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How Will the Further Consolidated Appropriations Act of 2020 Impact You and Your Business?

February 18, 2020
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The end of December 2019 brought not only the end of a decade, but also new tax legislation. The Further Consolidated Appropriations Act of 2020 was passed on December 20, 2019, and contains provisions that impact both individuals and businesses. The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) is part of the Further Consolidated Appropriations Act (“the Act”), which provides additional opportunities for individuals to increase their savings, and incentivizes business owners to provide qualified employer retirement plans to their employees.

The tax-related portions of these Acts comprise the following changes that are significant to individuals and businesses.

INDIVIDUALS

Repeal of the maximum age for traditional IRA contributions – previously, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the Act allows for an individual of any age to make contributions to a traditional IRA, as long as they meet the earned income requirement.

Required Minimum Distribution (RMD) age raised from 70½ to 72 – for individuals who attain age 70½ after December 31, 2019, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs – upon the death of plan participants or IRA owners prior to 2020, beneficiaries were allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. Beginning in 2020, however, distributions to most (non-spouse) beneficiaries are generally required to be distributed within 10 years following the plan participant or IRA owner’s death.

Expansion of Section 529 education savings plans – before 2019, distributions from these plans could only be used for qualified higher education expenses in order to be tax free. For distributions made after December 31, 2018, tax-free distributions from 529 plans can also be used to bay expenses related to a beneficiary’s apprenticeship program. Additionally, tax-free distributions up to $10,000 are allowed to pay off student loans of the beneficiary or the beneficiary’s sibling(s).

Kiddie Tax – under the TCJA and for the 2018 and 2019 tax years, the unearned income of a child was taxed at the rates of a trust/estate. The Act repealed these kiddie tax measures added by the TCJA, and therefore starting in 2020, the unearned income of children will be taxed under pre-TCJA rules and not at trust/estate rates.

Penalty-free retirement plan withdrawals for birth or adoption of child – generally a distribution before the age of 59½ from a retirement plan is subject to a 10% early withdrawal penalty on the amount of includible income. Starting in 2020, plan distributions that are used to pay for expenses related to the birth or adoption of a child will be penalty-free up to $5,000 per individual ($5,000 each for a married couple).

Taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes – beginning with the 2020 tax year, the new rules allow fellowship and stipend payments to be treated as compensation for purposes of determining an allowable IRA contribution, allowing students to begin saving for retirement sooner.

Tax-exempt difficulty-of-care payments treated as compensation for IRA purposes - beginning with the 2020 tax year, the Act allows tax-exempt difficulty-of-care payments made to home healthcare workers to be treated as compensation for purposes of calculating contribution limits for an IRA contribution.

Increased failure to file penalty – for returns due after December 31, 2019, the failure to file penalty for returns filed more than 60 days after their due date, is increased to the lesser of $435 (from $205) or 100% of the amount of the tax due, as amended by the SECURE Act.

EMPLOYER RETIREMENT PLANS

Multiple employer plans (MEPs) – an MEP is a single retirement plan maintained by two or more unrelated employers. Effective for plan years beginning after December 31, 2020, the SECURE Act provides relief by reducing constraints related to creating and maintaining MEPs, therefore allowing small employers to collectively take advantage of greater investment choices, while sharing the administrative costs with other members of the MEP.

Automatic plan enrollment credit – automatic enrollment has been shown to increase employee participation as well as retirement savings. Effective starting in 2020, a tax credit of up to $500 per year will be available for employers who create (or convert to) a plan with automatic enrollment provisions.

Small employer pension plan start-up credit – the Act increased the credit for pension plan start-up costs to the greater of (1) $500 or (2) the lesser of: (a) $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan or (b) $5,000. The credit is effective for plan years beginning after December 31, 2019.

Maximum default rate under the automatic enrollment safe harbor for 401(k) plans increased – the auto-enrollment cap is raised from 10 to 15 percent for salary reduction contributions made after an employee’s first plan year, effective for plan years beginning after December 31, 2019.

401(k) plans must allow long-term part-time employees to participate – under pre-Act law, employers could exclude part-time employees. The Act provides that a 401(k) plan must allow an employee to participate and make deferrals if the employee has worked at least 500 hours per year with the employer for at least 3 consecutive years, and has met the age requirement (age 21).

Qualified retirement plans barred from making credit card loans – effective for loans made after December 31, 2019, if a participant receives any amounts as a loan from a qualified employer plan through a credit card or similar arrangement, that amount will be treated as a plan distribution.

Plans adopted by filing due date for year may be treated as in effect as of close of year - employers may to elect to treat qualified retirement plans adopted after the close of the tax year but before the due date (including extensions) of the tax return as having been adopted as of the last day of the tax year (for plans adopted for tax years beginning after December 31, 2019).

Failure to file penalty increased for retirement plans – the failure to file penalty for retirement plan returns is increased for returns due after December 31, 2019 from $25 per day during which the failure continues (up to a maximum of $15,000) to $250 per day (not to exceed $150,000).

CERTAIN EXPIRING PROVISIONS EXTENDED THROUGH DECEMBER 31, 2020

  • Discharge of a home mortgage excluded from gross income of up to $2,000,000
  • Mortgage insurance premiums treated as home mortgage interest
  • Reduction in medical expense deduction floor to 7.5%
  • Deduction of qualified tuition and related expenses up to $4,000
  • Indian Employment Credit
  • Recovery period for racehorses is 3 years
  • Recovery period for motorsports entertainment complexes is 7 years
  • Expensing rules for certain productions up to $15M
  • Empowerment Zone tax incentives
  • New markets credit up to $5 billion and carryover through 2025
  • Employer credit for paid family and medical leave
  • Work Opportunity Credit
  • Health coverage tax credit
  • Qualified disaster distributions from retirement plans (through June 17, 2020)
  • Employee retention credit (through December 31, 2019)
  • Disaster relief provisions extended through February 18, 2020
    • Suspension of cap on charitable contributions for disaster relief
    • Automatic extension of filing deadlines for federally-declared disasters
  • Incentives for energy production, efficiency, and green economy jobs
    • Biodiesel and Renewable Diesel tax credits
    • Nonbusiness energy property credit
    • 2-wheeled plug-in electric vehicle credit
    • Credit for electricity produced from certain renewable resources
    • Energy efficient homes credit
    • Energy efficient commercial buildings deduction

Please contact your Citrin Cooperman adviser or a member of our Citrin Cooperman Federal Tax Policy Team to find out how we can help you and answer all of your questions regarding the Further Consolidated Appropriations Act and the SECURE Act.