Legislative updates

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.


Retirement Spotlight: January 2020 Spotlight on Important SECURE Act Provisions For Financial Advisers

The new year promises to provide plentiful opportunities for financial advisers to gain business and to demonstrate expertise to existing clients. As you likely know, the SECURE Act was signed into law on December 20, 2019. Many of the Act’s provisions took effect on January 1, 2020. Most of them offer real benefits to your clients; other provisions may not be as helpful, but you still need to understand them to provide the best service possible. This Retirement Spotlight focuses on a half-dozen SECURE Act provisions that will make the most significant impact on your retirement plan practice.

Let’s start with three provisions that you will most certainly get questions on.

  1. Traditional IRA owners can now contribute after age 70½. Since they were first available in 1998, Roth IRAs could receive contributions from individuals over 70½ provided that they were otherwise eligible. That is, Roth IRA owners had to have earned income—but not too much Now Traditional IRA owners will enjoy the same benefit. Your clients that continue to work—or that have working spouses—will be able to contribute even after they reach age 70½.

    More of your clients may be working well past the “normal retirement age”; now they can also keep contributing to their Traditional IRAs. Even though they may have to take required minimum distributions at the same time that they contribute to their IRAs, there is a good chance that they will be able to contribute more than they have to distribute each year. So this provision is a great way for your clients to ensure that they have sufficient retirement assets once they stop working.

  2. Traditional IRA required minimum distributions (RMDs) will now start at age 72. Not only can your clients make Traditional IRA contributions past age 70½, but now they can begin taking RMDs later. If your clients turn age 70½ in 2020 or later, they now can wait until age 72 to begin taking RMDs. Specifically, they will have until April 1 of the year following the year they turn 72 to take their first RMD. This year-and-a-half delay is not necessarily the big relief that some in the retirement industry had hoped for. But this change certainly provides some benefit.

    Based on increased life expectancies over the past several decades, Congress could have increased the starting age to 75 or later. There are, however, significant revenue implications for any delay in the RMD starting date. So this age-72 requirement was a bit of a compromise. The important thing to remember is this: if your client already turned age 70½ by the end of 2019, then RMDs cannot be delayed under the new rule. In other words, all of your clients born on or before June 30, 1949, are subject to the old rule, which makes the 70½ year the first distribution year.

  3. “Stretch IRAs” as we now know them are disappearing. For decades, IRA and qualified retirement plan (QRP) beneficiaries were able to take death distributions over their life expectancies. For example, a 20-year-old grandchild could distribute a grandparent’s IRA balance over 63 years. But now this generous provision has been altered to require faster distributions (generally over a 10-year time frame), which is designed to increase federal revenue. Nonspouse beneficiaries of account owners who die on or after January 1, 2020, are subject to this new rule, unless they are
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries who are not more than 10 years younger than the decedent’s age,
    • minor children of the decedent (they must begin a 10-year payout period upon reaching the age of majority), or
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.

    We expect that this change to the distribution rules will create considerable confusion for clients. They may be subject to two separate sets of beneficiary distribution rules, depending on the date of the account owner’s death. Some beneficiaries, such as spouses, will have the same options that we are familiar with; many others will face an accelerated payout. It may take time for the industry to sort through the many questions that will arise. And we may have to wait for definitive guidance from the IRS. But meanwhile, you can assure your clients that, while the beneficiary rules for both IRAs and QRPs have changed considerably, no immediate action is needed.

  4. The second group of changes involves employer-sponsored retirement plans and not IRAs specifically. Still, each of them could provide potential benefits to your clients.

  5. Employers may adopt a qualified retirement plan (QRP) up until their tax return due date, plus extensions. If you have clients that are also business owners, you have probably been asked at year end, “What can I do to reduce my tax burden?” For employers without a retirement plan, establishing such a plan can be a great idea. But QRPs were generally required to be adopted by the end of the employer’s tax year. (SEP and SIMPLE IRA plans have different deadlines.) Trying to quickly establish a new plan at year-end could cause unwanted stress and could lead to hasty decisions and compliance problems. Starting with 2020 tax years, employers may establish a QRP by their tax return due date, plus extensions. For example, unincorporated business owners could establish a plan for the 2020 tax year until October 15, 2021, if they have a filing extension.

    This new rule aligns the deadline for QRP establishment with the current SEP IRA plan adoption deadline. And though we still expect that some of your client employers will wait until the last minute to act, at least this new provision gives them more flexibility and options. Keep in mind, however, that salary deferrals must be made prospectively. So establishing a 401(k)-type “cash or deferred arrangement” will not allow plan participants to defer salary or wages that they have previously earned.

  6. Safe harbor 401(k) plans now have more contribution flexibility. Businesses with employees sometimes struggle to pass certain 401(k) testing requirements. Simply stated, plans are generally not allowed to provide highly compensated employees (including owners) with benefits that disproportionately favor them over the nonhighly compensated employees. One such test compares the salary deferrals of these two groups. To pass this test, owners (especially) often end up with much smaller deferrals than they would like. Fortunately, a “safe harbor” 401(k) provision deems this test to be passed, but only if the plan guarantees a healthy matching or nonelective contribution for rank-and-file employees. Unfortunately, detailed notification and timing requirements made these safe harbor provisions less than user friendly. For example, under one scenario, an employer could have made a three percent nonelective contribution in order to pass the nondiscrimination test—but only if the employer had notified employees, before the plan year started, that she might make this contribution to pass the test. In addition, the employer would have had to amend the plan before 30 days of the plan year end in order to take advantage of the testing relief. Now, employers can get the same testing relief, without a “pre-notice” and with substantially more time to amend the plan: instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a four percent contribution to all eligible employees rather than a three percent contribution.

    All of this is to say that employers now can enjoy much more flexibility when they adopt a safe harbor 401(k) plan. By some credible estimates, 30-40% of 401(k) plans that cover employees (in addition to owners) use this safe harbor feature. Making compliance easier for these plans—and for yet-to-be-adopted plans—is a great benefit. And learning more details about this provision will help you better serve your clients.

  7. Tax credits for small employers may help jump-start retirement plans. The SECURE Act provides two tax credits for small employers: one provision gives a $500/year startup credit for new 401(k) or SIMPLE IRA plans that include an automatic enrollment provision; another provision increases a startup credit (up to $5,000) for any small employer that adopts a qualified plan, SEP, or SIMPLE plan. Both credits are available to employers for three tax years, beginning with the start-up year. While these incentives may not—in and of themselves—convince an employer to adopt a retirement plan, they may take some of the financial sting out of the decision and prove that Congress is serious about increasing retirement plan coverage in America. Letting your clients know about these helpful tax credits can solidify your value in their eyes.

These six new provisions are likely to get a fair amount of coverage in the mainstream media and in the retirement industry. This Retirement Spotlight should help you discuss these changes more effectively with your clients. But keep in mind that the SECURE Act contains the most significant retirement plan changes in 15 years. There are many other provisions that affect IRAs and QRPs—and there are many questions that have already arisen about specific provisions and how certain changes should be implemented. As federal guidance is released, Ascensus will continue to share thoughtful analysis and practical insights.

 

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


President Trump Signs SECURE Act Into Law

Late Friday, December 20, President Trump signed into law two spending packages passed by Congress, which avert a government shutdown. One of the packages, the Further Consolidated Appropriations Act, 2020 (FCAA), is comprised of multiple bills—including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which contains several major retirement savings-related provisions. Ascensus’ latest Washington Pulse, released on Friday, discusses these provisions in detail.


Senate Approves Appropriations Bill with SECURE Act and Healthcare Provisions; President’s Signature Expected

The U.S. Senate today voted its approval of the Consolidated Appropriations Act of 2020, as passed by the House of Representatives, with provisions that will fund government operations for the coming fiscal year. Included are provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, as well as healthcare-related changes.

The process is still unfinished, with President Trump’s signature needed to enact the legislation. But given the fact that Trump administration officials were deeply involved in negotiating the bill’s provisions, it is generally considered a formality.

Key elements of the legislation can be found in Tuesday’s ascensus.com Latest News announcement.


Last Minute Funding Action by Congress Sets the Stage for Major Savings and Health Changes

In these final days of the 2019 congressional session, as lawmakers negotiated to avert a shutdown of federal government functions and to authorize spending for the coming fiscal year, a number of tax-advantaged savings and health care-related changes found their way into the legislative mix. The majority are provisions found in legislation passed earlier in 2019 by the House of Representatives, in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is legislation that was not taken up by the Senate.

The process is still unfinished. The House of Representatives and Senate must approve the appropriations package, and President Trump must sign it into law.  But indications are that leaders of both parties in both houses of Congress, as well as the Trump administration, are in support of the proposals. Following are key elements of the legislation.

 

Retirement Plans and Individual Savings

  • Enhances options for multiple employer plans (MEPs), including unrelated employers participating in pooled employer plans (PEPs)
  • Expands provisions for automatic enrollment and automatic contribution increases in 401(k)-type plans
  • Increases the retirement plan start-up tax credit to a maximum of $5,000 per year
  • Provides a new automatic enrollment tax credit
  • Delays required minimum distributions (RMDs) from IRAs and retirement plans to age 72
  • Requires most nonspouse IRA and retirement plan beneficiaries to deplete inherited accounts—and be taxed—within 10 years
  • Permits Traditional IRA contributions at any age
  • Treats certain graduate student taxable stipend and fellowship payments—and certain difficulty-of-care payments, as eligible compensation for IRA contribution purposes
  • Allows earlier entry into employer-sponsored retirement plans by some long-term, less-than-fulltime employees
  • Requires certain retirement plans to provide annual lifetime income estimates
  • Provides a new exemption from the IRA and retirement plan early distribution 10% percent excise tax for births and adoptions
  • Allows lifetime income investments to be rolled over to an IRA or another retirement plan if a current plan option is eliminated
  • Provides a longer period in which an employer may elect to establish a tax-qualified retirement plan
  • Enhances the ability of an employer to adopt a safe harbor plan design for its 401(k) plan
  • Provides an annuity selection safe harbor for those employer retirement plans that offer this investment option
  • Provides nondiscrimination relief for certain defined benefit pension plans closed to new participants
  • Permits in-service distributions at age 59½ to participants in governmental 457(b) plans and certain pension plans
  • Extends to those affected by a qualifying federally-declared disaster the special disaster-related rules for access to and use of retirement funds
  • Broadens the definition of eligible expenses in 529 plans
  • Several other miscellaneous provisions

 

Health and Welfare

Several tax provisions intended to help fund elements of the Affordable Care Act (ACA)—often referred to as Obamacare—would be repealed. They include the following.

  • Repeals the 40% excise tax (“Cadillac tax”) on certain high-cost employer-provided health insurance plans
  • Repeals the 2.3% excise tax on certain medical devices, which applied to manufacturers, producers, and importers (but not individuals)
  • Repeals an annual fee assessed to health insurance providers based on their market share (suspended for 2019), a fee typically passed on to consumers in the form of higher health insurance premiums

 

Effective Dates and Required Amending

Complicating the picture is the fact that the effective dates of some changes are mere days away—January 1, 2020—these dates having been retained from the legislation as passed by the House of Representatives in May, 2019. However, wisely included in the legislation is a delayed amendment deadline for employer-sponsored retirement plans. This will allow implementation of changes immediately, with amending for the changes generally by the end of the 2022 plan year (2024 for governmental and collectively-bargained plans).

 

Monitoring and More Analysis to Come

Watch this Ascensus.com News for updates and further analysis as it becomes available.


House of Representatives’ Government Funding Bill Contains SECURE Act Provisions

The House Rules Committee has released text of the Consolidated Appropriations Act, 2020, whose provisions are to fund government operations for the coming fiscal year. Included in this legislative text—as many have hoped—are provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The SECURE Act was passed as stand-alone legislation earlier this year by the House of Representatives, but was not taken up in the Senate. Inclusion in appropriations legislation was considered the last opportunity for passage of this legislation in 2019. These appropriations must have both House and Senate approval, and signature by President Trump, for the SECURE Act provisions to become law.

These provisions include the following.

  • Enhancement of options for multiple employer plans
  • Expanded provisions for automatic enrollment and automatic contribution increases in 401(k)-type plans
  • Enhanced retirement plan start-up and automatic enrollment tax credits
  • Delay in onset of required minimum distributions from retirement savings arrangements
  • Permitted Traditional IRA contributions at any age
  • Earlier entry into employer retirement plans by long-term, less-than-fulltime employees
  • Early distribution excise tax exemption for birth and adoption
  • Portability of lifetime income options
  • Enhanced ability to elect safe harbor status in 401(k) plans
  • Multiple additional provisions

 

More details on this legislation will be provided as the legislative process continues.


Bill Would Allow Tax- and Penalty-Free Retirement Savings Withdrawals for Student Loan and Education Payments

Sen. Rand Paul (R-KY) has introduced legislation that would permit tax-free, penalty-free withdrawals from IRAs and employer-sponsored retirement plans for qualified education expenses or student loan repayment. According to a summary released by Sen. Paul’s office, the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act would do the following.

  • Permit up to $5,250 per year to be distributed from an IRA or employer-sponsored retirement plan, tax-free and exempt from the 10 percent early distribution penalty tax, if used for eligible education expenses or eligible student loan repayments
  • Additionally, permit such tax- and penalty-free distributions for qualifying education expenses of a spouse or dependent
  • Allow employers to make student loan payments of up to $5,250 per year on behalf of an employee, as a tax-free employee benefit
  • Permit employees to elect Roth treatment for employer-made contributions to their retirement plan accounts—contributions that would generate potentially-tax-free earnings (currently, all employer contributions are pretax)
  • Repeal the current-law cap and phase-out of the student loan interest income tax deduction

The bill has been referred to the Senate Finance Committee.


Senators Propose Reforms to Strengthen Multiemployer (Union) Pension Plans

Senate Finance Committee Chairman Charles Grassley (R-IA) and Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Lamar Alexander (R-TN) have proposed the Multiemployer Pension Recapitalization and Reform Plan, ultimately to be reflected in legislation intended to assist struggling multiemployer (union) pension plans. Currently, only a Technical Explanation—not legislation text—is available.

The objectives, as stated in the Technical Explanation as well as in a Senate news release, include the following.

  • Stabilize plans in immediate danger of failure.
  • Provide a limited infusion of taxpayer dollars.
  • Strengthen the Pension Benefit Guaranty Corporation (PBGC)’s ability to insure the multiemployer system.
  • Put the multiemployer system on a stable path for the long term.
  • Ensure fiscal responsibility.

The bill does not go as far in providing actual funding for struggling pension plans as the Rehabilitation for Multiemployer Pensions Act, also known as the Butch Lewis Act, introduced by Ways and Means Committee Chairman Richard Neal (D-MA) and passed by the House of Representatives in July of this year. That legislation has not been considered in the Senate, but, as passed in the House, proposes the following.

  • Establish a Pension Rehabilitation Administration within the Treasury Department and a related trust fund to make loans to certain union pension plans that are in critical-and-declining status, or insolvent.
  • Enable the Treasury Department to issue bonds to fund the loans described above.
  • Appropriate to the PBGC funds for additional assistance that some plans could qualify for beyond the above-described loans.

 


IRS Proposed Regulations to Provide Additional HRA Guidance

Recently published in the Federal Register are IRS proposed regulations to help clarify the application of the employer-shared responsibility provisions and certain nondiscrimination rules pertaining to health reimbursement arrangements (HRAs) and other account-based group health plans that are integrated with individual health coverage or Medicare. The proposed regulations provide certain safe harbors with respect to the individual coverage HRA provisions. The IRS hopes these proposed regulations will spur adoption of individual coverage HRAs by employers.

The IRS proposes adding a location-based safe harbor to Internal Revenue Code Section (IRC Sec.) 4980H, Employer Shared Responsibility Provisions, which can be relied upon when determining affordability to its full-time employees (and their dependents) by an applicable large employer (ALE), who is defined as having an average of 50 or more full-time employees during the preceding calendar year. Under this safe harbor, an ALE would be allowed to use the lowest cost silver plan for self-only coverage offered through the Exchange in the rating area in which the employee’s primary site of employment is located, instead of the lowest cost silver plan in the rating area in which the employee resides. This safe harbor will help alleviate employer burden that could result from requiring that affordability be based on each employee’s place of residence, as employees may change residence locations from time to time, and maintaining up-to-date records may be difficult.

For purposes of this location safe harbor, the proposed regulations provide that an employee’s primary site of employment generally is the location at which the employer reasonably expects the employee to perform services on the first day of the plan year (or on the first day the individual coverage HRA may take effect, for an employee who is not eligible for the individual coverage HRA on the first day of the plan year). The employee’s primary site of employment is treated as changing if the location at which the employee performs services changes and the employer expects the change to be permanent.

The proposed regulations do not provide an age-based safe harbor under IRC Sec. 4980H for the age used to determine the premium of an employee’s affordability plan. Rather, the affordability needs to be based on each employee’s age. The IRS acknowledges that this can be burdensome to employers and is seeking comments on the administrative issues this may raise, as well as on safe harbors that would ease these burdens.

The proposed regulations also provide a safe harbor for the requirement to provide nondiscriminatory benefits under Treasury Regulation 1.105-11(c)(3)(i). This safe harbor states that an individual coverage HRA will not be treated as failing the aforementioned nondiscrimination requirements solely due to the benefits varying based on age—so long as the individual coverage HRA satisfies the age variation exemption under the same terms requirement (Treasury Regulation 54.9802-4(c)(3)(iii)(B)). However, this safe harbor does not automatically satisfy the prohibition on nondiscriminatory plan operation as a whole.

 

The proposed regulations under IRC Sec. 4980H are proposed to apply for periods beginning after December 31, 2019, and the proposed regulations under IRC Sec. 105(h) are proposed to apply for plan years after December 31, 2019.

The Treasury Department and the IRS are seeking public comments on these proposed regulations, which need to be submitted by December 29, 2019. Proposed regulations by the IRS generally may be relied upon by taxpayers in their proposed form.

Watch Ascensus.com for any further information about this guidance.