In a vote on December 20, the U.S. House of Representatives passed H.R. 88, titled the “Retirement, Savings, and Other Tax Relief Act of 2018.” The bill underwent an amendment in mid-December, which added several tax-deferred savings arrangement provisions.
Should the Republican-controlled Senate take up the bill, it would need the support of at least nine Senate Democrats to pass Congress and move to the President for signature or veto. With the holidays quickly approaching and the specter of a partial government shutdown looming, consideration by the Senate before year-end may be unlikely. In addition, although some components of the amended bill are viewed favorably by both parties, there remains contention over several of the provisions.
Thus passage, even after the holidays (but before the end of the current session), may not be likely. It is likely, however, that the bill—or at least some of its popular components—may be considered at a later date by the 116th Congress (including newly-elected members), which convenes on January 3, 2019.
Watch Ascensus.com News for any future developments.
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.
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.
The House Ways and Means Committee released an amended version of H.R. 88, the “Retirement, Savings, and Other Tax Relief Act of 2018,” on December 10. It contains a few notable changes from the bill’s first release late in November.
Generally, the retirement-related provisions in the amended bill are the same as the previous iteration. The majority of the new tax-deferred savings arrangement-related provisions are for Qualified Tuition Programs (commonly referred to as “529 plans”). Following are some of the changes to the amended bill in comparison to the late November release.
- Disaster relief is amended to now include relief for victims of severe storms and flooding in Wisconsin, Texas, North Carolina, Indiana, and Alabama, and also for victims of Tropical Storm Gita in American Samoa.
- An automatic 60-day extension would be granted for any tax filing for taxpayers with a principal abode or place of business located in a disaster area (effective for disasters declared after December 31, 2017).
- Qualified higher education expenses in 529 plans now would include expenses for fees, books, etc. of a designated beneficiary in an apprenticeship program registered and certified by the Secretary of Labor (effective for distributions taken after December 31, 2018).
- Qualified higher education expenses in 529 plans would now include expenses for materials, books, etc. of a designated beneficiary for homeschooling (effective for distributions taken after December 31, 2018).
- Qualified higher education expenses in 529 plans would now include reference to amounts paid as principal or interest on any “qualified education loan” (i.e., indebtedness incurred by a taxpayer to pay qualified higher education expenses), capped at $10,000 over an individual’s lifetime (effective for distributions taken after December 31, 2018).
- Unborn children (i.e., children in utero) would now be allowed to be named as 529 plan account beneficiaries (effective for contributions made after December 31, 2018).
- Several provisions were added in an attempt to restructure and modernize the IRS, including provisions related to online filings.
- Several provisions were added that relate to health and medical excise taxes.
The updated version of the bill is seen by many as having a reasonable chance of passing, although there is certainly opposition in both houses of Congress to the bill in its current form. Watch this ascensus.com news for further developments.
A tax bill has emerged from the House Ways and Means Committee, extending certain expiring tax provisions, addressing provisions of 2017 tax reform legislation and several recent disaster events (hurricanes and California wildfires), and proposing additional provisions that would affect tax-advantaged retirement savings arrangements. H.R. 88, titled the “Retirement, Savings, and Other Tax Relief Act of 2018,” is being reported as having bipartisan support.
How the legislation in its current form will be received in the Senate, if passed by the House, remains to be seen, although it is known that there have previously been negotiations on retirement provisions between leaders of both congressional bodies. Control of the House of Representatives will change with the start of the 116th Congress in January 2019, resulting from the November 2018 midterm elections. Leadership of the House Ways and Means Committee—the source of this bill—will shift from Rep. Kevin Brady (R-CA) to a Democratic House leader, widely expected to be Rep. Richard Neal (D-MA).
The following provisions of this legislation would in some manner impact retirement savings arrangements.
- Enhance retirement plan options related to distributions and repayments, plan loans, prorated tax treatment of distributions, etc., for several geographic areas recently affected by hurricanes, wildfires, typhoons, and volcanic eruptions
- Broaden options for employers to participate in multiple employer plans (MEPs) or a similar new design known as “pooled employer plan” (PEP)
- Extend the period within which a 401(k)-type plan may elect a safe harbor plan design
- Make Traditional IRA contributions an option for taxpayers of any age who have earned income
- Exempt $50,000 of aggregate retirement savings from RMD requirement (to be COLA-adjusted)
- Allow graduate student fellowship and stipend payments to qualify as earned income for IRA purposes
- Prohibit credit card-enabled retirement plan loan programs
- Allow retirement plan lifetime income investments to be distributed and rolled over to another accepting retirement arrangement if the plan ceases to offer this investment option
- Allow a higher cap (15 percent) on deferral rates in certain automatic enrollment 401(k) type plans
- Increase the maximum tax credit for small employers that establish retirement plans (maximum of $1,500 per year)
- Provide a tax credit incentive for employers to add automatic enrollment features to their retirement plans
- Allow 403(b)(7) custodial accounts to retain 403(b) status even if the plan is terminated by the sponsoring employer
- Permit recipients of military Ready Reserve compensation to make additional retirement plan salary deferrals
- Allow certain qualified retirement plans to be established through an employer’s tax return deadline, including filing extensions
- Provide nondiscrimination testing relief to certain defined benefit pension plans that are closed to new participants
- Enhance the fiduciary safe harbor for employer selection of lifetime income retirement plan investments
- Require an annual projection of potential lifetime income based on a participant’s retirement plan account balance
- Modify certain defined benefit pension plan insurance premiums paid to the Pension Benefit Guaranty Corporation (PBGC)
- Create a birth or adoption exemption to the 10 percent excise tax on early distributions from retirement plans
Senate Finance Committee ranking member Ron Wyden (D-Ore) and four other Democratic senators have introduced the Encouraging Americans to Save Act (EASA). A similar bill with the same title was introduced by Senator Wyden in 2016, but did not reach the floor for a vote. The 2018 version of EASA contains the same provisions as the 2016 version, with a few minor changes.
If enacted, the bill would do the following.
- Replace the current saver’s credit with a government-funded 50% match of up to $1,000 to be deposited directly into a 401(k), IRA, or similar account (subject to modified adjusted gross income ranges for individuals and married filers). The match would be claimed on Form 1040 or its equivalent.
- Reestablish the myRA (Roth IRA) program, which was a President Obama initiative that was phased out in September 2017, so that the aforementioned match may be deposited into a myRA for employees who do not provide an account for the match or who provide erroneous account numbers.
The bill was introduced by Democrats in a Republican-controlled Senate, and it is unknown if it will advance through the Senate. Watch this ascensus.com News for further developments, if applicable.
The IRS released proposed amendments in REG-107813-18 to defined contribution retirement plan hardship distribution regulations. These amendments have been drafted to reflect statutory changes contained in the Bipartisan Budget Act of 2018 and the application of hardship rules related to modifications made by the Tax Cuts and Jobs Act.
While the summary introducing these proposed amendments specifically identifies 401(k) plans, it further notes that these amendments “would affect participants in, and beneficiaries of, employers maintaining, and administrators of, plans that contain cash-or-deferred-arrangements, or provide for employee or matching contributions.” This would also include certain 403(b) plans.
The general categories identified in the proposed regulation for changes include the following.
- Deemed Immediate and Heavy Financial Need
- Distribution Necessary to Satisfy Financial Need
- Expanded Sources for Hardship Distributions
- Relief for Victims of Hurricanes Florence and Michael
The IRS is providing a 60-day comment period as described in the proposed regulation document.
Watch ascensus.com news for additional developments.
The Department of Labor (DOL) has proposed regulations to be officially published in tomorrow’s federal register which would allow employers to join together to form “Association Retirement Plans.”
Under the proposed rule, a retirement plan could be sponsored by an employer association or a professional employer organization (PEO). The rule would change the definition of “employer” within the meaning of ERISA Sec. 3(5). The PEO or employer association would be considered an “employer” under the new regulations. An employer association could be formed by employers within a geographic region such as a city, county, state, or metropolitan area, as well as by employers in a particular industry nationwide.
The DOL will be accepting public comments for 60 days from the publication of the proposed rule (expected tomorrow, October 23).
The proposal comes in response to an executive order issued by President Trump on August 31, 2018. The order directed the Department of the Treasury and the Department of Labor to issue regulations that expand access to retirement plans. Among other things, the executive order instructed the Department of Labor to consider regulations that would increase access to multiple employer plans by easing restrictions upon which businesses may join together to create multiple employer plans.
The IRS has released 2019 Form 1099-QA, Distributions From ABLE Accounts. This form is used to report information pertaining to distributions from savings accounts of certain special-needs individuals, accounts created by the Achieving a Better Life Experience (ABLE) Act.
ABLE accounts are intended to allow tax-advantaged saving for future expenses of special-needs individuals. Annual contributions up to the federal gift tax maximum (currently $15,000) can be made to an ABLE account. And, while no federal tax deduction is granted for contributions, qualifying distributions (including earnings) are tax-free, much like the IRC Section 529 state-sponsored education savings accounts after which ABLE accounts are modeled.
As a result of tax reform legislation enacted in 2017, certain 529 plan assets can be rolled over to ABLE accounts, and limited additional ABLE contributions may be made with earnings of a special-needs individual for whom an account was established.
The IRS has released a Program Letter communication, in which the agency shares plans for 2019 initiatives of its Tax Exempt/Government Entities (TEGE) division.
These initiatives will include continuing guidance on the Tax Cuts and Jobs Act, tax reform legislation enacted in December of 2017, some of whose effects are still being fleshed-out.
The communication also states that TEGE will be focused on compliance efforts that are cost-effective and limited in their intrusiveness when possible, including “educational efforts, soft letter compliance reviews, compliance checks, and correspondence or field examinations.” The letter further notes that TEGE will continue to refine its examination strategies to focus on the highest priority compliance areas.
More information on the TEGE division’s plans and accomplishments can be found in the Program Letter.