Congress adjourns without addressing IRA legislation

After passing a two-year budget deal in late December to avoid another government shutdown, the House and Senate adjourned for the year without acting to extend the legislation that permits qualified charitable distributions (QCDs) from IRAs. As a result, QCDs sunset on December 31, 2013, and are no longer permitted under current tax laws. IRA owners must now wait and see whether Congress will extend the legislation retroactively as they have in the past.

Fresh off his victory in the 2012 presidential election, President Obama early in his second term proposed significant IRA changes—including a cap of $3 million on IRAs and employer plans—in order to raise $9 billion of additional revenue over the next 10 years. The President also proposed

  • a five-year time period for inherited IRA distributions,
  • greater electronic filing of information returns,
  • reduced tax incentives for higher-income taxpayers,
  • elimination of required minimum distributions (RMDs) for certain individuals,
  • indirect nonspouse beneficiary rollovers to inherited IRAs,
  • a tax credit for small employer plan start-up costs that was double the amount previously proposed, and,
  • an automatic IRA option for individuals not covered by employer plans.

As with any Administration proposals, there were no guarantees that they would become law, as they represent the Administration’s wish list. The Administration instead looked to the President’s key supporters in the House and Senate to introduce the proposals as legislation that would move through the Congress and become law.

Shortly after the Obama Administration released its retirement savings proposals, Rep. Richard Neal (D-MA) reintroduced the Retirement Plan Simplification and Enhancement Act of 2013. Rep. Neal’s bill included a number of the Obama Administration proposals, including indirect nonspouse beneficiary rollovers to inherited IRAs, elimination of RMDs for those over age 70½ whose aggregate IRA and employer plan balances are less than $100,000, and an enhanced small employer plan start-up credit.

Rep. Neal also introduced the Automatic IRA Act of 2013 that included provisions to require employers in business for at least two years that have 10 or more employees to offer an automatic IRA option. Under Rep. Neal’s proposal, regular contributions would be made to an IRA on a payroll deduction basis. The employer’s role would be to facilitate employee contributions using its existing payroll deduction system, but no employer contributions would be required.

Employers offering automatic IRAs would provide employees with a standard notice and election form informing them of the option and allowing them to elect to participate or opt out. Employees who do not provide a written participation election would be automatically enrolled and have three percent of their compensation deposited to the IRA.

Employees could choose to opt out of participation, or opt for a lower or higher contribution rate than the three percent default. Employees could also choose a Traditional or Roth IRA, with the Roth IRA being the default.

The employer would be allowed to designate a single IRA trustee or custodian for all employees, or if preferred, could allow each employee to select the IRA trustee or custodian for that employee’s contributions.

To help defray costs, small employers with no more than 100 employees could claim a temporary, nonrefundable tax credit for the employer’s expenses associated with making automatic IRAs available to employees.

No action was taken on either of Rep. Neal’s bills after they were introduced and referred to Committee.

The President’s proposal to restrict the time period over which nonspouse beneficiaries could receive inherited IRA distributions was introduced in two separate student loan bills to offset the tax cost of maintaining reduced interest rates for certain federal student loans. The provision, which would have required most nonspouse beneficiaries of IRAs and employer plans to deplete the accounts within five years, would have accelerated the taxation of the accounts compared to being distributed and taxed over the beneficiary’s lifetime. The Senate twice voted on bills containing the five-year time period for nonspouse beneficiary payouts, but the measure failed both times. Legislation was later passed to maintain lower student loan interest rates, but without the nonspouse beneficiary payout limitation.

In the end, Congress saw much of its first term consumed by hearings on the IRS scandal and Benghazi terrorist attack, Edward Snowden’s allegations of NSA surveillance, and budget disputes that ultimately led to the October government shutdown. The only IRA legislation that was passed in first session of the 113th Congress was a bill that retitles the section of the Internal Revenue Code that permits spousal contributions. The action was taken by the House and Senate to honor recently retired Senator Kay Bailey Hutchison (R-TX) and renames section 219(c) of the Internal Revenue Code of 1986 as the Kay Bailey Hutchison Spousal IRA.

The second session of the 113th Congress has now convened, but it remains to be seen whether any action will be taken on IRA legislation. First on the agenda will be work on the massive spending bills that will implement the recently passed two-year budget deal and allocate funds among thousands of federal government programs, from agriculture to transportation and the military. In a deeply divided Congress facing mid-term elections in the fall, there are likely to be many disagreements as to how funds are allocated among the programs. With the government operating under a stopgap continuing resolution due to expire on January 15, and Congress set to leave for its mid-January recess shortly thereafter, there is little time to reach agreement. The manner in which agreement is reached—or not reached—could well set the tone for the remainder of the 113th Congress and determine the fate of any IRA legislation.

Dennis Zuehlke

Dennis Zuehlke

Dennis is Compliance Manager for Ascensus. Mr. Zuehlke provides clients with technical support on tax-advantaged accounts (including individual retirement accounts, health savings accounts, simplified employee pension plans, and Coverdell education ... Web: Details