Legislative updates

House Passes Senate’s Coronavirus Response Bill Unchanged, President Trump Signs Into Law

The House of Representatives today passed—by an expedited procedure—the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was passed by the Senate late on Wednesday, March 25. This afternoon, President Trump signed the legislation into law.

The CARES Act has many elements intended to aid businesses and workers, and to assist the U.S. healthcare system in dealing with the coronavirus (COVID-19) pandemic. As noted in a prior announcement, it also contains the following key provisions that would affect retirement savings arrangements, health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and health flexible spending arrangements (FSAs).

 

Retirement Savings Provisions

  • (As originally drafted, this legislation extended the income tax return filing deadline from April 15, 2020, to July 15, 2020. Prior to its enactment, however, the Treasury Department issued guidance extending the deadline and clarified other acts that are extended—including the ability to make IRA, HSA, and certain employer plan contributions—to July 15 for tax year 2019.)
  • Up to $100,000 in coronavirus-related distributions (CRDs) can be withdrawn by an individual from eligible retirement plans. These distributions will be exempt from the 10 percent early distribution penalty tax.
    • A CRD is defined as any distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual, defined as
      • an individual (or the spouse or a dependent of that individual) who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test; or
      • an individual who suffers related adverse financial consequences, or suffers from other factors as determined by the Secretary of the Treasury.

Plan administrators can rely on plan participants’ certification that they meet these requirements.

    • An eligible retirement plan is defined as a qualified retirement plan (e.g., a 401(k) plan), 403(a) plan, 403(b) plan, governmental 457(b) plan, or an IRA.
    • CRDs will be treated as meeting retirement plan distribution requirements, so long as all distributions from one employer—including members of a controlled group—do not exceed $100,000 to an individual.
    • There will be a three-year repayment period beginning the day after distribution, during which one or more repayments may be made, not to exceed, in aggregate, the amount distributed. Taxpayers can recontribute these amounts to an eligible retirement plan or IRA.
    • CRDs that are recontributed within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs will be taxed ratably over a three-year period, unless an individual elects otherwise.
    • CRDs are not considered statutory “eligible rollover distributions” for purposes of 20 percent mandatory withholding, the notice provided to recipients of distributions eligible for rollover (i.e., “402(f) notice”) and direct rollover requirements (but do remain eligible for rollover).
  • The retirement plan loan maximum for a qualified individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described above) will increase to the lesser of $100,000, or 100 percent of a participant’s vested balance.
    • Retirement plan loan repayment dates that occur between the date of enactment and December 31, 2020, can be delayed for one year. Due dates of subsequent payments (payments after those that may be delayed one year) and the five-year amortization period will be adjusted accordingly.
  • Plan sponsors will generally be required to amend their retirement plans for these provisions by the last day of the 2022 plan year (government plans will have an additional two years), or such other date as the Secretary of the Treasury may prescribe, with operational compliance during the interim period.
  • Individuals, including beneficiaries, will not be required to take their 2020 required minimum distributions (RMDs) from their defined contribution plans or IRAs. This RMD waiver would also apply to individuals who turned 70½ in 2019 but did not take their RMD before January 1, 2020).
  • The 2020 year will not be counted for purposes of a five-year payout period for a beneficiary. (This provision will not alter a required beginning date for years after 2020.)
  • Single employer defined benefit pension plan minimum required contributions due during 2020 can be delayed to January 1, 2021 (adjusted for interim earnings). This provision will also provide an option to use an alternative funding target percentage.
  • This legislation adds “public health emergency” to those events that allow the Department of Labor to postpone certain deadlines governed by ERISA Section 518.

Health Savings Arrangement-Related Provisions 

  • For plan years before 2022, health insurance plans can pay for telehealth and remote care services without first satisfying HSA-qualifying deductible conditions.
  • A medicine or drug need not be obtained by prescription to be a qualified medical expense for HSA, HRA, MSA, and health FSA purposes. This includes over-the-counter menstrual care products.

Further developments, including any clarifying guidance issued by the IRS or other governing agencies, will be shared on ascensus.com.

 


Senate Approves Massive Coronavirus Response Bill, with Significant Retirement Savings and Health Elements

On Wednesday night, March 25, shortly before midnight, Eastern Time, the U.S. Senate cleared lingering objections of both Democrat and Republican members and unanimously passed H.R. 748, the Coronavirus Aid, Relief and Economic Security, or CARES Act. The legislation has many elements intended to aid businesses and workers, and assist the U.S. health care system in working through the coronavirus (COVID-19) pandemic. It also contains multiple provisions that would affect retirement savings arrangements, health savings accounts (HSAs), Archer medical savings accounts (MSAs), health reimbursement arrangements (HRAs), and flexible spending arrangements (FSAs).

The next move is up to the U.S. House of Representatives, where a strategy known as “unanimous consent” could speed up passage of the legislation there, resulting in quicker delivery to President Trump for his signature. If there are objections to that strategy by House members, that body—currently in recess—may have to be recalled to the Capitol for a vote. Following are key provisions that would impact tax-favored retirement and health savings arrangements.

Retirement Savings Provisions

  • This legislation would extend the income tax return filing deadline from April 15, 2020, to July 15, 2020. (The Treasury Department has already extended the deadline as described above and clarified other acts that are extended as a result—including the ability to make IRA, HSA, and certain employer plan contributions by July 15 for tax year 2019.)
  • Up to $100,000 in coronavirus-related distributions (CRDs) could be withdrawn by an individual from eligible retirement plans. These distributions would be exempt from the 10 percent early distribution penalty tax.
    • A CRD is defined as any distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual, defined as
      • an individual (or the spouse or a dependent of that individual) who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test; or
      • an individual who suffers related adverse financial consequences, or suffers from other factors as determined by the Secretary of the Treasury.

Plan administrators could rely on plan participants’ certification that they meet these requirements.

    • An eligible retirement plan is defined as a qualified retirement plan (e.g., a 401(k) plan), 403(a) plan, 403(b) plan, governmental 457(b) plan, or an IRA.
    • CRDs would be treated as meeting retirement plan distribution requirements, so long as all distributions from one employer—including members of a controlled group—do not exceed $100,000 to an individual.
    • There would be a three-year repayment period beginning the day after distribution, during which one or more repayments may be made, not to exceed, in aggregate, the amount distributed. Taxpayers could recontribute these amounts to an eligible retirement plan or IRA.
    • CRDs that are recontributed within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs would be taxed ratably over a three-year period, unless an individual elects otherwise.
    • CRDs are not considered statutory “eligible rollover distributions” for purposes of 20 percent mandatory withholding, the notice provided to recipients of distributions eligible for rollover (i.e., “402(f)” notice) and direct rollover requirements (but do remain eligible for rollover).
  • The retirement plan loan maximum for a qualified individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described above) would increase to the lesser of $100,000, or 100 percent of a participant’s vested balance.
    • Retirement plan loan repayment dates that occur between the date of enactment and December 31, 2020, could be delayed for one year. Due dates of subsequent payments (payments after those that may be delayed one year) and the five-year amortization period would be adjusted accordingly.
  • Plan sponsors would generally be required to amend their retirement plans for these provisions by the last day of the 2022 plan year (government plans would have an additional two years), or such other date as the Secretary of the Treasury may prescribe, with operational compliance during the interim period.
  • Individuals would not be required to take their 2020 required minimum distributions (RMDs) from their defined contribution plans or IRAs. This RMD waiver would also apply to individuals who turned 70½ in 2019 but did not take their RMD before January 1, 2020).
  • The 2020 year would not be counted for purposes of a five-year payout period for a nonperson beneficiary. (This provision would not alter a required beginning date for years after 2020.)
  • Single employer defined benefit pension plan minimum required contributions due during 2020 could be delayed to January 1, 2021 (adjusted for interim earnings). This provision would also provide an option to use an alternative funding target percentage.
  • This legislation would add “public health emergency” to those events that would allow the DOL to postpone certain deadlines governed by ERISA Section 518.

Health Savings Arrangement-Related Provisions 

  • For plan years before 2022, health insurance plans could pay for telehealth and remote care services without first satisfying HSA-qualifying deductible conditions.
  • A medicine or drug need not be prescribed to be a qualified medical expense for HSA, HRA, MSA, and health FSA purposes. This includes over-the-counter menstrual care products.

Further progress of this legislation will be monitored and developments shared on ascensus.com

 


Washington Pulse: Congress and the IRS Provide Separate COVID-19 Guidance that Addresses Payment for Diagnosis and Treatment

The U.S. government has delivered two pieces of welcome relief in the midst of the coronavirus (COVID-19) pandemic. First, the President has signed legislation that requires healthcare insurance providers to cover COVID-19 testing without charging the patient. Second, the IRS has indicated that high deductible health plans (HDHPs) will retain their qualified status even if they cover the cost of COVID-19 testing and treatment before the satisfaction of the plan deductible. This will enable individuals with health savings accounts (HSAs) to continue to make tax-deductible contributions.

 

Legislative Relief for COVID-19 Testing

President Trump signed the Families First Coronavirus Response Act (the Act) on March 18, 2020, to address the many disruptions caused by the COVID-19 outbreak. One of the primary concerns addressed in this bill is the fear that those exposed to the virus might hesitate to be tested for the disease if they have to pay for such testing out of pocket. To encourage testing, the Act requires group and individual health insurance plans to provide coverage for two items.

  • Diagnostic testing products. This refers to federally approved products that detect the COVID-19 virus.
  • Items and services that are associated with the use of such a diagnostic product. Simply put, this requires health insurance plans to cover the costs of
    1. the office visit (even if virtual),
    2. any materials or services needed to determine whether testing is needed, and
    3. administering the test.

Health insurance plans must provide this coverage with no cost sharing (e.g., no deductibles, copayments, or coinsurance) and with no prior authorization. The statute gives joint enforcement authority to the Secretary of Health and Human Services, the Secretary of Labor, and the Secretary of Treasury, and each of these departments has the authority to issue guidance to implement these provisions.

 

IRS Relaxes HDHP Rules

To help facilitate the nation’s response to the COVID-19 virus, the IRS issued Notice 2020-15 on March 11. This guidance provides a green light for insurers offering HSA-compatible HDHPs to cover the cost of the COVID-19 diagnostic testing and associated treatment without application of a deductible or other cost sharing. The IRS notes that doing so will not disqualify the HDHP, so individuals covered by these plans may continue to contribute to their HSAs.

Normally, individuals can make HSA contributions only if they maintain HSA-compatible HDHPs. This means that the HDHP must meet certain requirements such as minimum deductibles and maximum out-of-pocket expenses. In general, individuals must not also be covered by a non-HDHP.

The concern that the cost of COVID-19 testing could be a barrier to seeking medical care during this outbreak led the IRS to relax current rules. The IRS states in Notice 2020-15, that

Due to the nature of this public health emergency, and to avoid administrative delays or financial disincentives that might otherwise impede testing for and treatment of COVID-19 for participants in HDHPs, this notice provides that all medical care services received and items purchased associated with testing for and treatment of COVID-19 that are provided by a health plan without a deductible, or with a deductible below the minimum annual deductible otherwise required . . . for an HDHP, will be disregarded for purposes of determining the status of the plan as an HDHP.

This easing of the existing HSA-compatible HDHP rules should be a welcome relief for many individuals who may be affected by the COVID-19 outbreak.

 

The Interaction of Legislative Relief and Notice 2020-15

IRS Notice 2020-15 states that an HDHP  that covers the cost of COVID-19 testing or treatment will still be considered an HSA-compatible HDHP—and eligible HSA owners will still be able to make tax-deductible contributions. The new federal statute, on the other hand, requires health plans to cover COVID-19 testing expenses, but not treatment expenses.

Individuals participating in HDHPs or any other type of health plan should consult the insurer regarding their costs associated with COVID-19 testing and treatment, including the potential application of any deductible or cost sharing. Watch ascensus.com Latest News for further developments regarding the effects of the COVID-19 pandemic on both health and welfare and retirement arrangements.

 

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


IRS Notice Confirms Delay of Tax Return Filing Deadline, Reiterates Tax Payment Extension

The IRS has issued Notice 2020-18, in which the Service makes official the delay to July 15, 2020, of the deadline for filing federal income tax returns and making required tax payments. This is a result of the Coronavirus (COVID-19) emergency. An Executive Order granting the tax filing extension was issued on Friday, March 20. (Before this Executive Order, IRS Notice 2020-17 had granted a deadline extension to July 15, 2020, to make required tax payments, but not to file tax returns.)

The scope of individuals and entities covered by the newest relief is sweeping. Notice 2020-18 states that “any person with a federal income tax payment or a federal income tax return due April 15, 2020, is affected by the COVID-19 emergency for purposes of the relief.” Further, “…’person’ includes an individual, a trust, estate, partnership, association, company or corporation…”

No special form must be filed to request the filing extension (e.g., with IRS Forms 4868 or 7004), and there is no limitation on amounts of tax owed—including self-employment tax, or estimated tax payments—the payment of which can be delayed to July 15, 2020.

Notice 2020-18 further states that “no extension is provided in this notice for the payment or deposit of any other type of federal tax, or for the filing of any federal information return.”

It is expected that certain other actions tied to the normal April 15, 2020, tax filing deadline—such as making 2019 IRA and HSA contributions, or making certain retirement plan contributions—are similarly granted an extension to July 15, 2020.

Additional guidance from the IRS may be forthcoming. Further developments will be promptly shared with Ascensus associates.


GOP Legislative Package Would Alter Retirement Plan and HSA Provisions as Part of COVID-19 Pandemic Response

Senate Republican coronavirus response legislation—the Coronavirus Aid, Relief and Economic Security, or CARES Act—has been proposed in order to assist Americans affected by the COVID-19 pandemic. The proposal has multiple provisions that would affect retirement savings arrangements and health savings accounts (HSAs). This legislative proposal is being monitored closely, and further developments will be shared as warranted.

Retirement Savings Provisions

  • Would extend the income tax return filing deadline from April 15, 2020, to July 15, 2020. (The IRS has since issued Notice 2020-18, which officially delayed the deadline to July 15, 2020.)
  • Would exempt up to $100,000 withdrawn from an Eligible Retirement Plan from the 10% early distribution penalty tax for Coronavirus-Related Distributions (CRDs).
    • A CRD is defined as a distribution made on or after the date of enactment and before December 31, 2020, to a Qualified Individual, defined as
      • an individual (or the spouse of the individual) who is diagnosed with COVID-19 or SARS-CoV-2 in an approved test;
      • an individual who suffers related adverse financial consequences, or suffers from other factors as determined by the Secretary of the Treasury.
    • An Eligible Retirement Plan is defined as a qualified retirement plan, including a 403(b) plan, governmental 457(b) plan, SEP plan, SIMPLE IRA plan, or an IRA.
    • CRDs would be treated as meeting retirement plan distribution requirements, so long as all distributions from one employer—including members of a controlled group—do not exceed $100,000.
    • There would be a 3-year repayment period, in one or more repayments, not to exceed the amount distributed. Taxpayers could recontribute these amounts to any retirement plan or IRA that the Internal Revenue Code permits.
    • CRDs that are recontributed within the 3-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs would be taxed ratably over a 3-year period, unless a taxpayer elects otherwise.
    • CRDs are not considered eligible rollover distributions. Plan sponsors will need to adjust their 402(f) statements to explain that these distributions are not subject to the mandatory 20% withholding and direct rollover rules (though they are still eligible for rollover).
  • The retirement plan loan maximum for a Qualified Individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described above) would increase to the lesser of $100,000, or 100% of a participant’s vested balance.
  • Retirement plan loan repayment dates between the date of the legislation’s enactment and December 31, 2020, could be delayed for 1 year, with the amortization period—including the 5-year repayment deadline—adjusted accordingly.
  • Retirement plan amendments for these provisions would generally be required by the last day of the 2020 plan year (government plans would have an additional two years), or such other date as the Secretary of the Treasury may prescribe, with operational compliance during the interim period.

HSA-Related Provisions

  • Telehealth and remote care services associated with the coronavirus pandemic could be paid by a health insurance plan without first satisfying a deductible, and would not be treated as violating HSA requirements.
  • Certain “direct primary care” arrangements for services between health care providers and clients would be treated as not violating HSA requirements.
  • Over-the-counter menstrual care products would be considered qualified medical expenses for HSA purposes.

 


Treasury Secretary Announces Tax Return Deadline Extension; Expected to Extend Contribution Deadlines

Treasury Secretary Steven Mnuchin has announced in a Twitter message this morning that the April 15, 2020, tax return filing deadline will be extended 90 days, to July 15, 2020. Formal guidance confirming this is expected. It is further expected that the deadline to make certain contributions to tax-advantaged savings arrangements—such as IRAs—will be similarly extended. This has been the case with certain previous federally-declared natural disasters. More information, including confirmation in formally-issued guidance, will be provided in a future communication.


Legislation to be Introduced to Suspend RMDs for 2020, Exempt Social Security Income from Taxation

Sen. Ed Markey (D-MA) has proposed legislation (S. 3527) to suspend for 2020 the obligation to withdraw required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs in response to investment market volatility accompanying the coronavirus (COVID-19) pandemic. Sen. Markey has also announced plans to introduce another bill to exempt Social Security benefits received in 2020 from taxation. (Taxation of Social Security benefits generally is means-tested, with amounts exceeding $25,000—$32,000 for married couples—subject to income tax.)

Retirement plan withdrawals generally are required annually for those who reached age 70½ in 2019 or a prior year, or who reach age 72 in 2020 or a later year (some who are still employed after these ages can further delay withdrawals from certain retirement plan).

In a news release issued Wednesday, March 18, Sen. Markey noted that the formula used to calculate these annual RMDs—which is based on December 31, 2019, values that preceded the recent markets downturn—would consume a disproportionate share of these individuals’ retirement savings. Thus, this reflects the importance of this 2020 RMD suspension.

The legislation based on S. 3527 bill text at Sen. Markey’s website, and which has bipartisan support, would do the following.

  • Suspend otherwise-required 2020 RMDs from qualified retirement plans, 403(b) plans, governmental 457(b) plans, and individual retirement arrangements (IRAs).
  • 2020 will be disregarded for purposes of the 5-year period for required depletion of an inherited IRA or retirement plan account.
  • Mandatory withholding (e.g., 20%) would not be applied to 2020 amounts withdrawn from these retirement savings arrangements, exempt up to such amount(s) that would represent RMDs if not for the 2020 exemption.
  • Retirement plans may operationally comply with these provisions, but must amend for the changes by the last day of 2022 plan years (2023 plan years for governmental plans).
  • An individual’s required beginning date for RMDs (generally April 1 of the year after attainment of RMD age or, if later, the year of retirement) would not be altered by a 2020 suspension.

 


Lawmakers Introduce Bill to Ensure COVID-19 (Coronavirus) Testing Costs Not Borne by Patients

Reps. Diana DeGette (D-CO) and Donna Shalala (D-FL) have introduced the Covering Coronavirus Test Act of 2020 (H.R. 6173). This legislation is intended to prevent health insurance companies from requiring those being tested for COVID-19 (coronavirus) to pay for the testing.

Based on H.R. 6173 legislative text obtained through Rep. DeGette, this very brief bill would amend the federal Public Health Service Act to do the following.

  • Require health insurers to cover the full cost of COVID-19 tests for any American with health insurance obtained through their employer, or individually purchased through an Affordable Care Act (ACA) exchange. (Medicare has announced that it will fully cover the cost of a COVID-19 test ordered by a physician. Coverage for the testing of those receiving Medicaid benefits will be a state-by-state decision, according to Rep. DeGette’s news release.)
  • Add COVID-19 testing to the list of ACA “preventive health services” required to be covered at no cost to patients.
  • Exempt COVID-19 testing from the one-year waiting period that new preventive services must undergo before insurers are required to cover them cost-free under the ACA.

This legislation does not currently have a companion Senate bill. It has been referred to the House Energy and Commerce Committee. The bill’s sponsors have indicated that—if not enacted separately—they hope to have these provisions added to any coronavirus legislation that is considered by Congress.

Rep. DeGette News Release


Retirement Spotlight – IRS Offers First Answers to Post-SECURE Act Reporting Questions

The most extensive changes to retirement saving in more than a decade became law when President Trump signed the Further Consolidated Appropriations Act of 2020 (FCAA) on December 20, 2019. While the main purpose of the FCAA was to fund the federal government for the next fiscal year, Congress also added significant retirement provisions to the FCAA by including the Setting Every Community Up for Retirement Enhancement (SECURE) Act in the broader bill.

Most of the retirement enhancements in the SECURE Act have been well received. But some provisions of the Act took effect mere days after enactment—on January 1, 2020—making implementation more difficult. Industry groups have requested that the IRS expedite guidance on the most pressing questions. This Retirement Spotlight will address the guidance that we have so far: some that is explicit and some that we can glean through draft instructions for required tax reporting.

 

New RMD Age of 72

The SECURE Act raised the age at which required minimum distributions (RMDs) must begin. Starting in 2020, RMDs from non-Roth IRAs and employer-sponsored retirement plans must be taken for the year the account owner turns 72, rather than 70½. On the other hand, those who reached age 70½ by the end of 2019 must take an RMD for 2019 and for all later years. So it is only those who turn 70½ in 2020 or later who will have no RMD until they reach age 72. (Remember that many employer plans permit non-owners to delay RMDs until retirement, an option not offered for IRAs or IRA-based plans.)

If an RMD has to be distributed for a given year, the IRA custodian, trustee, or issuer must inform the IRA owner by January 31. They must also tell the IRS that a taxpayer needs to take an RMD. To do this, the reporting organization simply checks a box on Form 5498, IRA Contribution Information, and files it by May 31 of the year the RMD is due (June 1 for 2020).

 

IRS Relief for Inaccurate IRA Custodian, Trustee, and Issuer Reporting

Because the SECURE Act became law so late in 2019, some organizations have struggled to accommodate the new rules. For example, they may have told IRA owners turning 70½ in 2020 that an RMD is required for 2020. This is incorrect, since RMDs in this case would be required at age 72 instead. Fortunately, IRS Notice 2020-6 grants relief from sanctions that could be assessed for this reporting inaccuracy if the following conditions are met.

  • By April 15, 2020, inform IRA owners who received the inaccurate information that no 2020 RMD is required.
  • Ensure that the 2019 Form 5498 for such clients—filed with the IRS by June 1, 2020—does not have a check mark in Box 11 (“Check if RMD for 2020”).
  • Ensure that the 2019 Form 5498 for such clients has no entries in Box 12a (“RMD date”) or Box 12b (“RMD amount”).

 

Relief for IRA Owners?

It is likely that some IRA owners who turn 70½ in 2020 have taken—or will take—a distribution this year in the mistaken belief that they must take an RMD. This belief may be based on receiving an inaccurate notice from their IRA administrator. They might have chosen not to take a distribution had they been aware that no RMD was required. And some might even wish to return the amount distributed to their IRA. But unless the assets were rolled over to an IRA within 60 days, this could not be done without IRS relief.

  • Notice 2020-6 did not address whether an IRA owner (or plan participant) who received a distribution they believed to be an RMD would be granted an extended period—beyond 60 days—to complete a rollover back into a tax-qualified savings arrangement.
  • The Notice also did not address whether an IRA owner could escape the one-rollover-per-12-month rule. This could be a concern, for example, if an IRA owner had set up systematic or periodic IRA withdrawals that had been calculated to satisfy an anticipated 2020 RMD. Under current rules, only one of these withdrawals would be eligible for rollover.

 

More Guidance Being Considered by IRS

Notice 2020-6 states that the IRS is “considering what additional guidance should be provided . . . including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.” We hope that upcoming IRS pronouncements will provide helpful guidance.

 

IRS Recommends Additional Communication with IRA Owners

Because of the potential for IRA owners to misunderstand the RMD age transition from 70½ to 72, the IRS “encourages all financial institutions . . . to remind IRA owners who turned age 70½ in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020.”

 

Qualified Birth or Adoption Distributions

We have received limited IRS guidance on a second SECURE Act provision, which allows for a “qualified birth or adoption distribution” from an IRA or employer retirement plan. An IRA owner or plan participant may withdraw up to $5,000—for each birth or adoption event—without facing the 10% early distribution excise tax. This provision is effective for 2020 and later years, and certain conditions and options apply.

  • Such distributions must occur within 12 months of the birth or adoption.
  • For adoptions, the adoptee may be a minor or an individual who is incapable of self-support.
  • Amounts withdrawn under this provision may be recontributed to an employer plan or IRA.

 

Tentative Guidance Received

Questions remain on these distributions. But we recently got limited guidance from the IRS through a draft version of the 2020 Instructions for Forms 1099-R and 5498. (Form 1099-R reports distributions from IRAs and employer retirement plans, while Form 5498 reports contributions, rollovers, and other information on IRAs.) While these draft instructions may not be definitive, the IRS’s approach in reporting such amounts is helpful.

  • A withdrawal taken as a qualified birth or adoption distribution is to be reported on Form 1099-R based on the recipient’s age (reported in Box 7, Distribution codes). For a recipient under age 59½, use Code 1, “Early distribution, no known exception.” The reporting entity makes no determination whether the distribution qualifies for the birth or adoption exception; this is the recipient’s responsibility.
  • The draft instructions further indicate that re-contributions of qualified birth or adoption distributions to an IRA must be reported on Form 5498 in Box 2, Rollover contributions, for the tax year received.

 

Many Unanswered Questions on Qualified Birth or Adoption Distributions

We are hoping for IRS guidance on the many open questions pertaining to this feature of the SECURE Act, including the following.

  • Confirmation that this feature is an optional feature for employer plans.
  • Clarification of the steps a plan administrator must take, if any, to substantiate that a distribution qualifies as a birth or adoption distribution.
  • Whether there is a time limit for the taxpayer to repay such distributions to an IRA or employer plan.
  • Clarification of the repayment process, including any tax implications.
  • Whether repayments of amounts distributed from an IRA will be subject to the one-per-12-month IRA-to-IRA rollover limitation.

 

Conclusion

The path to a full understanding of the FCAA and SECURE Act provisions—and their effect on retirement and other tax-advantaged savings arrangements—could be challenging. The IRS has so far given only minimal navigation assistance. More will be forthcoming—and the sooner, the better. Ascensus will continue to assess the effect of this legislation and any related guidance. Visit Ascensus.com for future updates.

 

Click here for a printable version of this issue of the Retirement Spotlight.


Rick Irace Shares Thoughts on the Outlook for Retirement Savings in 2020

In a recent WealthManagement.com article​​, Rick Irace, COO of Retirement, shares his thoughts on potential developments that retirement plan consultants should monitor through 2020. As always, plan consultants should keep up with the latest issuances from the Department of Labor, the SEC, and other government agencies. 2020 is also an election year, which means “it’ll be interesting to see what—if any—changes to the retirement plan landscape are discussed.” Advanced analytics are continuing to gain more and more prominence among plan sponsors and service providers, alike, which should advance the ability to forecast retention, gauge plan effectiveness, expand data points, and improve services.