As we move into the final quarter of 2021, all eyes are on the budget reconciliation bill, which includes retirement plan provisions to help fund the $3.5 trillion bill under consideration in Congress. If passed, the legislation would require mandatory distributions and IRA contribution limitations for high-income taxpayers with retirement account balances over $10 million and require distributions of Roth balances in excess of $20 million. Additionally, the Securing a Strong Retirement Act of 2021, a bill with bipartisan support, commonly referred to as SECURE 2.0, remains stalled in Congress. SECURE 2.0 builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 with the goal to increase retirement savings and simplifying and clarifying retirement plan rules.
The budget reconciliation bill and SECURE 2.0 are currently just proposed, not enacted, legislations. The following topics are part of current law and will be important for you to consider for year-end tax planning and perhaps tax planning in the coming year:
As of 2020, there is no longer an age limit prohibition for making contributions to a traditional IRA.
This allows taxpayers to retain their retirement savings in tax-favored arrangements, thus delaying income tax on the RMDs.
The Families First Coronavirus Response Act established tax credits for COVID-19-related paid sick and family medical leave. The Consolidated Appropriations Act (CAA) extended the benefits through March 31, 2021, but eliminated the mandatory requirement for 2021. The American Rescue Plan Act (ARPA) further extended the leave through Sept. 30, 2021. It also increased availability of the leave by expanding qualifying reasons for the leave to include wages paid for EPSL or EFML by employees to receive COVID-19 vaccinations or to recover from any injury, disability, illness or condition related to the vaccinations and by employees seeking or waiting for results of a COVID-19 test if either the employee has been exposed to COVID-19 or the employer has requested the COVID-19 test.
An eligible employer paying the leave can receive a tax credit equal to the wages paid to employees for that day, up to the following limits:
As of April 1, 2021, the 10-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee resets, and the limit on wages that can be taken into account for computing the family leave credit with respect to all calendar quarters in total increases to $12,000 from $10,000. For example, if, as of March 31, 2021, an employer reaches both of these limits for an employee, the employer would be able to claim an additional family leave credit up to $2,000 of qualified family leave wages plus a paid sick leave credit up to 10 days for qualified sick leave wages paid to that same employee from April 1, 2021, through Sept. 30, 2021. In addition to the qualifying reasons discussed above, the ARPA further expands the qualifying reasons for the EFML to include all of the qualifying reasons for the EPSL.
The ERC provides assistance to employers who continue to pay their employees despite their operations being affected by COVID-19. For more information on claiming the ERC, please see our articles on expiring provisions and the ERC.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act permits employers to defer timely payment of the employer’s portion of Social Security tax that would otherwise be required to be made during the period from March 27, 2020, through Dec. 31, 2020, without penalty or interest charges. For details on this provision, please see our article on expiring provisions.
Home tests for COVID-19 may be paid or reimbursed under health flexible spending arrangements (health FSAs), health savings accounts (HSAs) or health reimbursement arrangements (HRAs) because the cost to diagnose COVID-19 is an eligible medical expense for tax purposes. In addition, the costs of personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of COVID-19 are eligible medical expenses that can be paid or reimbursed under health FSAs, HSAs or HRAs.
An employer may adopt a qualified retirement plan for a taxable year after the last day of the taxable year provided it is adopted before the due date, included extensions, for filing the employer’s tax return for the taxable year. For example, an employer who wants to adopt a qualified retirement plan for calendar year 2021 has until Sept. 15, 2022, for a partnership or corporate employer, or Oct. 15, 2022, for a self-employed employer, to adopt the plan.
For sponsors of 401(k) plans, long-term and part-time employees are eligible to participate, effective for plan years beginning on or after Jan. 1, 2021. Under this rule, if a part-time employee has worked at least 500 hours in three consecutive years and is at least 21 years old by the last day of the three consecutive-year period, he or she must be offered the opportunity to make elective deferrals to the employer’s 401(k) plan. For purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, plans are not required to take into account hours of service in plan years beginning before Jan. 1, 2021. As a result, although affected plan sponsors will need to start tracking hours for this purpose beginning in 2021, plans will not be required to permit qualifying long-term or part-time employees to make deferrals under 401(k) plans before plan years starting in 2024.
Unrelated employers without any commonality may pool their resources by participating in a new type of multiple employer plan (MEP). The new retirement plans, referred to as pooled employer plans or open MEP, are treated as a single plan. In addition, the “one bad apple” rule no longer applies provided the procedure is followed for ensuring that one employer’s failure to meet the qualification requirements will not result in the disqualification of the MEP or open MEP. This is effective for plan years beginning on or after Jan. 1, 2020.
An employer with 100 or fewer employees may be eligible for a nonrefundable income tax credit for startup costs of adopting a new qualified retirement plan. The amount of the credit for a taxable year is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit is for three years.
We are still seeing numerous instances where employers are not taking into account deferred compensation for FICA at the appropriate time. Pursuant to the FICA “special timing rule” of section 3121(v)(2), deferred compensation is required to be taken into account at the later of the time of the performance of services and at such time when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit — usually at such time as the benefit becomes vested. This, of course, is in contrast to the SECA rules, that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should be focused on making sure that the deferred compensation, even if not distributed, is taken into account correctly in accordance with the “special timing rule” in a setting that requires payment of FICA taxes.
In the summer of 2016, the Department of the Treasury issued proposed regulations interpreting section 457 deferred compensation rules which apply to tax-exempt organizations and governmental subdivisions. These proposed regulations primarily addressed issues attendant with the granting and administration of “ineligible plans of deferred compensation” under section 457(f) and are slated to become effective until following such time that final regulations have been issued. As of the time of the preparation of this letter, we have seen no activity by the current administration that would suggest these regulations will be finalized anytime soon. Therefore, for the present, we are regarding these proposed regulations as an indication of the IRS’ interpretation of certain income tax issues attendant with the application of section 457 rules, and nothing more.
For more information on this topic, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.