Tax Reform

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.

House Passes Bill With Many Savings Arrangement Enhancements

The U.S. House of Representatives passed two of three bills that collectively comprise “Tax Reform 2.0” this week, and is expected to vote on the third today, September 28. One of these bills passed this week—the Family Savings Act of 2018—would make significant changes to the landscape of tax-advantaged savings arrangements. Included in it are provisions affecting employer-sponsored retirement plans, IRAs, 529 college savings programs, as well as a new all-purpose tax-free savings arrangement known as the Universal Savings Account.

Tax Reform 2.0

The Tax Reform 2.0 package is intended to be a follow-up to the Tax Cuts and Jobs Act, enacted in December of 2017. The primary objective of Tax Reform 2.0 has been to make permanent the individual income tax cuts in the 2017 legislation, which currently are set to expire in 2026. In addition to individual tax cut permanence and savings arrangement enhancements, a third component of Tax Reform 2.0 relates to “business innovation.” The business innovation component also was passed by the House this week; the individual income tax permanence bill is expected to be voted on by the House today (Friday, September 28).

Senate Opposition

Prospects for making the 2017 individual income tax cuts permanent, however, are considered poor because of opposition in the U.S. Senate. In light of this, there has been increasing focus on the possibility of advancing stand-alone legislation to enhance tax-advantaged savings arrangements. Some speculate that the House’s passage of the Family Savings Act could lead to a counter-move by the Senate with its own savings enhancement proposals, with the potential for a compromise bill containing a blend of House and Senate provisions.

Family Savings Act Details

The Family Savings Act bill that just passed virtually mirrors the legislation as first described at News early in September. Added to this are the addition of a fiduciary safe harbor for employers who include lifetime income investments in their retirement plans, and a provision allowing 529 education savings program accounts to be established for unborn children. Watch this News for further details.

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 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 News for updates.


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.

Second Round of Tax Reform Could Include Retirement Savings Provisions

A “House GOP Listening Session Framework” document, released by the Ways and Means Committee, hints at retirement savings provisions to be included in another round of tax reform legislation, referred to as “Tax Reform 2.0.” The document contains only broad, general descriptions, but many expect significantly more retirement savings provisions to be in the full legislative package when released.

Included in the document is a provision to create a “universal savings account,” a new tax-favored savings account that could be used for general purposes. Another provision would create a “new baby” early distribution exception. Amounts withdrawn from retirement savings arrangements when a new child is born to or adopted by parents with such accounts would not be subject to the 10 percent early distribution penalty tax. In addition, withdrawn amounts could be repaid under the legislation’s terms.

More details on this second round of tax cut legislation are expected to be released soon. Many feel, however, that passage in the Senate is less likely than in the House.

Dan Kravitz Explains the Impact of Tax Reform on Employer-Sponsored Retirement Plans

In an article​ published by PLANADVISER, Dan Kravitz, head of Kravitz, discussed ​his most recent webinar, which ​​​explained the impact of the Ta​​x Cuts and Jobs Act on employer-sponsored​​ retirement plans. ​​The tax bill will allow many ​​clients to have a lower tax rate, directly impacting ​​small business owners’ decisions ​about running retirement plans. ​“Many but not all of these owners can now deduct up to 20% of qualified business income,” Kravitz noted. “There are many limitations and phase-outs that have to be considered, but pass-through entities are taxed at the individual level, as we know, so it is important to understand the new individual rates, because it will directly impact plan design decisions that do fall within our purview.”​

Washington Pulse: President to Sign Tax Reform; IRAs, Qualified Plans, 529s, and Other Savings Arrangements Impacted

On December 20, 2017, the House and Senate passed H.R. 1, the final tax reform bill (the Bill). The Bill will soon be signed into law by President Trump, resulting in fulfillment of one of the GOP’s major 2016 campaign promises. The Bill will affect retirement and other tax-advantaged savings arrangements and, in some cases, will become effective as soon as it is signed. Highlights of the changes made to savings arrangements and their effective dates are described below. In addition, Ascensus has prepared a comparison chart showing the differences between the current rules, the original House and Senate proposals, and the new rules provided in the Bill.

Changes to IRAs, Education Savings, and ABLE Arrangements

Recharacterizing Roth IRA Conversions Eliminated

The Bill eliminates a taxpayer’s ability to recharacterize a conversion to a Roth IRA. As a result, converting non-Roth IRA assets or rolling over employer plan assets to a Roth IRA will be a one-way process. Annual contributions to a Roth IRA can still be recharacterized as Traditional IRA contributions for the same tax year and vice versa. (Effective for tax years beginning after December 31, 2017.)

Slower Cost-of-Living Adjustments for IRAs, HSAs, Archer MSAs, and the Saver’s Credit

The Bill will change the method for calculating adjustments for inflation so that they will occur less frequently than under the current formula. This will apply to IRA, HSA, Archer MSA, and saver’s credit-related adjustments. Annual limitations associated with employer-sponsored retirement plans will generally not be affected. (Effective for tax years beginning after December 31, 2017.)

529 Plans and ABLE Accounts

The Bill makes the following changes to 529 plans and Achieving Better Life Experience (ABLE) accounts.

  • 529 plan assets (up to $10,000 annually) can be used for elementary and secondary school tuition expenses, in addition to those qualified post-secondary education expenses allowed under current law. (Effective for 529 plan distributions made after December 31, 2017.)
  • 529 plan assets can be rolled over to ABLE accounts for special-needs individuals, in amounts up to the annual ABLE contribution limit (e.g., $14,000 for 2017); such rollovers would offset other contributions to that ABLE account for the year. (Effective for 529 plan distributions made after the date of enactment, and rollovers before January 1, 2026.)
  • An ABLE account beneficiary (the special-needs individual) can contribute his earned income even if his contribution, when added to contributions made by others, results in overall contributions above the annual ABLE contribution limit. The ABLE account beneficiary’s contribution amount will be limited to the lesser of his income or the federal single-person poverty limit. The ABLE account beneficiary, or a person acting on his behalf, will be responsible for ensuring compliance with the additional contribution limit. The additional contribution will be unavailable if the ABLE account beneficiary made deferral contributions to a 401(k), 403(b), or governmental 457(b) plan. (Effective for tax years beginning after the date of enactment, and contributions before January 1, 2026.)
  • ABLE account contributions made by the ABLE account beneficiary will be eligible for the saver’s credit. (Effective for taxable years beginning after the date of enactment, and contributions before January 1, 2026.)

Provisions Applying to Employer-Sponsored Retirement Plans

Rollover of Offset Retirement Plan Loans

The Bill extends the 60-day period for rolling over the amount of an “offset” to a plan loan to the tax filing deadline, including extensions, for the tax year in which the offset/distribution occurs. The extension applies to offsets as a result of plan termination or severance from employment. (Effective for loan offsets treated as distributed in tax years beginning after 2017.)

Casualty Loss Provision Could Affect Plan Hardship Distributions

The Bill no longer allows a deduction for casualty losses unless a taxpayer suffering the casualty loss is located in a presidentially-declared disaster area. Deductible casualty losses are also among the “safe harbor” conditions for hardship distributions from employer-sponsored retirement plans under existing Treasury regulations. Unless those regulations are rewritten, casualty losses experienced by certain plan participants may no longer meet the safe harbor condition commonly used in the granting of certain hardship distributions. (Effective for losses incurred in taxable years beginning after December 31, 2017, and before January 1, 2026.)

Taxation of Pass-Through Income

The Bill generally provides owners of businesses that result in pass-through income (e.g., partnerships, s-corporations) with a deduction up to 20 percent of business income. Generous pass-through income tax rules could potentially create a disincentive for employers to establish or maintain retirement plans. But analysis of the new rule suggests that concerns about a disincentive have been minimized or eliminated compared to more generous formulas. (Effective for tax years beginning after December 31, 2017.)

Tax-Advantaged Savings Arrangements in General

Special Relief for 2016 Disaster Areas

The Bill grants retirement plan-related relief to eligible victims of any 2016 presidentially-declared disaster. This relief is basically retroactive and includes the following.

  • Qualifying distributions of up to $100,000 from employer-sponsored retirement plans and IRAs before age 59½ will not be subject to the 10 percent early distribution penalty tax.
  • Repayment of qualifying distributions from employer-sponsored retirement plans and IRAs can be made within three years.
  • Distributions not repaid will generally be taxed ratably over a three-year period, unless electing otherwise.
  • Otherwise-mandatory withholding will be waived for qualifying distributions.
  • Delayed amendment deadlines for employers that grant the relief but without enabling plan provisions; plans can be amended to add such provisions by the end of the first plan year beginning on or after January 1, 2018.

(Effective as of the date of enactment, and applicable to distributions on or after January 1, 2016, and before January 1, 2018.)

Items Eliminated From Prior Senate and House Bills

The following items were among provisions in earlier versions of the House and Senate bills, but subsequently removed either before passage, or by the conference committee that resolved differences between the House and Senate bills.

  • Relaxation of hardship distributions to include qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on these and employee deferrals.
  • Alignment of annual and catch-up deferral contributions among 401(k), 403(b), and governmental 457(b) plans.
  • Alignment of the in-service distribution eligibility age of 59½ as an option for all plans.
  • Adding the assessment of a 10 percent early distribution penalty tax to distributions from governmental 457(b) plans.
  • Creation of a safe harbor formula for employers to determine “independent contractor” vs. “employee” status.
  • Creation of a nondiscrimination testing safe harbor for certain defined benefit pension plans closed to new participants.
  • Creation of a simplified tax return form for taxpayers age 65 and older.

Next Steps

In the context of tax-advantaged savings arrangements, and by comparison to some of the drastic changes that were initially being considered by Congress (e.g., limiting pretax elective deferrals to employer-sponsored retirement plans), the result is a positive one. As is always the case with tax law changes, questions will arise no matter how straightforward some changes seem on the surface. Ascensus will continue to monitor any and all developments resulting from tax reform pertaining to IRAs, employer-sponsored retirement plans, and other tax-advantaged savings arrangements. Visit for the latest developments.



Washington Pulse: Tax Reform Proposal Would Impact Savings Arrangements

On November 2, 2017, the House Ways and Means Committee’s GOP leadership introduced the Tax Cuts and Jobs Act. The proposed legislation is generally intended to reduce individual and corporate tax rates and simplify income tax filings. It also makes changes that would affect the forms, documents, and operations of employer-sponsored retirement plans, IRAs, HSAs, education savings accounts, and other savings arrangements.

The Ways and Means Committee continues to make changes to the bill before the House of Representatives votes on it. The vote was expected to occur during the week of November 13, 2017, but may occur earlier. Meanwhile, the Senate is working on a tax reform bill of its own.

Although the legislative process is still ongoing, the following is a summary of the more significant provisions from the initial proposal that could become law and affect tax-favored savings arrangements. More subtle provisions (e.g., potential changes to the definition of compensation for certain plan purposes) continue to be analyzed.


Distribution and Loan Provisions in Employer-Sponsored Retirement Plans

In-Service Distributions

Retirement plans generally have a minimum age requirement that participants must meet in order to withdraw plan assets while still employed. The minimum age requirement for these types of distributions (known as in-service distributions) varies between retirement plans, but age 59½ tends to be the most common. Pension plans and governmental 457(b) plans, however, are required to use higher age requirements (e.g., age 62). To encourage employees participating in those plans to continue working rather than retiring to access their retirement savings, the Ways and Means bill would reduce the minimum age requirement for those plans to age 59½.

This change would apply for plan years beginning after 2017.

Hardship Distributions

The current rules applicable to hardship distributions are complex and may complicate matters for participants experiencing financial difficulty. The Ways and Means bill would relax these rules for qualified retirement plans and 403(b) plans by

  • expanding hardship distributions to include qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs)—and earnings on all contribution types removed,
  • not requiring participants to take plan loans before granting certain hardship distributions, and
  • not requiring elective deferral contributions to be suspended for six months after receiving certain hardship distributions.

These changes would apply for plan years beginning after 2017.

In addition to the changes noted above, the Ways and Means bill may affect a participant’s ability to qualify for a hardship distribution through a casualty loss. To determine whether a casualty loss and, therefore, a hardship exists, current regulations rely on a section of law that would be eliminated by the Ways and Means bill. It is unclear whether, in the absence of revised regulations, a participant would meet the conditions necessary to qualify for a hardship distribution based on a casualty loss.

This change would apply for tax years after 2017.

Rollover Period for Offset Plan Loans

Currently, if a loan from a qualified plan, 403(b) or governmental plan has not been fully repaid when a participant leaves employment, or a plan is terminated, the outstanding balance is “offset” against the participant’s account balance, and becomes taxable if not rolled over within 60 days. The Ways and Means bill would extend the 60-day period to a participant’s tax filing deadline (including extensions) for the tax year in which the offset occurs.

The change would apply for tax years after 2017.


Miscellaneous Provisions in Employer-Sponsored Retirement Plans

Nondiscrimination Testing for Closed Defined Benefit Plans

Defined benefit (DB) plans that are closed to new participants may, eventually, chiefly benefit highly paid employees and lead to compliance testing failures. The Ways and Means bill would extend relief to certain plans by expanding the cross-testing of contributions to a defined contribution plan maintained in addition to a defined benefit plan. The objective of this provision is to allow closed DB plans to avoid having to be frozen or terminated.

This change would apply on the date of enactment.

Unrelated Business Taxable Income

In general, if an IRA or employer-sponsored retirement plan holds assets that generate income unrelated to the plan, those revenues (known as unrelated business taxable income (UBTI)) will be subject to current-year taxation. Historically, it has been clear that IRAs and retirement plans of nongovernmental entities are subject to such annual taxation. The Ways and Means bill clarifies that retirement plans of governmental entities will also be subject to the UBTI rules.

This change would apply for tax years after 2017.

Pass-Through Income Rate

Under the Ways and Means bill, businesses structured in a manner that generates pass-through income (e.g., S-corporations) would be taxed at a 25 percent rate for “business income,” rather than the proposed maximum 20 percent corporate tax rate. Owner-employees would be taxed at individual income tax rates for “compensation.” In general, no more than 30 percent of revenues could be treated as business income and taxed at the favorable 25 percent rate, and at least 70 percent would be treated as compensation and taxed at the individual income tax rates.

Unduly generous pass-through taxation could potentially create a disincentive for employers to establish or maintain retirement plans for themselves and their employees. But the requirement to treat much of a business’ revenue as compensation—taxed at individual income tax rates—seems to limit this concern.

This provision would apply for tax years after 2017.

Taxation of Nonqualified Deferred Compensation  

Under current rules, nonqualified deferred compensation generally remains subject to creditor claims and business risk, and, when paid, is treated as compensation. The Ways and Means bill would tax such amounts when they are no longer subject to a substantial risk of forfeiture rather than when actually paid.

This provision generally would apply to tax years beginning after 2017, but is subject to certain transition rules.


Changes to IRAs, Health Savings Arrangements, and Education Savings Arrangements

Recharacterizations Eliminated

Under current law, a Traditional IRA contribution can be recharacterized as a Roth IRA contribution for the same tax year if done by the following October 15  (six-months following the IRA owner’s April 15 tax filing deadline). The reverse—recharacterizing a Roth IRA contribution to Traditional IRA—can also be done. In addition, IRA owners can recharacterize the conversion of Traditional IRA assets to a Roth IRA. Under the Ways and Means bill, the ability to change the nature of a Traditional or Roth IRA contribution, or to undo a Roth IRA conversion, would be eliminated. The elimination of recharacterizations is intended to prevent “gaming the system” to reduce a tax obligation.

This provision applies for tax years after 2017.

Coverdell Education Savings Account, 529 Plan Changes

Under current law, a distribution from a Coverdell education savings account (ESA) that is “contributed” to a 529 plan is considered a tax-free event for the ESA, but subject to the 529 plan’s maximum accumulation amount. Under the Ways and Means bill, contributions could no longer be made to ESAs. ESAs could remain open, however, with rollovers permitted between ESAs or from an ESA to a 529 plan. The bill would treat the ESA-to-529 plan asset movement as a rollover, not a 529 plan contribution.

In addition, up to $10,000 of 529 plan assets—currently usable only for post-secondary academic or vocational education—could be used annually for elementary or secondary (high school) tuition, or for costs associated with participation in a qualified apprenticeship program. A 529 plan could also be set up during pregnancy on behalf of an unborn child.

These provisions would apply to distributions and contributions after 2017.

HSA, MSA Changes

Under current law, individuals may deduct Archer medical savings account (MSA) contributions. Under the Ways and Means bill, taxpayers would no longer be eligible to deduct MSA contributions, nor would an employer contribution to an employee’s MSA be excluded from the employee’s taxable compensation. The bill merely simplifies the rules by consolidating two similar tax-favored accounts into a single account with more taxpayer-friendly rules.

In addition, the bill would clarify certain HSA comparable contribution and reporting requirements and would replace certain laws for health flexible spending accounts (FSAs), health reimbursement account (HRAs), and MSAs that had been relied upon to govern HSAs.

These provisions apply to tax years beginning after 2017.



The details in this Washington Pulse are based on the initial proposal from the Chairman of the House Ways and Means Committee. That proposal is already being debated by the Ways and Means Committee and may change. In addition, the Senate is soon expected to introduce its tax reform proposal, leading to a conference committee process if the House and Senate bills differ. All of this, before the possibility of being signed into law. If Congress can get this done, it is expected that savings arrangements will be affected one way or another. Clearly, there is much more to come. Ascensus will continue to closely monitor this fast paced legislative process and provide additional details as they become available. Visit for the latest developments.