Legislative updates

Ways & Means Committee Reveals Savings Details in Tax Reform 2.0 Legislation

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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.


Ways & Means Committee Identifies Savings-Related Provisions in Tax Reform 2.0

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.

 


Dan Kravitz Discusses Tax Advantages of Cash Balance Plans

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.​


IRS Issues Proposed Regulations and Notice on Pass-Through Income Taxation

The IRS has released proposed regulations for determining business tax deductions for certain non-corporate enterprises (e.g., sole proprietorships, partnerships, S corporations) which pass through business income to an owner’s individual income tax return.

The Tax Cuts and Jobs Act of 2017 (federal tax reform legislation) altered the taxation not only of corporations, but also of such pass-through-taxed business entities. These businesses generally can deduct 20 percent of their qualified business income. These regulations are intended to aid in determining this tax deduction, which will be available to eligible taxpayers for the first time when filing their 2018 tax returns.

In addition to the proposed regulations, the IRS has also issued Notice 2018-64, which contains a proposed revenue procedure that provides guidance on methods for calculating W-2 wages for such business owners receiving pass-through income, and determining their tax obligations under the tax reform provisions.


Barb Van Zomeren Discusses Retirement and Savings Reforms

In a recent article published by BenefitsPro, Barb Van Zomeren discusses open multiple employer plans and other retirement and savings reforms​ currently under consideration by Congress. “There are different schools of thought on how to handle the fiduciary question for small employer in open MEPs,” said Van Zomeren. “Some proposals want service providers to absorb all of the fiduciary liability, and leave participating employers without any.”


Two HSA-Related Bills Passed by House, Senate Prospects Uncertain

The House of Representatives passed two bills that would make changes to health savings accounts (HSAs), Archer medical savings accounts (MSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). There currently is no timetable for their being taken up by the Senate, nor certainty that they will be, during the 2018 session. HSAs are increasingly high profile savings vehicles, given the significant shift toward high-deductible health plans (HDHPs) as an employer health care benefit.

H.R. 6199

H.R. 6199, Restoring Access to Medication and Modernizing Health Savings Accounts Act of 2018, would do the following.

  • Allow HSA-eligible health plans to provide first-dollar coverage (coverage prior to satisfying a deductible) of a non-preventive nature in amounts up to $250 for those with individual coverage, $500 for those with family coverage
  • Allow treatment at an on-site employer or retail (e.g., pharmacy) clinic without the recipient being considered covered by an HSA-disqualifying health plan
  • HSA contribution eligibility under specified circumstances would not be affected by a spouse who is covered by a health FSA
  • A newly-established HSA could receive amounts transferred from a health FSA or HRA in an amount not to exceed the maximum annual FSA contribution limit ($2,650 for an individual and $5,300 for family for 2018)
  • Treat certain health and fitness expenses as qualified medical expenses for HSA, MSA, FSA, and HRA purposes
  • Allow individuals covered by a “direct primary care arrangement,” under which they receive ongoing care under a fixed periodic fee, as HSA-eligible, in the absence of any other HSA-disqualifying factor
  • Treat certain non-prescription medications and health aids (e.g., Ibuprofen, menstrual care products) as qualified medical expenses for HSA, MSA, HRA, and FSA purposes

H.R. 6311

H.R. 6311, Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act of 2018, would do the following.

  • Increase the maximum annual HSA contribution to $6,650 for single coverage, $13,300 for family coverage (indexed)
  • If both spouses are eligible for the $1,000 HSA annual catch-up contribution, both amounts could be allocated to the account of one spouse
  • Treat individuals enrolled in Medicare Part A-only as HSA contribution-eligible, if no other disqualifying factors
  • If an HSA is established within 60 days after an individual is covered by an HSA-eligible HDHP, that HSA will  be treated as if it was established on the date coverage began, for purposes of covering medical expenses
  • Treat certain catastrophic and bronze-level health plans (as defined under the Patient Protection and Affordable Care Act, “Obamacare”) as HSA-eligible HDHP plans
  • Allow FSA year-to-year carryover of up to three times the annual FSA contribution limit (currently $2,650 for individual)

Watch the Ascensus News for further developments.


Bipartisan Bill Could Expand Retirement Plan Self-Correction

Senator Rob Portman (R-OH) and Senator Ben Cardin (D-MD), who in several previous sessions of Congress have introduced legislation primarily focused on retirement plan enhancement and simplification, have teamed up to introduce “The Protecting Taxpayers Act.”

This legislation primarily is intended to make the IRS more responsive and accountable to taxpayers. Most of the bill’s provisions are of that nature. But one provision included in the legislation could have a significant effect on employer-sponsored retirement plan administration. This provision would “allow retirement plan administrators, except as otherwise provided in regulation, to self-correct all inadvertent plan violations without additional submissions to the IRS.”

This could have a dramatic effect on the number of retirement plan operational failures that would require formal submission and payment of fees for plan corrections. Given the prominence of these senators and the popular concept of a more responsive and accountable IRS, the bill is likely to have bipartisan support. Working against it in this session of Congress, however, is the short remaining schedule of Congressional work days.


Dennis Zuehlke Discusses New Tax Reform

In a recent artic​le​ published by the Credit Union National Association, Dennis Zuehlke discusses the recently passed tax-reform bill​ eliminating the ability to reverse a Roth individual retirement account (IRA) conversion​, also known as a recharacterization. He warns that individuals who convert and do not seek tax advice may not be aware of the tax impact until they file their federal tax return months later.


Washington Pulse: Finally Final: Court’s Mandate Terminates DOL Fiduciary Guidance

The U.S. Fifth Circuit Court of Appeals has finally made it official: the 2016 Department of Labor (DOL) fiduciary investment advice final regulations and accompanying guidance are repealed. On June 21, 2018, the Fifth Circuit issued the formal mandate that implements its March 2018 ruling “vacating” (i.e., making null and void) this much-contested guidance, whose purpose was to provide retirement savers with greater protection from conflicted and potentially exploitive investment advice. Attempts during the March-to-June interval to appeal the Fifth Circuit’s ruling and save the fiduciary guidance ultimately proved unsuccessful.

It is not completely clear what this outcome will mean for investment advisors and advisory firms in their future relationships with retirement savers. DOL regulations dating back to 1975—intended for replacement by the now-repealed 2016 guidance—may once again provide the standard that determines fiduciary status. 1996 and 2005 DOL sub-regulatory guidance may also shed additional light. It is hoped that the DOL will release formal guidance soon in order to provide greater clarity regarding future investment fiduciary standards.

How the DOL Investment Fiduciary Guidance Was Defeated

Several earlier District Court challenges to the fiduciary guidance ended with multiple lower courts all upholding it. One of these was a Texas District Court decision, which was appealed to the Fifth Circuit Court of Appeals. There the fiduciary guidance suffered its first defeat. Perhaps more important, the Fifth Circuit’s March ruling had sufficient authority to vacate “in toto” the final regulations and several accompanying prohibited transaction exemption (PTE) components. All were eliminated, in all legal jurisdictions nationwide. The Fifth Circuit judge writing for the majority rebuked the DOL for over-stepping its authority in issuing the 2016 guidance.

The Fifth Circuit’s decision was not unanimous. The three-judge Fifth Circuit panel (the full Fifth Circuit Court of Appeals has nine members) that rendered the decision was split 2-1. Had this ruling occurred during the Obama administration, with the same DOL leadership that had issued the guidance, the loss would in all probability have been appealed. With the Trump administration and its new DOL leadership committed to revising or withdrawing the guidance, the Fifth Circuit’s ruling was welcomed by the DOL, rather than challenged. Others—including the states of California, Oregon, and New York, in concert with the American Association of Retired Persons (AARP)—sought standing to appeal, but were denied. The ultimate deadline of June 13, 2018, for a DOL appeal to the Supreme Court passed as expected, and eight days later came the Fifth Circuit mandate that sealed the fiduciary guidance’s fate.

What Happens Next?

Over the slightly more than two years since the DOL investment fiduciary final regulations and exemptions were issued in April 2016, many financial organizations and investment advisors have made changes to their business models, compensation practices, and investment lineups to comply with new rules. Some even acknowledged fiduciary status as part of the new compliance regime. Will these changes be modified or reversed?  Can a firm or advisor disclaim a fiduciary role after having embraced it?  Does any DOL guidance issued from 2016 to the present have continued purpose or bearing on investment advising relationships?

Other DOL Investment Fiduciary Guidance; More is Needed 

Financial organizations, investment advisors, and service providers who serve them are wondering what past guidance can—or should—be relied on now that the 2016 final regulations and accompanying PTEs have become invalid. Possibilities include the following.

  • The DOL 1975 regulations specified a five-part test to determine if investment advice is fiduciary in nature, but generally apply only to advising that is associated with employer-sponsored retirement plans, not IRAs.
  • Interpretive Bulletin (IB) 96-1 clarified what constitutes investment information versus investment advice. IB 96-1 describes safe harbors to help employers guard against unintentionally providing information that could be construed as investment advice.
  • DOL Advisory Opinion 2005-23A addressed limited circumstances in which a person who is already a fiduciary to an employer-sponsored retirement plan could become an investment fiduciary when plan assets are rolled over from the plan to an IRA. According to this 2005 guidance, an individual who is not already a plan fiduciary may provide IRA rollover advice without becoming an investment fiduciary.
  • DOL Field Assistance Bulletin (FAB) 2018-02 was written after the Fifth Circuit’s March ruling vacating the final investment fiduciary regulations and exemptions. Anticipating this guidance to be eliminated, FAB 2018-02 provided for a transition period during which relaxed impartial conduct standards are to apply, accompanied by lenient enforcement. The impartial conduct standards require that those who provide investment advice for a fee
  • make no misleading statements,
  • receive only reasonable compensation, and
  • act in a client’s best interest.

FAB 2018-02 states that these standards are to apply “until after regulations or exemptions or other administrative guidance has been issued.”

The DOL has remained silent following the Fifth Circuit’s June 21, 2018, mandate officially invalidating the investment fiduciary guidance. Within the investment advisory and retirement industries it is widely hoped that the DOL will soon release more definitive guidance, providing greater clarity and assurance regarding the agency’s investment fiduciary standards and compliance expectations.

Proposed SEC Fiduciary Guidance

As the fate of the DOL investment fiduciary guidance was being determined in the judicial system, the Securities and Exchange Commission (SEC) in April issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. The agency did so eight years after the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the agency a directive to consider issuing standards of conduct for investment recommendations.

The proposed rules generally do not apply to banks or credit unions unless they are (or own) a broker-dealer or a registered investment advisor. The rules do appear to cover individual plan participants receiving direct investment recommendations, but exclude employer plans per se as a business exception. The guidance is also believed to cover investors in individual tax-advantaged accounts, such as IRAs, health savings accounts, and education savings accounts, but only for securities investments, which greatly limits the reach of this SEC guidance. The proposed SEC package contains three items.

  1. A “Regulation Best Interest” for broker-dealers
  2. A rule requiring disclosure of the nature of the advising relationship (fiduciary or not), and restraints on use of the term “advisor”
  3. Clarifications on fiduciary standards applicable to investment advisors

Although the full impact of the SEC proposed guidance is undetermined at this time, the SEC has indicated that the final guidance will generally include advice given to retirement savers who are invested in securities and are receiving investment advice from broker-dealers or registered investment advisors. The SEC is accepting public comments for a 90-day period, which began on May 9, 2018.

Still unknown at this time is the extent to which there will be coordination—and hopefully commonality—between the SEC and DOL guidance that will ultimately govern investment advising relationships.

NOTE: See SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance, for more information on the proposed SEC guidance or visit www.ascensus.com for the latest developments.


Appeals Court Issues Mandate Repealing DOL Fiduciary Investment Advice Guidance

The U.S. Fifth Circuit Court of Appeals has released its official mandate document vacating (repealing) the Department of Labor’s (DOL’s) 2016 fiduciary investment advice final regulations and accompanying prohibited transaction exemptions. This action officially seals the repeal of this guidance, which has been the subject of intense debate and opposition for the last several years. Multiple attempts had been made by the DOL during the Obama administration to arrive at guidance that would provide greater protection for retirement investors, while considering the challenges faced by the investment advising industry.

The Fifth Circuit Court’s mandate has been expected since the deadline for a possible appeal passed earlier this month. The original Fifth Circuit Court ruling striking down the DOL fiduciary guidance was issued in March. When the DOL failed to appeal the Court’s decision and attempt to save the guidance, several states joined the American Association of Retired Persons (AARP) in seeking standing to appeal, but were denied.

Multiple delays in full implementation and enforcement of the 2016 fiduciary guidance had followed the transition from the Obama administration-led DOL to the present administration and its DOL leadership, which advocated the guidance’s reexamination or rollback. A temporary relaxed enforcement policy was announced in May, to be in effect until full implementation and enforcement, which officially were scheduled for July 1, 2019. Some industry watchers, however, doubted that the 2016 fiduciary guidance was likely to take full effect in its current form.

No statement on today’s Fifth Circuit Court mandate vacating the guidance has yet been issued by the DOL.