Legislative updates

Financial Transaction Tax May Have Little Chance to Become Law

Firms in the financial sector were galvanized into opposition recently when Democrats in the U.S. Senate and House of Representatives introduced the Wall Street Tax Act of 2019. The legislation would impose a tax of 1/10th of 1 percent on securities or derivatives trading transactions to offset the federal budget deficit.

Sponsors include Senators Jeff Merkley (D-OR), Chris Van Hollen (D-MD), Kirsten Gillibrand (D-NY), and Brian Schatz (D-HI), and Representatives Peter DeFazio (D-OR) and Alexandria Ocasio-Cortez (D-NY).  A previous version of this legislation proposed tax credits to offset the tax effects on transactions tied to tax-favored savings accounts, such as IRAs and 401(k) plans, but there appear to be no defined offsets or exemptions for such accounts in this version of the legislation.

Although the highly controversial legislation has received significant publicity, it is given little chance of enactment in this Congress given the Republican majority in the Senate, regardless of what happens in the Democrat-controlled U.S. House of Representatives.

Senate Tax Extenders Bill Has Disaster Provisions Impacting Retirement Plans

Senate Finance Committee Chairman Charles Grassley (R-IA) has introduced the Tax Extender and Disaster Relief Act of 2019 (S. 617). The primary aim of the legislation is to extend a number of expired or expiring tax provisions, which generally are viewed as tax incentives or as offering special tax options.

This legislative vehicle is also being used to provide tax-related relief to victims of several 2018 natural disaster events. These include presidentially-declared disasters that occurred between January 1, 2018, and March 1, 2019 (this bill’s relief does not include victims of California wildfires, for whom similar relief was provided by Public Law 115-123).

The bill’s following tax relief provisions specific to retirement savings arrangements apply to distributions taken from IRAs and tax-qualified employer-sponsored retirement plans.

  • “Qualified disaster distributions” would include amounts not to exceed $100,000, received by a person whose principal residence was located in a covered disaster area and who suffered economic loss as a result.
  • Qualified distributions would include those taken on or after the first day of the covered disaster period, and before a date 180 days after enactment of this legislation.
  • The 10 percent excise tax for early distributions would not apply to qualified disaster distributions.
  • Inclusion in income of qualified disaster distributions would be done ratably over a three-year period, unless a taxpayer chose otherwise.
  • Such distributions could be repaid over a three-year period.
  • Qualified disaster distributions from employer plans would not be subject to mandatory 20 percent withholding.
  • 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 plan.
  • Plan loan repayments following disaster events could be delayed up to one year, or 180 days after this legislation’s enactment, whichever is later; 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 (two years later for governmental plans).

The prospects for this legislation to be enacted are unclear at this time, due in part to differing leadership positions on whether the tax cost of these provisions must be offset with new revenues, offset with spending cuts elsewhere, or enacted without offsets. Progress of this legislation will be monitored closely, and developments reported at this Ascensus.com News as warranted.


Rick Irace Comments on the Retirement Industry Outlook for 2019

In a recent Wealth Management article,  Chief Operating Officer Rick Irace comments on the key developments that retirement plan consultants should monitor in 2019. Irace focuses mainly on recent proposals related to multiemployer plans (MEPs) and the convergence of health savings and retirement savings efforts.

“Most recently, the concept of the ‘open MEP,’ in which employers would not be required to have common ownership or business purpose, has gained some serious traction,” notes Irace. “The most recent DOL regulations stop short of permitting ‘open MEPs,’ but they do broaden the definition of an employer. This could be a step in the right direction…,” concludes Irace.

Washington Pulse: Familiar Retirement Reforms Already in Play in New Congress

The new 116th Congress begins with a blank slate as bills introduced in the 115th Congress have sunset with the transition. But lawmakers and Hill watchers may justifiably have a sense of déjà vu, as familiar retirement legislation has been introduced in the brief period since the new Congress convened in January. Despite the U.S. House of Representatives flipping to Democratic control in November’s midterm elections, retirement reform remains an issue where significant bipartisan support is evident, and clearly growing.

The Retirement Enhancement and Savings Act of 2019 (RESA 2019) is the latest version of a bill that has been introduced in Congress multiple times since 2016. But, despite bipartisan support the legislation has failed to advance.

RESA 2019, whose primary sponsors are Rep. Ron Kind (D-WI) and Mike Kelly (R-PA), would make many changes to the retirement saving landscape that are primarily intended to achieve three objectives: encourage more employers to offer retirement plans, and encourage greater accumulation and preservation of savings in retirement plans and IRAs

Several significant items included in the bill and intended to address the bill’s objectives are described below.

Allow Pooled Employer Plans to Encourage Offering Workplace Saving Options

More than one-third of Americans have no access to an employer-sponsored retirement plan. Often-cited obstacles for employers considering establishing a plan —especially among small to mid-size employers—are the cost, administrative responsibility, and potential fiduciary liability. One proposed remedy in RESA 2019 is enhancement of the multiple employer plan (MEP) option. MEP arrangements allow many employers to participate in a commonly-administered plan, with the flexibility to tailor provisions to their respective needs. Proponents hope this will yield economies of scale that lead to reduced cost, greater sharing of administrative burden and reduced fiduciary liability for participating employers

Past regulatory restrictions have required MEP-participating employers to have a commonality among them (e.g., common ownership, business purpose, etc.). This has greatly limited use of the MEP concept. Among other MEP enhancements, RESA would permit “open MEPs” by creating “pooled employer plans” (PEPs). PEPs would be exempt from the commonality requirement and would be required to specify a “pooled plan provider” that is the plan’s named fiduciary and plan administrator. The result could be more employers offering a retirement plan to their employees.

Lifetime Income Investments – a Solution to Outliving Retirement Savings?

In addition to the issue of workers having no workplace retirement plan, there is great concern that the savings of many will not be enough to support them through their retirement years. An often-proposed solution is greater use of so-called “lifetime income investments,” which can be used to transform accumulated savings into an income stream throughout retirees lives. Such investments, whose payout in retirement can resemble a payment stream from a defined benefit pension plan, have seen limited use in the past. A major obstacle to their use has been the concern of retirement plan sponsors over potential fiduciary liability for the soundness of the lifetime income provider.

RESA 2019’s sponsors hope to address employers’ fear of fiduciary liability. The bill would require an annual statement that projects potential lifetime income payments—using a participant’s actual accumulation—in the hope of stimulating increased saving and increased use of lifetime income products to provide a secure retirement. The legislation also offers a new fiduciary safe harbor to encourage more employers to offer these investments in their plans.

Will Tax Incentives Motivate Employers and Savers?

RESA 2019 contains several tax incentives for establishing retirement plans and for workers to save more. The maximum tax credit for small employers establishing a plan would be 10 times greater. A new credit for implementing automatic enrollment of employees would be created. All workers—or those whose spouse has earned income—would be eligible to make Traditional IRA contributions beyond age 70½.

Proposal to Eliminate Life Expectancy Payments to Nonspouse Beneficiaries Remains

While RESA’s provisions generally have been welcomed, one that is particularly complex would require most nonspouse beneficiaries of IRA and employer plan accounts to distribute them and pay any taxes owed within five years, for aggregate balances that exceed $450,000. Lesser amounts could be distributed and taxed over a beneficiary’s lifetime. This provision is included in RESA 2019—as it has been in other legislation—to raise tax revenue in order to offset various incentives and enhancements the bill contains.

And More …

RESA 2019 contains many more provisions that address a host of retirement saving issues. Some would offer greater latitude in when employer plans can be established and plan design changes made. Others would address the insolvency of the insurance program for defined benefit pension plans, limit pre-retirement leakage from plans, and make it easier to successfully terminate 403(b) plans.

For a more complete description of RESA 2019 provisions—which mirror those contained in RESA 2018—see the March, 2018, Ascensus Washington Pulse and watch Ascensus.com News for the latest developments.

Click here for the printable version.

Congressmen Reintroduce RESA Legislation with Retirement Savings Enhancements

Representatives Ron Kind (D-WI) and Mike Kelly (R-PA) have introduced the Retirement Enhancement and Savings Act (RESA) of 2019. Versions of this legislation have been introduced in several sessions of Congress dating back to 2016, including introduction in March of 2018. In the past, this legislation has had broad bipartisan support.

RESA of 2019 includes several provisions affecting retirement, which among other things, would results in the following if enacted.

  • Greater ability for employers to participate in multiple-employer plans (MEPs)
  • Incentives for plans to offer lifetime income investments
  • Liberalized IRA provisions
  • Expanded tax credits for establishing retirement plans and implementing automatic enrollment

Watch this ascensus.com News for a detailed analysis on this introduced legislation.

IRS Releases Guidance on Tax Reform’s Pass-Through Income Provisions

The Treasury Department and Internal Revenue Service have issued several elements of guidance for pass-through income taxation provisions of the Tax Cuts and Jobs Act (TCJA) of 2017. Many of the legislation’s provisions took effect for 2018 tax years. In addition to significantly reducing the corporate tax rate, TCJA provided special tax treatment for certain taxpayers who receive what is known as “pass-through income.” This includes sole proprietors and partners. Also some S-Corporation businesses generate pass-through income.

Pass-through income is “passed through” to a recipient’s individual income tax return and taxed at their individual tax rate, which under changes wrought by TCJA may now range from 10 to 37 percent. This taxable pass-through income may be reduced, however, by a Qualified Business Income Deduction. Calculation of this deduction is highly complex, but considering several potential variables, including payment of W-2 income to employees, it generally is not greater than 20 percent of Qualified Business Income. (While W-2 income does have a bearing on the magnitude of a retirement plan contribution in many cases, it has particular relevance in determining the general business income deduction available to pass-through businesses.)

Of significant concern during the TCJA legislative process was whether new pass-through income taxation rules might create a disincentive for those who receive such income to establish—or continue to maintain—an employer-sponsored retirement plan. By all indications, such disincentives have not materialized. In fact, under certain circumstances, it can be highly advantageous for a pass-through business owner to establish and contribute to a retirement plan, and thereby qualify for a greater Qualified Business Income Deduction.

Following are four pieces of guidance released by the IRS affecting pass-through income taxation. Note that the final and proposed regulations below are released in pre-published form, and minor editorial changes could be made when the final versions are released in the Federal Register (no publication date has been announced).

Final Regulations on Qualified Business Income Deduction
These final regulations provide guidance on the deduction for Qualified Business Income under TCJA’s new pass-through taxation rules. They are effective upon publication in the Federal Register, and generally apply to taxable years ending after their publication. However, the guidance further states that they—or the proposed version issued in August of 2018—generally can be relied upon for tax years ending in calendar year 2018.

Proposed Regulations for Those With Mutual Fund or Trust Interests, etc.
These new proposed regulations provide guidance on deductions available to pass-through income recipients with interests in certain regulated investment companies (mutual funds) or certain trusts, and for certain “previously suspended losses” considered Qualified Business Income. They amend certain elements of the August 2018 proposed regulations and provide anti-avoidance guidance relevant to applying TCJA’s new pass-through income taxation rules. These new proposed regulations generally are applicable for taxable years ending after their publication in the Federal Register, but may be relied upon until finalized. Public comments on these new proposed regulations and requests for a public hearing must be received within 60 days of their publication in the Federal Register.

IRS Revenue Procedure 2019-11
Revenue procedure 2019-11 provides a method for calculating W-2 wages paid by an employer—a factor that influences taxable Qualified Business Income. It generally is effective for 2018 and later tax years.

IRS Notice 2019-07
Notice 2019-07 is narrow, special-purpose guidance that addresses real estate rentals that may qualify as trades or businesses for pass-through income taxation purposes. It is effective for 2018 and later tax years.

Comprehensive Retirement Savings Enhancement Bill Introduced

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have announced joint sponsorship of legislation with retirement plan implications: the Retirement Security and Savings Act of 2018 (yet unnumbered). This bill is their most comprehensive joint legislative effort since teaming up to help advance and enact retirement elements of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006.

A news release issued by Sen. Portman’s office acknowledged that this legislation is intended to establish “a foundation for a broader bipartisan, bicameral retirement policy debate in the next Congress” (2019). The news release further notes that “[t]he senators will continue their efforts to improve this legislation.” It also identifies a wide spectrum of interest groups and retirement industry players whose support the senators claim to have.

Following is a high-level, preliminary summary of this bill’s provisions.

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans with higher contribution levels
  • Provide a small employer tax credit for implementing automatic enrollment
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the saver credit for contributions to employer-sponsored plans and IRAs, and make it refundable and payable to a retirement account
  • Liberalize employer plan eligibility rules for less-than-full-time workers
  • Apply certain retirement plan nondiscrimination tests (e.g., top-heavy) separately to part-time employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to inherited IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) from required minimum distributions (RMDs)
  • Increase the RMD age in stages to age 75
  • Reduce excise tax for RMD failures from 50 percent to 25 percent, and under certain circumstances to as low as 10 percent
  • Reduce, under certain circumstances, the excise tax for IRA excess contributions from six percent to three percent
  • Exempt earnings on timely-removed IRA excess contributions from the 10 percent excise tax on early (pre-59½) distributions
  • Modernize the mortality tables that dictate RMD amounts
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Treat certain student loan repayments as qualifying for employer matching contributions to a retirement plan
  • Treat employer-provided retirement planning services received in lieu of compensation as nontaxable
  • Allow an employer to make additional nonelective contributions to SIMPLE IRA plans
  • Allow self-correction of more inadvertent retirement plan operational failures
  • Expand the investments suitable for 403(b)(7) custodial accounts
  • Allow “de minimis” incentives to employees to contribute deferrals to certain employer-sponsored plans (without being considered to violate the contingent benefit rule)
  • Provide a second, higher catch-up deferral amount for those contributing at age 60 or older (current basic catch-up eligibility begins at age 50)
  • Raise the maximum qualifying longevity annuity contract (QLAC) contribution amount (amount excludable from RMDs) from $125,000 to $200,000
  • Allow certain annuities that feature accelerating payments to satisfy RMD requirements
  • Enhance the ability to partially annuitize retirement benefits
  • Authorize a study and report to Congress on current reporting and disclosure requirements
  • Consolidate certain defined contribution retirement plan notices
  • Simplify retirement plan distribution notice requirements
  • Exempt retirement plans from required recoupment of inadvertent overpayments to participants, and legitimize the rollover of such amounts
  • Allow custodial accounts of terminating 403(b)(7) plans to remain subject to 403(b)(7) rules, rather than requiring distribution from the account to the owner
  • Allow greater flexibility to use base pay for determining retirement benefits (excluding certain overtime pay)
  • Allow Roth-type deferral contributions to be made to SIMPLE IRA plans
  • Permit an employer to apply catch-up deferral eligibility requirements separately to legitimate separate lines of business
  • Liberalize the substantially equal periodic payment rules to allow transfers or rollovers between certain qualified plans if net periodic distributions (e.g., annual) comply with the distribution schedule
  • Enhance the ability of terminating employees to contribute payments for accumulated sick leave, vacation pay, severance or back pay to a deferral-type retirement plan
  • Permit the merger or transfer of plan assets from qualified retirement plans into 403(b) plans
  • Exempt designated Roth accounts in employer-sponsored plans (e.g., Roth 401(k), Roth 403(b)) from RMD requirements
  • Extend the qualified charitable distribution exemption from taxation to include SEP, SIMPLE IRA, qualified retirement, 403(b), and governmental 457(b) plans
  • Permit rollovers from Roth IRAs to employer-sponsored plans, with directive to the Secretary of the Treasury to modify the regulations to permit
  • Permit a spouse beneficiary of an employer-sponsored retirement plan account to elect to be treated as the employee for RMD purposes
  • Address certain interest crediting rates, mortality rates, and PBGC premiums for defined benefit plans

It is likely that the concepts in this bill could influence legislative action in 2019 rather than in the soon-to-end 2018 session of the 115th Congress. After all, this legislation is being introduced against a backdrop of legislative uncertainty as Congress prepares to conclude its 2018 session with a substantially different cast of senators and representatives to convene the 116th Congress in January 2019.

Also looming over the completion of legislative business before the holiday recess is the threat of a partial government shutdown when funding for multiple government functions expires today, December 21. While temporary funding by way of a continuing resolution through February was considered and approved by the Senate, there is significant uncertainty over the ability of Congress and President Trump to reach an agreement that would enable this continued government funding.

Regardless, there appears to be a growing readiness on the part of Congress to consider comprehensive retirement savings reform and enhancement, as indicated by the multitude of bills in the 2018 session with retirement elements. For that reason alone, the Retirement Security and Savings Act of 2018 merits a detailed study for all of its potential implications.



Bill Would Allow Matching Contributions on Student Loan Payments

The Retirement Parity for Student Loans Act (yet unnumbered), introduced by Senators Ron Wyden (D-OR) and Ben Cardin (D-MD), would allow employers to make contributions to 401(k), 403(b), and SIMPLE IRA plans in amounts having a matching relationship to an employee’s student loan debt repayments.

The legislation follows and may in part be a consequence of an August 2018 IRS private letter ruling (PLR) that addressed an employer’s request to make certain retirement plan contributions based on employees’ student loan debt repayments. While some in the industry were confused as to how such contributions would be treated for retirement plan purposes, the PLR’s facts and circumstances made clear that because such contributions were not matched to employee retirement contributions, they were not matching contributions in the traditional retirement plan sense. Such contributions, according to the PLR, could be made to the retirement accounts of qualifying employees as employer contributions of another type (e.g., profit sharing contributions) if plan design permitted, and otherwise-required nondiscrimination testing for the plan could be satisfied.

Senators Wyden’s and Cardin’s bill is intended to make this option broadly available to employers whose employees may be repaying student loan debt. Under the Retirement Parity for Student Loans Act, 401(k), 403(b), and SIMPLE IRA plans—all of which permit salary deferrals by participating employees—could allow employer contributions based on employees’ student loan repayments without special plan design conditions or special IRS approval. While such amounts would not actually match an employee’s deferrals into the 401(k), 403(b), or SIMPLE IRA plan, such employer-paid amounts could be contributed to such plans using their regular matching contribution formula.

Following are some of the bill’s key provisions.

  • 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)—including catch-up contributions, 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, thus, 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).

Little time remains in the 2018 session of the 115th Congress. But it is reasonable to expect that—if not acted upon in this session—this bill could be reintroduced in the 116th Congress that will convene in January 2019.