Congressman Neal introduces retirement savings legislation

March 04, 2012

Congressman Neal (D-MA) has introduced legislation -- H.R. 4050, the "Retirement Plan Simplification and Enhancement Act of 2012" -- which would make a number of changes to ERISA and the Tax Code. It's unlikely in an election year that this bill will pass, but the issues it addresses -- retirement income, annuities, electronic disclosure, simplification of administration -- may be taken up when Congress is next ready to act generally on pension issues.

In this article we review the key provisions of the bill affecting corporate pension plans.

Changes to the 401(k) automatic enrollment/automatic increase safe harbor

Under rules added by the Pension Protection Act, certain plans that provide for automatic enrollment and an automatic increase in contributions do not have to run the 401(k) nondiscrimination (ADP) test -- this is generally referred to as the "automatic enrollment/automatic increase safe harbor."

To qualify for the safe harbor, each eligible employee must be enrolled in the plan at a minimum contribution rate of 3% (subject to the employee's right to elect out). That contribution rate continues for the year of the initial contribution and for the subsequent year (the "initial period"). Thereafter, it must be increased at least one percentage point per year until a 6% rate is reached, after which no further increases are required. The following table summarizes these rules.

Year

Contribution rate

Initial period (year of initial contribution and next plan year)

3%

2nd year

4%

3rd year

5%

4th year

6%

 

These percentages are, in effect, minimums, and employees have the right to elect out of any "automatic" contribution. Current rules provide, however, that safe harbor automatic contributions may not exceed 10%.

H.R. 4050 would make two changes to the automatic contribution rules.

Elimination of 10% cap on automatic increase contributions. The 10% limit on automatic contributions has been criticized by some who believe using a higher "escalation" percentage would lead to higher savings for some employees. H.R. 4050 would eliminate the 10% cap.

Authorization for Treasury to increase automatic contribution percentages. In a similar vein, H.R. 4050 would authorize the Secretary of the Treasury to prescribe regulations increasing the "base-line" automatic contribution percentages described in the table above, except that no percentage increase could be by more than eight percentage points. In determining whether and how much to increase base-line automatic contribution percentages, the Secretary is to consider: the extent to which the increases would result in more retirement savings; and the extent to which, if the increases are "too large," they could discourage adoption of safe harbor automatic enrollment/automatic increase arrangements ("including the possible increase in employer cost due to increased matching contributions") or result in employees electing not to contribute.

Require long-term part-time employees to participate in 401(k) plans

The bill would generally require sponsors of 401(k) plans to cover employees working more than 500 but less than 1,000 hours per year for three consecutive years. Tax Code nondiscrimination and top heavy rules would, however, generally not apply to these employees, and the rule would generally not cover collectively bargained employees.

GAO to study applying QJSA rules to DC plans

Defined contribution plans that pay benefits as a lump sum and provide that any death benefit is paid to the participant's spouse generally do not have to comply with ERISA/Tax Code QJSA rules. Those rules generally require that the "default" form of payment is a life annuity for unmarried participants and a joint and survivor annuity, with the participant's spouse as the beneficiary, for married participants.

H.R. 4050 would require the Government Accountability Office to study the application of the QJSA rules to DC plans and what modifications of current rules would be necessary to do so. This proposal -- to apply QJSA rules to DC plans -- has been around for some time and has garnered some support but never enough to pass legislation.

Other annuity-related provisions

The bill includes a number of other annuity-related provisions including:

Rules for the "third-party administration" (e.g., by an insurance company) of annuity distributions.

Simplification of the treatment of annuity age and service rules.

Facilitation of the rollover of annuities

Exception from required distributions where aggregate retirement savings do not exceed $100,000

Under the bill, if the aggregate balance to the credit of an employee under all retirement plans does not exceed $100,000, then the Tax Code minimum distribution rules would not apply. The present value (to be added to the "aggregate balance") of defined benefit plan benefits would be determined on a Tax Code 417(e) basis.

New electronic disclosure rules

Under the bill, ERISA-required disclosures could generally be provided either on a web site or, subject to certain restrictions, electronically.

Website

Required documents may be provided on a website if:

Access to the documents is available on a timely or continuous basis, as appropriate.

The intended recipient has been furnished notification of the availability of the documents and how they can be accessed.

The intended recipient has been apprised of his or her ability to request and obtain, free of charge, a paper copy.

The website disclosure is written in a manner calculated to be understood by the average plan participant, furnished in advance of the date it is required to be provided, and annually thereafter; special rules apply to time-sensitive/event-based notifications.

Electronic notification

Required documents may be provided (other than on a website) in one of the following manners:

Through the use of paper.

Electronically to a recipient who has the ability to effectively access documents furnished in electronic form at his or her place of work, and with respect to whom access to the employer's electronic information is an integral part of his or her work. This is more or less the current "default" Department of Labor standard and is generally considered problematic because it does not allow for the use of, e.g., kiosks.

Electronically to a recipient who has affirmatively consented, in electronic or nonelectronic form, to receiving documents or materials through electronic media. Recipients must be notified of the effect of the consent and any hardware and software requirements. This (also) is more or less the current "default" DOL standard and is generally considered problematic because it requires getting the employee to do something affirmative -- consent.

Electronically to a recipient who has the effective ability to access the electronic medium used and who has received notification through the use of paper of his ability to request and obtain, free of charge, a paper copy of such documents or materials.

A plan administrator is only permitted to use one of these methods if appropriate and necessary measures have been taken that are reasonably calculated to ensure that the system:

Has safeguards to maximize the likelihood of actual receipt of transmitted information.

Protects the confidentiality of a recipient's personal information.

Is designed so that the electronically delivered documents or materials are prepared and furnished in a manner that is consistent with the style, format, and content requirements applicable to the documents or materials.

If necessary, apprises each recipient of the significance of the disclosure and apprises each recipient of the ability to request and obtain a paper version of electronically furnished disclosures.

Treasury and DOL are directed to coordinate their electronic disclosure policies.

It's not clear that this is an ideal electronic disclosure regime. DOL is actively reconsidering its electronic disclosure policies and recently issued guidance with respect to electronic disclosure of fee information. We would expect that there will, in the relatively near future, be other proposals to revise electronic disclosure rules.

Nondiscrimination rules not to apply to certain closed classes

Where an employer freezes a DB plan and establishes (or enhances) a DC plan, Tax Code nondiscrimination issues may arise with respect to grandfathered benefits. H.R. 4050 addresses two such issues: where "old plan" benefits are no longer provided to new entrants; and where special "make-whole" benefits are provided under the DC plan to "old plan" participants. Generally, under H.R. 4050, there would not be a nondiscrimination problem with respect to these sorts of programs where the closed class is nondiscriminatory at the beginning (e.g., at the time of the freeze and establishment of the DC plan), even if subsequently (e.g., as lower paid employees disproportionately terminate and leave the class) it becomes "discriminatory."

Other provisions

Other provisions of the bill affecting corporate retirement plans would:

Expand the Employee Plans Compliance Resolution System.

Allow the use of forfeitures to fund employer contributions under either of the 401(k) safe harbors.

Modify the "substantial cessation of operations" rule under ERISA Title IV.

Direct DOL, Treasury and the Pension Benefit Guaranty Corporation to study ERISA and Tax Code reporting and disclosure requirements and "make such recommendations as may be appropriate to the appropriate committees of the Congress to consolidate, simplify, standardize, and improve the applicable reporting and disclosure requirements so as to simplify reporting for plans ... and ensure that needed understandable information is provided to participants ...."

Allow plan administrators to consolidate certain DC plan notices.

Allow provision of certain "elect out" notices (e.g., with respect to automatic enrollment and qualified default investments) to be made on an annual rather than plan year basis.

* * *

We will update you if and when this bill moves forward through the legislative process.

October Three, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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