January 2019 Newsletter Vol. 20, No. 1
New Tax Law
The effects of the new tax law still not completely understood. My
advice is to discuss how the changes affect your situation with
your accountant or other tax advisor. Many are paying less tax.
Many small businesses qualify for the 20% credit.
My experience in the past year has been that accountants have
been working with the new tax law to get their clients that 20%
credit, sometimes by using contributions to qualified plans to
move the income from not qualifying for the credit down to
qualifying for the credit. Defined benefit pension plans (including
cash balance plans) are particularly helpful in this as discussed in
my next section.
Reasonable Compensation
The IRS has been somewhat vague in the past as to what
reasonable compensation is and is not. The tax court cases have
generally revolved around the issue of excessive compensation. In
one of those decisions, the tax court made clear that pension and
other tax qualified plan contributions are part of compensation.
Thus, if a spouse of a business owner only provided enough
services to justify reasonable compensation of $50,000 then a
$100,000 contribution to a defined benefit pension plan meant the
spouse was paid an unreasonably high compensation.
This tax court decision went the other way as well. If the IRS
thinks that a business owner should be paying himself at least
$200,000 in compensation based on $400,000 in profits, if the
business owner received $100,000 in W-2 compensation and a
pension contribution of $150,000, then the business owner was
paid enough.
The IRS did issue proposed regulations on the 199A deduction
last August, making the decision process extra complicated. As I
stated above, my advice is to discuss how the changes affect your
situation with your accountant or other tax advisor and
that I am open to working with your accountant or other
tax advisor to help him or her create a strategy for your
business.
Tax Legislation – Future
Bipartisan Tax legislation for retirement plans is actually
a real possibility for 2019 despite the changes in the
House.
Rep. Richie Neal (D-MA), now the ranking Democrat on
the House Ways & Means Committee, and the man in
line to become chairman of that powerful committee in
January, has already cited several priorities on which he
even thinks he might align with President Trump, and
two of them — increasing retirement savings and
protecting multiemployer pension plans — deal with
retirement. Neal has long been focused on retirement
issues and has, in just the past year, introduced his
signature piece of retirement legislation, the Automatic
Retirement Plan Act (ARPA), to address the retirement
plan coverage gap.
ARPA would require all but the smallest employers to
maintain at minimum a deferral-only 401(k) or 403(b)
plan with a requirement to automatically enroll workers
into the plan. But that is not all.
ARPA also expands the types of employees that have to
be eligible to participate, to include all workers expected
to work for an employer for more than three months,
regardless of the number of hours worked. An employer
would no longer be allowed to exclude up to 30% of its
workforce from participating in a plan, and the current
one-year/1,000-hour service requirement would be
repealed. Employers with existing plans would have five
years (seven years for smaller employers) to transition to
these new coverage rules.
ASPPA hase been in active discussions with Rep. Neal
and his staff for months on sensible modifications to this
legislation for the next Congress, including exempting
the new coverage requirements from the top-heavy
testing rules and significantly modifying the tax penalties
for non-compliance. Neal and his staff have shown a
sincere willingness to work with ASPPA to address
concerns while still achieving their core policy objective
of reducing the coverage gap.
At the same time, proving that the spirit of bipartisanship is not
dead, Sens. Rob Portman (R-OH) and Ben Cardin (D-MD) are
once again teaming up on retirement security legislation. Most of
us in the retirement industry came to refer to the Economic
Growth Tax Relief and Recovery Act (EGTRRA) as “Portman-
Cardin” for good reason, as they led the charge to passage in the
U.S. House of Representatives that included a host of vital
improvements for retirement savings.
This time the dynamic pension duo is taking up retirement
security in the U.S. Senate, introducing a comprehensive
retirement security bill Dec. 19 that includes provisions to
encourage small plan startups, boost automatic enrollment and reenrollment
practices, expand employer matching contributions for
student loan repayments, provide portability of lifetime income
options, expand the Saver’s Credit, and reform required minimum
distirbutions.
Sen. Grassley’s (R-IA) decision to return as Chairman of the
powerful Senate Finance Committee following Sen. Hatch’s
retirement also bodes well. Grassley previously has been a
sponsor of comprehensive retirement legislation, including the
Graham-Grassley legislation that formed the basis (along with the
Portman-Cardin bill in the House) for the 2001 EGTRRA
retirement reforms. He was also Chairman of the Finance
Committee when Congress enacted the Pension Protection Act in
2006.
Beyond that, the Senate Finance Committee that he will now chair
in 2016 unanimously passed the Retirement Enhancement and
Savings Act (RESA), which would allow for “open” multiple
employer plans (MEPs), facilitate in-plan lifetime income options
and disclosures, and other key changes. The House version of that
bill had 85 cosponsors in the House, and while it has been bogged
down by procedural and policy disagreements, there remains hope
that it could see action in the 116th Congress.
Just after Thanksgiving, House Republicans released a wideranging
tax package — including a number of retirement savings
provisions. We’re talking, and forgive me if I am starting to sound
repetitive, “open” MEPs, enhancements for small businesses to
start a retirement plan, changes to required minimum distributions
(RMDs), an annuity purchase safe harbor for employers,
provisions to enhance lifetime income portability, and an increase
in the current cap on contributions under the automatic enrollment
safe harbor (QACA) contributions, from 10% to 15%. The
prospects for this particular bill to become law in its entirety are
remote — but it is a positive sign that the 116th Congress could
address bipartisan improvements to the retirement system along
the lines of RESA.
And then there are the initiatives underway by the Trump
administration: The President’s executive orders on
association retirement plans, RMDs and e-delivery —
the need for clarity on the fiduciary implications when
advisors service retirement plans and advise participants
on rollovers (a remnant concern of ours due to the
DOL’s vacated fiduciary investment advice rule), and
the emerging interest of individual states in crafting their
own fiduciary standards.
Please call me if you have any questions.