1. This past week a tax bill was introduced into the Senate and placed onto the calendar that will have very significant effects on IRA accounts and other types of defined contribution plans, in regard to the way that beneficiaries will receive their legacies.

2. The bill is numbered as S. 3471, the “Retirement Enhancement and Savings Act of 2016”, or RESA 2016. The full text is available online in xml/html, txt, and pdf formats, as follows:

https://www.congress.gov/114/bills/s3471/BILLS-114s3471pcs.xml
https://www.congress.gov/bill/114th-congress/senate-bill/3471/text?format=txt
https://www.congress.gov/114/bills/s3471/BILLS-114s3471pcs.pdf

3. The bill was introduced on November 16, 2016 and seems to have the unanimous support of the Senate Finance Committee. It contains a large number of provisions relating to retirement plans, offering something to many different constituencies. Considering the level of bipartisan support it may have a good chance of passage in the current lame duck session of Congress, despite the detrimental provisions that place limitations for the “stretch” for beneficiaries of defined contribution plans.

4. I prepared the following summary to highlight some of the areas that would be a concern within this forum. This is only a quick initial response, so there may be further areas of concern or further interpretations.

5. One provision that would be welcomed by many is the abolishment of the maximum age of 70 1/2 for contributions to traditional IRAs, starting with year 2017 (Section 108, at p. 32ff of the pdf file of the bill).

6. Another beneficial section of the bill expands the hardship exemptions for early distributions (section 111, at p. 35ff of the pdf file).

7. A further beneficial section allows a tax deduction against payments received for volunteer firefighters and EMT responders for year 2017 only (section 401, at p. 117 of the pdf file). The new deduction is increased to $50 per month of service, up from the $30 in a previous deduction, now expired.

8. However, The bill is apparently required to be revenue neutral over all provisions. Therefore, the cost for these benefits is supposed to be paid by truncating the stretch for inherited defined contribution accounts, primarily inherited IRA accounts (section 501, at p. 133ff of the pdf file). If enacted, this section will result in a high amount of increased complexity and confusion associated with inherited defined contribution accounts.

9. Under this provision the existing provisions relating to succession, including stretch provisions, will remain in place up to a valuation of $450,000 for all defined contribution plans of an individual, including IRAs. The scope of covered defined contribution plans appears to include traditional IRA, Roth IRA, 401(a), 401(k), 403(b) (possibly), 414, and possibly other types of defined contribution plans of an individual.

10. For valuations over the threshold of $450,000, a new distribution regimen will be placed into effect requiring a full distribution within five years of the date of death. Where multiple accounts are held, the amount exceeding the $450,000 limit will be “allocated” across all accounts in accordance with regulations that will be established.

11. If a deceased individual has more than one beneficiary, the portion subject to the five year distribution period will be determined ratably, also in accordance with regulations to be established.

12. Exceptions are made for surviving spouses, minor children (until they reach the age of majority), disabled beneficiaries, chronically ill beneficiaries, or a person less than ten years younger than the decedent.

13. The effective date will be for persons who die starting in year 2017, with exceptions of the effective date for collective bargaining agreements, and 404(d) governmental plans.

14. Qualified annuity contracts are excluded.

15. The conference report from the Senate Finance Committee, in the unnumbered report release, states that the threshold of $450,000 will be indexed for inflation. However, there does not appear to be any provision in the bill for indexing of this amount. Possibly other sections of the IRC contain a general indexing provision that would permit indexing, but it appears unclear at this time where the authorization for indexing would would lie.

16. This bill seems to be a good recipe for chaos. It doesn’t seem likely that regulations can be put into place in a timely manner. Then, after regulations are released, all plans will need to be amended to conform. A high degree of complexity will result, and the burden may well fall to the beneficiaries to determine the total value of all plans of a decedent, in order to know the amount exceeding the threshold for the five year distributions. Each plan custodian or administrator can’t know the total value of all plans, since each plan cannot even be aware of the existence of all other plans of the decedent. Frequently, the beneficiaries of an individual likewise have no knowledge of any other beneficiaries. Since all defined contribution plans of one person are aggregated together, the scope of regulations would need to be extensive and would need to extend to issues never before addressed. Implementation would seem to require a lengthy transition period, which is not accounted for in the pending bill. Therefore, I believe that much confusion and complexity would be the expected result.

17. The threshold for the five year distribution period is actually not high enough to apply only to “rich” persons. A great many persons who have had full careers with a lifetime of contributions to IRA and 401(k) plans, and who have been fortunate enough to invest wisely, will now find their estate plans disrupted. Further, the beneficiaries who receive large sums within five years will see their income from all sources placed into higher income tax brackets. If the beneficiaries are enrolled in Medicare, they will be subject to be placed into higher brackets for increased IRMAA assessments.

18. If enacted, an advantage will be created in favor of Roth IRA plans and designated Roth 401(k) plans. Having a greater percentage of funds in Roth plans will allow estate planning with an assurance that the beneficiaries will not be faced with an excessive income tax burden when they receive larger distributions within a five year period.