Bill Section
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Current Law
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New Law
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Sec. 311. Repayment of qualified birth or adoption distribution limited to three years
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Following the SECURE Act, current law does not limit the period during which a qualified birth or adoption distribution may be repaid and qualify as a rollover distribution.
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Requires qualified birth or adoption distributions to be recontributed within three years of the distribution in order to qualify as a rollover contribution. (This aligns the rule with similar disaster relief provisions and simplifies plan administration.)
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Sec. 331. Special rules for the use of retirement funds in connection with qualified federally declared disasters
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In recent years, Congress has eased plan distribution and loan rules in cases of disaster on a case-by-case basis.
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Provides permanent special rules governing plan distributions and loans in cases of qualified federally declared disasters. Up to $22,000 may be distributed to a participant per disaster; Amount is exempt from the 10% early withdrawal tax; Inclusion in gross income may be spread over 3-year period; Amounts may be recontributed to a plan or account during the 3-year period beginning on the day after the date of the distribution; Allows certain home purchase distributions to be recontributed to a plan or account if those funds were to be used to purchase a home in a disaster area and were not so used because of the disaster; and Increases the maximum loan amount for qualified individuals and extends the repayment period.
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Sec. 202. Qualifying longevity annuity contracts (“QLACs”)
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Existing regulations limit the premiums an individual can pay for a QLAC to the lesser of $125,000 (indexed) or 25% of the individual’s account balance,. and provides for other restrictions on non-spouse death benefits.
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Eliminates the 25% limit and increases the dollar limit from $125,000 (indexed) to $200,000 (indexed). Clarifies that a divorce occurring after a QLAC is purchased but before payments begin will not affect the permissibility of the joint and survivor benefits under the contract. Further clarifies that employees may rescind a contract during the 90-day trial period (“short free-look period”).
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Sec. 308. Distributions to firefighters
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Current law permits “qualified public safety employees” in a governmental plan to take retirement withdrawals beginning at age 50 after separation from service without incurring a 10% early withdrawal penalty.
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Extends the age 50 early withdrawal exception for qualified public safety employees to also apply to private sector firefighters receiving distributions from a qualified retirement plan or 403(b) plan.
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Sec. 326. Exception to penalty on early distributions from qualified plans for individuals with a terminal illness
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Present law imposes a 10% tax penalty on early distributions from tax-preferred retirement accounts unless certain exceptions apply.
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Creates an exception to the 10% early withdrawal penalty for distributions to individuals whose physician certifies that they have an illness or condition that is reasonably expected to result in death in 84 months or less.
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Sec. 333. Elimination of additional tax on corrective distributions of excess contributions
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Current law requires a corrective distribution of an excess contribution to an IRA, along with any earnings on the excess contribution. The distribution is subject to the 10% early withdrawal penalty.
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Exempts corrective distributions and corresponding earnings from the 10% early withdrawal penalty.
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Sec. 305. Expansion of Employee Plans Compliance Resolution System (“EPCRS”)
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Under existing rules, employer sponsors of qualified plans have only limited opportunities to self-correct plan errors under EPCRS. This generally involves operational failures that are insignificant (or otherwise corrected within a three-year period).
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The Treasury Department is directed to expand EPCRS to (i) allow IRA custodians to address eligible inadvertent failures, and (ii) add preapproved correction methods for eligible inadvertent failures, including general principles of correction, and to update Revenue Procedure 2021-30 for these changes within two years after enactment.
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Sec. 301. Recovery of retirement plan overpayments
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Fiduciaries for plans that have mistakenly overpaid a participant must take reasonable steps to recoup such overpayment, such as collecting the overpayment from the participant or employer in order to maintain the tax-qualified status of the plan and comply with ERISA. EPCRS includes various procedures for correcting overpayments made from defined benefit and defined contribution plans. The Pension Benefit Guaranty Corporation (“PBGC”) also has overpayment recoupment policies for terminating defined benefit plans.
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A 401(a), 403(a), 403(b), and governmental plan (but not including a 457(b) plan) will not fail to be a tax favored plan merely because the plan fails to recover an “inadvertent benefit overpayment” or otherwise amends the plan to permit this increased benefit. In certain cases, the overpayment is also treated as an eligible rollover distribution, which is why this provision impacts IRAs. There are additional provisions related to overpayments under ERISA-covered plans that do not apply to traditional or Roth IRAs.
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Sec. 322. Tax treatment of IRA involved in a prohibited transaction
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If an IRA owner or beneficiary engages in a prohibited transaction with respect to the IRA, the IRA loses its tax-favored status and ceases to be an IRA as of the first day of the taxable year in which the prohibited transaction occurs. As a result, the IRA is treated as distributing to the individual on the first day of that taxable year the fair market value of all of the assets in the account.
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Clarifies that, for this purpose, each IRA of the individual shall be treated as a separate contract.
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