Details of Tax Reform 2.0 Legislation Revealed
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 enacted in December 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 making individual tax cuts permanent and changes to savings arrangements, a third component relates to “business innovation.”
The House Ways and Means Committee is expected to consider the legislation 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. 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; 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.
Multiple employer plans (MEPs) — The legislation would enhance the ability of employers to jointly participate in a common plan, the purpose being to reduce administrative burden and expense. Also referred to as “pooled employer plans.” Effective for plan years beginning after December 31, 2019.
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.
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.
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.
Prohibition on qualified plan credit card loans — Loans from employer-sponsored 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.
Portability of lifetime income investments — A retirement plan participant would be allowed to distribute and roll over to an IRA or other employer-sponsored 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.
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. Deeming 403(b) custodial accounts to be IRAs would overcome this obstacle. Effective for plan terminations after December 31, 2018.
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.
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.
Government employer contributions — The legislation 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.
Armed Forces Ready Reserve contributions — Members of the Armed Forces Ready Reserve would be allowed 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.
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.
Relief for closed defined benefit (DB) plans — The legislation would modify nondiscrimination rules 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.
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 would begin no later than six months after date of enactment.
Universal Savings Accounts — An account similar to a Roth IRA (no tax deduction, tax-free earnings) would be created 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); subject to a $2,500 per year maximum contribution. Effective for tax years beginning after December 31, 2018.
Expansion of 529 plans — The definition of qualified expenses would be amended to include those related to apprenticeship programs and homeschooling. Up to $10,000 (total) would also be allowed to be used to repay student loan debt. The definition of qualified expenses for K-12 education would be expanded (currently limited to tuition). Effective for distributions made after December 31, 2018.
Birth or adoption excise tax exemption — Up to $7,500 for expenses related to the birth or adoption of a child would be exempt from the 10 percent early distribution excise tax. Such amounts withdrawn could be repaid. Effective for distributions made after December 31, 2018.
Ascensus will continue to follow this legislation as it progresses through the House of Representatives, analyzing its potential effects .
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