Overview

Title

To amend the Internal Revenue Code of 1986 to provide a contribution limit and increased minimum distributions for certain retirement plans with large account balances.

ELI5 AI

The bill wants to stop people from putting too much money into huge retirement piggy banks by setting a big cap on them, making them take some money out every year, and using extra money to help Social Security.

Summary AI

S. 5422 aims to modify the Internal Revenue Code of 1986 by introducing limits on contributions to certain retirement plans with large account balances and by increasing the required minimum distributions from these plans. The bill sets a contribution cap of $4,000,000, adjusted annually for inflation, and imposes additional taxes on excess contributions. It also mandates that plan administrators report contributions and balances to ensure compliance with these new rules. Revenue generated from these changes will be allocated to the Social Security Trust Funds.

Published

2024-12-04
Congress: 118
Session: 2
Chamber: SENATE
Status: Introduced in Senate
Date: 2024-12-04
Package ID: BILLS-118s5422is

Keywords AI

internal revenue code retirement plans contribution limit minimum distributions tax implications social security trust funds reporting requirements inflation adjustment large account balances administrative burden

Sources

Bill Statistics

Size

Sections:
4
Words:
3,646
Pages:
19
Sentences:
68

Language

Nouns: 929
Verbs: 226
Adjectives: 305
Adverbs: 14
Numbers: 161
Entities: 158

Complexity

Average Token Length:
4.17
Average Sentence Length:
53.62
Token Entropy:
5.02
Readability (ARI):
28.42

AnalysisAI

General Summary of the Bill

This proposed legislation, introduced in the Senate as S. 5422, aims to amend the Internal Revenue Code of 1986. The focus of the bill is to manage contributions to large retirement plans by introducing a new limit and increasing mandatory distributions. In particular, the bill sets a contribution cap for certain retirement accounts with balances exceeding $4 million and establishes higher minimum distribution requirements for these large accounts. Additionally, it mandates new reporting requirements for plan administrators to ensure compliance. The bill also directs a portion of the additional revenue generated through these measures to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund.

Summary of Significant Issues

Several concerns arise from the bill's provisions. One of the primary issues is the ambiguity surrounding the selection of the $4 million threshold for limiting contributions. Without a clear rationale for this figure, the cap may seem arbitrary and raise fairness concerns among those managing large retirement portfolios. Furthermore, the adjustment mechanism for inflation, linked to the limit, is complex and could perplex everyday individuals trying to gauge the long-term impact on their savings.

Moreover, the increased reporting obligations may impose notable administrative burdens. These could translate to higher operational costs, potentially passed on to plan participants. Additionally, the bill lacks detailed guidance on how to manage excess contributions, presenting risks of non-compliance due to taxpayer errors. Enhanced minimum distribution requirements for large accounts might also impose unexpected tax burdens on retirees unless effectively communicated and understood.

Lastly, there is limited information on the allocation and oversight of funds directed to the Federal Trust Funds, which could result in inefficiencies or mismanagement.

Impact on the Public

From a broad perspective, this bill seeks to promote fairness in tax benefits by ensuring that excessively large retirement savings accounts are adequately taxed and distributed. By setting a contribution cap, the legislation could prevent disproportionate tax advantages for individuals with substantial retirement savings, potentially redistributing benefits within other social systems.

However, for everyday Americans and especially those nearing retirement or with significant savings, this bill could lead to confusion due to the intricate language and mechanisms. Individuals exceeding the $4 million threshold may need to make strategic financial adjustments to avoid additional taxes or penalties. Moreover, plan administrators might increase fees or pass on the costs of managing new reporting responsibilities to the participants, indirectly affecting many account holders.

Impact on Specific Stakeholders

Retirement Plan Holders: Individuals with retirement savings nearing or exceeding the $4 million mark could face financial and administrative challenges. They might need to re-evaluate their savings strategies to prevent excess contributions and adjust to potentially higher minimum distribution obligations.

Plan Administrators and Trustees: The new regulations burden these entities with expanded reporting duties. These could increase operational complexities and costs, which they might transfer to their clients through increased fees.

Federal Trust Funds: The bill's provision to allocate part of the increased revenue to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund might enhance their financial standing. Nonetheless, the lack of clear directives for managing these allocations raises accountability concerns.

General Taxpayers: If effectively implemented, the bill could contribute to a more equitable tax system by ensuring wealthier individuals with larger retirement accounts pay an equitable share, potentially benefiting broader public services.

In conclusion, while the bill's intent to regulate large retirement accounts aims to enhance fairness in taxation, the complexity embedded in its provisions may pose challenges for both individuals and administrators. Effective communication and guidance will be crucial to mitigate these impacts and navigate the implications of the Retirement Fairness Act.

Financial Assessment

The proposed bill, S. 5422, seeks to introduce financial changes to the way certain retirement accounts are managed and taxed. It focuses primarily on setting limits for retirement accounts with larger balances and on adjusting mandatory distributions for these accounts.

Contribution Limits

The bill sets a significant threshold by establishing a contribution cap of $4,000,000 for applicable retirement plans. This threshold is not only a key financial reference but also a point of contention due to its lack of transparency. The absence of a clear justification for setting the limit at this amount raises concerns about fairness, especially for individuals whose retirement accounts exceed this balance. Moreover, there is a provision for adjusting this $4,000,000 cap annually for inflation, which involves complex calculations that might confuse participants who are trying to assess the impact on their savings.

Taxes on Excess Contributions

To ensure adherence to these contribution limits, the bill imposes taxes on contributions that exceed the permissible cap. These financial penalties are intended to enforce compliance, yet they could pose issues for individuals inadvertently violating these terms due to misunderstandings stemming from the convoluted explanation of limits and inflation adjustments.

Reporting Requirements and Administrative Burden

The bill also introduces new reporting mandates for plan administrators. They are required to provide detailed accounts of contributions and balances to both the IRS and the plan participants. This could potentially increase administrative costs, which might be passed on to the participants, thus affecting their retirement savings. The necessity of such rigorous reporting is questioned, particularly when considering the potential administrative burden it imposes without providing a clear public benefit.

Increased Minimum Distributions

Retirement plans exceeding the $4,000,000 threshold may face enhanced minimum distribution requirements, compelling individuals to withdraw more from their accounts than originally planned. This increase in mandatory distributions is set to ensure the reduction of large retirement balances, but it could also lead to unexpected tax liabilities for retirees. For those with substantial accounts, this can significantly impact their financial strategy, emphasizing the need for clear and transparent communication from the authorities regarding these changes.

Allocation to Social Security Trust Funds

An important financial aspect of the bill is the allocation of increased tax revenues to the Social Security Trust Funds. Specifically, 50 percent of the additional revenue generated through these changes is earmarked for this purpose. While this allocation presents a financial strategy intended to bolster Social Security, the bill lacks details on how these funds will be effectively managed. The absence of specific measurement criteria could lead to potential mismanagement, overshadowing the intended support for the trust funds.

The bill's references to various sections of the tax code presume a high level of expertise, challenging the general public's understanding. This barrier could hinder effective compliance and understanding, especially for those without a specialized background in tax or law. Consequently, it is essential that the financial aspects of this bill are communicated in a manner that is both accessible and comprehensible to a wider audience.

Issues

  • The $4,000,000 'applicable dollar amount' for contribution limits is unclear in its justification. This lack of transparency in determining such a significant threshold could lead to perceptions of unfairness, particularly from those whose plans exceed this threshold (Section 409B).

  • The inflation adjustment mechanism for the 'applicable dollar amount' is complex, and its lack of transparency could confuse average plan participants trying to understand how these changes affect their retirement savings (Sections 2 and 409B).

  • The potential administrative burden of new reporting requirements on plan administrators or trustees is significant. There is no evident justification for these burdens, which could increase costs for plan participants (Section 2 and Reporting Requirements).

  • There is a lack of detailed guidance on the allocation of excess applicable annual additions, which may lead to taxpayer errors or misuse, compromising compliance (Sections 2 and 409B).

  • The bill proposes increased minimum distributions for plans exceeding $4,000,000. This could financially impact retirees with large accounts, further necessitating clear communication and guidance to prevent unwarranted tax consequences (Increase in Minimum Required Distributions).

  • Funding allocation methods to the Federal Trust Funds are not detailed, leading to risks of mismanagement and lack of measurement criteria for their effective use (Section 3 - Transfer of amounts to trust funds).

  • The extensive references to other code sections assume a high level of tax code understanding, potentially alienating individuals without a legal or tax background, hindering effective public understanding and compliance (Various sections within the bill).

Sections

Sections are presented as they are annotated in the original legislative text. Any missing headers, numbers, or non-consecutive order is due to the original text.

1. Short title Read Opens in new tab

Summary AI

The section states that the act can be referred to as the "Retirement Fairness Act."

2. Contribution limit and increased minimum distributions for certain retirement plans with large account balances Read Opens in new tab

Summary AI

The proposed section of the bill establishes a contribution limit of $4 million for certain retirement plans with large account balances and specifies rules for handling contributions that exceed this limit, including tax implications and increased required distributions. It introduces a reporting requirement for plan administrators to ensure compliance, with these changes taking effect for taxable years starting after December 31, 2024.

Money References

  • “(a) General rule.—Notwithstanding any other provision of this title, no applicable annual additions shall be made by, or on behalf of, an individual for the taxable year to any applicable retirement plan to the extent such applicable annual additions exceed the excess (if any) of— “(1) the applicable dollar amount for the taxable year, over “(2) the aggregate balances to the credit of the individual (whether as a participant, owner, or beneficiary) in all applicable retirement plans (determined as of the close of the calendar year preceding the calendar year in which the taxable year begins).
  • “(3) ALLOCATION OF EXCESS APPLICABLE ANNUAL ADDITIONS.—If the applicable dollar amount for a taxable year exceeds the amount described in subsection (a)(2), the taxpayer may, in such form and manner as the Secretary may prescribe, allocate such excess to applicable annual additions to each applicable retirement plan in such manner as the taxpayer chooses.
  • “(2) APPLICABLE DOLLAR AMOUNT.
  • — “(A) IN GENERAL.—The term ‘applicable dollar amount’ means $4,000,000.
  • “(B) ADJUSTMENT FOR INFLATION.—In the case of any taxable year beginning after 2025, the $4,000,000 amount under subparagraph (A) shall be increased by an amount equal to the product of— “(i) such amount, and “(ii) the cost-of-living adjustment under section 1(f)(3) for the calendar year in which such taxable year begins, determined by substituting ‘calendar year 2024’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof. “
  • (C) ROUNDING.—If any amount as adjusted under subparagraph (B) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000.
  • — (1) IN GENERAL.—Subsection (a) of section 4973 of the Internal Revenue Code of 1986 is amended— (A) by striking “or” at the end of paragraph (5), (B) by inserting “or” after the comma at the end of paragraph (6), and (C) by inserting after paragraph (6) the following new paragraph: “(7) an applicable retirement plan (within the meaning of section 409B(c)(3)),”. (2) EXCESS CONTRIBUTIONS TO APPLICABLE RETIREMENT PLANS.—Section 4973 of such Code is amended by adding at the end the following new subsection: “(i) Excess contributions to applicable retirement plans.—For purposes of this section, in the case of applicable retirement plans (within the meaning of section 409B(c)(3)), the term ‘excess contributions’ means, with respect to any taxable year, the sum of— “(1) the excess of the applicable annual additions (within the meaning of section 409B(c)(1)) to such plans over the limitation under section 409B(a) for such taxable year, and “(2) the lesser of— “(A) the amount determined under this subsection for the preceding taxable year, reduced by the aggregate distributions from such plans for the taxable year (including distributions required under section 4974(e)) to the extent not contributed in a rollover contribution to another eligible retirement plan in accordance with section 402(c), 403(b)(8), 457(e)(16), 408(d)(3), or 408A(d)(3), or “(B) the amount (if any) by which the amount determined under section 409B(a)(2) for the taxable year exceeds the applicable dollar amount under section 409B(c)(2) for the taxable year.”. (3) CONFORMING AMENDMENTS.—Subsection (a) of section 4973 of such Code is amended— (A) by striking “accounts or annuities” and inserting “accounts, annuities, or plans”, and (B) by striking “account or annuity” and inserting “account, annuity, or plan”. (c) Increase in minimum required distributions.
  • (1) IN GENERAL.—Section 4974 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection: “(f) Increase in minimum required distributions for payees with large aggregate account balances.— “(1) IN GENERAL.—If this subsection applies to a payee for any taxable year— “(A) all qualified retirement plans and eligible deferred compensation plans of the payee which are applicable retirement plans taken into account in computing the excess described in paragraph (2)(A) shall be treated as 1 plan solely for purposes of applying this section to the increase in minimum required distributions for the taxable year described in subparagraph (B), and “(B) the minimum required distributions under this section for all plans treated as 1 plan under subparagraph (A) with respect to such payee for the taxable year shall be increased by the excess (if any) of— “(i) the excess described in paragraph (2)(A), over “(ii) the sum of the minimum required distributions (determined without regard to this subsection) for all such plans. “(2) APPLICATION.—This subsection shall apply to a payee for a taxable year— “(A) if the aggregate balances to the credit of the payee (whether as a participant, owner, or beneficiary) in all applicable retirement plans (determined as of the close of the calendar year preceding the calendar year in which the taxable year begins) exceed the applicable dollar amount for the calendar year in which the taxable year begins, and “(B) without regard to whether amounts with respect to the payee are otherwise required to be distributed under section 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), or 457(d)(2). “(3) COORDINATION AND ALLOCATION.
  • — “(A) IN GENERAL.—If there is an excess described in paragraph (2)(A) for the first taxable year of a taxpayer beginning during 2025 (in this paragraph referred to as the ‘historic excess’), then the amount taken into account under paragraph (1)(B)(i) for such first taxable year and each subsequent taxable year to which this paragraph applies shall, in lieu of the excess described in paragraph (2)(A) for each such taxable year, be equal to— “(i) in the case of such first taxable year, 10 percent of the historic excess, and “(ii) in the case of each subsequent taxable year to which this paragraph applies, the sum of— “(I) 100 percent of amount (if any) by which the excess described in paragraph (2)(A) for such taxable year exceeds the adjusted historic excess for such taxable year, plus “(II) 10 percent of the adjusted historic excess for such taxable year (100 percent of such adjusted historic excess for any taxable year if it is less than $1,000).
  • “(B) ADJUSTED HISTORIC EXCESS.—For purposes of this paragraph, the term ‘adjusted historic excess’ means, with respect to any taxable year, the lesser of— “(i) the excess (if any) of the— “(I) the historic excess, over “(II) the aggregate amount of the historic excess taken into account under clauses (i) and (ii)(II) of subparagraph (A) for all preceding taxable years, or “(ii) the aggregate balances to the credit of the payee (whether as a participant, owner, or beneficiary) in all applicable retirement plans (determined as of the close of the calendar year preceding the calendar year in which such taxable year begins) in excess of $4,000,000. “
  • (C) TAXABLE YEARS TO WHICH PARAGRAPH APPLIES.—This paragraph shall not apply to— “(i) any taxable year if the aggregate amount of the historic excess taken into account under clauses (i) and (ii)(II) of subparagraph (A) for all preceding taxable years equals such historic excess, or “(ii) the first taxable year in which the aggregate balances to the credit of the payee (whether as a participant, owner, or beneficiary) in all applicable retirement plans (determined as of the close of the calendar year preceding the calendar year in which such taxable year begins) are $4,000,000 or less and any subsequent taxable year.
  • (2) EXCEPTION FROM 10 PERCENT ADDITIONAL TAX ON EARLY DISTRIBUTIONS.—Section 72(t)(2) of such Code is amended by adding at the end the following new subparagraph: “(O) DISTRIBUTIONS OF EXCESS BALANCES.—Distributions from applicable retirement plans (within the meaning of section 409B) to the extent such distributions during the taxable year do not exceed the amount (if any) by which— “(i) the amount determined under section 409B(a)(2) for the taxable year, exceeds “(ii) the applicable dollar amount under section 409B(c)(2) for the preceding taxable year.”

409B. Contribution limit on certain retirement plans with large account balances Read Opens in new tab

Summary AI

In this section, the law sets a limit on how much money can be added each year to certain large retirement accounts. For retirement account balances over $4 million, no additional contributions can be made in a year, ensuring that excess contributions are treated in special ways depending on the type of retirement plan. The law also explains how to handle contributions that go over this limit and adjusts for inflation starting in 2025.

Money References

  • (a) General rule.—Notwithstanding any other provision of this title, no applicable annual additions shall be made by, or on behalf of, an individual for the taxable year to any applicable retirement plan to the extent such applicable annual additions exceed the excess (if any) of— (1) the applicable dollar amount for the taxable year, over (2) the aggregate balances to the credit of the individual (whether as a participant, owner, or beneficiary) in all applicable retirement plans (determined as of the close of the calendar year preceding the calendar year in which the taxable year begins). (b) Rules relating to contribution limitations.— (1) PLANS OTHER THAN CERTAIN IRAS.
  • (3) ALLOCATION OF EXCESS APPLICABLE ANNUAL ADDITIONS.—If the applicable dollar amount for a taxable year exceeds the amount described in subsection (a)(2), the taxpayer may, in such form and manner as the Secretary may prescribe, allocate such excess to applicable annual additions to each applicable retirement plan in such manner as the taxpayer chooses.
  • (c) Definitions and special rules.—For purposes of this section— (1) APPLICABLE ANNUAL ADDITION.— (A) IN GENERAL.—The term “applicable annual addition” means any of the following made to or on behalf of an individual: (i) An annual addition (within the meaning of section 415(c)(2)). (ii) Any contribution to an individual retirement plan, including any employer or employee contribution to a simplified employee pension under section 408(k) or a simple retirement account under section 408(p). (iii) Any deferral under an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A). (B) ROLLOVER CONTRIBUTIONS DISREGARDED.—A rollover contribution under section 402(c), 403(b)(8), 408(d)(3)(A)(ii), or 457(e)(16) shall not be treated as an annual addition. (2) APPLICABLE DOLLAR AMOUNT.
  • (A) IN GENERAL.—The term “applicable dollar amount” means $4,000,000.
  • (B) ADJUSTMENT FOR INFLATION.—In the case of any taxable year beginning after 2025, the $4,000,000 amount under subparagraph (A) shall be increased by an amount equal to the product of— (i) such amount, and (ii) the cost-of-living adjustment under section 1(f)(3) for the calendar year in which such taxable year begins, determined by substituting “calendar year 2024” for “calendar year 2016” in subparagraph (A)(ii) thereof. (C) ROUNDING.—If any amount as adjusted under subparagraph (B) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000. (3) APPLICABLE RETIREMENT PLAN.—The term “applicable retirement plan” means— (A) a defined contribution plan to which section 401(a) or 403(a) applies, (B) an annuity contract under section 403(b), (C) an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), or (D) an individual retirement plan. (d) Regulations.—The Secretary shall prescribe such regulations and guidance as are necessary or appropriate to carry out the purposes of this section, including regulations or guidance that provide for the application of this section and section 4974(e) in the case of plans with a valuation date other than the last day of a calendar year. ---

3. Transfer of amounts to trust funds Read Opens in new tab

Summary AI

Amounts equivalent to 50% of the revenue increase generated by applying section 2 are allocated to both the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund, as established under the Social Security Act.