Legislative and Judicial Actions

➜ 2021 HSA Inflation Adjustment

The IRS has published Revenue Procedure (Rev. Proc.) 2020-32. The new procedure provides the 2021 inflation adjusted amounts for health savings accounts (HSAs), as determined under Section 223 of the Internal Revenue Code (IRC). For calendar year 2021, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan (HDHP) is $3,600. The annual limitation for an individual with family coverage under an HDHP is $7,200. The new limit for self-only coverage is up $50 from this year’s limit, while the family limit has increased by $100.

➜ 403(b) Catch-Up Contributions

The IRS says its plans for the current fiscal year include ensuring 403(b) plans use proper procedures when allowing for catch-up contributions. Whereas, like 401(k) and governmental 457(b) plans, 403(b)s may allow participants to make catch-up contributions starting at age 50, they may also permit them a special 15-year catch-up contribution.

An IRS Issue Snapshot explains that, under the special 403(b) catch-up, employees of a qualified organization may contribute an increased dollar amount under Internal Revenue Code (IRC) Section 402(g)(1) if they have met certain requirements. The Issue Snapshot follows a program letter from IRS Tax Exempt and Government Entities Commissioner Tamera Ripperda, which explains the agency’s priorities for fiscal year 2020. In the letter, the IRS says it will examine 403(b) plans for universal availability, excessive contributions and proper use of catch-up contributions under IRC Section 414(v); it also will examine 457(b) plans for excessive contributions and proper use of the special three-year catch-up contribution rule. According to the IRS, this strategy was delayed from fiscal year 2019 and will begin this fiscal year.

➜ Tax Treatment May Be Different for CARES Act Provisions

The Coronavirus Aid, Relief and Economic Security (CARES) Act created a new emergency retirement plan distribution option called the coronavirus-related distribution, or CRD. A CRD may be drawn from an employer-sponsored retirement plan or from individual retirement accounts (IRAs) in any amount up to $100,000. Under the legislation, the 10% penalty tax the IRS normally levies on early plan distributions is waived. Further, the individual taking a CRD may spread the reported income over three years for tax purposes, plus he has three years to repay the distribution without being taxed. However, state tax treatment of CRDs may vary, and communications explaining the benefit should reflect that, says Adam Cohen, a partner in global law firm Eversheds Sutherland and leader of its employee benefits team. The same issue exists for the CARES Act provision allowing employers to offer certain help with employee student loan repayments. Under the act, employers may make payments up to $5,250 toward employees’ student loans through the end of this year, and the payments need not be reported as taxable income for federal income tax purposes. Participant communications about the student loan payments should include warnings about state tax treatment, similar to what is included in communications about CRDs, Cohen says.

➜ ‘Down-Market’ Fee Challenge

Plaintiffs have filed a proposed class action lawsuit against Aegis Media Americas, alleging that the firm has permitted excessive fees to be levied on participants within its defined contribution (DC) retirement plan. Filed in the U.S. District Court for the Southern District of New York, the complaint alleges a familiar host of fiduciary breaches commonly included in Employee Retirement Income Security Act (ERISA) lawsuits. What distinguishes the suit is the relatively small size of the plan compared with the many other plans that have faced similar allegations. Such plans generally have well over $1 billion in assets, while the Aegis plan in question held some $540 million at the end of 2018, according to case documents, though it has presumably grown since then.

➜ Iowa Adopts Best Interest Standard for Annuities

On May 11, the Iowa Insurance Division filed an “adopted regulation” to require annuity agents to act in the best interest of their customers. Iowa’s annuity standard builds on efforts by the National Association of Insurance Commissioners (NAIC) to develop a framework Suitability in Annuity Transactions Model Regulation that is harmonized with rulemaking by the Securities and Exchange Commission (SEC), as well as a public comment period and hearing that the division itself held. The new regulation includes several important changes relative to the original version the division published. Most importantly, the Iowa regulation now includes an explicit caveat to the effect that regulated entities that meet the standards prescribed by the SEC’s Regulation Best Interest (Reg BI) will be assumed to be in compliance with Iowa’s regulation.

➜ Digital Letter Ruling Requests

The IRS has issued Revenue Procedure (Rev. Pro.) 2020-29, which modifies revenue procedures 2020-01 and 2020-1 IRB [Internal Revenue Bulletin], established at the beginning of this year. Through 2020-29, the IRS will temporarily allow the electronic submission of requests for letter rulings, closing agreements, determination letters and information letters submitted under the jurisdiction of its Office of Chief Counsel.

The new procedures also apply for determination letters issued by the IRS Large Business and International Division (LB&I). In Rev. Pro. 2020-29, the IRS establishes that, until it makes further modifications, both paper and electronic requests for determination advice will be accepted. The procedure provides detailed information on how taxpayers may request advice from the IRS in the form of letter rulings, including nonautomatic requests for changes in methods of accounting, nonautomatic requests for changes in accounting periods, closing agreements, determination letters and information letters. Rev. Pro. 2020-1 generally requires taxpayers to submit paper copies of written materials with “wet signatures.”

While 2020-29 remains effective, the IRS will accept electronic submissions only “if [these] are transmitted by facsimile or compressed and encrypted email attachments using the electronic submission procedures described in Section 4 of this revenue procedure” and are “signed using the electronic signature procedures described in Section 5.” The agency will also continue to accept printed requests for advice as provided in Rev. Pro. 2020-1.

➜ IRS Q&A About Relief Provisions

Section 2202 of the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, provides for special distribution options and rollover rules for retirement plans and individual retirement accounts (IRAs), as well as expands permissible loans from certain retirement plans.

A new Q&A document from the IRS, published on May 4, clears up some questions stakeholders may have about the relief package’s provisions. The agency says it, along with the Treasury Department, is formulating guidance on Section 2202 and anticipates releasing that guidance soon. It points to IRS Notice 2005-92, issued on November 30, 2005, that provided guidance on the tax-favored treatment of distributions and plan loans under sections 101 and 103 of the Katrina Emergency Tax Relief Act of 2005 (KETRA) for those who suffered the effects of the hurricane. The Treasury Department and the IRS anticipate that the guidance on the coronavirus legislation will apply the principles of Notice 2005-92, as the provisions of Section 2202 are substantially similar.

The current guidance explains coronavirus-related distributions (CRDs) and describes relief for participant loans provided under the CARES act. It also lists who is a qualified individual for purposes of Section 2202.