In-Depth Analysis of Year-End Tax Act: Spending Bill Tax Provisions Creates Changes That May Necessitate Amended Returns for 2018 and Revisions to 2019 Estimates. (Client Letters Included)

(Parker Tax Publishing December 30, 2019)

On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020 (the Act). The Act contains numerous tax provisions, including (1) extensions of credits and deductions that had expired in prior years, as well as some that were scheduled to expire in 2019; (2) the repeal of the Tax Cuts and Jobs Act of 2017 (TCJA) changes to the kiddie tax rules; (3) new disaster relief tax provisions; (4) the permanent repeal of the "Cadillac Tax" on high cost employer sponsored health insurance and two other healthcare taxes; (5) the expansion of Section 529 plans; and (6) major changes to some retirement-related tax provisions. Pub. L. 116-94.

Practice Aid: New CLIENT LETTERS are available to help you explain the Act's key provisions and potential impact. For a sample letter explaining the provisions affecting Individuals click here and for a sample letter explaining the provisions affecting Businesses click here

Introduction

As a year-end holiday gift, Congress included a number of individual and business friendly tax provisions in the year-end spending package. The Act brought back to life many deductions and credits that had expired at the end of 2017, as well as a few others that had either expired at the end of 2018 or were scheduled to expire at the end of 2019. In addition, new disaster-related tax provisions have been added, a trio of unpopular healthcare taxes were repealed, Section 529 plans were expanded, and substantial changes were made to retirement-related tax provisions.

Some of the funding for these changes will come from increases made to various penalty provisions - notably increases in the penalties for failing to timely file a tax return or timely pay the tax due, and a tenfold increase in the penalty for failing to file a Form 5500.

An explanation of the Act's numerous tax provisions follows.

I. Tax Extenders

The Act extends three dozen expired and expiring deductions and tax credits, generally through December 31, 2020. All but a few of the provisions had expired at the end of 2017 and were extended retroactively to December 31, 2017.

Practice Tip: Amended 2018 tax returns and revisions to previously calculated 2019 tax liabilities may be warranted for clients affected by the Act's retroactive extension of tax breaks that had expired in 2017.

Individual Tax Extenders

Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness: Under Code Sec. 108(a)(1)(E), gross income does not include the discharge of indebtedness of a taxpayer if the debt discharged is qualified principal residence indebtedness which is discharged before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Treatment of Mortgage Insurance Premiums as Qualified Residence Interest: For tax years after 2017 and before 2021, Code Sec. 163(h)(3)(E) provides that taxpayers can treat amounts they paid during the year for qualified mortgage insurance as qualified residence interest. The insurance must be in connection with acquisition debt for a qualified residence. This provision had expired on 12/31/2017 and has been extended retroactively.

Deduction of Qualified Tuition and Related Expenses: For tax years after 2017 and before 2021, taxpayers with modified adjusted gross income within certain limits may deduct up to $4,000 of qualified education expenses paid during the year. The deduction under Code Sec. 222(e) for tuition and related expenses is based on qualified education expenses a taxpayer pays for an eligible student who is: (1) himself or herself; (2) his or her spouse; or (3) a dependent for whom the taxpayer would be entitled to claim an exemption on his or her tax return under pre-TCJA rules. The maximum deduction is limited to $4,000 of expenses for taxpayers with modified adjusted gross income that does not exceed $65,000 ($130,000 in the case of a joint return). For taxpayers with modified adjusted gross income that exceeds those amounts, the maximum deduction is $2,000, as long as the taxpayer's adjusted gross income does not exceed $80,000 ($160,000 in the case of a joint return). This provision had expired on 12/31/2017 and has been extended retroactively.

Reduction in Medical Expense Deduction Floor: For tax years beginning after 2018 and before 2021, the Act extends the provision in Code Sec. 213 which allows a taxpayer to deduct medical expenses to the extent they exceed 7.5 percent of the taxpayer's adjusted gross income (AGI), rather than the 10 percent of AGI that was scheduled to apply. In addition, there is no adjustment to the medical expense deduction when computing the alternative minimum tax for 2019 and 2020. This provision had expired on 12/31/2018 and has been extended retroactively.

Credit for Health Insurance Costs of Eligible Individuals: The health coverage tax credit in Code Sec. 35 is extended through 2020. The credit is available to taxpayers who receive benefits under certain trade adjustment assistance (TAA) programs or benefits from the Pension Benefit Guaranty Corporation (PBGC). The credit is 72.5 percent of amounts paid for qualified health insurance coverage for eligible coverage months. This provision had expired on 12/31/2017 and has been extended retroactively. Prior to being extended, this provision had been set to expire on 12/31/2019.

Energy Incentive Extenders

Energy Efficient Homes Credit: The credit under Code Sec. 45L for energy efficient homes is extended through 2020 for homes acquired after December 31, 2017. The credit applies to contractors who construct or manufacture qualifying energy efficient homes in the year such homes are sold or leased for use as a residence. The credit is $2,000 or $1,000, depending on whether the home is constructed or manufactured and on the energy saving standards satisfied. This provision had expired on 12/31/2017 and has been extended retroactively.

Nonbusiness Energy Property Credit: The nonbusiness energy property credit under Code Sec. 25C is extended to property placed in service before 2021. Taxpayers are allowed a nonbusiness energy property credit for (1) 10 percent of the amounts paid or incurred for qualified energy efficiency improvements installed during the tax year, and (2) the amount of residential energy property expenditures paid or incurred during the tax year. This provision had expired on 12/31/2017 and has been extended retroactively.

Energy Efficient Commercial Buildings Deduction: The deduction under Code Sec. 179D for the cost of energy efficient commercial building property is extended to property placed in service before 2021. The deduction is limited to the excess (if any) of (1) the product of $1.80 and the square footage of the building, over (2) the aggregate amount of the Code Sec. 179D deductions allowed with respect to the building for all prior tax years. This provision had expired on 12/31/2017 and has been extended retroactively.

Qualified Fuel Cell Motor Vehicles Credit: The alternative motor vehicle fuel credit under Code Sec. 30B is extended to motor vehicles purchased before 2021. The credit applies to vehicles propelled by chemically combining oxygen with hydrogen and creating electricity (i.e., fuel cell vehicles). The base credit is $4,000 for vehicles weighing 8,500 pounds or less. Heavier vehicles can get up to a $40,000 credit, depending on their weight. An additional $1,000 to $4,000 credit is available for cars and light trucks to the extent their fuel economy exceeds the 2002 base fuel economy set forth in the Code. This provision had expired on 12/31/2017 and has been extended retroactively.

Two-Wheeled Plug-In Electric Vehicle Credit: The credit under Code Sec. 30D for a taxpayer who acquires a qualified two-wheeled plug-in electric drive motor vehicle is extended and applies to vehicles acquired before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Alternative Fuel Refueling Property Credit: The credit under Code Sec. 30C for alternative fuel refueling property is extended to property placed in service before January 1, 2021. The credit is equal to 30 percent of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year. This provision had expired on 12/31/2017 and has been extended retroactively.

Credit for Electricity Produced from Certain Renewable Resources: The credit under Code Sec. 45(d) for electricity produced from certain renewable resources at qualified facilities is extended through 2020. In addition, (1) the election under Code Sec. 48(a)(5) to treat qualified facilities as energy property is available through 2020; (2) a wind facility under construction, where the construction of the facility begins before January 1, 2021, is a qualified facility for purposes of the credit; and (3) for purposes of the phaseout of the credit for wind facilities, the credit amount is 40 percent for any facility the construction of which begins after December 31, 2019, and before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Extension and Clarification of Excise Tax Credits Relating to Alternative Fuels: The 50 cents per gallon credit under Code Sec. 6426(d) is extended through 2020. The credit is allowed against the excise tax on special fuels for alternative fuel that is sold by the taxpayer for use as a fuel in a motor vehicle or motorboat, for use as a fuel in aviation, or for use by the taxpayer for such purposes. This provision had expired on 12/31/2017 and has been extended retroactively.

Biodiesel and Renewable Diesel Incentives: The credit allowed under Code Sec. 40A for certain biodiesel or renewable diesel used or sold as fuel in a trade or business is extended through 2022. There are five components to this biodiesel fuels credit: (1) the biodiesel credit; (2) the renewable diesel credit; (3) the biodiesel mixture credit; (4) the renewable diesel mixture credit; and (5) the small agri-biodiesel producer credit. In addition, the credit under Code Sec. 6426 for alcohol fuel, biodiesel, and alternative fuel mixtures is extended to any sale or use for any period before January 1, 2023. This provision had expired on 12/31/2017 and has been extended retroactively.

Second Generation Biofuel Producer Credit: The credit allowed under Code Sec. 40(b) for a second generation biofuel producer is extended to qualified second generation biofuel production before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Special Allowance for Second Generation Biofuel Plant Property: The special depreciation allowance in Code Sec. 168(l) for qualified second generation biofuel plant property placed in service during the year is extended to property placed in service before January 1, 2021.

Special Rule for Sales or Dispositions to Implement FERC or State Electric Restructuring Policy for Qualified Electric Utilities: The provision under Code Sec. 451(k)(3) which spreads qualified gains on sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy ratably over an eight tax year period is extended through 2020. This provision had expired on 12/31/2017 and has been extended retroactively.

Alternative Fuel Refueling Property Credit: The credit under Code Sec. 30C for purchases of qualified alternative fuel vehicle refueling property is extended through 2020. The credit is equal to 30 percent of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year. This provision had expired on 12/31/2017 and has been extended retroactively.

Production Credit for Indian Coal Facilities: In the case of a producer of Indian coal, the period during which the credit for such a producer is available under Code Sec. 45(e)(10) is extended from the 12-year period beginning on January 1, 2006, to the 15-year period beginning on January 1, 2006. This provision had expired on 12/31/2017 and has been extended retroactively.

Increased Excise Tax Rates on Coal: Before January 1, 2019, coal extracted from mines was taxed at either $1.10 per ton if from an underground mine, or $0.55 per ton if from a surface mine. The total amount of tax was not to exceed 4.4 percent of the price at which such ton of coal was sold by the producer. After December 31, 2018, the tax rates were scheduled to decline. The Act reinstates the increased rates on coal through December 31, 2020. This provision had expired on 12/31/2017 and has been extended retroactively.

Business Tax Extenders

Classification of Certain Race Horses as 3-Year Property: The three-year MACRS recovery period under Code Sec. 168(e)(3)(A) is extended to any race horse placed in service before 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Recovery Period for Motorsports Entertainment Complexes: The seven-year MACRS recovery period under Code Sec. 168(i)(15) for certain motorsports entertainment complex is extended to property placed in service before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Expensing Rules for Certain Film, Television, and Live Theatrical Productions: The owner of a qualified film or television production or a qualified live theatrical production that began after 2015 and before 2021 may elect under Code Sec. 181 to deduct production costs in the year the costs are paid or incurred in lieu of capitalizing the costs and recovering them through depreciation allowances. This provision had expired on 12/31/2017 and has been extended retroactively.

New Markets Tax Credit: The New Markets credit in Code Sec. 45D is now available through 2020. Under Code Sec. 45D, a taxpayer is allowed a credit for a percentage of the amount paid for a qualified equity investment in a qualified community development entity. In addition, if the new markets tax credit limitation for any calendar year exceeds the aggregate amount allocated for such year, such limitation for the succeeding calendar year is increased by the amount of such excess. No amount may be carried under the preceding sentence to any calendar year after 2025. Prior to being extended, this provision had been set to expire on 12/31/2019.

Employer Credit for Paid Family and Medical Leave: The paid family and medical leave credit under Code Sec. 45S is extended through 2020. The credit allows eligible employers to claim a general business credit equal to an applicable percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave, provided that the rate of payment under the program is at least 50 percent of the wages normally paid to an employee. Prior to being extended, this provision had been set to expire on 12/31/2019.

Work Opportunity Credit: The work opportunity credit under Code Sec. 51 is extended through 2020. Under this provision, employers are generally allowed a 40 percent credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees. Prior to being extended, this provision had been set to expire on 12/31/2019.

Empowerment Zone Tax Incentives: The designation procedure under Code Sec. 1391 for certain empowerment zone tax incentives is extended to designations made before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Provisions Relating to Beer, Wine, and Distilled Spirits: The exemption under Code Sec. 263A(f)(4) from the interest capitalization rule for taxpayers that age beer, wine, and distilled spirits is extended through 2020. In addition, the reduced excise tax rate on beer under Code Sec. 5051(a)(1)(C) and Code Sec. 5051(a)(2)(A), the reduced excise tax rate under Code Sec. 5041(c)(8) on wine produced by small domestic producer, the reduced rate of excise tax in Code Sec. 5001(c) on certain distilled spirits is extended through 2020. Changes were also made to the provision in Code Sec. 5041(b) relating to the adjustment of alcohol content level for purposes of applying excise taxes, to the definition in Code Sec. 5041(h) of "mead" and "low alcohol by volume wine," to the rules in Code Sec. 5212 relating to the transfer of distilled spirits between bonded premises, and to the rules in Code Sec. 5555 relating to the retention of records by persons liable for excise taxes on distilled spirits, wines, and beer. Prior to being extended, this provision had been set to expire on 12/31/2019.

Look-Thru Rule for Related Controlled Foreign Corporations: The look-thru rules of Code Sec. 954(c)(6) are extended through 2020. The look-through rules provide that dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person is not treated as foreign personal holding company income to the extent attributable or properly allocable to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. The look-through rules do not apply in the case of any interest, rent, or royalty to the extent such interest, rent, or royalty creates (or increases) a deficit which, under Code Sec. 952(c), may reduce the subpart F income of the payor or another controlled foreign corporation. Prior to being extended, this provision had been set to expire on 12/31/2019.

Mine Rescue Team Training Credit: Certain mining businesses are allowed a credit under Code Sec. 45N for a percentage of the training program costs paid or incurred to train qualified mine rescue team employees. The credit is available for tax years beginning before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

Indian Employment Credit: Under the Indian employment credit, employers are allowed a credit for a percentage of the wages and health insurance costs paid to employees who are American Indians. The Indian employment credit is now available through the end of 2020. Code Sec. 45A provides that the credit is equal to 20 percent of the excess of the amount of qualified wages and qualified employee health insurance costs paid or incurred for qualified employees during the tax year over the amount of such wages and health insurance costs that were paid or incurred for qualified employees during the base year, which is calendar year 1993. However, the total amount of wages and health insurance costs that may be taken into account for any qualified employee for a tax year is limited to $20,000. This provision had expired on 12/31/2017 and has been extended retroactively.

Railroad Track Maintenance Credit: Certain taxpayers are allowed a credit under Code Sec. 45G(f) for qualified railroad track maintenance expenses paid or incurred during the tax year. The credit is extended for qualified railroad track maintenance expenditures paid or incurred during tax years beginning before January 1, 2023. This provision had expired on 12/31/2017 and has been extended retroactively.

Accelerated Depreciation for Business Property on Indian Reservations: The provision in Code Sec. 168(j)(9), which provides accelerated depreciation deductions for qualified Indian reservation property, is extended to property placed in service before January 1, 2021. This provision had expired on 12/31/2017 and has been extended retroactively.

American Samoa Economic Development Credit: The American Samoa Economic Development Credit enacted under the Health Care Act of 2006 is extended through 2020. This provision had expired on 12/31/2017 and has been extended retroactively.

Oil Spill Liability Trust Fund Financing Rate: The Oil Spill Liability Trust Fund financing rate (i.e., the oil spill tax) which had expired for periods after December 31, 2018, has been extended through December 31, 2020. It generally applies to crude oil received at a U.S. refinery and to petroleum products entered into the United States for consumption, use, or warehousing. The oil spill tax also applies to certain uses and the exportation of domestic crude oil. This provision had expired on 12/31/2018 and has been extended retroactively.

II. Modification of Kiddie Tax Rules

Background. A special kiddie tax applies to a child who -

(1) (i) is under age 18 at the end of the year, (ii) is age 18 at the end of the year and did not have earned income that was more than half of the child's support, or (iii) was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of the child's support;

(2) has more than a specified amount of unearned income;

(3) has a parent who is alive at the close of the tax year; and

(4) does not file a joint tax return.

There is also a reduced alternative minimum tax exemption for a child subject to the kiddie tax.

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the kiddie tax that was imposed was the sum of (1) the tax that would be imposed if the child's taxable income were reduced by net unearned income, plus (2) the child's share of the allocable parental tax. The allocable parental tax is: (1) the tax that would be imposed if the parents' taxable income included the net unearned income of all children to which the kiddie tax applies, minus (2) the tax that would be imposed without including such child's net unearned income.

The TCJA changed the way a child's unearned income was taxed so that, for years 2018-2025, the trust and estate tax rates, rather than a parent's tax rate, applied to such income. This is problematic because the income levels at which the higher trust and estate tax rates apply are lower than under the individual tax rates.

New Law. The Act eliminates the kiddie tax calculation that was enacted in the Tax Cuts and Jobs Act of 2017. Thus, estate and trust tax rates are no longer used to calculate a child's tax on unearned income. The Act also eliminates the reduced AMT exemption amount for a child to whom the kiddie tax applies.

The change in tax rates applicable to a child's unearned income applies to tax years beginning after December 31, 2019. The elimination of the special AMT exemption applies to tax years beginning after December 31, 2017. However, a taxpayer may elect (at such time and in such manner as the IRS may provide) for the change in tax rates to also apply to tax years of the taxpayer which begin in 2018, 2019, or both (as specified by the taxpayer in such election).

III. Disaster Tax Relief

The Act includes provisions, discussed below, relating to disaster tax relief for qualified disaster areas. For purposes of applying the disaster tax relief provisions, the Act defines a qualified disaster area, a qualified disaster zone, a qualified disaster, and an incident period.

The term ''qualified disaster area'' means any area with respect to which a major disaster was declared, during the period beginning on January 1, 2018, and ending on February 18, 2020, by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act if the incident period of the disaster with respect to which such declaration is made begins on or before December 20, 2019. Such term does not include the California wildfire disaster area (as defined in the Bipartisan Budget Act of 2018).

The term ''qualified disaster zone'' means that portion of any qualified disaster area which was determined by the President, during the period beginning on January 1, 2018, and ending on February 18, 2020, to warrant individual or individual and public assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the qualified disaster with respect to such disaster area.

The term ''qualified disaster'' means, with respect to any qualified disaster area, the disaster by reason of which a major disaster was declared with respect to such area.

The term ''incident period'' means, with respect to any qualified disaster, the period specified by the Federal Emergency Management Agency as the period during which such disaster occurred (except that for purposes of this disaster tax relief such period is not treated as beginning before January 1, 2018, or ending after January 19, 2020).

Special Disaster-Related Rules for Use of Retirement Funds

Under the Act, an exception to the 10-percent early withdrawal tax applies in the case of "qualified disaster distributions" from a qualified retirement plan, a Code Sec. 403(b) plan, or an IRA. In addition, as discussed further, income attributable to a qualified disaster distribution may be included in income ratably over three years, and the amount of a qualified disaster distribution may be recontributed to an eligible retirement plan within three years.

A "qualified disaster distribution" is any distribution from a qualified retirement plan, Section 403(b) plan, or governmental Section 457(b) plan, made on or after the first day of the incident period of a qualified disaster and before June 28, 2020, to an individual whose principal place of abode at any time during the incident period is located in the qualified disaster area and who has sustained an economic loss by reason of such disaster, regardless of whether a distribution otherwise would be permissible.

A plan is not treated as violating any Code requirement merely because it treats a distribution as a qualified disaster distribution, provided that the aggregate amount of distributions received by an individual which may be treated as qualified disaster distributions for any tax year does not exceed the excess (if any) of (1) $100,000, over (2) the aggregate amounts treated as qualified disaster distributions received by such individual for all prior tax years.

Any amount required to be included in income as a result of a qualified disaster distribution is included in income ratably over the three-year period beginning with the year of distribution unless the individual elects not to have ratable inclusion apply.

Any portion of a qualified disaster distribution may, at any time during the three-year period beginning the day after the date on which the distribution was received, be recontributed to an eligible retirement plan to which a rollover can be made. Any amount recontributed within the three-year period is treated as a rollover and thus is not includible in income.

Any individual who received a qualified disaster distribution during the period beginning on the date which is 180 days before the first day of the incident period of the qualified disaster and ending on the date which is 30 days after the last day of such incident period, which was to be used to purchase or construct a principal residence in a qualified disaster area, but which was not so purchased or constructed on account of the qualified disaster, may, during the "applicable period," make one or more contributions in an aggregate amount not to exceed the amount of such qualified distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made. The "applicable period" is, in the case of a principal residence in a qualified disaster area with respect to any qualified disaster, the period beginning on the first day of the incident period of such qualified disaster and ending on June 28, 2020.

Employee Retention Credit for Employers Affected by Qualified Disasters

The Act provides a credit of 40 percent of the qualified wages (up to a maximum of $6,000 in qualified wages per employee) paid by an eligible employer to an eligible employee.

The term ''eligible employer'' means any employer (1) which conducted an active trade or business in a qualified disaster zone at any time during the incident period of the qualified disaster with respect to such qualified disaster zone, and (2) with respect to whom the trade or business is inoperable at any time during the period beginning on the first day of the incident period of such qualified disaster and ending on December 20, 2019, as a result of damage sustained by reason of such qualified disaster.

The term "eligible employee" means with respect to an eligible employer an employee whose principal place of employment with such eligible employer (determined immediately before the qualified disaster) was in the qualified disaster zone.

The term ''qualified wages'' means wages (as defined in Code Sec. 51(c)(1) but without regard to Code Sec. 3306(b)(2)(B)) paid or incurred by an eligible employer with respect to an eligible employee at any time on or after the date on which the trade or business first became inoperable at the principal place of employment of the employee (determined immediately before the qualified disaster referred to in such paragraph) and before the earlier of (1) the date on which such trade or business has resumed significant operations at such principal place of employment, or (2) the date which 150 days after the last day of the incident period of the qualified disaster. Such term includes wages paid without regard to whether the employee performs no services, performs services at a different place of employment than such principal place of employment, or performs services at such principal place of employment before significant operations have resumed.

The credit is treated as a current year business credit under Code Sec. 38(b) and therefore is subject to the tax liability limitations of Code Sec. 38(c). Rules similar to Code Sec. 51(i)(1), Code Sec. 52, and Code Sec. 280C(a) apply to the credit.

Temporary Increase in Limitation on Qualified Contributions

Under the Act, the charitable contribution limitation for individuals and corporations is increased for qualified contributions. The term ''qualified contribution'' means any charitable contribution (as defined in Code Sec. 170(c)) if (1) such contribution is paid, during the period beginning on January 1, 2018, and ending on February 18, 2020, in cash to an organization described in Code Sec. 170(b)(1)(A), and is made for relief efforts in one or more qualified disaster areas; (2) the taxpayer obtains from such organization contemporaneous written acknowledgment (within the meaning of Code Sec. 170(f)(8)) that such contribution was used (or is to be used) for relief efforts in one or more qualified disasters; and (3) the taxpayer has elected the application of this provision with respect to such contribution.

A qualified contribution does not include a contribution by a donor if the contribution is (1) to an organization described in Code Sec. 509(a)(3), or (2) for the establishment of a new, or maintenance of an existing, donor advised fund (as defined in Code Sec. 4966(d)(2)).

In the case of a partnership or S corporation, the election described above is made separately by each partner or shareholder.

Special Rules for Qualified Disaster-Related Personal Casualty Losses

Under the Act, in the case of a qualified disaster-related personal casualty loss which arose as the result of a net disaster loss, such loss is deductible without regard to whether aggregate net losses exceed 10 percent of a taxpayer's adjusted gross income. In order to be deductible, however, such losses must exceed $500 per casualty. Finally, such losses may be claimed in addition to the standard deduction and may be claimed by taxpayers subject to the alternative minimum tax. The term ''net disaster loss'' means the excess of qualified disaster-related personal casualty losses over personal casualty gains. The term ''qualified disaster-related personal casualty losses'' means losses described in Code Sec. 165(c)(3) which arise in a qualified disaster area on or after the first day of the incident period of the qualified disaster to which such area relates, and which are attributable to such qualified disaster.

Special Rule for Determining Earned Income

The Act permits qualified individuals to elect to calculate their earned income tax credit and additional child tax credit for an applicable tax year using their earned income from the prior tax year. Qualified individuals are permitted to make the election with respect to an applicable tax year only if their earned income for such tax year is less than their earned income for the preceding tax year.

Qualified individuals are (1) individuals who, at any time during the incident period of a qualified disaster, had their principal place of abode in the applicable qualified disaster zone or (2) individuals who during any portion of such incident period were not in the applicable qualified disaster zone but whose principal place of abode was in the applicable qualified disaster area and were displaced from such principal place of abode by reason of the qualified disaster. An applicable tax year is any tax year which includes any portion of the incident period of a qualified disaster.

For purposes of this provision, in the case of a joint return for a tax year which includes an applicable tax year, the provision applies if either spouse is a qualified individual. In such cases, the earned income which is attributable to the taxpayer for the preceding tax year is the sum of the earned income which is attributable to each spouse for such preceding tax year.

Any election to use the prior year's earned income applies with respect to both the earned income credit and additional child tax credit. For administrative purposes, the incorrect use on a return of earned income pursuant to an election under this provision is treated as a mathematical or clerical error. An election under this rule is disregarded for purposes of calculating gross income in the election year.

Automatic Extension of Filing Deadlines in the Case of Certain Taxpayers Affected by Federally Declared Disasters

The Act provides to qualified taxpayers in the case of a federally declared disaster a mandatory 60-day period that is disregarded in determining whether the acts listed in Code Sec. 7508 (e.g., filing an income, estate, gift, employment, or excise tax return, paying any income, estate, or gift, employment, or excise tax or any installment thereof or of any other liability to the United States in respect thereof, etc.) were performed in the time prescribed, as well as a 60-day period that is disregarded in determining the amount of interest, penalty, additional amount, or addition to tax and the amount of credit or refund. The 60-day period begins on the earliest incident date specified in the declaration of the relevant disaster and ends on the date which is 60 days after the latest incident date so specified. For purposes of this provision, the term "disaster area" has the meaning given such term under Code Sec. 165(i)(5)(B) with respect to a federally declared disaster.

Qualified taxpayers are (1) any individual whose principal residence is located in a disaster area, (2) any taxpayer if the taxpayer's principal place of business (other than the business of performing services as an employee) is located in a disaster area, (3) any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a disaster area, (4) any taxpayer whose records necessary to meet a deadline for the acts listed above are maintained in a disaster area, (5) any individual visiting a disaster area who was killed or injured as a result of the disaster, and (6) solely with respect to a joint return, any spouse of an individual who is a qualified taxpayer.

IV. Repeal of Certain Healthcare Taxes

Repeal of the "Cadillac Tax"

Background. Under the Affordable Care Act, an excise tax was imposed under Code Sec. 4980I on certain health insurance providers for any excess benefit provided by an employer to an employee with respect to "employer-sponsored health coverage." An excess benefit is the amount, if any, by which the aggregate cost of such coverage exceeds a threshold amount. The excess benefit is determined on a monthly basis and the amount of the excise tax is equal to 40 percent of the sum of the monthly excess benefits for the tax year. Originally scheduled to take effect in 2020, the effective date of the excise tax had been pushed back to 2022 by the PATH Act (2015).

New Law. The Act permanently repeals the excise tax on high cost employer sponsored health insurance for tax years beginning after December 31, 2019. As a result, the so-called "Cadillac Tax" has been repealed nearly a decade after its original enactment without ever having gone into effect.

Repeal of the Medical Device Tax

Background. Code Sec. 4191 imposes a manufacturer's excise tax on the sale of any taxable medical device by a manufacturer, producer, or importer. The amount of the tax is 2.3 percent of the price for which such a medical device is sold. A taxable medical device is generally any device (as defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans, excluding eyeglasses, contact lenses, hearing aids, and any other medical device the Secretary of Treasury determines to be of a type that is generally purchased by the general public at retail for individual use.

New Law. The Act permanently repeals the excise tax on medical taxes for sales after December 31, 2019.

Repeal of Annual Fee on Health Insurance Providers

Background. Section 9010 of Pub. L. No. 111-148 (Affordable Care Act) imposes an annual fee on most entities engaged in the business of providing health insurance with respect to U.S. health risks. For purposes of this provision, the Secretary of the Treasury apportions an aggregate annual fee among all covered health insurance providers based on a ratio designed to reflect relative market share of the U.S. health insurance business. The inflation indexed aggregate annual fee is $15.5 billion for 2020.

New Law. The Act permanently repeals the annual fee on health insurance providers for calendar years beginning after December 31, 2020.

V. Expansion of Section 529 Plans

Background. A qualified tuition program (i.e., a "529 plan") is a program established and maintained by a state or agency or instrumentality thereof, or by one or more eligible educational institutions, which satisfies certain requirements and under which a person may purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary (i.e., a prepaid tuition program). Section 529 provides specified income tax and transfer tax rules for the treatment of accounts and contracts established under qualified tuition programs.

In the case of a program established and maintained by a state or agency or instrumentality thereof, a qualified tuition program also includes a program under which a person may make contributions to an account that is established for the purpose of satisfying the qualified higher education expenses of the designated beneficiary of the account, provided it satisfies certain specified requirements (a "savings account program"). Under both types of qualified tuition programs, a contributor establishes an account for the benefit of a particular designated beneficiary to provide for that beneficiary's higher education expenses.

In general, prepaid tuition contracts and tuition savings accounts established under a qualified tuition program involve prepayments or contributions made by one or more individuals for the benefit of a designated beneficiary. Decisions with respect to the contract or account are typically made by an individual who is not the designated beneficiary. Qualified tuition accounts or contracts generally require the designation of a person (i.e., the account owner) whom the program administrator (oftentimes a third-party administrator retained by the State or by the educational institution that established the program) may look to for decisions, recordkeeping, and reporting with respect to the account established for a designated beneficiary.

Distributions for the purpose of meeting the designated beneficiary's higher education expenses are generally not subject to tax. For purposes of receiving a distribution from a qualified tuition program that qualifies for this favorable tax treatment, the term qualified higher education expenses means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution, and expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with such enrollment or attendance. Qualified higher education expenses generally also include room and board for students who are enrolled at least half-time. Qualified higher education expenses include the purchase of any computer technology or equipment, or Internet access or related services, if such technology or services are to be used primarily by the beneficiary during any of the years a beneficiary is enrolled at an eligible institution.

For distributions made after December 31, 2017, a designated beneficiary may, on an annual basis, receive up to $10,000 in aggregate 529 distributions to be used in connection with expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. To the extent such distributions do not exceed $10,000, they are treated in the same manner as distributions for qualified higher education expenses.

Contributions to a qualified tuition program must be made in cash. Section 529 does not impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition benefits relating to a qualified tuition account; however, the program is required to have adequate safeguards to prevent contributions in excess of amounts necessary to provide for the beneficiary's qualified higher education expenses. Contributions generally are treated as a completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for federal income tax purposes, although they may be deductible for state income tax purposes. Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is not subject to current income tax).

A qualified tuition program may not permit any contributor to, or designated beneficiary under, the program to direct (directly or indirectly) the investment of any contributions (or earnings thereon) more than two times in any calendar year, and must provide separate accounting for each designated beneficiary. A qualified tuition program may not allow any interest in an account or contract (or any portion thereof) to be used as security for a loan.

New Law. The Act makes several modifications to Section 529 plans.

First, the Act allows tax-free treatment applicable to distributions for higher education expenses to apply to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program. The apprenticeship program must be registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.

Second, the Act allows tax-free treatment to apply to distributions of certain amounts used to make payments on principal or interest of a qualified education loan. No individual may receive more than $10,000 of such distributions, in aggregate, over the course of the individual's lifetime.

Third, the Act contains a special rule allowing amounts to be distributed to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). This rule allows a 529 account holder to make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.

These provisions apply to distributions made after December 31, 2018.

VI. Retirement Plans

Increased Penalties for Failure to File Form 5500

Background. Various retirement-related filing requirements are met by filing an Annual Return/Report of Employee Benefit Plan, Form 5500 series, and providing the information as required on the form and related instructions. A failure to file Form 5500 generally results in a civil penalty of $25 for each day during which the failure continues, subject to a maximum penalty of $15,000. This penalty may be waived if it is shown that the failure is due to reasonable cause.

New Law. Under the Act, a failure to file Form 5500 generally results in a penalty of $250 for each day during which the failure continues, subject to a maximum amount of $150,000.

Observation: The Act imposes a staggering tenfold increase in the penalty for failure to file a required Form 5500. The potentially ruinous new $150,000 maximum penalty may give pause to small businesses considering implementing Section 401(k) plans or other qualified plans that require the annual filing of Form 5500. Businesses with such plans will have strong additional incentives to put systems in place to ensure timely compliance.

In addition, the Act provides that a failure to file an annual registration statement as required under Code Sec. 6652(d) generally results in a penalty of $10 for each participant with respect to whom the failure applies, multiplied by the number of days during which the failure continues, subject to a maximum penalty of $50,000 for a failure with respect to any plan year. A failure to file a required notification of change generally results in a penalty of $2 for each day during which the failure continues, subject to a maximum penalty of $5,000 for any failure.

Finally, the Act provides that a failure to provide a required withholding notice generally results in a penalty of $10,000 for each failure, subject to a maximum penalty of $10,000 for all failures during any calendar year.

These provisions are effective for returns, statements and notifications required to be filed, and withholding notices required to be provided, after December 31, 2019.

Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth of Child or Adoption

Background. A distribution from a qualified retirement plan, a tax-sheltered annuity plan (i.e., a Section 403(b) plan), an eligible deferred compensation plan of a state or local government employer (i.e., a governmental Section 457(b) plan), or an IRA generally is included in income for the year distributed. These plans are referred to collectively as "eligible retirement plans." In addition, unless an exception applies, a distribution from a qualified retirement plan, a Section 403(b) plan, or an IRA received before age 59 1/2 is subject to a 10-percent additional tax (referred to as the "early withdrawal tax") on the amount includible in income.

The terms of a qualified retirement plan, Section 403(b) plan, or governmental Section 457(b) plan generally determine when distributions are permitted. However, in some cases, restrictions may apply to distributions before an employee's termination of employment, referred to as "in-service" distributions. Despite such restrictions, an in-service distribution may be permitted in the case of financial hardship or an unforeseeable emergency.

New Law. Under the Act, an exception to the 10-percent early withdrawal tax applies in the case of a qualified birth or adoption distribution from an applicable eligible retirement plan. An applicable eligible retirement plan is an eligible retirement plan (as defined in Code Sec. 402(c)(8)(B)) other than a defined benefit plan. In addition, qualified birth or adoption distributions may be recontributed to an individual's applicable eligible retirement plan, subject to certain requirements.

A qualified birth or adoption distribution is a distribution from an applicable eligible retirement plan to an individual if made during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. An eligible adoptee means any individual (other than a child of the taxpayer's spouse) who has not attained age 18 or is physically or mentally incapable of self-support.

Compliance Tip: The Act requires the name, age, and taxpayer identification number of the child or eligible adoptee to which any qualified birth or adoption distribution relates to be provided on the tax return of the individual taxpayer for the tax year.

The maximum aggregate amount which may be treated as qualified birth or adoption distributions by any individual with respect to a birth or adoption is $5,000. The maximum aggregate amount applies on an individual basis. Therefore, each spouse separately may receive a maximum aggregate amount of $5,000 of qualified birth or adoption distributions (with respect to a birth or adoption) from applicable eligible retirement plans in which each spouse participates or holds accounts.

Generally, any portion of a qualified birth or adoption distribution may, at any time after the date on which the distribution was received, be recontributed to an applicable eligible retirement plan to which a rollover can be made. Such a recontribution is treated as a rollover and thus is not includible in income.

This provision applies to distributions made after December 31, 2019.

Repeal of Maximum Age for Traditional IRA Contributions

The Act repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70 1/2 is repealed. The Act also coordinates this change with the special rules for qualified charitable distributions in Code Sec. 408(d)(8)(A) by adding a new rule which provides that the amount of distributions not includible in gross income by reason of Code Sec. 408(d)(8)(A) for a tax year is reduced by an amount equal to the excess of (i) the aggregate amount of deductions allowed to the taxpayer under Code Sec. 219 for all tax years ending on or after the date the taxpayer attains age 70 1/2, over the aggregate amount of reductions for all tax years preceding the current tax year.

The repeal of the prohibition on contributions applies to contributions made for tax years beginning after December 31, 2019. The change to the qualified charitable distribution rule applies to distributions made for tax years beginning after December 31, 2019.

Increase in Age for Required Beginning Date for Mandatory Distributions

Background. Employer-provided qualified retirement plans, traditional IRAs, and individual retirement annuities are subject to required minimum distribution rules. Required minimum distributions generally must begin by April 1 of the calendar year following the calendar year in which the individual (employee or IRA owner) reaches age 70 1/2. Failure to make a required minimum distribution triggers a 50-percent excise tax, payable by the individual or the individual's beneficiary. The tax is imposed during the tax year that begins with or within the calendar year during which the distribution was required. The tax may be waived if the distribution did not occur because of reasonable error and reasonable steps are taken to remedy the violation.

New Law. The Act changes the age on which the required beginning date for required minimum distributions is based, from the calendar year in which the employee or IRA owner attains 70 1/2 years to the calendar year in which the employee or IRA owner attains 72 years. Under the Act, the former rules continue to apply to employees and IRA owners who attain age 70 1/2 prior to January 1, 2020.

The provision is effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 1/2 after December 31, 2019.

Modification of Required Distribution Rules for Designated Beneficiaries

Background. Minimum distribution rules apply to tax-favored employer-sponsored retirement plans and IRAs. Employer-sponsored retirement plans are of two general types: defined benefit plans, under which benefits are determined under a plan formula and paid from general plan assets, rather than individual accounts; and defined contribution plans, under which benefits are based on a separate account for each participant, to which are allocated contributions, earnings and losses.

In general, under the minimum distribution rules, distribution of minimum benefits must begin to an employee (or IRA owner) no later than a required beginning date and a minimum amount must be distributed each year (sometimes referred to as "lifetime" minimum distribution requirements). These lifetime requirements do not apply to a Roth IRA. Minimum distribution rules also apply to benefits payable with respect to an employee (or IRA owner) who has died (sometimes referred to as "after-death" minimum distribution requirements). The regulations provide a methodology for calculating the required minimum distribution from an individual account under a defined contribution plan or from an IRA. In the case of annuity payments under a defined benefit plan or an annuity contract, the regulations provide requirements that the stream of annuity payments must satisfy.

The after-death minimum distributions rules vary depending on (1) whether an employee (or IRA owner) dies on or after the required beginning date or before the required beginning date, and (2) whether there is a designated beneficiary for the benefit. Under the regulations, a designated beneficiary is an individual designated as a beneficiary under the plan or IRA. Similar to the lifetime rules, for defined contribution plans and IRAs (i.e., individual accounts), the required minimum distribution for each year after the death of the employee (or IRA owner) is generally determined by dividing the account balance as of the end of the prior year by a distribution period.

If an employee (or IRA owner) dies on or after the required beginning date, the basic statutory rule is that the remaining interest must be distributed at least as rapidly as under the method of distribution being used before death. Under the regulations, for individual accounts, this rule is also interpreted as requiring the minimum required distribution to be calculated using a distribution period. If there is no designated beneficiary, the distribution period is equal to the remaining years of the employee's (or IRA owner's) life, as of the year of death. If there is a designated beneficiary, the distribution period (if longer) is the beneficiary's life expectancy calculated using the life expectancy table in the regulations, determined in the year after the year of death.

If an employee (or IRA owner) dies before the required beginning date and any portion of the benefit is payable to a designated beneficiary, the statutory rule is that distributions are generally required to begin within one year of the employee's (or IRA owner's) death (or such later date as prescribed in regulations) and are permitted to be paid (in accordance with regulations) over the life or life expectancy of the designated beneficiary. If the beneficiary of the employee (or IRA owner) is the individual's surviving spouse, distributions are not required to commence until the year in which the employee (or IRA owner) would have attained age 70 1/2. If the surviving spouse dies before the employee (or IRA owner) would have attained age 70 1/2, the after-death rules apply after the death of the spouse as though the spouse were the employee (or IRA owner). Under the regulations, for individual accounts, the required minimum distribution for each year is determined using a distribution period and the period is measured by the designated beneficiary's life expectancy, calculated in the same manner as if the individual died on or after the required beginning date.

In cases where distribution after death is based on life expectancy (either the remaining life expectancy of the employee (or IRA owner) or a designated beneficiary), the distribution period generally is fixed at the employee's (or IRA owner's) death and then reduced by one for each year that elapses after the year in which it is calculated. If the designated beneficiary dies during the distribution period, distributions continue to the subsequent beneficiaries over the remaining years in the distribution period.

The distribution period for annuity payments under a defined benefit plan or annuity contract (to the extent not limited to the life of a designated beneficiary) is generally subject to the same limitations as apply to individual accounts.

If an employee (or IRA owner) dies before the required beginning date and there is no designated beneficiary, then the entire remaining interest of the employee (or IRA owner) must generally be distributed by the end of the fifth calendar year following the individual's death (i.e., five-year rule).

New Law. The Act changes the after-death required minimum distribution rules applicable to defined contribution plans, as defined, with respect to required minimum distributions to designated beneficiaries. A defined contribution plan for this purpose means an eligible retirement plan (qualified retirement plans, Section 403(b) plans, governmental Section 457(b) plans, and IRAs) other than a defined benefit plan.

Under the Act, the five-year rule is expanded to become a 10-year period instead of five years, such that the 10-year rule is the general rule for distributions to designated beneficiaries (i.e., any individual designated as a beneficiary by the employee) after death (regardless of whether the employee (or IRA owner) dies before, on, or after the required beginning date) unless the designated beneficiary is an eligible designated beneficiary.

For eligible designated beneficiaries, an exception to the 10-year rule (for death before the required beginning date under present law) applies whether or not the employee (or IRA owner) dies before, on, or after the required beginning date. The exception (similar to pre-Act law) generally allows distributions over life or life expectancy of an eligible designated beneficiary beginning in the year following the year of death. Eligible designated beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee (or IRA owner), is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee (or IRA owner), or is a child of the employee (or IRA owner) who has not reached the age of majority. In the case of a child who has not reached the age of majority, calculation of the minimum required distribution under this exception is only allowed through the year that the child reaches the age of majority.

In determining required minimum distributions after the death of an employee (or IRA owner), the Act is generally effective for required minimum distributions with respect to employees (or IRA owners) with a date of death after December 31, 2019. In the case of a governmental plan, in determining required minimum distributions after the death of an employee, the Act applies to distributions with respect to employees who die after December 31, 2021.

Certain Taxable Non-Tuition Fellowship and Stipend Payments Treated as Compensation for IRA Purposes

Background. There are two general types of individual retirement arrangements (IRAs): traditional IRAs and Roth IRAs. The total amount that an individual may contribute to one or more IRAs for a year is generally limited to the lesser of: (1) a dollar amount ($6,000 for 2019); and (2) the amount of the individual's compensation that is includible in gross income for the year. In the case of an individual who has attained age 50 by the end of the year, the dollar amount is increased by $1,000. In the case of a married couple, contributions can be made up to the dollar limit for each spouse if the combined compensation of the spouses that is includible in gross income is at least equal to the contributed amount.

New Law. Under the Act, an amount includible in an individual's income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study or research (such as a fellowship, stipend, or similar amount) is treated as compensation for purposes of IRA contributions.

This provision applies to tax years beginning after December 31, 2019.

Treating Excluded Difficulty of Care Payments as Compensation for Determining Retirement Contribution Limitations

Background. Gross income does not include amounts received by a foster care provider during the tax year as qualified foster care payments. Qualified foster care payments include any payment made pursuant to a foster care program of a State or political subdivision which is paid by (1) a state or political subdivision thereof or (2) a qualified foster care placement agency, and which is either paid to the foster care provider for caring for a qualified foster individual in the foster care provider's home, or a "difficulty of care" payment.

A "difficulty of care" payment is compensation for providing the additional care needed for certain qualified foster individuals. Such payments are provided when a qualified foster individual has a physical, mental or emotional disability for which the State has determined that (1) there is a need for additional compensation to care for the individual, (2) the care is provided in the home of the foster care provider, and (3) the payments are designated by the payor as compensation for such purpose. An applicant must request an assessment of need from the State agency administering the program and submit a medical evaluation which is reassessed every year.

Since "difficulty of care" payments are excluded from gross income, home healthcare workers receiving only such payments are unable to participate in tax-qualified retirement plans or individual retirement accounts because "difficulty of care" payments are not considered compensation or earnings upon which contributions to such plans or accounts may be made.

New Law. The Act amends Code Sec. 415(c) and Code Sec. 408(o) to increase the contribution limit to qualified retirement plans and individual retirement accounts to include "difficulty of care" payments.

For individual retirement accounts, the provision applies to contributions after December 20, 2019. For defined contribution plans, the provision applies to plan years beginning after December 31, 2015.

Benefits Provided to Volunteer Firefighters and Emergency Medical Responders

Background. In general, a reduction in property tax by persons who volunteer their services as emergency responders under a State law program is includible in gross income. However, for tax years beginning after December 31, 2007, and before January 1, 2011, an exclusion applied for any qualified state or local tax benefit and any qualified reimbursement payment provided to members of qualified volunteer emergency response organizations.

A qualified volunteer emergency response organization is a volunteer organization that is organized and operated to provide firefighting or emergency medical services for persons in a state or a political subdivision and is required (by written agreement) by the state or political subdivision to furnish firefighting or emergency medical services in the state or political subdivision.

A qualified state or local tax benefit is any reduction or rebate of certain taxes provided by a State or local government on account of services performed by individuals as members of a qualified volunteer emergency response organization. These taxes are limited to state or local income taxes, state or local real property taxes, and state or local personal property taxes. A qualified reimbursement payment is a payment provided by a state or political subdivision thereof on account of reimbursement for expenses incurred in connection with the performance of services as a member of a qualified volunteer emergency response organization. The amount of excludible qualified reimbursement payments is limited to $30 for each month during which a volunteer performs services.

Subject to certain limitations, individuals are allowed itemized deductions for (1) State and local income taxes, real property taxes, and personal property taxes, and (2) contributions to charitable organizations, including unreimbursed expenses incurred in performing volunteer services for such an organization.

The amount of state or local taxes taken into account in determining the deduction for taxes is reduced by the amount of any excludible qualified state or local tax benefit. Similarly, expenses paid or incurred by an individual in connection with the performance of services as a member of a qualified volunteer emergency response organization are taken into account for purposes of the charitable deduction only to the extent the expenses exceed the amount of any excludible qualified reimbursement payment.

New Law. The Act reinstates for one year the exclusions for qualified state or local tax benefits and qualified reimbursement payments provided to members of qualified volunteer emergency response organizations. The Act also increases the exclusion for qualified reimbursement payments to $50 for each month during which a volunteer performs services. Under the Act, the exclusions for qualified state or local tax benefits and qualified reimbursement payments do not apply for tax years beginning after December 31, 2020.

The provision is effective for tax years beginning after December 31, 2019. As described above, the exclusions do not apply for tax years beginning after December 31, 2020. Thus, the exclusions apply only for tax years beginning during 2020.

Portability of Annuity Contracts and Other Lifetime Income Options

Background. The investment options under a particular employer-sponsored retirement plan may change at times. Similarly, a plan that allows employees to direct the investment of their accounts in any product, instrument or investment offered in the market may be amended to limit the investments that can be held in the plan. In these cases, employees may be required to change the investments held within their accounts.

The terms of some investments impose a charge or fee when the investment is liquidated, particularly if the investment is liquidated within a particular period after acquisition. For example, a lifetime income product, such as an annuity contract, may impose a surrender charge if the investment is discontinued.

If an employee has to liquidate an investment held in an employer-sponsored retirement plan because of a change in investment options or a limit on investments held in the plan, the employee may be subject to a charge or fee as described above. In addition, restrictions on in-service distributions may prevent the employee from preserving the investment through a rollover.

New Law. The Act permits qualified defined contribution plans, Section 403(b) plans, or governmental Section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of annuity contracts and other lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.

Specifically, the Act provides that, if a lifetime income investment is no longer authorized to be held as an investment option under a qualified defined contribution plan, Section 403(b) plan, or governmental Section 457(b) plan, except as otherwise provided in guidance, the plan does not fail to satisfy the Code requirements applicable to the plan solely by reason of allowing (1) qualified distributions of a lifetime income investment, or (2) distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract. Such a distribution must be made within the 90-day period ending on the date when the lifetime income investment is no longer authorized to be held as an investment option under the plan.

For this purpose, the Act provides that a qualified distribution is a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA. A lifetime income investment is defined as an investment option designed to provide an employee with election rights (1) that are not uniformly available with respect to other investment options under the plan and (2) that are rights to a lifetime income feature available through a contract or other arrangement offered under the plan (or under another employer-sponsored retirement plan or IRA through a direct trustee-to-trustee transfer).

A lifetime income feature is (1) a feature that guarantees a minimum level of income annually (or more frequently) for at least the remainder of the life of the employee or the joint lives of the employee and the employee's designated beneficiary, or (2) an annuity payable on behalf of the employee under which payments are made in substantially equal periodic payments (not less frequently than annually) over the life of the employee or the joint lives of the employee and the employee's designated beneficiary. Finally, a qualified plan distribution annuity contract is an annuity contract purchased for a participant and distributed to the participant by an employer-sponsored retirement plan or an employer-sponsored retirement plan contract.

This provision applies to plan years beginning after December 31, 2019.

Treatment of Custodial Accounts on Termination of Section 403(B) Plans

Background. Section 403(b) plans are a form of tax-favored employer-sponsored plan that provide tax benefits similar to qualified retirement plans. Section 403(b) plans may be maintained only by (1) charitable tax-exempt organizations, and (2) educational institutions of state or local governments (that is, public schools, including colleges and universities). Many of the rules that apply to Section 403(b) plans are similar to the rules applicable to qualified retirement plans, including Section 401(k) plans.

A Section 403(b) plan is permitted to contain provision for plan termination and that allow accumulated benefits to be distributed on termination. In order for a plan termination to be effectuated, however, all plan assets must be distributed to participants.

New Law. Under the Act, the Secretary of the Treasury is directed to issue guidance by June 20, 2020, to provide that, if an employer terminates a Section 403(b) plan under which amounts are contributed to custodial accounts, the plan administrator or custodian may distribute an individual custodial account in kind to a participant or beneficiary of the plan and the distributed custodial account must be maintained by the custodian on a tax-deferred basis as a Section 403(b)(7) custodial account, similar to the treatment of fully-paid individual annuity contracts under Rev. Rul. 2011-7, until amounts are actually paid to the participant or beneficiary. In addition, such guidance must provide that (1) the Section 403(b)(7) status of the distributed custodial account is generally maintained if such account thereafter adheres to the requirements of Section 403(b) in effect at the time of the account's distribution, and (2) a custodial account is not considered distributed to the participant or beneficiary if the employer has any material retained rights under the account (the employer, however, is not treated as retaining material rights simply because the custodial account was originally opened under a group contract).

The Act directs such guidance to apply retroactively for tax years beginning after December 31, 2008.

This provision is effective on December 20, 2019.

Qualified Cash or Deferred Arrangements Must Allow Long-Term Employees Working More Than 500 but Less Than 1,000 Hours per Year to Participate

Background. Qualified retirement plans are of two general types: defined benefit plans, under which benefits are determined under a plan formula and paid from general plan assets, rather than individual accounts; and defined contribution plans which include Section 401(k) plans, under which benefits are based on a separate account for each participant, to which are allocated contributions, earnings and losses.

A Section 401(k) plan legally is not a separate type of plan, but is a profit-sharing or stock bonus plan that contains a qualified cash or deferred arrangement under which employees may make elective deferrals. Section 401(k) plans may be designed so that elective deferrals are made only if the employee affirmatively elects them. Alternatively, a Section 401(k) plan may provide for "automatic enrollment," under which elective deferrals are made at a specified rate (referred to as a "default rate") when an employee becomes eligible to participate unless the employee affirmatively elects not to make contributions or to make contributions at a different rate. Other special rules apply to such arrangements. The maximum annual amount of elective deferrals that can be made by an employee to a Section 401(k) plan for a year for 2019 is $19,000 plus $6,000 for employees age 50 or older (catch-up contribution amount) or, if less, the employee's compensation. Section 401(k) plans may provide for matching contributions, which are made on account of elective deferrals, and may provide for employer nonelective contributions.

A qualified retirement plan generally can delay participation in the plan based on attainment of age or completion of years of service but not beyond the later of completion of one year of service (that is, a 12-month period with at least 1,000 hours of service) or attainment of age 21. A plan also cannot exclude an employee from participation (on the basis of age) when that employee has attained a specified age. Employees can be excluded from plan participation on other bases, such as job classification, as long as the other basis is not an indirect age or service requirement. A plan can provide that an employee is not entitled to an allocation of employer nonelective or matching contributions for a plan year unless the employee completes either 1,000 hours of service during the plan year or is employed on the last day of the year even if the employee previously completed 1,000 hours of service in a prior year. However, once an employee has completed 1,000 hours of service during a plan year, an employee cannot be precluded from making elective deferrals based on a service requirement.

Qualified retirement plans are subject to requirements as to the period of service after which a participant's right to his or her accrued benefit must be nonforfeitable (that is, "vested"). Generally, a year of vesting service is only required to be credited if an employee completes 1,000 hours of service during the year.

New Law. The Act requires a Section 401(k) plan to permit an employee to make elective deferrals if the employee has worked at least 500 hours per year with the employer for at least three consecutive years and has met the age requirement (age 21) by the end of the three consecutive year period (for this purpose, an employee is referred to as a "long-term part-time employee" after having completed this period of service). Thus, a long-term part-time employee cannot be excluded from the plan because the employee has not completed a year of service as defined under the participation requirements described above (a 12-month period with at least 1,000 hours of service).

Once a long-term part-time employee meets the age and service requirements, such employee must be able to begin participation no later than the earlier of (1) the first day of the first plan year beginning after the date on which the employee satisfied the age and service requirements or (2) the date six months after the date on which the individual satisfied those requirements. Employers may, but are not required to, allow long-term part-time employees to participate in the design based safe harbors (including the automatic enrollment safe harbor). If an employer does permit a long-term part-time employee to participate in such an automatic enrollment 401(k) plan, that employee would have elective deferrals automatically made at the default rate unless the employee affirmatively elects not to make contributions or to make contributions at a different rate.

The Act does not require a long-term part-time employee to be otherwise eligible to participate in the plan. Thus, the plan can continue to treat a long-term part-time employee as ineligible under the plan for employer nonelective and matching contributions based on not having completed a year of service. However, for a plan that does provide employer contributions for long-term part-time employees, the Act requires a plan to credit, for each year in which such an employee worked at least 500 hours, a year of service for purposes of vesting in any employer contributions.

The changes by the Act do not apply to collectively bargained employees.

The provision applies to plan years beginning after December 31, 2020, except that for determining whether the three consecutive year period has been met, 12-month periods beginning before January 1, 2021, are not taken into account.

Plan Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year

Background. In order for a qualified retirement plan to be treated as maintained for a tax year, the plan must be adopted by the last day of the tax year. However, the trust under the plan will not fail to be treated as in existence due to lack of corpus merely because it holds no assets on the last day of the tax year. Contributions made by the due date (plus extensions) of the tax return for the employer maintaining the plan for a tax year are treated as contributed on account of that tax year. Thus a plan can be established on the last day of a tax year even though the first contribution is not made until the due date of the employer's return of tax for the tax year. Further, if the terms of a plan adopted during an employer's tax year fail to satisfy the qualification requirements that apply to the plan for the year, the plan may also be amended retroactively by the due date (including extensions) of the employer's return, provided that the amendment is made retroactively effective. However, this provision does not allow a plan to be adopted after the end of a tax year and made retroactively effective, for qualification purposes, for the tax year prior to the tax year in which the plan was adopted by the employer.

New Law. Under the Act, if an employer adopts a qualified retirement plan after the close of a tax year but before the time prescribed by law for filing the return of tax of the employer for the tax year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the tax year.

The Act does not override rules requiring certain plan provisions to be in effect during a plan year, such as the provision for elective deferrals under a qualified cash or deferral arrangement.

The provision applies to plans adopted for tax years beginning after December 31, 2019.

Disclosure Regarding Lifetime Income

Background. In May 2013, the Department of Labor issued proposed regulations under which a benefit provided to a defined contribution plan participant would include an estimated lifetime income stream of payments based on the participant's account balance. However, information about lifetime income that might be provided by funds in a defined contribution plan is not currently required to be included in a benefit statement.

New Law. The Act requires a benefit statement provided to a defined contribution plan participant to include a lifetime income disclosure. However, the lifetime income disclosure is required to be included in only one benefit statement during any 12-month period.

A lifetime income disclosure is required to set forth the lifetime income stream equivalent of the participant's total account balance under the plan. The lifetime income stream equivalent to the account balance is the amount of monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, based on assumptions specified in guidance prescribed by the Secretary of Labor. The required lifetime income streams are (1) a qualified joint and survivor annuity for the participant and the participant's surviving spouse, based on assumptions specified in guidance, including the assumption that the participant has a spouse of equal age, and (2) a single life annuity. The lifetime income streams may have a term certain or other features to the extent permitted under guidance.

Under the Act, no plan fiduciary, plan sponsor, or other person has any liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance under the Act and that include the explanations contained in model disclosure. This protection applies without regard to whether the lifetime income stream equivalent is required to be provided.

Effective Date. The requirement to provide a lifetime income disclosure applies with respect to benefit statements provided more than 12 months after the latest of the issuance by the Labor Secretary of (1) interim final rules, (2) the model disclosure, or (3) prescribed assumptions.

Increase in 10 Percent Cap for Automatic Enrollment Safe Harbor after 1st Plan Year

Background. Section 401(k) plans are generally designed so that an employee will receive cash compensation unless the employee affirmatively elects to make elective deferrals to the Section 401(k) plan. Alternatively, a plan may provide that elective deferrals are made at a specified rate (i.e., default rate) when an employee becomes eligible to participate unless the employee elects otherwise (that is, affirmatively elects not to make contributions or to make contributions at a different rate). This plan design is referred to as automatic enrollment.

An annual nondiscrimination test, called the actual deferral percentage test (the ADP test) applies to elective deferrals under a Section 401(k) plan. The ADP test generally compares the average rate of deferral for highly compensated employees to the average rate of deferral for nonhighly compensated employees and requires that the average deferral rate for highly compensated employees not exceed the average rate for nonhighly compensated employees by more than certain specified amounts. If a plan fails to satisfy the ADP test for a plan year based on the deferral elections of highly compensated employees, the plan is permitted to distribute deferrals to highly compensated employees (i.e., excess deferrals) in a sufficient amount to correct the failure. The distribution of the excess deferrals must be made by the close of the following plan year. The ADP test is deemed to be satisfied if a Section 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (i.e., 401(k) safe harbor plan), as well as certain required rights and features and satisfies a notice requirement. One type of 401(k) safe harbor includes automatic enrollment.

An automatic enrollment safe harbor plan must provide that, unless an employee elects otherwise, the employee is treated as electing to make elective deferrals at a default rate equal to a percentage of compensation as stated in the plan and at least (1) 3 percent of compensation for the first year the deemed election applies to the participant, (2) 4 percent during the second year, (3) 5 percent during the third year, and (4) 6 percent during the fourth year and thereafter. Although an automatic enrollment safe harbor plan generally may provide for default rates higher than these minimum rates, the default rate cannot exceed 10 percent for any year.

New Law. Under the Act, the 10-percent limitation on the default rates under an automatic enrollment safe harbor plan is increased to 15 percent after the first year that an employee's deemed election applies.

This provision applies to plan years beginning after December 31, 2019.

Rules Relating to Election of Safe Harbor 401(k) Status

Background. An annual nondiscrimination test, called the actual deferral percentage test (the "ADP" test) applies to elective deferrals under a Section 401(k) plan. The ADP test generally compares the average rate of deferral for highly compensated employees to the average rate of deferral for nonhighly compensated employees and requires that the average deferral rate for highly compensated employees not exceed the average rate for nonhighly compensated employees by more than certain specified amounts. If a plan fails to satisfy the ADP test for a plan year based on the deferral elections of highly compensated employees, the plan is permitted to distribute deferrals to highly compensated employees (i.e., excess deferrals) in a sufficient amount to correct the failure. The distribution of the excess deferrals must be made by the close of the following plan year.

The ADP test is deemed to be satisfied if a Section 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (i.e., 401(k) safe harbor plan), described below, as well as certain required rights and features and satisfies a notice requirement.

Under one type of 401(k) safe harbor plan (i.e., basic 401(k) safe harbor plan), the plan either (1) satisfies a matching contribution requirement (i.e., matching contribution basic 401(k) safe harbor plan) or (2) provides for a nonelective contribution to a defined contribution plan of at least 3 percent of an employee's compensation on behalf of each nonhighly compensated employee who is eligible to participate in the plan (i.e., nonelective basic 401(k) safe harbor plan). The matching contribution requirement under the matching contribution basic 401(k) safe harbor requires a matching contribution equal to at least 100 percent of elective contributions of the employee for contributions not in excess of three percent of compensation, and 50 percent of elective contributions for contributions that exceed 3 percent of compensation but do not exceed five percent, for a total matching contribution of up to 4 percent of compensation. The required matching contributions and the 3 percent nonelective contribution under the basic 401(k) safe harbor must be immediately nonforfeitable (that is, 100 percent vested) when made.

Another safe harbor applies for a Section 401(k) plan that include automatic enrollment (i.e., automatic enrollment 401(k) safe harbor). Under an automatic enrollment 401(k) safe harbor, unless an employee elects otherwise, the employee is treated as electing to make elective deferrals equal to a percentage of compensation as stated in the plan, not in excess of 10 percent and at least (1) 3 percent of compensation for the first year the deemed election applies to the participant, (2) 4 percent during the second year, (3) 5 percent during the third year, and (4) 6 percent during the fourth year and thereafter.

Under the automatic enrollment 401(k) safe harbor, the matching contribution requirement is 100 percent of elective contributions of the employee for contributions not in excess of one percent of compensation, and 50 percent of elective contributions for contributions that exceed one percent of compensation but do not exceed six percent, for a total matching contribution of up to 3.5 percent of compensation ("matching contribution automatic enrollment 401(k) safe harbor"). The rate of nonelective contribution under the automatic enrollment 401(k) safe harbor plan is three percent, as under the basic 401(k) safe harbor (i.e., nonelective contribution automatic enrollment 401(k) safe harbor). However, under the automatic enrollment 401(k) safe harbors, the matching and nonelective contributions are allowed to become 100 percent vested only after two years of service (rather than being required to be immediately vested when made).

The notice requirement for a 401(k) safe harbor plan is satisfied if each employee eligible to participate is given, within a reasonable period before any year, written notice of the employee's rights and obligations under the arrangement and the notice meets certain content and timing requirements (i.e., safe harbor notice).

New Law. The Act eliminates the safe harbor notice requirement with respect to nonelective 401(k) safe harbor plans. However, the general rule under present law requiring a Section 401(k) plan to provide each eligible employee with an effective opportunity to make or change an election to make elective deferrals at least once each plan year still applies.

Under the Act, a plan can be amended to become a nonelective 401(k) safe harbor plan for a plan year (that is, amended to provide the required nonelective contributions and thereby satisfy the safe harbor requirements) at any time before the 30th day before the close of the plan year.

Further, the Act allows a plan to be amended after the 30th day before the close of the plan year to become a nonelective contribution 401(k) safe harbor plan for the plan year if (1) the plan is amended to provide for a nonelective contribution of at least 4 percent of compensation (rather than at least 3 percent) for all eligible employees for that plan year and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year (generally, by the close of following plan year).

This provision applies to plan years beginning after December 31, 2019.

Qualified Employer Plans Prohibited from Making Loans through Credit Cards and Other Similar Arrangements

Background. Employer-sponsored retirement plans may provide loans to participants. Unless the loan satisfies certain requirements in both form and operation, the amount of a retirement plan loan is a deemed distribution from the retirement plan. Among the requirements that the loan must satisfy are that the loan amount must not exceed the lesser of 50 percent of the participant's account balance or $50,000 (generally taking into account outstanding balances of previous loans), and the loan's terms must provide for a repayment period of not more than five years (except for a loan specifically to purchase a home) and for level amortization of loan payments to be made not less frequently than quarterly. Thus, if an employee stops making payments on a loan before the loan is repaid, a deemed distribution of the outstanding loan balance generally occurs.

A deemed distribution of an unpaid loan balance generally is taxed as though an actual distribution occurred, including being subject to a 10-percent early distribution tax, if applicable. A deemed distribution is not eligible for rollover to another eligible retirement plan. Subject to the limit on the amount of loans, which precludes any additional loan that would cause the limit to be exceeded, the rules relating to loans do not limit the number of loans an employee may obtain from a plan. Some arrangements have developed under which an employee can access plan loans through the use of a credit card or similar mechanism.

New Law. Under the Act, a plan loan that is made through the use of a credit card or similar arrangement does not meet the requirements for loan treatment applicable to qualified retirement plans, and is therefore a deemed distribution.

This provision applies to loans made after December 20, 2019.

Increase in Credit Limitation for Small Employer Pension Plan Startup Costs

Background. A nonrefundable income tax credit is available for qualified startup costs of an eligible small employer that adopts a new qualified retirement plan, SIMPLE IRA plan, or SEP (i.e., an eligible employer plan), provided that the plan covers at least one non-highly compensated employee. Qualified startup costs are expenses connected with the establishment or administration of the plan or retirement-related education for employees with respect to the plan. The credit is the lesser of (1) a flat dollar amount of $500 per year, or (2) 50 percent of the qualified startup costs. The credit applies for up to three years beginning with the year the plan is first effective, or, at the election of the employer, with the year preceding the first plan year.

An eligible employer is an employer that, for the preceding year, had no more than 100 employees, each with compensation of $5,000 or more. In addition, the employer must not have had a plan covering substantially the same employees as the new plan during the three years preceding the first year for which the credit would apply. Members of controlled groups and affiliated service groups are treated as a single employer for purposes of these requirements. All eligible employer plans of an employer are treated as a single plan.

No deduction is allowed for the portion of qualified startup costs paid or incurred for the tax year equal to the amount of the credit.

New Law. The Act changes the calculation of the flat dollar amount limit on the credit. Under the Act, the flat dollar amount for a tax 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. As under present law, the credit applies for up to three years.

The provision applies to tax years beginning after December 31, 2019.

Small Employer Automatic Enrollment Credit

Background. A nonrefundable income tax credit is available for qualified startup costs of an eligible small employer that adopts a new qualified retirement plan, SIMPLE IRA plan or SEP (referred to as an eligible employer plan), provided that the plan covers at least one nonhighly compensated employee. Qualified startup costs are expenses connected with the establishment or administration of the plan or retirement-related education for employees with respect to the plan.

The credit is the lesser of (1) a flat dollar amount of $500 per year or (2) 50 percent of the qualified startup costs. The credit applies for up to three years beginning with the year the plan is first effective, or, at the election of the employer, with the year preceding the first plan year.

An eligible employer is an employer that, for the preceding year, had no more than 100 employees with compensation of $5,000 or more. In addition, the employer must not have had a plan covering substantially the same employees as the new plan during the three years preceding the first year for which the credit would apply. Members of controlled groups and affiliated service groups are treated as a single employer for purposes of these requirements. All eligible employer plans of an employer are treated as a single plan.

No deduction is allowed for the portion of qualified startup costs paid or incurred for the tax year equal to the amount of the credit.

A qualified defined contribution plan may include a qualified cash or deferred arrangement under which employees may elect to have plan contributions (i.e., elective deferrals) made rather than receive cash compensation (i.e., a Section 401(k) plan). A SIMPLE IRA plan is an employer-sponsored retirement plan funded with individual retirement arrangements (IRAs) that also allows employees to make elective deferrals. Section 401(k) plans and SIMPLE IRA plans may be designed so that the employee will receive cash compensation unless the employee affirmatively elects to make elective deferrals to the plan. Alternatively, a plan may provide that elective deferrals are made at a specified rate (when the employee becomes eligible to participate) unless the employee elects otherwise (i.e., affirmatively elects not to make contributions or to make contributions at a different rate). This alternative plan design is referred to as automatic enrollment.

New Law. Under the Act, an eligible employer is allowed a business tax credit of $500 per year for up to three years for startup costs for new Section 401(k) plans and SIMPLE IRA plans that include automatic enrollment, in addition to the plan startup credit allowed under present law. An eligible employer is also allowed a credit of $500 per year for up to three years if it converts an existing plan to an automatic enrollment design.

The provision applies to tax years beginning after December 31, 2019.

Multiple Employer Plans; Pooled Employer Plans

Background. Some Internal Revenue Code requirements are applied to a multiple employer plan on a plan-wide basis. For example, all employees covered by the plan are treated as employees of all employers participating in the plan for purposes of the exclusive benefit rule. Similarly, an employee's service with all participating employers is taken into account in applying the minimum participation and vesting requirements. In applying the limits on contributions and benefits, compensation, contributions, and benefits attributable to all employers are taken into account. Other requirements are applied separately, including the minimum coverage requirements, nondiscrimination requirements (both the general requirements and the special tests for Code Sec. 401(k) plans), and the top-heavy rules. However, the qualified status of the plan as a whole is determined with respect to all employers maintaining the plan, and the failure by one employer (or by the plan itself) to satisfy an applicable qualification requirement may result in disqualification of the plan with respect to all employers (sometimes referred to as the "one bad apple" rule).

New Law. The Act amends the Code and ERISA to provide relief from the "one bad apple" rule for certain plans (referred to as "covered multiple employer plans"). A covered multiple employer plan is a multiple employer qualified defined contribution plan or a plan that consists of individual retirement accounts (IRAs), including under an IRA trust, that either (1) is maintained by employers which have a common interest other than having adopted the plan, or (2) in the case of a plan not described in (1), has a pooled plan provider, and which meets certain other requirements.

The Act outlines various requirements that apply to a pooled provider plan under the Code. It also outlines various requirements that apply under ERISA to a qualified defined contribution plan that is established or maintained for the purpose of providing benefits to the employees of two or more employers and that meets certain requirements to be a "pooled employer plan," and provides that a pooled employer plan is treated for purposes of ERISA as a single plan that is a multiple employer plan.

These amendments apply to plan years beginning after December 31, 2020.

Combined Annual Report for Group of Plans

Background. Under the Code, an employer maintaining a qualified retirement plan generally is required to file an annual return containing information required under regulations with respect to the qualification, financial condition, and operation of the plan. ERISA requires the plan administrator of certain pension and welfare benefit plans to file annual reports disclosing certain information to the Department of Labor (DOL). These filing requirements are met by filing a completed Form 5500, Annual Return/Report of Employee Benefit Plan. Forms 5500 are filed with DOL, and information from Forms 5500 is shared with the IRS. A separate Form 5500 is required for each plan.

New Law. The Act directs the IRS and DOL to work together to modify Form 5500 so that all members of a group of plans described below may file a single consolidated Form 5500. In developing the consolidated Form 5500, IRS and DOL may require it to include all information for each plan in the group as IRS and DOL determine is necessary or appropriate for the enforcement and administration of the Code and ERISA.

The Act provides that the consolidated Form 5500 is to be implemented no later than January 1, 2022, and will be effective for returns and reports for plan years beginning after December 31, 2021.

Provisions Relating to Plan Amendments

Background. Special rules apply with respect to making amendments to qualified retirement plan or annuity contracts.

New Law. The Act amends the conditions under which plan amendments will meet applicable requirements under the Internal Revenue Code.

Other Retirement Plan Related Provisions

With respect to retirement plans, the Act also does the following:

(1) Clarifies the retirement income account rules relating to church-controlled organizations;

(2) Provides special rules for minimum funding standards for community newspaper plans;

(3) Provides a fiduciary safe harbor for the selection of a lifetime income provider;

(4) Modifies the nondiscrimination rules to protect older, longer service participants; and

(5) Modifies PBGC premiums for CSEC plans.

VII. Miscellaneous Provisions

Increase in Penalty for Failure to File

The Act provides that, if a return is filed more than 60 days after its due date, then the failure to file penalty may not be less than the lesser of $435 or 100 percent of the amount required to be shown as tax on the return. This provision applies to returns with filing due dates (including extensions) after December 31, 2019.

Modification of the Tax Rate for the Excise Tax on Investment Income of Private Foundations.

The excise tax rate in Code Sec. 4940(a) on investment income of private foundations is reduced from 2 percent to 1.39 percent. In addition, the reduced tax where a foundation meets certain distribution requirements is eliminated.

Additional Low-Income Housing Credit Allocations for Qualified 2017 and 2018 California Disaster Areas

The Act increases the state housing credit ceiling for California for calendar year 2020.

Treatment of Certain Possessions

The Act provides that the Treasury Secretary must pay to each possession of the United States which has a mirror code tax system amounts equal to the loss (if any) to that possession by reason of the application of the provisions of this title. Such amounts must be determined by the Treasury Secretary based on information provided by the government of the respective possession. With respect to each U.S. possession that does not have a mirror code tax system, the Treasury Secretary must pay amounts estimated by the Secretary as being equal to the aggregate benefits (if any) that would have been provided to residents of such possession by reason of the provisions of this title if a mirror code tax system had been in effect in such possession. The preceding sentence does not apply unless the respective possession has a plan, which has been approved by the Treasury Secretary, under which such possession will promptly distribute such payments to its residents.

Modification of Income for Purposes of Determining Tax-Exempt Status of Certain Mutual or Cooperative Telephone or Electric Companies

The Act amends Code Sec. 501(c)(12) to provide that, in the case of a mutual or cooperative telephone or electric company, certain income will not be taken into account in determining the company's tax-exempt status.

Repeal of Increase in Unrelated Business Taxable Income for Certain Fringe Benefit Expenses

The Act eliminates Code Sec. 512(a)(7), effective to when it was enacted in the Tax Cuts and Jobs Act of 2017. Under Code Sec. 512(a)(7), unrelated business taxable income of an organization was increased by any amount for which a deduction was not allowable by reason of Code Sec. 274 and which was paid or incurred by such organization for any qualified transportation fringe (as defined in Code Sec. 132(f)), any parking facility used in connection with qualified parking (as defined in Code Sec. 132(f)(5)(C)), or any on-premises athletic facility (as defined in Code Sec. 132(j)(4)(B)).

Increase Information Sharing to Administer Excise Taxes

Generally, tax returns and return information are confidential and may not be disclosed unless authorized in the Code. Return information includes data received, collected or prepared by the Treasury Secretary with respect to the determination of the existence or possible existence of liability of any person under the Code for any tax, penalty, interest, fine, forfeiture, or other imposition or offense. Code Sec. 6103 provides exceptions to the general rule of confidentiality, detailing permissible disclosures. Under Code Sec. 6103(h)(1), tax information is open to inspection by or disclosure to Treasury officers and employees whose official duties require the inspection or disclosure for tax administration purposes.

The Act allows the IRS to share returns and return information with employees of U.S. Customs and Border Protection whose official duties require such inspection or disclosure for purposes of administering and collecting the heavy vehicle use tax. This provision is effective on December 20, 2019.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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