IRS Clarifies Guidance for Fellowship Stipend Contributions to IRAsBy: Jacqueline Robinson-Hamm
Thursday, March 17, 2022
Language from the Graduate Student Savings Act, which FASEB endorsed, was incorporated into the SECURE Act of 2019, eventually becoming law in December 2019. This change in Public Law 116–94, defines fellowship stipend payments for graduate students and postdoctoral researchers as compensation for the purpose of contributing to an individual retirement arrangement (IRA) account. Prior to this language being incorporated into law, fellowship monies were largely ineligible to be contributed to an IRA. Recently, documents released by the U.S. Internal Revenue Service (IRS) contradicted this language, creating confusion among fellowship scientists about eligibility of fellowship money contributions to IRAs. FASEB acted swiftly to alert Congress about the confusion, and the U.S. Department of the Treasury updated the IRS guidance to reflect public law.
For tax year 2021, IRS publications, Tax Benefits for Education (Publication 970) and Contributions to IRAs (Publication 590-A), contained language implying that compensation on Form W-2 was necessary to contribute to an IRA. Fellowship stipend recipients typically do not receive Form W-2—part of the impetus for the change in compensation definition specified by the Graduate Student Savings Act. For example, text previously included in Publication 970 stated, “You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement.” This, and similar language in Publication 590-A, were in conflict with public law. Although public law supersedes information in IRS publications, these documents caused confusion pertaining to the legality of fellowship monies being contributed to IRAs.
FASEB contacted the offices of Sens. Elizabeth Warren (D-MA), Mike Lee (R-UT), and Ron Wyden (D-OR) and Reps. Jim Banks (R-IN) and Seth Moulton (D-MA) to ask IRS to clarify that graduate students and postdoctoral scholars receiving a fellowship stipend do not need to receive Form W-2 to legally contribute to an IRA. Wyden’s office alerted Senate Finance Committee staff, who relayed concerns to the Department of Treasury. In February, both Publication 970 and 590-A were revised to include language for graduate students and postdoctoral scholars receiving fellowship monies. Specifically, both publications now reflect that “certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes.” FASEB’s outreach efforts have resulted in both IRS publications being revised for consistency with public law. Most important, now all guidance documents are clear for graduate students, postdoctoral scholars, and tax advisers that fellowship monies are legally contributable to IRAs.