benefits. The guaranteed benefits described in these regulations relate to terminating single-employer DB plans. They specifically address a change from prior law with respect to owners of the businesses sponsoring such terminating plans.
The guidance—first issued as proposed regulations on March 7, 2018—implements changes brought about by the Pension Protection Act of 2006 (PPA). Before PPA, as now, there have been limitations on the benefit guarantees—insurance payments—that are provided by this agency when a plan cannot do so. Note, however, that certain DB plans, including owner-only plans and small plans of certain professional organizations, are not insured by PBGC.
The PBGC-insured benefits of certain owners have restrictions that do not apply to rank-and-file employees. Before PPA, there were benefit limitations that applied to substantial owners, these being defined as a person owning the entire interest in an unincorporated trade or business, or more than 10 percent of a partnership or corporation. PPA changed the applicable definition from substantial owner to “majority owner,” now defined as a person owning the entire interest in an unincorporated trade or business, or more than 50 percent of a partnership or corporation.
The U.S. House of Representatives has passed the Protecting Family and Small Business Tax Cuts Act of 2018 by a vote of 220-191. This was the third and final bill in the Tax Reform 2.0 package considered in the House last week. The other two bills—the Family Savings Act of 2018 and the American Innovation Act—were passed by the House last week.
The Protecting Family and Small Business Tax Cuts Act of 2018 makes permanent the individual tax cuts that were contained in the Tax Cuts and Jobs Act (signed into law in December 2017). It also contains some provisions that will impact savings arrangements, should the bill pass in the Senate and become law.
- The ability of beneficiaries of Achieving a Better Life Experience (ABLE) accounts to contribute their own earned income above the ABLE limit would be made permanent (the Tax Cuts and Jobs Act requires this provision to expire the end of 2025)
- The ability to roll 529 education savings plan assets to ABLE accounts would be made permanent (the Tax Cuts and Jobs Act requires this provisions to expire the end of 2025)
- The Sinai Peninsula of Egypt would be considered a “combat zone” (the Tax Cuts and Jobs Act has the Sinai Peninsula of Egypt listed as a qualified hazardous duty area)
- The 7.5 percent adjusted gross income (AGI) threshold for medical expense deductions and for the IRA early distribution penalty tax exception for medical expenses would be extended to December 31, 2020 (it was 10 percent of AGI prior to the Tax Cuts and Jobs Act, which changed it to 7.5 percent of AGI and to increase back to 10 percent after December 31, 2018).
The bill now moves to the Senate for consideration. Prospects of this bill passing the Senate are not good, but the other two bills in Tax Reform 2.0 are considered to have better odds. Watch this Ascensus.com News for further details.
The U.S. House of Representatives passed two of three bills that collectively comprise “Tax Reform 2.0” this week, and is expected to vote on the third today, September 28. One of these bills passed this week—the Family Savings Act of 2018—would make significant changes to the landscape of tax-advantaged savings arrangements. Included in it are provisions affecting employer-sponsored retirement plans, IRAs, 529 college savings programs, as well as a new all-purpose tax-free savings arrangement known as the Universal Savings Account.
Tax Reform 2.0
The Tax Reform 2.0 package is intended to be a follow-up to the Tax Cuts and Jobs Act, enacted in December of 2017. The primary objective of Tax Reform 2.0 has been to make permanent the individual income tax cuts in the 2017 legislation, which currently are set to expire in 2026. In addition to individual tax cut permanence and savings arrangement enhancements, a third component of Tax Reform 2.0 relates to “business innovation.” The business innovation component also was passed by the House this week; the individual income tax permanence bill is expected to be voted on by the House today (Friday, September 28).
Prospects for making the 2017 individual income tax cuts permanent, however, are considered poor because of opposition in the U.S. Senate. In light of this, there has been increasing focus on the possibility of advancing stand-alone legislation to enhance tax-advantaged savings arrangements. Some speculate that the House’s passage of the Family Savings Act could lead to a counter-move by the Senate with its own savings enhancement proposals, with the potential for a compromise bill containing a blend of House and Senate provisions.
Family Savings Act Details
The Family Savings Act bill that just passed virtually mirrors the legislation as first described at ascensus.com News early in September. Added to this are the addition of a fiduciary safe harbor for employers who include lifetime income investments in their retirement plans, and a provision allowing 529 education savings program accounts to be established for unborn children. Watch this Ascensus.com News for further details.
The House Ways and Means Committee has released the text of three separate bills that collectively comprise what is being called “Tax Reform 2.0.” One of these bills, if enacted by Congress, would make significant changes to tax-advantaged savings arrangements.
The legislative package is intended to be a follow-up to the Tax Cuts and Jobs Act, which was enacted in December of 2017. The primary objective of Tax Reform 2.0 is to make permanent the individual tax cuts in the 2017 legislation, which are set to expire in 2026 (unlike the corporate tax cuts, which are permanent). In addition to individual tax cut permanence and changes to savings arrangements, a third component relates to “business innovation.”
The House Ways and Means Committee is expected to consider the legislation this week, and amendments are possible. House Speaker Paul Ryan (R-WI) has indicated that a vote by the full House chamber can be expected by the end of September. Finally, it should be emphasized that any legislation that is passed in the House must also be passed in the Senate in identical form. Under rules expected to govern any consideration of Tax Reform 2.0 in the Senate, a simple majority would not suffice, and the support of some Democrats would be required. This makes enactment of the legislation an uncertain outcome, at best.
Following is a general description of the savings provisions in Tax Reform 2.0. The legislation will continue to be analyzed for all its potential effects, and further details will be forthcoming.
- Multiple employer plans (MEPs) — Also referred to as “Pooled Employer Plans,” the legislation would enhance the ability of employers to jointly participate in a common plan, the purpose being to reduce administrative burden and expense. Effective for plan years beginning after December 31, 2019.
- Extend the period to adopt 401(k) safe harbor design — 401(k) plans could elect ADP/ACP testing safe harbor status after the plan year begins if the employer makes non-elective contributions to all eligible employees (versus matching contributions) and satisfies simplified safe harbor notice requirements. Effective for plan years beginning after December 31, 2018.
- Graduate student IRA eligibility — Graduate student stipend or fellowship payments would qualify as compensation for IRA contribution purposes. Effective for tax years beginning after December 31, 2018.
- Traditional IRA contributions at any age — Anyone with earned income (or with spouse earned income) could make Traditional IRA contributions, thus would no longer be limited to those under age 70½. Effective for contributions for tax years beginning after December 31, 2018.
- Prohibition on qualified plan credit card loans — Loans from employer plans that are taken under a credit card arrangement would be considered distributions for tax and other purposes. Effective for loans taken after the date of enactment.
- Portability of lifetime income investments — Would allow a retirement plan participant to distribute and roll over to an IRA or other employer plan a lifetime income investment—even in the absence of a distribution triggering event—if the investment is no longer available under the plan. Effective for plan years beginning after December 31, 2018.
- 403(b) custodial accounts to become IRAs with plan termination — A current obstacle to 403(b) plan termination is liquidating accounts to complete the termination process. This would be overcome for certain plans by deeming 403(b) custodial accounts to be IRAs. Effective for plan terminations after December 31, 2018.
- 403(b) participation by employees of qualifying church controlled organizations (QCCOs) — The legislation would clarify which employees of such organizations are eligible to participate in such plans. Effective (retroactively) for plan years beginning after December 31, 2008.
- Exempt small balances from required minimum distribution (RMD) rules — The annual requirement to receive an RMD would be waived for any year if the required distribution would reduce an individual’s aggregate balance below $50,000 (would combine balances in IRAs, qualified plans, 403(b) plans and governmental 457(b) plans). Effective for calendar years beginning more than 120 days after enactment.
- Government employer contributions — Would clarify rules for certain “government pick-up” retirement plan contributions for new and existing employees. Effective for plan years beginning after the date of enactment.
- Armed Forces Ready Reserve contributions — Would allow members of the Armed Forces Ready Reserve to make certain additional elective deferrals beyond the limitation in Internal Revenue Code Section 402(g). Effective for plan years beginning after December 31, 2018.
- More time to establish a plan — An employer would have until the business’s tax return deadline, including extensions, to establish a plan, rather than the last day of the business’s tax year. This grace period would not apply to adding a 401(k) component to a qualified plan. Effective for plans adopted for taxable years beginning after December 31, 2018.
- Relief for closed defined benefit (DB) plans — Nondiscrimination rules would be modified so that a business could continue to operate a defined benefit pension plan that is closed to new employees; such employers typically offer a defined contribution (DC) plan to new employees instead. Effective generally as of the date of enactment.
- PBGC DB insurance program evaluation — A study of the PBGC’s pension plan insurance program and its premiums would be required; to be completed by an independent organization. The study to begin no later than six months after date of enactment.
- Universal Savings Accounts — Would create an account similar to a Roth IRA (no tax deduction, tax-free earnings) with the ability to remove any amount at any time for any reason, tax free (no ordering rules or qualified distribution rules as in a Roth IRA), and subject to a $2,500 per year maximum contribution. Effective for tax years beginning after December 31, 2018.
- Expansion of 529 Plans — Would amend the definition of qualified expenses to include those related to apprenticeship programs and homeschooling. Would also allow up to $10,000 (total) to be used to repay student loan debt, and would expand the definition of qualified expenses for K-12 education (currently limited to tuition). Effective for distributions made after December 31, 2018.
- Birth or adoption excise tax exemption — Would exempt (from the 10 percent early distribution excise tax) up to $7,500 for expenses related to the birth or adoption of a child. Such amounts withdrawn could be repaid. Effective for distributions made after December 31, 2018.
This legislation will continue to be followed as it progresses through the House of Representatives. Watch this ascensus.com News for more details.
The House Ways & Means Committee has released a brief outline of proposals to enhance retirement and other tax-advantaged savings programs. These are to be included in what House GOP leadership calls Tax Reform 2.0, to be tax cuts beyond those contained in the Tax Cuts and Jobs Act of 2017.
The most high-profile element of Tax Reform 2.0 is to make permanent individual taxpayer tax cuts, which under the terms of the 2017 legislation will otherwise expire in 2026. Corporate tax cuts, on the other hand, are permanent under the terms of the Tax Cuts and Jobs Act.
Capitol Hill watchers differ in their assessment of the seriousness of the House Tax Reform 2.0 proposal, since relatively few believe such legislation can garner the necessary votes to be passed by the Senate; that would be necessary for it to become law. Some see the House effort as being of potential political benefit in the run-up to the November midterm elections—an effort to depict House Republicans as favoring individual tax cut permanence and House Democrats in opposition.
Actual legislative text of Tax Reform 2.0, including its savings-related provisions, has not yet been released. This is expected as early as the week of September 10. Based on the brief descriptions in the latest Ways & Means Committee news release, the following provisions are expected to be included in Tax Reform 2.0.
- Enhance the ability of individual employers to join in commonly-administered multiple employer plans (MEPs)
- Extend the deadline by which a new retirement plan can be established for a given tax year
- Simplify the rules for participation in employer plans
- Allow small retirement account balances to be exempt from required minimum distribution (RMD) requirements
- Allow Traditional IRA contributions at any age (no longer ending eligibility at age 70½)
- Liberalize rules to better allow military reservists to maximize retirement savings contributions
- A Universal Savings Account—usable for any purpose and with no required distributions—would resemble a Roth IRA; no tax deduction, but tax-free earnings
- Section 529 education savings program qualified expenses would to include apprenticeship fees, home schooling, and student loan expenses
- A “new baby” provision would allow excise-tax-free early distributions from retirement accounts, with the option to later replenish such amounts
As noted above, despite likely bipartisan support for a number of these provisions, the odds of enactment are uncertain at best. Watch this Ascensus.com News for updates.
In a recent Accounting Today article, Dan Kravitz provides insight on how top-earning service professionals can utilize cash balance plans to lower their tax bills. The Treasury Department recently proposed new regulations that would prohibit planning techniques such as the “crack and pack” — where business owners split their firms into different entities to lower their tax bills. Kravitz said his firm, a specialist in defined-benefit plans for small businesses, is actively marketing pensions as a way for service professionals to get around the new rules.