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Congress enacts tax and retirement changes

Authored by Paul Dillon, Christine Faris, Michelle Hobbs, Mike Schiavo and Michael Wronsky

Congress attached numerous tax provisions to a series of government funding bills (collectively, “the bill”), including repeal of three Affordable Care Act (ACA) taxes, a long list of so-called “tax extenders,” and various technical changes to the retirement plan rules. Both chambers have now passed the bill, which is expected to be signed into law by the end of this week.

The spending bill does not include other priorities that Democrats and Republicans were hoping to have in year-end legislation. Democrats had been pushing for tax extenders to be paired with the expansion of tax credits benefiting low- and middle-income families as well as renewable energy tax credits. Republicans had been pressing for technical corrections for drafting errors in the 2017 Tax Cuts and Jobs Act (TCJA). Most notably, the bill did not correct the qualified improvement property glitch; consequently, such property is still ineligible for bonus depreciation.

ACA taxes

The bill repealed three taxes that were part of the ACA – the “Cadillac” tax, the health insurance industry fee and the medical device tax.

The Cadillac tax, a 40% levy on generous health insurance plans, was intended to help drive down healthcare spending by incentivizing employers to lower costs to avoid being subject to the tax. Due to strong opposition from a broad coalition in both parties, the Cadillac tax was repeatedly delayed and never went into effect.

Second, the health insurance industry fee, originally enacted as part of the ACA to help fund the marketplace exchanges, has been revoked. This fee was scheduled to be collected from insurance companies offering fully insured health plans beginning in 2018 and had been given a one-year moratorium by Congress.

Finally, the 2.3% tax on medical devices was cancelled. This tax drew bipartisan opposition from lawmakers who warned it harmed innovation by hurting small medical device companies.

With the repeal of these three taxes, as well as the TCJA’s repeal of the individual mandate, many of the significant funding sources of the ACA have now been eliminated.

Tax extenders

More than 30 tax extenders were included in the package -- most of which expired at the end of 2017, as well as some that were not set to expire until the end of 2019. The majority of these provisions were enacted through Dec. 31, 2020. With most 2018 tax returns already filed, it is unclear how the IRS will accommodate amended returns to take advantage of these newly reinstated tax benefits. In addition, many forms and instructions could need revisions to address this legislation.

Extenders that have been temporarily reinstated include:

  • New Markets Tax Credit
  • Employer credit for paid family and medical leave
  • Exclusion from income of discharge of qualified principal residence indebtedness
  • Reduction in medical expense deduction floor to 7.5% from 10%
  • Deduction of qualified tuition and related expenses
  • Classification of race horses as three-year property
  • Empowerment zone tax incentives
  • Biodiesel and renewable diesel incentives
  • Energy-efficient homes credit
  • Energy-efficient commercial buildings deduction (a.k.a. the section 179D deduction)
  • Work Opportunity Tax Credit
  • Credit for health insurance costs of eligible individuals

Provisions for disaster tax relief were also included in the bill.

Retirement provision changes

Congress also included the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 in the spending bill. The SECURE Act is the first major retirement legislation since the Pension Protection Act of 2006.

Some of the highlights include:

  • The maximum age for making contributions to an IRA is repealed
  • Any employer sponsoring a 401(k) plan is required to offer long-term, part-time employees the opportunity to make elective deferral contributions
  • The default contribution limit under an automatic enrollment safe harbor 401(k) plan is increased to 15%
  • The beginning age for required minimum distributions increases to age 72, from 70½
  • The safe harbor notice requirement for 401(k) plans with non-elective safe harbor contributions is eliminated
  • Employers that are not part of a controlled group or affiliated service group may establish pooled employer plans (open multiple employer plans (MEPs))
  • Small employers receive tax credits for establishing retirement plans
  • New annual disclosure requirement for defined contribution plans to provide lifetime income stream based on participant’s account balance
  • Deadline for adopting a qualified retirement plan is extended to the due date for filing the employer’s tax return for the taxable year, including extensions

Important tax update for not-for-profits that provide parking benefits

As part of a deal to extend certain tax credits, lawmakers and administration officials agreed to fix a provision in the TCJA that taxed qualified transportation fringe benefits provided by not-for-profits as unrelated business income, subject to the 21% unrelated business income tax (UBIT). This agreement, released Dec. 17, 2019, had bipartisan support and the support of not-for-profits across the country, including the National Council of Nonprofits.

Retroactively effective to Jan. 1, 2018, qualified transportation fringe benefits provided by not-for-profit organizations for their employees will no longer be taxed as unrelated business income subject to the 21% tax. Qualified transportation fringe benefits include:

  • Transportation in a commuter highway vehicle
  • Transit pass
  • Qualified parking

We encourage you to meet with your Baker Tilly advisor to discuss how these provisions may impact your tax situation.

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