New retirement plan distribution options introduced by SECURE 2.0

April 30, 2024 | by RSM US LLP

Executive summary: Distribution options

Employers establish retirement plans to provide a vehicle to set aside monies, whether funded by the employee or the employer, to be preserved for a retirement benefit. The rules related to when an employee can take a distribution from their retirement plan account are restrictive considering the goal of preserving the retirement funds. SECURE 2.0, enacted on Dec. 29, 2022, included provisions that loosen some of the restrictions on withdrawals from a retirement plan. The additional options available give plan sponsors flexibility in choosing what to offer their employees.


In general

There are a few general concepts to keep in mind as we dive deeper into some of the provisions added by SECURE 2.0.

  1. A plan sponsor has discretion as to whether and how these optional plan provisions will be incorporated into the plan.
  2. All the distribution provisions discussed are exempt from the 10% tax on early withdrawals (i.e., before age 59½) from a retirement plan. However, the amount withdrawn is still subject to income tax.
  3. While income tax applies, there is the ability for an individual to recoup taxes, and restore their retirement savings, by re-contributing to the plan some or all the amounts withdrawn within three years of distribution.
  4. The provisions can be made available to any plan participant, not just a current employee.

Domestic abuse

A survivor of domestic abuse often needs access to additional funds to assist in escaping or recovering from an unsafe situation. “Domestic abuse” for this purpose is defined in SECURE 2.0 as: “physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.” The survivor must certify that they experienced domestic abuse within the last year to receive a distribution that is no more than the lesser of $10,000 (for 2024, as indexed) or 50% of the survivor’s vested plan balance.

This distributable event became available, after Dec. 31, 2023, for implementation by an IRC section 401(a) defined contribution plan (including 401(k), but not money purchase pension plans), 403(a) annuity plan, 403(b) plan and a governmental 457(b) plan, as well as individual retirement accounts (IRAs).

Emergency personal expense

Unforeseen emergency situations that require immediate financial resolution are a common occurrence. This distributable event allows up to $1,000 of the participant’s plan account to be withdrawn. To receive the distribution, the participant must certify that they have an expense for themselves or a family member that is an immediate financial need. Only one such distribution can be issued in a calendar year. Another personal expense distribution cannot be issued in the three calendar years following the year of distribution unless the withdrawn amount is repaid to the plan or contributions made by the participant to the plan after the distribution are at least equal to the amount distributed.

Many plans already provide hardship distribution options for employees. However, the circumstances under which a hardship distribution can be issued are limited. For example, an employee’s car may require a $750 repair, which would not fall under one of the safe harbor reasons for hardship distribution. However, the employee could use the emergency personal expense provision to take a distribution to cover the $750 repair.

This distributable event became available, after Dec. 31, 2023, for implementation by an IRC section 401(a) defined contribution plan (including 401(k), but not money purchase pension plans), 403(a) annuity plan, 403(b) plan and a governmental 457(b) plan, as well as IRAs.

Federally declared disasters

Repeatedly, Congress has enacted legislation after disasters (e.g., hurricanes, floods, wildfires) providing individuals the opportunity to take a penalty-free distribution or loan from their retirement plan accounts to assist them as they rebuild their lives. In lieu of the disaster-by-disaster approach, Congress enacted permanent rules for distributions and loans related to federally declared disaster areas.

Key features of the new distribution provision are:

  • A participant can request a distribution of up to $22,000 up to 180 days after the date of the disaster.
  • The individual must have sustained an economic loss in relation to the disaster and must have a principal place of residence located in the disaster area.
  • The tax effect of the amount withdrawn can be spread over three years rather than the entire amount being taxable in the year withdrawn.

Key features of the new loan provision are:

  • The maximum dollar amount that can be made available is the lesser of 50% of the individual’s vested plan balance or $100,000 (increased from $50,000 under the normal loan rules).
  • Loan repayments, whether on an existing loan or one taken because of the disaster, owed between the date of the disaster and up to 180 days after the disaster can be delayed for one year.

These provisions became available for disasters after Jan. 26, 2021, and can be implemented by an IRC section 401(a) defined contribution plan (including 401(k) plans), 403(a) annuity plan, 403(b) plan, and a governmental 457(b) plan, as well as IRAs.

Terminal illness

This provision was not added as a distributable event, but rather just as an exception to the early withdrawal penalty. Therefore, it only applies when a distribution is issued under another plan provision. The intention was to have this be an optional plan distributable event. There has been a technical corrections bill drafted that would address this, as well as some other SECURE 2.0 provisions, but it has not yet been finalized.

IRS Notice 2024-2 provides guidance on terminal illness distributions in the form of Q&As. The guidance confirmed the following:

  • A terminally ill individual is one who has an illness or physical condition that a physician has certified is expected to result in death in 84 months or less. The 84 months is measured from the date of certification.
  • Certification must be obtained prior to the distribution and contain specific information (e.g., the name and contact information of the physician, a narrative description to support the conclusion that the individual is terminally ill, the date the physician examined the individual, etc.) as outlined in Notice 2024-2.
  • Only the physician’s certification must be provided to a plan administrator to support the distribution. However, the individual should retain appropriate underlying documents to support their distribution and as part of maintaining complete tax records.
  • Generally, there is no limit to the amount that can be treated as a terminal illness distribution. However, distributions cannot be made solely because of a terminal illness. Therefore, the participant must qualify for a distribution based on another plan provision, and any limits applicable to the distributable event being utilized to issue the distribution would have to be considered. For example, a plan may allow in-service distributions, but it might cap such distributions to $10,000.

The provision became available after Dec. 29, 2022, for distributions from IRC section 401(a) defined benefit and defined contribution plans (including 401(k) plans), 403(a) annuity plans, and 403(b) plans, as well as IRAs.

Takeaway

Legislators see that employees have unexpected financial needs arise for which they need a source of funds. The only source, for some employees, with an amount sufficient to assist with the need is retirement plan savings. Relaxation of the distribution rules to provide an employee with a current source of funds may negatively impact the individual’s financial position in retirement overall but may also help encourage participants to contribute to their retirement plans by alleviating fears that their funds are not accessible when needed under extenuating circumstances. The opportunity is available for an employee to restore their retirement account by re-contributing the distribution taken, but how many individuals will avail themselves of this opportunity? Employees contemplating one of these distributions should consider 1) other sources of income that may be available to assist with the financial need, 2) the current tax ramifications of the withdrawal, and 3) how the reduction to their account balance will affect them in retirement.

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This article was written by Christy Fillingame, Lauren Sanchez and originally appeared on 2024-04-30. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/services/business-tax/new-retirement-plan-distribution-options-introduced-by-secure-2-0.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP 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. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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.

Estate planning Q&A: Qualified Personal Residence Trusts Explained

April 29, 2024 | by RSM US LLP

Many people want their loved ones to inherit their home after they are gone. However, leaving the value of your home in your estate can contribute to a high estate tax bill. Qualified Personal Residence Trusts (QPRT) can be a valuable tool to make a lifetime transfer of your home to your family, still enjoy the home during your life, and potentially reduce your estate taxes.

What is a QPRT?

A QPRT is an irrevocable trust designed to reduce the amount of gift and estate taxes typically incurred when transferring a personal residence to beneficiaries. By transferring your home into a QPRT, you can continue living in it for a specified term while passing it on to your heirs at a reduced transfer tax cost. The essence of a QPRT lies in its ability to freeze (for estate tax purposes) the value of your home at the time of the trust’s creation, potentially shielding any future appreciation from estate taxes.

What are the requirements for establishing a QPRT?

  • Generally, the personal residence must be the sole asset of the trust.
  • You decide on a fixed term (e.g., 5, 10, 20 years) during which you retain the right to live in the home. After this term, the residence passes to the beneficiaries designated in the trust. You may live in the home after the term, but you must pay rent to retain the estate tax advantages.
  • Once established, the terms of the QPRT cannot be altered, and residence cannot be taken back

What are the benefits of setting up a QPRT?

  • When you transfer your home into a QPRT, the value of the gift used for gift tax reporting purposes is calculated based on the current value of your home minus the value of your retained interest in living there for the term of the QPRT. Thus, the value of the gift is less than an outright gift.
  • Any appreciation in your home’s value during and after the term occurs outside of your estate, potentially saving on future estate taxes.
  • Payment of rent after the term is not considered a gift to the other QPRT beneficiaries.
  • If necessary, the residence can be sold while it is owned by the QPRT.

What are the potential downsides of setting up a QPRT?

  • If you die during the QPRT term, the entire home is included in your estate.
  • Transfers made during life generally mean a carryover basis for your beneficiaries, leaving them with the burden of potential capital gains if they sell. If a QPRT is not utilized and the asset is included in your estate, there may be a step-up in basis, potentially avoiding capital gains.
  • The payment of rent after the term can cause additional complications, such as determining the fair market rent, cash flow issues for the renter, or disagreements among family members.
  • QPRTs may not be an efficient tool for multigenerational transfers because you cannot allocate your available generation-skipping tax exemption to the transfer until the end of the term, when values have likely increased.
  • You must file a gift tax return and obtain a professional appraisal to establish the transferred interest’s value for transfer tax purposes.

Is a QPRT right for you?

QPRTs offer a strategic way to pass a valuable asset to your loved ones. However, the decision to use a QPRT requires careful consideration of its benefits and limitations. In addition, it is important to properly administer QPRTs to avoid IRS scrutiny. By understanding the requirements, advantages, and potential downsides, you can make an informed decision about whether a QPRT is right for your estate planning needs. As always, consult with your RSM tax advisor to tailor a strategy that best suits your situation and goals.

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This article was written by Scott Filmore, Amber Waldman and originally appeared on 2024-04-29. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/tax-alerts/2024/estate-planning-qa-qualified-personal-residence-trusts-explained.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The journey to 2025 tax reform begins

April 29, 2024 | by RSM US LLP

Executive summary:

House Ways & Means Committee Chairman Jason Smith (R-MO)  and House Tax Subcommittee Chairman Mike Kelly (R-PA) recently announced the formation of 10 “Committee Tax Teams”.  Each team will address key tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire in 2025 and identify legislative solutions that seek to help many taxpayers.

Tax policy and potential legislation will be top of mind for many as we move closer to the expiration of many TCJA provisions.


The journey to 2025 tax reform begins

Last week, House Ways & Means Committee Chairman Jason Smith and House Tax Subcommittee Chairman Mike Kelly announced the formation of 10 “Committee Tax Teams”. Each committee is comprised of Republican Ways and Means Committee members tasked with identifying legislative solutions to various policy areas that will be part of discussions as we approach the expiration of several provisions from the 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025.

While not unexpected, the announcement loosely resembles a similar action taken in 2017 as Congress began deliberations leading to the enactment of the TCJA. It is noteworthy that there are no Democratic members assigned to these teams.

It is important to keep in mind that the advancement of Republican and Democratic priorities will be largely dependent upon the results of the upcoming presidential and congressional elections later this year. While policymakers will face pressure to reach a consensus on extending the sunsetting provisions, the outcome of the election will significantly determine how both the process moves forward and the outcome of that process.

Key TCJA-related provisions that are scheduled to change after 2025 going into 2026 include:

  • An increase in the top individual tax rate from 37% to 39.6%
  • A decrease (by roughly 50%) in the standard deduction amount
  • A decrease (by roughly 50%) in the estate tax exemption amount
  • A return of personal exemptions for taxpayers and dependents
  • Changes to various itemized deductions and the alternative minimum tax – including the elimination of the $10,000 State and Local Tax (SALT) cap
  • Expiration of the Section 199A pass-through deduction (allowing for a 20% deduction of qualified business income)
  • An increase in the Base Erosion and Anti-Abuse Tax (BEAT) rate from 10% to 12.5%
  • The research credit no longer being a benefit for any BEAT taxpayers
  • An increase in the Global Intangible Low-Taxed Income (GILTI) tax rate
  • The Foreign-Derived Intangible Income (FDII) benefit becoming less generous.

It is important to realize that the TCJA enacted a number of permanent tax law changes, such as a reduction in the statutory corporate tax rate, and substantive changes to the way international corporations are taxed. Even though those provisions are permanent, they will be part of the upcoming tax reform debate and are subject to change as part of the upcoming tax reform process. There are also a number of other non-TCJA extenders that have either expired or are due to expire, as well as a broad array of tax proposals that were part of the Build Back Better deliberations a few years ago but which did not ultimately become enacted into law. All of these provisions are on the table, as are the tax provisions that were enacted as part of the Inflation Reduction Act – including the corporate alternative minimum tax, the stock buy back excise tax, and numerous alternative energy tax incentives.

Attached below are the Tax Team Assignments. We will continue to monitor events as they evolve. For more information, see the Ways and Means Committee Press Release.

Attachment: Tax Team Assignments

Area of Focus

Chair

Members

American Manufacturing

Rep. Buchan

  • Rep. Murphy*
  • Rep. Arrington
  • Rep. Tenney
  • Rep. Malliotakis

Working Families

Rep. Fitzpatrick

  • Rep. Malliotakis*
  • Rep. Moore
  • Rep. Steel
  • Rep. Carey

American Workforce

Rep. LaHood

  • Rep. Carey*
  • Rep. Wenstrup
  • Rep. Smucker
  • Rep. Fitzpatrick

Mainstreet

Rep. Smucker

  • Rep. Steube*
  • Rep. Buchanan
  • Rep. A. Smith
  • Rep. Arrington
  • Rep. Van Duyne

New Economy

Rep. Schweikert

  • Rep. Van Duyne*
  • Rep. Murphy
  • Rep. Tenney
  • Rep. Steel

Rural America

Rep. Adrian Smith

  • Rep. Fischbach*
  • Rep. Feenstra*
  • Rep. Kustoff
  • Rep. Steube

Community Development

Rep. Kelly

  • Rep. Tenney*
  • Rep. LaHood
  • Rep. Moore
  • Rep. Carey

Supply Chain

Rep. Miller

  • Rep. Kustoff*
  • Rep. Wenstrup
  • Rep. Ferguson
  • Rep. Fishbach
  • Rep. Feenstra

Innovation

Rep. Estes

  • Rep. Steel*
  • Rep. Schweikert
  • Rep. Ferguson
  • Rep. Hern
  • Rep. Murphy

Global Competitiveness

Rep. Hern

  • Rep. Moore*
  • Rep. Kelly
  • Rep. Estes
  • Rep. Miller
  • Rep. Feenstra

*Denotes Vice-Chair

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This article was written by Fred Gordon, Tony Coughlan and originally appeared on 2024-04-29. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/financial-reporting/the-journey-to-2025-tax-reform-begins.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP 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. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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.

Understanding energy rebates tax treatment

April 29, 2024 | by RSM US LLP

Executive summary

The IRS released new guidelines regarding the tax treatment with respect to Department of Energy (DOE) Home Energy Rebate Programs funded by the Inflation Reduction Act of 2022. According to the guidelines, homeowners who receive rebates should consider them as purchase price adjustments which are not includible in their gross income. On the other hand, businesses that receive rebates in connection with the sale of goods or provision of services to a purchaser must report them as taxable income. Additionally, those who are eligible for DOE rebates and section 25C credits must make necessary reductions to their expenditures eligible for the section 25C credit. This will promote sustainable investments and encourage people to adopt energy efficient measures.


The IRS recently issued Announcement 2024-19, which provides a detailed explanation of the federal income tax treatment of rebates under the Department of Energy (DOE) Home Energy Rebate Programs (a program established under the 2022. This guidance outlines the program’s background, specifies the tax implications for purchasers and businesses, and explains how these rebates interact with other tax credits.

The DOE Home Energy Rebate Programs encourage homeowners to invest in energy-efficient home improvements and electrification projects. By allocating funds for rebate programs focused on whole-house energy savings and high-efficiency electrification, the Act seeks to alleviate the energy burden on low-income households and foster sustainable energy practices.

Tax implications for homeowners

Under the announcement, rebates received by homeowners for whole-house energy-savings retrofits or qualified electrification projects are treated as purchase price adjustments. This classification significantly lowers the financial barrier to energy-efficient home upgrades by ensuring these rebates do not contribute to the homeowner’s gross income, which is in line with previous tax rulings and policies promoting energy conservation. Taxpayers, however, must reduce their cost basis in the property by the amount of the rebate.

Rebate payments to homeowners, recognized as adjustments to the purchase price, are exempt from information reporting requirements under section 6041 of the Code. Consequently, the entity issuing the rebate is not obligated to submit an information return to the IRS or provide the purchaser with a statement detailing the rebate payments.

Tax implications for businesses

Unlike individual homeowners, business entities must include rebate amounts in their gross income. The announcement also clarifies reporting requirements for organizations that make the rebate payment and when such reporting under section 6041 of the Code is required.

Understanding the inclusion or exclusion of rebates in gross income

The tax treatment of rebates, as detailed in Rev. Ruls. 91-36 and 76-96, provides crucial context for why rebates are treated differently in the tax code. Rev. Ruls. 91-36, for instance, highlights that noncash incentives from utility companies for participating in energy conservation programs are not considered part of the taxpayer’s gross income. Similarly, Rev. Ruls. 76-96 states that cash rebates from automobile manufacturers reduce the vehicle’s purchase price and are not taxable income.

Both rulings highlight a fundamental principle: rebates that effectively reduce the purchase price of a product or service are not to be treated as taxable income. For taxpayers, this means that such rebates lower the out-of-pocket costs for certain purchases without increasing their tax liabilities. For businesses, particularly those receiving rebates, these amounts are recognized in the taxpayer’s gross income under section 61. This treatment ensures that the economic reality of rebate transactions is accurately reflected in tax calculations.

Coordination with the section 25C Energy Efficient Home Improvement Credit

Recipients of DOE Home Energy Rebate Programs must account for these rebates when calculating the section 25C credit, ensuring that the rebate amount reduces the total amount of qualified expenditures. This adjustment is crucial for taxpayers eligible for both DOE rebates and the section 25C credit, ensuring that they do not receive a double benefit and that tax incentives accurately reflect their actual investment in energy efficient property.

Washington National Tax Takeaways

Key takeaways include understanding the favorable tax treatment of energy-efficient upgrades for homeowners who benefit from rebates not being treated as taxable income. This effectively lowers the cost of such improvements, encouraging greener living without the burden of increased taxes. On the business side, entities must incorporate received rebates into their gross income.

The detailed guidance ensures that individuals and businesses can navigate these incentives effectively, maximizing the impact of the Inflation Reduction Act on the nation’s transition to a more energy-efficient and sustainable future. It highlights the government’s effort to incentivize energy efficiency through tax benefits, offering a financial boost to those investing in sustainable home solutions.

The IRS recently updated its FAQ document (Fact Sheet 2024-15) to address the guidance in Announcement 2024-19 on the federal income tax treatment of these incentives.

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This article was written by Kate Abdoo, Ryan Corcoran, Sara Hutton, Brent Sabot and originally appeared on 2024-04-29. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/tax-alerts/2024/understanding-energy-rebates-tax-treatment.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP 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. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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.

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