Legislative updates

Proposed Tax Benefits for Retirement Saving Distributions Used for LTC Insurance

Senator Patrick Toomey (R-PA), has re-introduced the Long-Term Care Affordability Act, legislation that would permit tax-free retirement saving distributions of up to $2,500 per year—indexed for inflation—that are used to purchase long-term care insurance. The arrangements to which the legislation applies would include qualified retirement plans, 403(a) and 403(b) plans, governmental 457(b) plans, and IRAs.

These distributions would also be exempt from the 10 percent early distribution penalty tax. The bill would also create new distribution triggers for employee deferral amounts that have been contributed to 401(k), 403(b), and governmental 457(b) plans.

This bill has been referred to the Senate Committee on Finance


Several Health Savings Bills Proposed

Senator Ben Sasse (R-NE) recently introduced two bills aimed at providing more flexibility for the use of health savings accounts (HSAs). Senate bill 2113 proposes to expand permissible distributions from an employee’s health flexible spending arrangement or health reimbursement arrangement to the employee’s HSA. Senate bill 2099 proposes to make HSAs more broadly available by removing the requirement that individuals be enrolled in a high deductible health plan. Further details of these proposals have not yet been made available.

A third bill has been introduced by Senator John Kennedy (R-LA). The Telehealth HSA Act would allow high deductible health plans to provide telehealth services before meeting the plan deductible without affecting HSA eligibility. Currently, employees may need to pay out of pocket for such services.

All three bills have been referred to the Senate Finance Committee for further consideration.


Bill Would Double IRA Contribution Limit for Those Without Retirement Plan Access

Senator John Kennedy (R-LA) has introduced the Increasing Retirement Amount Act to allow individuals without access to a workplace retirement plan to save more for retirement by providing an increased IRA contribution limit of $12,000 per year, subject to annual cost of living adjustments. The special rule would also allow catch-up contributions of up to $3,000 per year for those age 50 or older.

Eligible individuals include workers whose employer did not maintain a retirement plan during the applicable tax year. The current IRA contribution limit is $6,000, or $7,000 for individuals age 50 or older, regardless of taxpayer access to other retirement savings.


Enhancing Emergency and Retirement Savings Act Introduced

Senator James Lankford (R-OK) and Senator Michael Bennet (D-CO) have introduced the Enhancing Emergency and Retirement Savings Act of 2021 to provide flexibility and access for those who experience unexpected emergencies.

The legislation would provide a penalty-free “emergency personal expense distribution” option from employer-sponsored retirement plans and IRAs. The proposal would allow for one emergency distribution per calendar year of up to $1,000 from the individual’s total nonforfeitable accrued benefit under the plan. The bill requires that the withdrawn funds be paid back to the plan before an additional emergency distribution from that same plan is allowed. The amount can be recontributed within a three-year period to any eligible plan to which a rollover contribution can be made.

An emergency personal expense distribution is defined as a distribution for purposes of meeting unforeseeable or immediate financial need relating to necessary personal or family emergency expenses. The plan sponsor of an employer-sponsored retirement plan may rely on an employee’s certification that the conditions are satisfied in determining whether the distribution is an emergency distribution.


Retirement Security and Savings Act Re-Introduced

Senators Rob Portman (R-OH), and Ben Cardin (D-MD), have introduced the Retirement Security and Savings Act of 2021, legislation that was last introduced in 2019. This bill, like the Securing a Strong Retirement Act introduced in the House of Representatives earlier this month, is intended to build on the Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019. With more than 50 provisions, this bill contains a broad set of retirement reforms under the following categories, highlights of which are enumerated below.

Expanding Coverage and Increasing Retirement Savings

  • Establishes a new automatic enrollment safe harbor with contributions starting at 6 percent in the first year and a three-tier rate of matching contributions on deferrals up to 10 percent of pay
  • Provides for a special tax credit on the first 2 percent of pay to nonhighly compensated employees for employers that adopt the new safe harbor
  • Makes the individual taxpayer’s saver’s credit refundable and would require that the credit be contributed directly to a Roth IRA or designated Roth in a qualified plan
  • Reduces the long-term part-time threshold implemented under the SECURE Act from three consecutive years with at least 500 hours to two consecutive years with at least 500 hours
  • Provides for a 60-day rollover to an inherited IRA for nonspouse beneficiaries
  • Raises the RMD age to 75 in 2032
  • Creates an additional catch-up contribution for those who have attained age 60 that is $10,000 for retirement plans that are not SIMPLE IRA or 401(k) plans, and $5,000 for SIMPLE plans and will be indexed with the cost of living
  • Allows deferral of tax on gain from sale of employer securities to an ESOP

 

Preservation of Income

  • Increases the maximum amount that can be funded to a qualifying longevity annuity contract (QLAC) to $200,000
  • Directs the Secretary of the Treasury to update regulations to allow exchange-traded funds (ETFs) to be included in variable annuity products

 

Simplification and Clarification of Qualified Retirement Plan Rules

  • Directs the Secretaries of the Treasury and Labor to adopt regulations outlining the consolidation of certain employee notices into a single notice
  • Permits nonspouse beneficiaries to roll over assets to 401(k), 403(b), and 457 plans
  • Allows contributions to SIMPLE IRA plans on a Roth basis
  • Reduces the 50 percent penalty for late distribution of a required minimum distribution (RMD) to 25 percent
  • Allows mergers of 401(a) and 403(b) plans
  • Exempts retirement savers that have $100,000 or less in retirement assets from taking RMDs
  • Reduces penalties for IRA excess contributions and the failure to take an RMD from an IRA if corrected timely, and removes requirements that, in case of a prohibited transaction, the IRA ceases to be qualified as an IRA and that assets are deemed to be distributed
  • Creates a national retirement savings lost and found (including an online searchable database to reunite retirement savers with their savings), increases the cash-out limit to $6,000, and requires that unclaimed balances under $1,000 are transferred to the Pension Benefit Guarantee Corporation (PBGC)

 

Defined Benefit Plan Reform

  • Clarifies that the variable interest crediting rate used as the projected interest crediting rate for cash balance plans is a reasonable projection subject to a maximum of 6 percent
  • Eliminates indexing of PBGC variable rate premiums
  • Reduces the overfunding threshold by which employers with overfunded pension plans may use a portion of the surplus assets to fund welfare benefits to the same population of retirees and extends provision through 2031

 

Reforming Employer Plan Rules to Harmonize with IRA Rules

  • Synchronizes retirement plan rules to allow the exemption of Roth balances from RMD rules
  • Allows plan participants to make charitable distributions
  • Allows spouse beneficiaries to treat a deceased participant’s balance as their own in the plan
  • Roth IRA amounts would be permitted to be rolled over to retirement plans

 

Plan Amendments

  • Establishes an amendment deadline on or before the last day of the first plan year beginning on or after January 1, 2023 (2025 for governmental plans), and conforms the plan amendment dates under the SECURE Act, Coronavirus Aid, Relief, and Economic Security (CARES) Act, and Taxpayer Certainty and Disaster Tax Relief Act to these new dates

Smaller Sequel to SECURE Act Re-Introduced in Senate

Senator Charles Grassley (R-IA), along with co-sponsors Maggie Hassan (D-NH) and James Lankford (R-OK), have re-introduced the Improving Access to Retirement Savings Act. The bill was originally introduced late in the last session of Congress and contains the following provisions.

  • Expands access to multiple employer plan (MEP) arrangements by allowing 403(b) plans of tax-exempt organizations to participate
  • Clarifies that eligibility for the small employer pension plan start-up credit for small employers joining a MEP is predicated on the first three years of participation in the MEP, irrespective of how long the MEP has been in existence
  • Provides a 9½-month safe harbor for correction of employee elective deferral failures in an automatic contribution arrangement
  • Allows retroactive amendments until the employer tax return due date plus extensions that increase certain benefit accruals for the preceding plan year

These provisions were included in a larger bill, Securing a Strong Retirement Act or SSRA, that was approved by the House Ways and Means Committee earlier this month.


Securing a Strong Retirement Act Re-Introduced

House Ways and Means Committee Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) have introduced the Securing a Strong Retirement Act (SSRA) of 2021, legislation that was first introduced in October 2020. It builds upon the Setting Every Community Up for Retirement Enhancement Act (SECURE) Act of 2019. The House Ways and Means Committee held a markup hearing Wednesday, May 5, and unanimously voted to advance this legislation to the full House of Representatives to vote on the measure.

This legislation is the first comprehensive bipartisan retirement legislation introduced in 2021. SSRA of 2021 expands upon and includes additional provisions from the SSRA of 2020. While this bill (and others) have been coined by many as “SECURE 2.0,” it is prudent to follow retirement legislation developments by bill name for clarity and think of “SECURE 2.0” in the context of retirement reform generally.

The new and amended provisions include the following changes from the 2020 proposal.

  • Requires automatic enrollment of eligible employees in 401(k) and 403(b) plans with certain exceptions and grandfathering provisions, but eliminates the same requirement for SIMPLE IRA plans that appeared in the 2020 proposal
  • Increases the required minimum distribution (RMD) age to 73 on January 1, 2022; to age 74 on January 1, 2029; and to age 75 on January 1, 2032. The SECURE Act previously increased the age from 70½ to 72.
  • Drops the provision aligning ESOP rules of S Corporations with those of C Corporations that appeared in the 2020 proposal, but adds a placeholder that it is a Congressional goal to preserve and foster employee ownership of S Corporations through ESOPs
  • Provides an additional, indexed higher tier of catch-up deferral contributions for those who are age 62, 63, and 64
  • Permits 403(b) plans to participate in multiple employer plan (MEP) arrangements, specifically including pooled employer plans (PEPs)
  • Reduces from three years to two years the period of service requirement for long-term, part-time workers, and disregards pre-2021 service for vesting purposes
  • Directs the Departments of Labor (DOL) and Treasury to issue regulations explaining what fiduciaries need to do to meet their fiduciary duty in searching for missing participants
  • Eliminates the provision permitting tax-free qualified charitable contributions to be made from employer-sponsored retirement plans that appeared in the 2020 proposal
  • Permits employers to perform top-heavy tests separately for defined contribution plans covering excludable employees
  • Limits repayment of qualified birth or adoption distributions to three years
  • Permits participants to self-certify that deemed hardship distribution conditions are met in certain circumstances
  • Permits participants who self-certify that they have experienced domestic abuse to withdraw the lesser of $10,000 or 50 percent of their account without being subject to the 10 percent early distribution penalty tax. The funds could be repaid to the plan over three years.
  • Makes changes to stock attribution rules under family attribution for coverage and nondiscrimination testing
  • Permits discretionary amendments that increase benefits to participants to be adopted by the due date of the employer’s tax return
  • Permits new 401(k) plans established after the end of the taxable year but before the employer’s tax filing date that are treated as having been established on the last day of the taxable year to receive elective deferrals up to the due date of the employee’s tax return for the initial year when they are sponsored by sole proprietors and single-member LLCs
  • Limits only the portion of an IRA used in a prohibited transaction to be treated as distributed, as opposed to current rules disqualifying and treating the entire IRA as distributed
  • Permits SIMPLE IRAs to accept Roth contributions, and, plan permitting, allows employees to treat employee and employer SEP contributions as Roth contributions
  • Matches hardship rules for 403(b) plans to the 401(k) plan rules
  • Requires catch-up contributions to be made on a Roth basis beginning January 1, 2022
  • Permits defined contribution plans to provide participants with the option of receiving match contributions on a Roth basis
  • Plan amendments pursuant to this legislation must generally be made by the end of the 2023 plan year (2025 for governmental plans); plan amendment dates under the SECURE Act, CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 are revised to conform with the same new dates

 

This legislation carries forward the following provisions from the 2020 proposal.

  • Further enhances the small retirement plan start-up credit, with a maximum credit of 100% (vs. the current 50%) for employers with no more than 50 employees
  • Requires the IRS to promote the saver’s credit
  • Permits 403(b) plans to invest in collective investment trusts
  • Provides for indexing of IRA catch-up contributions
  • Permits certain student loan repayments to qualify for employer retirement plan matching contributions
  • Allows a small employer joining a MEP or PEP arrangement to potentially claim a small plan start-up credit during the first three years of the MEP/PEP arrangement’s existence
  • Provides a new small employer tax credit for enhanced plan eligibility for military spouses
  • Permits immediate de minimis financial incentives, in addition to a matching contribution, to individuals for contributing to a retirement plan
  • Enhances options for correcting employee salary deferral errors
  • Increases the qualifying longevity annuity contract RMD exemption
  • Permits increasing payments in IRA and defined contribution plan life annuity benefits
  • Allows retirement plan fiduciaries additional discretion in whether to seek recoupment of accidental overpayments
  • Reduces excise tax on certain failures to take RMDs
  • Changes disclosure rules for performance benchmarks for asset allocation funds
  • Directs Treasury, DOL, and the Pension Benefit Guaranty Corporation (PBGC) to review and report on reporting and disclosure requirements and makes recommendations to Congress to consolidate, simplify, standardized, and improve such requirements
  • Simplifies retirement plan disclosures to non-participating employees
  • Creates a national online “lost and found” database to connect individuals with unclaimed retirement account benefits
  • Expands the IRS retirement plan correction program to permit self-correction of certain inadvertent IRA errors
  • Eliminates “first day of the month” deferral election requirement for governmental 457(b) plans
  • Requires defined contribution plans to provide paper benefit statements at least once annually, unless a participant elects otherwise
  • Makes certain technical corrections to SECURE Act provisions

Congress Votes to Extend Paycheck Protection Program

A proposal to extend the Paycheck Protection Program (PPP) through the end of May has passed the Senate by a vote of 92-7. The PPP was set to expire on March 31, 2021, just weeks after changes were made to expand availability to certain small businesses. The House had voted earlier this month to pass the bill, and it now heads to the President for signature.

PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security Act. The loans are meant to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include wages and salaries, as well as employer contributions to defined contribution and defined benefit retirement plans. Expenses for providing group healthcare coverage—including payment of insurance premiums—can also be included.


Washington Pulse: American Rescue Plan Act Provides Coronavirus Relief

President Biden has signed legislation that funds another round of assistance as the nation copes with the health and economic effects of the coronavirus pandemic. Several previous bills in 2020 provided direct cash benefits to Americans, created a small business lending program to help employers retain employees, and provided enhanced access to tax-favored retirement savings.

This latest round of relief, a $1.9 trillion stimulus bill known as the American Rescue Plan Act of 2021 (ARPA), contains a third round of direct payments to Americans, funding to help hard-hit industries, and many other provisions—including some that will affect health plans and defined benefit plans.

Health Plan Relief

ARPA’s health-related provisions are meant to help individuals who have suffered a job loss or a reduction of hours to maintain their health insurance coverage. The following text summarizes the most important health plan-related provisions.

COBRA Continuation Coverage Premium Assistance

ARPA provides premium assistance for COBRA continuation coverage. This type of coverage allows eligible individuals who lose their health benefits to continue participating in their group health plan for a limited period of time. The premium assistance is designed to help both employees and employers. For example, premium assistance can help former employees keep their employer health plan coverage at a critical time. COBRA coverage can be prohibitively expensive—individuals may have to pay up to 102 percent of the cost to the plan—which discourages enrollment in many circumstances. If the premium is subsidized, employees are more likely to opt for COBRA coverage. When faced with a serious medical event, individuals and families who have this coverage can avoid potentially catastrophic financial consequences.

Premium reimbursement can help employers by ensuring increased COBRA coverage enrollment. Having a large number of COBRA enrollees can help employers spread costs over a greater number of healthy individuals who will pay premiums without having significant claims (as opposed to having only individuals with substantial medical costs enrolled in COBRA coverage).

Premium Assistance Basics

ARPA effectively provides free COBRA coverage by creating a subsidy that pays 100 percent of the COBRA premiums. Normally, the individual who is enrolled in COBRA coverage would need to pay these premiums. ARPA authorizes payment for premiums arising from COBRA coverage during the period beginning on April 1, 2021, and ending on September 30, 2021. This premium assistance is available only for certain categories of individuals who are enrolled in COBRA coverage during this period. These “assistance eligible individuals” include the following persons:

  • Employees who are eligible for COBRA coverage because of involuntary termination of employment for reasons other than gross misconduct. (A key feature of the relief is that employees who voluntarily terminate are not eligible for the subsidy.)
  • Employees who are eligible for COBRA coverage because of a reduction in hours that causes them to lose eligibility for their employer’s health plan.
  • Dependents of the employees who have lost eligibility for the reasons indicated above.

COBRA-eligible individuals who meet these criteria and who either 1) have not yet enrolled in COBRA coverage, or 2) had already enrolled in COBRA coverage but discontinued their coverage, have an additional 60 days to elect COBRA coverage and to take advantage of the subsidy. The 60-day enrollment period will begin on the date that the individual receives an ARPA-required notice that explains both the subsidy itself and the individual’s extended opportunity to elect COBRA continuation coverage.

The subsidy is “paid” through a tax credit that is provided to the employer sponsoring the health plan or to the insurer providing the coverage when an individual enrolls in COBRA coverage.

ARPA also permits employers—at their discretion—to allow individuals who are eligible for the subsidy to enroll in different coverage also offered by the employer, as long as the other coverage is also offered to other similarly situated active employees and

  • does not exceed the premium cost of the health coverage initially enrolled in,
  • does not provide excepted benefits only, and
  • is not a qualified small employer health reimbursement arrangement (QSEHRA) or a flexible spending arrangement (FSA).

Premium Assistance Notification

Because awareness of the subsidy is critical to increasing COBRA enrollment, employers must communicate the availability of premium assistance and the option to enroll in different coverage (if allowed). Individuals must receive the additional notification within 60 days of becoming eligible. Employers may provide the disclosures by amending existing notices or by including a separate document with the COBRA election notice.

Within 30 days following the bill’s enactment, the Departments of Labor (DOL), Treasury, and Health and Human Services must issue model notice language in order to help employers comply with the COBRA premium assistance notification requirements. Specifically, the model notices must include

  • the forms necessary to establish eligibility for premium assistance;
  • the plan administrator’s or other party’s contact information—including name, address, and telephone number;
  • a description of the extended election period provided;
  • a description of the qualified beneficiary’s penalty for failure to notify the plan if eligibility for premium assistance ceases;
  • a description of the qualified beneficiary’s right to a reduced premium and any conditions on entitlement to the reduced premium; and
  • a description of the qualified beneficiary’s option to enroll in different coverage (if the employer permits).

Expiration of Premium Assistance

Eligible individuals will generally receive subsidized premiums for coverage beginning on April 1, 2021, and ending on September 30, 2021. Individuals will become ineligible for premium assistance during that period if they

  • reach the maximum period for COBRA coverage, or
  • become eligible to be covered under another group health plan.

For individuals who reach the maximum period of COBRA coverage, a notice must be provided 15 to 45 days before the expiration of premium assistance. The notice must prominently identify the expiration date. To help employers comply with the requirement, the DOL must produce model notices to communicate the expiration of premium assistance 45 days following ARPA’s enactment.

If, during the period of COBRA coverage, individuals receiving the subsidy become eligible for coverage under another health plan, they must notify the plan that they are no longer eligible for premium assistance. Failure to notify the plan will result in a $250 penalty. If an individual intentionally fails to notify the plan, the penalty could be up to 110 percent of the premium assistance amount. The penalty does not apply if there is a reasonable cause for the failure to notify.

Tax Provisions for Premium Assistance

The premium assistance amount will not be included in the individual’s gross income for federal tax purposes.

Defined Benefit Plan Relief

ARPA’s retirement-related provisions are designed to provide relief to single-employer and multiemployer defined benefit (DB) plans. Following is a high-level summary of these provisions.

Amortization Relief for Single-Employer DB Plans

ARPA treat a single-employer DB plan as having no funding shortfall bases, and no shortfall installments from the bases, in prior years and spreads out funding shortfall installments to 15 years. These changes have the effect of reducing an employer’s minimum required contributions.

Extension of Pension Funding Stabilization Percentages for Single-Employer DB Plans

The three segment rates used for the applicable interest rates are provided with minimum and maximum percentages, effectively stabilizing the rates to be applied in future years. ARPA provides funding relief in a time of lower interest rates by setting the minimum percentage at a five percent “floor.” A plan can elect not to have this provision apply in plan years before 2022.

Multiemployer DB Plan Relief

ARPA provides relief for certain underfunded multiemployer plans for 2020 and 2021 plan years—including retention of the preceding plan year’s plan status (endangered, critical, etc.), extension of the plan’s funding improvement period or rehabilitation period (whichever is applicable) by five years, and use of a 30-year amortization base when amortizing investment losses.

Special Assistance Program for Multiemployer Plans at the Pension Benefit Guaranty Corporation (PBGC)

A special fund will be created for struggling multiemployer plans that are most vulnerable. The fund will provide financial assistance in the form of a lump-sum payment sufficient to provide benefits through 2051. Plans receiving this assistance must comply with additional conditions, including reinstating previously suspended benefits. For plan years beginning after December 31, 2030, multiemployer plan premiums to the PBGC will increase to $52 per participant.

Community Newspaper DB Plans

Certain community newspapers with DB plans can elect to take advantage of more favorable interest rates and amortization periods. They can also avoid some at-risk DB plan requirements.

Next Steps

Employers with defined benefit plans should start reviewing the new rules so they can take full advantage of the relief provided by the American Rescue Plan Act. Single-employer DB plans may want to consider whether to opt into or out of the relief. The stabilization percentages will automatically apply for 2020 if employers don’t opt out.

Employers with health plans should

  • work with COBRA service providers (if applicable) to meet the new COBRA notification requirements,
  • understand how premium amounts are reimbursed through the payroll tax credit process, and
  • coordinate with payroll providers and tax professionals to help ensure proper documentation and tax payments.

Ascensus will closely monitor all future ARPA-related guidance. Visit ascensus.com for the latest updates.

 

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