H.R. 2029

The President signed into law H.R. 2029, the-Consolidated Appropriations Act of 2016 (The Act) on December 18, 2015. The Act includes several retirement account related provisions.

The following is an explanation of some of these provisions.

Extension of the Tax-Fee Qualified Charitable Distribution Provision

The qualified charitable distribution (QCD) provision has been extended for distributions made January 1, 2015 and after.

Background

A distribution of up to $100,000 per calendar year is tax-free, if the amount meets the requirements for a QCD. These requirements are as follows:

• The distribution must be  made on or after the date on which the  IRA owner reaches age 70-½,
• The distribution must be made from a traditional IRA, a Roth IRA, or a SEP or SIMPLE IRA that will not receive SEP or SIMPLE employer contributions for the plan-year that ends with or within the taxable year that the QCD is made. This includes inherited IRAs,
• The IRA Custodian/trustee must make the amount payable to a qualified charity. For the purpose of a QCD, a qualified charity is described in section 170(b)(1)(A), which are generally, public charities other than a supporting organization or a donor advised fund.

Note: The amount can be sent directly to the charity; or delivered in the form of a check to the IRA owner who can then deliver it to the charity, providing the custodian/trustee makes the check payable to the charity.

The IRA owner must be eligible to deduct the amount as a charitable contribution, if the amount had been donated to a charity outside of a QCD.

Extension

Since it was created as a temporary provision under the Pension Protection Act of 2006, the QCD provision has been extended for a year or two  on multiple occasions. In this case, The Act makes the extension permanent.

Reminder: QCDs can be used as RMDs

A QCD can be used to satisfy the account owner’s RMD for the year, if it is the first distribution made from the IRA during the calendar year, up to the RMD amount.

Allowing Rollovers to SIMPLE IRAs From Certain Other Types of Retirement Accounts

Rollovers can now be made from employer sponsored retirement plans and traditional IRAs, to SIMPLE IRAs that have met the 2-year requirement.

Background

Since it was created by the Small Business Job Protection Act of 1996, the only amounts that could be rolled over or transferred to a SIMPLE IRA were amounts from other SIMPLE IRAs.

In addition, amounts could not be moved from a SIMPLE IRA to another retirement account that was not a SIMPLE IRA, unless the distributing SIMPLE IRA had been funded with a SIMPLE IRA contribution for at least 2-years.

The New Rollover Rules

Effective Friday, December 18, 2015, the day the Act was signed into law, SIMPLE IRAs that meet the 2-year requirement are eligible to accept rollovers of eligible amounts from employer sponsored retirement plans and traditional IRAs.

Employer sponsored retirement plans are defined contribution plans such as 401(k) and profit sharing plans, 403(b) plans, and governmental 457(b) plans.

Designated Roth accounts and Roth IRAs still cannot be rolled over to SIMPLE IRAs.

The 2-year restriction on rolling SIMPLE IRAs to other retirement accounts that are not SIMPLE IRAs is still in effect.

Technical Amendment for Rollovers of Certain Airline Payment Amounts

Under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), and the FAA Modernization and Reform Act of 2012 ( the FAA- Act), a qualified airline employee may rollover up to 90% of all airline payments received to a traditional IRA, and –consistent with the rollover rules- exclude the amount from income. There is no limit on the amounts that can be rolled over to a Roth IRA; however, such amount would be taxable.

An airline payment amount was defined in the FAA- Act as “…any payment of money or other property payable by a commercial passenger airline, under the authority of a Federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, to a qualified airline employee in respect of certain claims of the employee against the airline”. The definition was amended in 2014 to include any payment of money or other property payable by a commercial passenger airline to a qualified airline employee in certain cases.

Under the FAA- Act , an airline payment is treated as a rollover to a traditional IRA, if the rollover is made within 180 days of receipt of the amount , or within 180 days of February 14, 2012, the date of enactment of the 2012 FAA Act- if later.

For Roth IRAs, WRERA provides that the 180 days period is within 180 days of receipt of such amount ,or, if later, within 180 days of December 23, 2008, the date of enactment of WRERA.

The Change Under The Act

The 2014 amendment did not contain a provision to allow previously made payments that came within the definition of airline payment amounts as a result of the amendments to be rolled over within 180 days after enactment.

The Act allows such amounts to be rolled over within 180 days of receipt or, if later, within the period beginning on December 18, 2014, and ending 180 days after December 18, 2015.

Expansion of the Age 50 Exception to the 10% Early Distribution Penalty

The definition of qualified public safety employee has been expanded to include more employees.

Background

A distribution from a retirement account is subject to a 10% early distribution penalty, if the distribution occurs before the account owner reaches age 59½. There are some exceptions to this penalty, one of which is commonly referred to the age 55 exception.

Under this exception, the 10% early distribution penalty does not apply if the individual separates from service with the plan sponsor in the year he reaches age 55 or later, and the distribution occurs after separation from service.

This age-55 requirement is reduced to age 50 for qualified safety employees. A qualified public safety employee is defined as an employee of a State or political subdivision of a State if the employee provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision.

Earlier this year, the exception was expanded, effective for distributions made 01/01/2016 and after, to include certain Federal law enforcement officers, Federal customs and border protection officers and Federal firefighter air traffic controller. In addition, the provision was also expanded to include governmental defined contribution plans, such as Thrift Savings Plans and 403(b) plans.

The Change Under The Act

The Act further expands the definition of qualified public safety employee to include nuclear materials couriers, members of the United States Capitol Police, members of the Supreme Court police, and diplomatic security special agents of the United States Department of State.

Please call us with questions 1-866-225-1786 X 305  

This is a high level overview of the rules that apply to these provisions.

Please do not hesitate to call my office with any questions regarding the above, or any other retirement plans related matters.