After Near Misses, Congress Zeroes in on Major Retirement Reforms
Lawmakers in the U.S. House of Representatives and Senate have not given up on enacting major retirement savings enhancements. Their multiple attempts in 2017 and 2018 yielded incremental changes within tax reform and budget bills, but more comprehensive changes eluded them. Such legislation has become a priority and has bipartisan support. This support is apparent among Republicans and Democrats in both the House and Senate, including the top leadership levels of both parties.
Under consideration is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, co-sponsored by Representatives Richard Neal (D-MA), Kevin Brady (R-TX), Ron Kind (D-WI), and Mike Kelly (R-PA). During bill mark-up, provisions from another bill were added that would enhance the formation of multiple employer plans (MEPs). Approved by the House Ways and Means Committee, the SECURE Act of 2019 was reported to the full House for debate and a vote. (Similar legislation has been introduced in the Senate.)
New Incentives to Establish or Enhance Employer Plans
The following SECURE Act provisions would create new incentives and modify existing incentives for employers to establish retirement plans. They would also broaden the time window within which employers may establish plans.
Multiple employer plans: Enhance an employer’s ability to participate in a MEP and add a new variant to be known as a “pooled employer plan,” or PEP. Both have basic features in common; the latter to be administered by a pooled plan provider (effective for 2021 and later plan years).
Multiple participating businesses with a common interest would generally be part of a MEP.
Multiple participating businesses with no common interest other than plan sponsorship would generally be part of a PEP.
Smaller MEPs/PEPs could, as permitted by the IRS, file a simplified short Form 5500-SF plan tax return.
Noncompliance by one participating employer would not disqualify the entire MEP/PEP arrangement (eliminates the “bad apple” rule).
Deadline to establish a plan: Allow an employer to establish a qualified plan—such as a profit sharing or pension plan—as late as its business tax filing deadline, including extensions. Under current rules, employers must establish a qualified plan by the last day of their business year. The extension would not apply to certain plan provisions, such as elective deferrals (effective for 2020 and later taxable years).
Small employer plan start-up credit: Increase the small employer retirement plan start-up tax credit from $500 to a maximum of $5,000 per year, available for three years (effective for 2020 and later taxable years).
Automatic enrollment credit: Provide a new automatic enrollment tax credit, available to employers with new or existing small 401(k) plans (100 or fewer employees) or SIMPLE IRA plans that include automatic enrollment; maximum tax credit $500 per year, for up to three years (effective for 2020 and later taxable years).
Election of 401(k) nonelective safe harbor design: Eliminate the safe harbor notice requirement for employers that make nonelective safe harbor plan contributions and grant employers more time to amend their plans to implement a nonelective 401(k) safe harbor plan feature. Amendments may be made up to 30 days before the end of a plan year. However, amendments may be made up to the deadline for removing excess contributions for a plan year (generally, by the close of the following plan year) if the plan is also amended to require a four percent nonelective safe harbor contribution (effective for 2020 and later plan years).
Annuity selection safe harbor: Create a new safe harbor for a plan fiduciary to meet ERISA’s “prudent man rule” when selecting an insurer and an annuity contract to offer lifetime income options under a plan (no specified effective date).
New Ways to Save More in Employer Plans
The next set of provisions would allow employers more freedom to automatically increase employees’ deferral contributions, require employers to share with each participant a projection of future retirement benefits, and promote plan entry for certain part-time employees.
Higher cap on deferrals in safe harbor 401(k) plans: Increase from 10 percent to 15 percent the maximum deferral rate that can apply in a 401(k) plan as a result of automatic enrollment and automatic deferral increases in a qualified automatic contribution arrangement (QACA) (effective for 2020 and later plan years).
Lifetime income disclosure: Require defined contribution plans to provide, at least annually, a projected lifetime income stream that a participant’s accrued benefit could generate; employers would not be liable for amounts projected (effective for benefit statements provided more than 12 months after the DOL issues guidance, interest assumptions to be used, and a model disclosure. The bill prescribes that all three be completed within one year of the date of enactment).
Participation by less than full-time employees: Generally allow employees who have three consecutive 12-month periods of 500 hours of service and satisfy the plan’s minimum age requirement to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive eligibility rules could continue to be applied, however, to other contribution sources (e.g., matching contributions) and to ADP/ACP safe harbor plans. Employers would also be permitted to exclude such employees from coverage, nondiscrimination, and top-heavy test rules (effective for 2021 and later plan years, but no 12-month period that begins before January 1, 2021, shall be taken into account).
More Targeted Provisions Affecting Employer Plans
The SECURE Act contains a number of additional, more targeted provisions that apply to employer plans.
Custodial accounts of terminating 403(b) plans: Allow the plan administrator or custodian of a 403(b) custodial account to distribute the account in kind to a participant or beneficiary when the employer is terminating the 403(b) plan (retroactive; effective for 2009 and later taxable years).
Lifetime income portability: Allow plan participants in a qualified retirement plan, 403(b) plan, or governmental 457(b) plan to roll over lifetime income investments to an IRA or another retirement plan without a traditional distribution event if their plan no longer permits such investments (effective for 2020 and later plan years).
Higher penalties for plan reporting failures: Retirement plan information reporting failures would lead to the following increased penalties (effective for filings and notices required January 1, 2020, and thereafter).
Form 5500, $105 per day, up to a maximum of $50,000
Form 8955-SSA (deferred benefit reporting), $2 per day, up to a maximum of $10,000 for failing to file, $2 per day, up to a maximum of $5,000 for failing to file a notification of change
Withholding notices, $100 per day, up to a maximum of $50,000
Credit card loan prohibition: Treat retirement plan loans enabled through credit card or similar programs as distributed from the plan and subject to taxation (applies to loans made after the date of enactment).
Shared Form 5500 filing: Allow employers sponsoring defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options, to file a common Form 5500 (effective for 2022 and later plan years).
Nondiscrimination relief for closed pension plans: Provide nondiscrimination testing relief for defined benefit pension plans closed to new participants; such employers generally offer a defined contribution plan as an alternative for new employees (effective upon enactment, or—if elected—for 2014 and later plan years).
Community newspaper pension funding relief: Allow sponsors of certain plans maintained for community newspapers to calculate defined benefit plan contributions with interest rates and amortization periods that reduce funding requirements (effective for plan years ending after December 31, 2017).
Church retirement plan rules: Clarify which employees may participate in retirement plans sponsored by church-controlled organizations (effective for past, present, and future plans years).
Pension plans of cooperatives and charities: Reduce Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans of certain cooperatives and charities to $19-per-participant for fixed-rate premiums, and $9-per-$1,000 of unfunded vested benefits for variable-rate premiums (effective on date of enactment).
New Provisions Affecting Employer Plans and IRAs
The following SECURE Act provisions could affect both employer plans and IRAs, or further connect these types of plans.
More rapid payouts to beneficiaries: Most nonspouse beneficiaries of IRA, qualified defined contribution, 403(b), and governmental 457(b) plan balances would generally be required to distribute inherited amounts within 10 years (effective for participant/IRA owner deaths in 2020 or later years; 2022 or later years for governmental plans; special delay to accommodate contracts of certain collectively bargained plans). Exceptions include those who, at the time of the account owner’s death, are
spouses,
disabled individuals,
certain chronically ill individuals,
beneficiaries whose age is within 10 years of the decedent’s age,
minors (they would begin a 10-year payout period upon reaching the age of majority), and
recipients of certain annuitized payments begun before enactment of the SECURE Act.
Delayed age for beginning RMDs: The age when required minimum distributions (RMDs) from Traditional IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans must generally begin would be increased from age 70½ to age 72 (effective for distributions required in 2020 and later years, for those who reach age 70½ in 2020 or a later year).
Birth/adoption excise tax exception: The birth of a child or adoption of a child or individual who requires support would qualify as a distribution event and an exemption from the 10 percent excise tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs and defined contribution qualified plans, 403(b) plans, and governmental 457(b) plans; amounts could be repaid (effective for distributions in 2020 and later years).
“Difficulty of care” as eligible retirement income: Increase the contribution limit to qualified plans, 403(b) plans, and IRAs to include “difficulty-of-care” payments (effective upon enactment for IRAs, and for 2016 and later plans years for employer plans).
More Flexibility for IRA Contributions
The following provisions would specifically affect IRAs.
Traditional IRA contributions at any age: Taxpayers with earned income could make Traditional IRA contributions at any age, not just for years before reaching age 70½, as under current law (effective for 2020 and later taxable years).
Graduate student IRA contributions: Certain stipend, fellowship, and similar payments to graduate and postdoctoral students would be treated as earned income for IRA contribution purposes (effective for 2020 and later taxable years).
New Eligible Expenses for 529 Plans
The SECURE Act also broadens the definition of eligible expenses for qualified tuition or “529” plans.
Eligible expense categories: 529 plan distributions taken for certain expenses related to the following items would be considered qualified, and therefore not subject to taxation (effective for distributions in 2019 and later years).
Registered apprenticeships
Home schooling
Repayment of student loans of a 529 plan beneficiary—or sibling—up to $10,000 (total, not annual)
Expenses in addition to tuition for attendance at an elementary or secondary public, private, or religious school
Will This Time be Different?
Significant bipartisan support has been present for retirement and education savings reform for the past several years, yet efforts to enact legislation have fallen short. Now, in the 116th Congress, momentum seems to be building. Whether the outcome this time will be different remains to be seen. Ascensus will closely monitor the progress of the SECURE Act and comparable Senate legislation.
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