Tax Reform

Retirement Spotlight – IRS Offers First Answers to Post-SECURE Act Reporting Questions

The most extensive changes to retirement saving in more than a decade became law when President Trump signed the Further Consolidated Appropriations Act of 2020 (FCAA) on December 20, 2019. While the main purpose of the FCAA was to fund the federal government for the next fiscal year, Congress also added significant retirement provisions to the FCAA by including the Setting Every Community Up for Retirement Enhancement (SECURE) Act in the broader bill.

Most of the retirement enhancements in the SECURE Act have been well received. But some provisions of the Act took effect mere days after enactment—on January 1, 2020—making implementation more difficult. Industry groups have requested that the IRS expedite guidance on the most pressing questions. This Retirement Spotlight will address the guidance that we have so far: some that is explicit and some that we can glean through draft instructions for required tax reporting.


New RMD Age of 72

The SECURE Act raised the age at which required minimum distributions (RMDs) must begin. Starting in 2020, RMDs from non-Roth IRAs and employer-sponsored retirement plans must be taken for the year the account owner turns 72, rather than 70½. On the other hand, those who reached age 70½ by the end of 2019 must take an RMD for 2019 and for all later years. So it is only those who turn 70½ in 2020 or later who will have no RMD until they reach age 72. (Remember that many employer plans permit non-owners to delay RMDs until retirement, an option not offered for IRAs or IRA-based plans.)

If an RMD has to be distributed for a given year, the IRA custodian, trustee, or issuer must inform the IRA owner by January 31. They must also tell the IRS that a taxpayer needs to take an RMD. To do this, the reporting organization simply checks a box on Form 5498, IRA Contribution Information, and files it by May 31 of the year the RMD is due (June 1 for 2020).


IRS Relief for Inaccurate IRA Custodian, Trustee, and Issuer Reporting

Because the SECURE Act became law so late in 2019, some organizations have struggled to accommodate the new rules. For example, they may have told IRA owners turning 70½ in 2020 that an RMD is required for 2020. This is incorrect, since RMDs in this case would be required at age 72 instead. Fortunately, IRS Notice 2020-6 grants relief from sanctions that could be assessed for this reporting inaccuracy if the following conditions are met.

  • By April 15, 2020, inform IRA owners who received the inaccurate information that no 2020 RMD is required.
  • Ensure that the 2019 Form 5498 for such clients—filed with the IRS by June 1, 2020—does not have a check mark in Box 11 (“Check if RMD for 2020”).
  • Ensure that the 2019 Form 5498 for such clients has no entries in Box 12a (“RMD date”) or Box 12b (“RMD amount”).


Relief for IRA Owners?

It is likely that some IRA owners who turn 70½ in 2020 have taken—or will take—a distribution this year in the mistaken belief that they must take an RMD. This belief may be based on receiving an inaccurate notice from their IRA administrator. They might have chosen not to take a distribution had they been aware that no RMD was required. And some might even wish to return the amount distributed to their IRA. But unless the assets were rolled over to an IRA within 60 days, this could not be done without IRS relief.

  • Notice 2020-6 did not address whether an IRA owner (or plan participant) who received a distribution they believed to be an RMD would be granted an extended period—beyond 60 days—to complete a rollover back into a tax-qualified savings arrangement.
  • The Notice also did not address whether an IRA owner could escape the one-rollover-per-12-month rule. This could be a concern, for example, if an IRA owner had set up systematic or periodic IRA withdrawals that had been calculated to satisfy an anticipated 2020 RMD. Under current rules, only one of these withdrawals would be eligible for rollover.


More Guidance Being Considered by IRS

Notice 2020-6 states that the IRS is “considering what additional guidance should be provided . . . including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.” We hope that upcoming IRS pronouncements will provide helpful guidance.


IRS Recommends Additional Communication with IRA Owners

Because of the potential for IRA owners to misunderstand the RMD age transition from 70½ to 72, the IRS “encourages all financial institutions . . . to remind IRA owners who turned age 70½ in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020.”


Qualified Birth or Adoption Distributions

We have received limited IRS guidance on a second SECURE Act provision, which allows for a “qualified birth or adoption distribution” from an IRA or employer retirement plan. An IRA owner or plan participant may withdraw up to $5,000—for each birth or adoption event—without facing the 10% early distribution excise tax. This provision is effective for 2020 and later years, and certain conditions and options apply.

  • Such distributions must occur within 12 months of the birth or adoption.
  • For adoptions, the adoptee may be a minor or an individual who is incapable of self-support.
  • Amounts withdrawn under this provision may be recontributed to an employer plan or IRA.


Tentative Guidance Received

Questions remain on these distributions. But we recently got limited guidance from the IRS through a draft version of the 2020 Instructions for Forms 1099-R and 5498. (Form 1099-R reports distributions from IRAs and employer retirement plans, while Form 5498 reports contributions, rollovers, and other information on IRAs.) While these draft instructions may not be definitive, the IRS’s approach in reporting such amounts is helpful.

  • A withdrawal taken as a qualified birth or adoption distribution is to be reported on Form 1099-R based on the recipient’s age (reported in Box 7, Distribution codes). For a recipient under age 59½, use Code 1, “Early distribution, no known exception.” The reporting entity makes no determination whether the distribution qualifies for the birth or adoption exception; this is the recipient’s responsibility.
  • The draft instructions further indicate that re-contributions of qualified birth or adoption distributions to an IRA must be reported on Form 5498 in Box 2, Rollover contributions, for the tax year received.


Many Unanswered Questions on Qualified Birth or Adoption Distributions

We are hoping for IRS guidance on the many open questions pertaining to this feature of the SECURE Act, including the following.

  • Confirmation that this feature is an optional feature for employer plans.
  • Clarification of the steps a plan administrator must take, if any, to substantiate that a distribution qualifies as a birth or adoption distribution.
  • Whether there is a time limit for the taxpayer to repay such distributions to an IRA or employer plan.
  • Clarification of the repayment process, including any tax implications.
  • Whether repayments of amounts distributed from an IRA will be subject to the one-per-12-month IRA-to-IRA rollover limitation.



The path to a full understanding of the FCAA and SECURE Act provisions—and their effect on retirement and other tax-advantaged savings arrangements—could be challenging. The IRS has so far given only minimal navigation assistance. More will be forthcoming—and the sooner, the better. Ascensus will continue to assess the effect of this legislation and any related guidance. Visit for future updates.


Click here for a printable version of this issue of the Retirement Spotlight.

Retirement Spotlight: January 2020 Spotlight on Important SECURE Act Provisions For Financial Advisors

The new year promises to provide plentiful opportunities for financial advisors to gain business and to demonstrate expertise to existing clients. As you likely know, the SECURE Act was signed into law on December 20, 2019. Many of the Act’s provisions took effect on January 1, 2020. Most of them offer real benefits to your clients; other provisions may not be as helpful, but you still need to understand them to provide the best service possible. This Retirement Spotlight focuses on a half-dozen SECURE Act provisions that will make the most significant impact on your retirement plan practice.

Let’s start with three provisions that you will most certainly get questions on.

  1. Traditional IRA owners can now contribute after age 70½. Since they were first available in 1998, Roth IRAs could receive contributions from individuals over 70½ provided that they were otherwise eligible. That is, Roth IRA owners had to have earned income—but not too much Now Traditional IRA owners will enjoy the same benefit. Your clients that continue to work—or that have working spouses—will be able to contribute even after they reach age 70½.

    More of your clients may be working well past the “normal retirement age”; now they can also keep contributing to their Traditional IRAs. Even though they may have to take required minimum distributions at the same time that they contribute to their IRAs, there is a good chance that they will be able to contribute more than they have to distribute each year. So this provision is a great way for your clients to ensure that they have sufficient retirement assets once they stop working.

  2. Traditional IRA required minimum distributions (RMDs) will now start at age 72. Not only can your clients make Traditional IRA contributions past age 70½, but now they can begin taking RMDs later. If your clients turn age 70½ in 2020 or later, they now can wait until age 72 to begin taking RMDs. Specifically, they will have until April 1 of the year following the year they turn 72 to take their first RMD. This year-and-a-half delay is not necessarily the big relief that some in the retirement industry had hoped for. But this change certainly provides some benefit.

    Based on increased life expectancies over the past several decades, Congress could have increased the starting age to 75 or later. There are, however, significant revenue implications for any delay in the RMD starting date. So this age-72 requirement was a bit of a compromise. The important thing to remember is this: if your client already turned age 70½ by the end of 2019, then RMDs cannot be delayed under the new rule. In other words, all of your clients born on or before June 30, 1949, are subject to the old rule, which makes the 70½ year the first distribution year.

  3. “Stretch IRAs” as we now know them are disappearing. For decades, IRA and qualified retirement plan (QRP) beneficiaries were able to take death distributions over their life expectancies. For example, a 20-year-old grandchild could distribute a grandparent’s IRA balance over 63 years. But now this generous provision has been altered to require faster distributions (generally over a 10-year time frame), which is designed to increase federal revenue. Nonspouse beneficiaries of account owners who die on or after January 1, 2020, are subject to this new rule, unless they are
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries who are not more than 10 years younger than the decedent’s age,
    • minor children of the decedent (they must begin a 10-year payout period upon reaching the age of majority), or
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.

    We expect that this change to the distribution rules will create considerable confusion for clients. They may be subject to two separate sets of beneficiary distribution rules, depending on the date of the account owner’s death. Some beneficiaries, such as spouses, will have the same options that we are familiar with; many others will face an accelerated payout. It may take time for the industry to sort through the many questions that will arise. And we may have to wait for definitive guidance from the IRS. But meanwhile, you can assure your clients that, while the beneficiary rules for both IRAs and QRPs have changed considerably, no immediate action is needed.

  4. The second group of changes involves employer-sponsored retirement plans and not IRAs specifically. Still, each of them could provide potential benefits to your clients.

  5. Employers may adopt a qualified retirement plan (QRP) up until their tax return due date, plus extensions. If you have clients that are also business owners, you have probably been asked at year end, “What can I do to reduce my tax burden?” For employers without a retirement plan, establishing such a plan can be a great idea. But QRPs were generally required to be adopted by the end of the employer’s tax year. (SEP and SIMPLE IRA plans have different deadlines.) Trying to quickly establish a new plan at year-end could cause unwanted stress and could lead to hasty decisions and compliance problems. Starting with 2020 tax years, employers may establish a QRP by their tax return due date, plus extensions. For example, unincorporated business owners could establish a plan for the 2020 tax year until October 15, 2021, if they have a filing extension.

    This new rule aligns the deadline for QRP establishment with the current SEP IRA plan adoption deadline. And though we still expect that some of your client employers will wait until the last minute to act, at least this new provision gives them more flexibility and options. Keep in mind, however, that salary deferrals must be made prospectively. So establishing a 401(k)-type “cash or deferred arrangement” will not allow plan participants to defer salary or wages that they have previously earned.

  6. Safe harbor 401(k) plans now have more contribution flexibility. Businesses with employees sometimes struggle to pass certain 401(k) testing requirements. Simply stated, plans are generally not allowed to provide highly compensated employees (including owners) with benefits that disproportionately favor them over the nonhighly compensated employees. One such test compares the salary deferrals of these two groups. To pass this test, owners (especially) often end up with much smaller deferrals than they would like. Fortunately, a “safe harbor” 401(k) provision deems this test to be passed, but only if the plan guarantees a healthy matching or nonelective contribution for rank-and-file employees. Unfortunately, detailed notification and timing requirements made these safe harbor provisions less than user friendly. For example, under one scenario, an employer could have made a three percent nonelective contribution in order to pass the nondiscrimination test—but only if the employer had notified employees, before the plan year started, that she might make this contribution to pass the test. In addition, the employer would have had to amend the plan before 30 days of the plan year end in order to take advantage of the testing relief. Now, employers can get the same testing relief, without a “pre-notice” and with substantially more time to amend the plan: instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a four percent contribution to all eligible employees rather than a three percent contribution.

    All of this is to say that employers now can enjoy much more flexibility when they adopt a safe harbor 401(k) plan. By some credible estimates, 30-40% of 401(k) plans that cover employees (in addition to owners) use this safe harbor feature. Making compliance easier for these plans—and for yet-to-be-adopted plans—is a great benefit. And learning more details about this provision will help you better serve your clients.

  7. Tax credits for small employers may help jump-start retirement plans. The SECURE Act provides two tax credits for small employers: one provision gives a $500/year startup credit for new 401(k) or SIMPLE IRA plans that include an automatic enrollment provision; another provision increases a startup credit (up to $5,000) for any small employer that adopts a qualified plan, SEP, or SIMPLE plan. Both credits are available to employers for three tax years, beginning with the start-up year. While these incentives may not—in and of themselves—convince an employer to adopt a retirement plan, they may take some of the financial sting out of the decision and prove that Congress is serious about increasing retirement plan coverage in America. Letting your clients know about these helpful tax credits can solidify your value in their eyes.

These six new provisions are likely to get a fair amount of coverage in the mainstream media and in the retirement industry. This Retirement Spotlight should help you discuss these changes more effectively with your clients. But keep in mind that the SECURE Act contains the most significant retirement plan changes in 15 years. There are many other provisions that affect IRAs and QRPs—and there are many questions that have already arisen about specific provisions and how certain changes should be implemented. As federal guidance is released, Ascensus will continue to share thoughtful analysis and practical insights.


Click here for a printable version of this issue of the Retirement Spotlight.

IRS Issues FAQs for Qualified Business Income Deduction

The IRS has published on its website a list of frequently asked questions relating to the qualified business income (QBI) deduction. The deduction was created by the 2017 Tax Cuts and Jobs Act, under Internal Revenue Code Section 199A. It permits noncorporate taxpayers to deduct up to 20 percent of QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Individuals and some trusts and estates with QBI, qualified real estate investment trust dividends, or qualified publicly traded partnership income may be eligible for the deduction.

The IRS explains in the FAQs that deductible contributions that the taxpayer makes to a qualified retirement plan, savings incentive match plan for employees of small employers (SIMPLE) IRA plan, or simplified employee pension (SEP) plan are accounted for when determining QBI.

Newly Introduced Retirement Reform Bill Has Better Chance of Progressing

Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) have announced the introduction of the Retirement Enhancement and Savings Act (RESA) of 2019.

This legislation is a version of similar legislation introduced several times dating back to 2016. This year, however, the prospect of enacting major retirement enhancement legislation seems especially promising, given indications of bipartisan support in both the House and Senate.

RESA 2019 includes these retirement changes and enhancements.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Remove the 401(k) automatic enrollment safe harbor deferral cap entirely (now 10 percent)
  • Simplify 401(k) safe harbor rules and give employers more flexibility in electing to implement a safe harbor design
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for implementing automatic enrollment in 401(k) and SIMPLE IRA plans
  • Treat taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Permit IRAs to hold shares of S Corporation banking entities
  • Generally prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) participants to retain individual tax-favored custodial accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined Form 5500 reports for certain similar plans
  • Require benefit statements to defined contribution plan participants to include an annual lifetime income disclosure based on participant balance
  • Provide a fiduciary safe harbor to employers for selection of a lifetime income provider
  • Protect older, longer service employees in defined benefit plans by providing nondiscrimination relief to plans that are closed to new participants
  • Modify the Pension Benefit Guaranty Corporation premiums for single-employer, multi-employer, and cooperative and small employer charity (CSEC) plans
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 5 years of the death of the account owner; would not apply to the first $400,000 of inherited balances
  • Increase penalties for failure to file certain information returns and IRS Form 5500
  • Allow the IRS to share certain returns and return information with other governmental agencies for tax administration purposes

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.