Tax Reform: Comparison of House and Senate Tax Cuts and Jobs Act Versions

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1 Tax Reform: Comparison of House and Senate Tax Cuts and Jobs Act Versions (Highlights Affecting Retirement and Individual Savings Arrangements) Employer-Sponsored Retirement Plan Provisions 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 (commonly known as in-service distributions) varies between retirement plans, but age 59½ is most common. Pension plans and governmental 457(b) plans, however, are required to use higher ages (e.g., age 62). The House bill would reduce the minimum age requirement for pension plans and governmental 457(b) plans to age 59½. Effective for plan years beginning after December Hardship Distributions Distributions from 401(k) and 403(b) plans may be made to plan participants who have a financial hardship. Hardship distributions may be taken only from elective deferrals. Hardship distributions generally may be taken only after a plan participant has taken all available plan loans. Elective deferrals generally must be suspended for six months following hardship distributions. The House bill would relax the hardship distribution rules by expanding hardship distributions to include qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and earnings on all contribution types removed, allowing hardship distributions without first taking available plan loans, and continuing to allow participants to make elective deferral contributions after having received hardship distributions. The Senate bill would relax the hardship distribution rules by expanding hardship distributions to include qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and earnings on all contribution types removed, and allowing hardship distributions without first taking available plan loans. Effective for plan years beginning after December Effective for plan years beginning after December Copyright 2017 Ascensus, Inc. All Rights Reserved.

2 Rollover Period for Offset Plan Loans Nondiscrimination Testing for Closed Defined Benefit Plans If a loan from a qualified retirement plan or 403(b) 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. Defined benefit plans that are closed to new participants may, eventually, chiefly benefit highly paid employees and lead to compliance testing failures. The House bill would extend the 60-day rollover period to a participant s tax filing deadline (including extensions) for the tax year in which the offset occurs. The House bill would extend relief to certain plans by expanding the ability to cross-test contributions to a defined contribution plan maintained in addition to a defined benefit plan. The objective of this provision is to allow closed defined benefit plans to avoid having to be frozen or terminated. Same as the House bill. Effective on the date of enactment. Unrelated Business Taxable Income In general, if an IRA or employersponsored retirement plan holds assets that generate income unrelated to the plan, such income (known as unrelated business taxable income (UBTI)) is 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 House bill clarifies that retirement plans of governmental entities will also be subject to the UBTI rules. 2 Copyright 2017 Ascensus, Inc. All Rights Reserved.

3 Pass-Through Income Rate Pass-through income for owners of businesses such as S-corporations is taxed at the owners personal income tax rates. The House bill would tax pass-through business income at a 25 percent rate, rather than the proposed maximum 20 percent corporate tax rate. Owner-employees would be taxed at individual income tax rates on their compensation. In general, no more than 30 percent of income could be treated as business income and taxed at the favorable 25 percent rate, while the remaining 70 percent would be treated as compensation and taxed at the individual income tax rates. The Senate bill addresses the taxation of a business structured in a manner that generates pass-through income (e.g., an S-Corp) by proposing an income tax deduction of an amount up to 23 percent of the combined qualified business income. The combined qualified business income is generally the sum of the deductible amount for each trade or business of a taxpayer. The deductible amount for each trade or business of a taxpayer is generally the lesser of 23 percent of a taxpayer s qualified business income or 50 percent of the Form W-2 wages for the business. The Form W-2 wage limit, however, does not apply to a taxpayer filing a joint income tax return with Form W-2 wages of $500,000 or less ($250,000 for other income tax returns). Individual Savings Arrangements Provisions (IRA, Health, Education, and Special Needs Accounts) 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. The House bill would eliminate the ability to do a recharacterization. Effective for tax years beginning after December Same as the House bill 3 Copyright 2017 Ascensus, Inc. All Rights Reserved.

4 Slower Cost-of- Living Adjustments for IRAs, HSAs, Archer MSAs, and the Saver Credit Coverdell Education Savings Accounts (ESAs) Many of the annual dollar limitations that apply to IRAs and other individual savings arrangements are adjusted periodically for inflation. The same is true for a taxpayer s income-based eligibility to receive the saver credit for contributions to IRAs or deferrals to employer-sponsored retirement plans. Annual contributions may be made to an ESA. In addition, an ESA distribution 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. The House bill would no longer permit contributions to 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 as a 529 plan contribution. The Senate bill would change the method for calculating annual adjustments so that they would occur less frequently than under the current formula. Annual limitations associated with employer-sponsored retirement plans would generally not be affected, but IRA, HSA, Archer MSA, and saver credit-related adjustments would be. Effective for tax years beginning after December 529 plans 529 plan assets may be used to pay for post-secondary academic or vocational education. Effective for distributions made after December The House bill would expand the use of 529 plan assets to include use of up to $10,000 annually for The Senate bill would expand the use of 529 plan assets to include use of up to $10,000 annually for 529 plans The term designated beneficiary is defined as an individual designated as the beneficiary of amounts paid to the 529 program. The term individual is undefined by the statute. elementary or secondary (high school) tuition, or costs associated with participation in a qualified apprenticeship program. Effective for contributions made after December The House bill provides that a 529 plan could be set up during pregnancy on behalf of an unborn child. Effective for contributions made after elementary and secondary school tuition expenses, and expenses for homeschooling. Effective for contributions made after December 4 Copyright 2017 Ascensus, Inc. All Rights Reserved.

5 529 plans A distribution of 529 plan assets may be rolled over to another qualified tuition program for the benefit of the designated beneficiary or the designated beneficiary s family member. The Senate bill would permit 529 plan assets to be rolled over to an Achieving Better Life Experience (ABLE) account for the designated beneficiary or the designated beneficiary s family member, 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 distributions made after the date of enactment, and rollovers before January 1, ABLE accounts Aggregate contributions made to an ABLE account for the benefit of a designated beneficiary may not exceed the annual ABLE contribution limit (e.g., $14,000 for 2017). The Senate bill would permit an ABLE account beneficiary to contribute his earned income even if his contribution, when added to contributions made by others, resulted in contributions above the annual ABLE contribution limit. The ABLE account beneficiary s contribution amount would 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, would be responsible for ensuring compliance with the additional contribution limit. The additional contribution would be unavailable if the ABLE account beneficiary made deferral contributions to a 401(k), 403(b), or governmental 457(b) plan. ABLE account contributions made by the ABLE beneficiary would be eligible for the saver credit. Effective for taxable years after the date of enactment, and contributions before January 1, Copyright 2017 Ascensus, Inc. All Rights Reserved.

6 HSA, MSA Changes Individuals may deduct Archer medical savings account (MSA) contributions. The House bill would not allow taxpayers to deduct MSA contributions. In addition, employer contributions to an employee s MSA would no longer be excluded from the employee s taxable compensation. The bill simplifies the rules by consolidating two similar tax-favored accounts into a single account with more taxpayer-friendly rules. In addition, the House 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. Effective for tax years beginning after December Tax-Advantaged Savings Arrangements in General Special Relief for 2016 Disaster Areas IRA, qualified retirement plan, and 403(b) plan distributions received before age 59½ are generally taxable and subject to the 10 percent early distribution penalty tax. The Senate bill would grant retirement plan related relief to eligible victims for any 2016 presidentially declared disaster event. This relief is of a magnitude normally associated with special federal legislation, such as that recently enacted in 2017 for victims of Hurricanes Harvey, Irma, and Maria. The relief granted to 2016 federally-declared disaster area victims would include the following. Qualifying distributions of up to $100,000 from employer-sponsored retirement plans 6 Copyright 2017 Ascensus, Inc. All Rights Reserved.

7 and IRAs before age 59½ would not be subject to the 10 percent penalty tax. Qualifying distributions from employersponsored retirement plans without enabling plan provisions will not be considered operational failures if plans are amended to add such provisions by the end of the first plan year beginning on or after January 1, Repayment of qualifying distributions from employer-sponsored retirement plans and IRAs within three years. Ratable taxation over a three-year period for distributions not repaid. Waiver of mandatory withholding from qualifying distributions. Effective on date of enactment and applicable to distributions on or after January 1, 2016, and before January 1, This document is provided for informational purposes only. It is not intended to provide authoritative guidance or tax or legal advice. Ascensus provides administrative and recordkeeping services and is not a broker-dealer or an investment advisor. Ascensus and the Ascensus logo are registered trademarks of Ascensus, Inc. 7 Copyright 2017 Ascensus, Inc. All Rights Reserved.