Among its COVID-19 relief provisions, the Consolidated Appropriations Act of 2021 (“CAA”) allows taxpayers affected by a qualifying disaster to take distributions of up to $100,000 from their qualified retirement plans. Under the provision, they can pay the tax over a three-year period and are exempted from the usual 10 percent penalty on early distributions.

• a presidentially declared disaster between December 28, 2019 and December 31, 2020; or
• a qualified disaster area per the Stafford Act that has been declared by the President between January 1,2020 and February 19, 2021; or
• the same as “major disaster” per the Stafford Act and within the timeframe of December 28, 2019 through December 31, 2020.

Qualified disasters are monitored and made public by FEMA, and listed on their disaster declarations page.

Under the CAA, disaster relief is available only in connection with recent natural disasters other than those solely related to COVID-19. The COVID-19 provisions of the CCA provide temporary relief from the partial plan termination rules under section 411(d)(3) of the Internal Revenue Code of 1986, as amended, for employee turnover due to the COVID-19 pandemic period.

In the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress modified its qualified disaster distribution rules by removing the 10 percent tax for early withdrawals for coronavirus-related distributions of up to $100,000. To qualify the distribution must be from an IRA or eligible defined contribution plan, including 401(k), 403(b), and 457(b) plans, and made between January 1 and December 31, 2020.

In addition, the distribution must be made to an individual:

• who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (Covid-19) by a test approved by the Centers for Disease Control and Prevention, or
• whose spouse or dependent is diagnosed with such virus or disease by such a test, or
• who experiences adverse financial consequences as a result the coronavirus.

Adverse financial consequences can include consequences resulting from an individual, individual’s spouse, or household member (defined as someone who shares the individual’s principal residence):

• being quarantined,
• being furloughed or laid off or having work hours reduced due to such virus or disease,
• being unable to work due to lack of child care due to such virus or disease,
• whose owned or operated business was closed or had operating hours reduced due to such virus or disease,
• incurring a reduction in pay or self-employment income,
• having a job offer rescinded or start date for a job delayed, or
• other factors as determined by the Secretary of the Treasury.

If you have taken advantage of the CARES Act or CAA provisions for retirement plan distributions and have questions on how this may impact your taxes please reach out to your HBK Tax Advisor or HBKS Wealth Advisor.

On December 20 the President signed into law two spending packages that will fund the government through the rest of the fiscal year. Included in the spending packages were the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and a number of tax provisions, many of which may have an impact on your future financial planning. HBK is currently reviewing these important provisions and will be providing a more in-depth look at what many of these provisions may mean for you. For now, the following provides a quick overview of some of the more impactful provisions:

SECURE Act Provisions

• The age at which individuals need to start taking required minimum distributions (RMDs) has increased from age 70 ½ to age 72 (note that this increase only applies for individuals who have not reached the age of 70 ½ on or before December 31, 2019);
• There is no longer an age cap for individuals to make contributions to Individual Retirement Accounts (IRAs);
• Inherited IRAs must now be paid out over a ten (10) year period, and cannot be stretched out over the lifetime of the non-spouse beneficiary;
• Up to $10,000 held in a Section 529 plan may now be used to pay off student debt; and
• Up to $5,000 may be withdrawn, penalty free, from a Section 401(k) plan in order to help with the costs of childbirth or adoption (income taxes still apply).

Other Tax Provisions

• Many taxes that were enacted as part of the 2010 health care reform law have been repealed, including the 2.3% medical device excise tax and the 40% excise tax on high-cost health insurance plans (known as the “Cadillac tax”);
• A number of tax credits have been extended, including the work opportunity tax credit, credits for energy-efficient homes, and credits for health insurance costs of eligible individuals;
• The high tax rate on investment income of private foundations has decreased from 2% to 1.39%;
• The transportation fringe benefit tax that was imposed on tax-exempt organizations by the Tax Cuts and Jobs Act of 2017 has been eliminated; and
• The changes made to the tax rates imposed on children’s unearned income (known as the “kiddie tax”) have been eliminated, so that the income will no longer be taxed at the higher tax rates of trusts and estates, but will now be taxed at the highest marginal tax rates of the child.

Congress is great at titling laws with acronyms. The SECURE Act is yet another one of that category of bills with cutesy names with greater emphasis on creating a word than making sense, in this case, “Setting Every Community Up for Retirement Enhancement Act of 2019,” which, contrary to its title, has nothing to do with communities per se. This bill has passed the House with overwhelming bipartisan support and is paired with a similar bill in the Senate. The Senate effort to pass this legislation is currently stalled.

We expect many of the following proposals to become law:

• Eliminate the age 70-1/2 cutoff at which workers are no longer allowed to contribute to IRAs;

• Increase the age at which required minimum distributions must be made from an IRA or employer sponsored qualified retirement plans, like 401(k) plans, from age 70-1/2 to age 72;

• Limit the period of time that distributions from inherited IRAs and inherited employer sponsored qualified retirement plans would be required to be paid out to 10 years rather than the life expectancy of their beneficiaries. Exceptions to this limit are likely to include spousal rollovers and inherited retirement accounts where the beneficiary is a minor or disabled;

• Permit employers to automatically escalate their employees’ contributions up to 15% of pay, which is an increase from the prior limitation of 10%;

• Increase the tax credits provided to small businesses who start up retirement savings plans and/or include automatic enrollment from $500 to $5,000;

• Allow graduate students and postdoctoral to save for retirement based on their stipends/fellowships, and allow home healthcare workers to save based on “difficulty of care” payments, which are otherwise not counted as compensation;

• Create a safe harbor that employers can use when they are choosing group annuity issuers to support 401(k) plan lifetime income stream options;

• Require plan sponsors to tell the participants about how much monthly retirement income their assets might produce; and

• Expand Section 529 education savings accounts to include such categories as apprenticeships and homeschooling expenses.

The proposed changes to the required distribution period from IRAs and other employer sponsored qualified retirement plans will significantly accelerate distributions. Let’s look at this example:

An individual age 25 inherits a $1,000,000 IRA. The required distributions under current law would be paid out over the life expectancy of the 25-year old, which would be 58.2 years. The SECURE Act would require the beneficiary to withdraw everything from the inherited IRA over 10 years. Under current law, the initial required distribution for the 25-year-old beneficiary would be $17,182 ($1,000,000 divided by 58.2). In the second year, the minimum amount required to be distributed would be the balance at the beginning of the second year divided by 57.2. In each successive year the divisor would be reduced by 1. Ultimately, the full amount would be distributed within the 58.2-year period. If the required minimum amount is not distributed, the beneficiary would be subject to a 50% penalty on the amount not distributed.

The SECURE Act would not require a distribution in the first year. The total amount in the IRA would be required to be fully distributed within the 10-year period in any manner the IRA beneficiary decides. The entire IRA could be distributed on the last day of the 10-year period. The SECURE Act will require a beneficiary to plan distributions over the 10-year period more carefully.

We will address planning issues associated with these proposed changes to the required minimum distribution rules in future articles.

The Pension Benefit Guaranty Corporation (PBGC) is helping defined contribution (DC) and other plan sponsors looking to terminate their plans by expanding its Missing Participants Program. For more than 20 years, the program has been available to PBGC-insured single employer defined benefit (DB) plans only. Now, the final rule, published in the Federal Register on Dec. 22, 2017, helps more plan sponsors with the tedious issue of locating missing participants when closing out plans and increases the likelihood that more participants will be reunited with their lost retirement money.

Plans terminating after Dec. 31, 2017, can participate in the voluntary program, including:

• 401(k)s and other DC plans
• Multiemployer DB plans covered by Title IV of the Employee Retirement Income Security Act (ERISA) of 1974
• Professional service employer plans with 25 or fewer participants
• Single-employer DB plans

The most important changes to the program are highlighted below.

Changes in the Missing Participants Program

In general, before transferring assets to the PBGC, DC plan sponsors need to follow guidelines issued in the Labor Department’s Field Assistance Bulletin (FAB) 2014-01 outlining the fiduciary duties for those terminating plans.

The new rule stipulates that plan sponsors need to have “reasonable certainty” that the participant’s whereabouts is unknown when the plan is being closed out. Examples in the rule include notices to the participant’s last known address getting returned as undeliverable or uncashed distribution checks. Participants can also be considered missing if they do not elect a form of distribution after being given notice of a plan’s termination.

Then, DC plan sponsors need to follow the five points outlined in the FAB to satisfy the required “diligent search” step. Rules for DB plans have eased, giving them options on the procedure in order to pass the check.

Plan sponsors can transfer missing participant benefits to the PBGC instead of opening an Individual Retirement Account or annuity; the PBGC charges a one-time fee of $35 per account for these transfers. The PBGC will not charge a fee for accounts of $250 or less, nor will it charge for simply reporting information on where the benefits are held. The PBGC also simplified the method DB plan sponsors need to use in determining the appropriate amount to transfer to the agency.

Participants from all types of plans who qualify for the program will be listed in the agency’s searchable database of missing participants and beneficiaries. The agency will also periodically search for missing participants. When one is found, the PBGC will pay out the benefit with interest. There will be no distribution charge.

The PBGC added an anti-cherry-picking clause that says any plan that uses the program must transfer all missing participants to the agency, instead of selectively moving certain accounts.

Other Changes for Plan Sponsors

Often, plan sponsors don’t realize how time consuming or difficult it can be to find missing participants. It has been a chronic problem for plan sponsors and is frequently left as a last-minute task that can overwhelm already limited resources.

This final rule eliminates unnecessary hoops and gives DB and DC plan sponsors a new, more useful option when dealing with missing participants. It eases the definition of missing participant and gives flexibility for DB plans in diligent search rules. Meanwhile, the database of missing participants will be user-friendly, with information from DB and DC plans. Centralizing information from various plans will increase the likelihood that benefits will be distributed appropriately, or will direct participants to where benefits are being held.

To help plan sponsors understand and take advantage of the expanded program, the PBGC created a webpage outlining the specific requirement variations and forms necessary for each type of plan.