On October 27, 2020, House Ways and Means Committee Chairman Neal (D-MA) and Ranking Member Brady (R-TX) released the Securing a Strong Retirement Act – a set of retirement savings policy changes with bi-partisan support. The bill builds on changes made by 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act and may provide a template for further improvement of our current retirement savings system.
In this article we review elements of the new proposal affecting private, single employer retirement plans.
Highlights of the new proposal include
- A new auto-enrollment/escalation mandate for 401(k) plans
- A solution to some of the technical problems presented by programs providing for 401(k) matching contributions for student loan repayments
- A relaxation of the required minimum distribution (RMD) rules, increasing the required beginning date from age 72 to age 75, providing an exemption for DC/IRA balances up to $100,000, and allowing special treatment for certain annuity provisions.
- Establishment of a Retirement Savings Lost and Found agency to assist participants in finding missing benefits and instructing DOL/IRS/PBGC to (finally) provide a definition of when a participant may be treated as “missing” for purposes of ERISA and the Internal Revenue Code.
The new proposal would require that all 401(k) plans include an automatic enrollment feature that –
Allows permissible withdrawals.
Provides for an automatic contribution rate that is not less than 3 % and not more than 10 % or pay.
Provides for automatic escalation of that contribution by 1 percentage point for each year of participation (not above 10%).
Provides for a default investment into a qualified default investment alternative (QDIA) (e.g., a target date fund).
Plans established before enactment, new businesses (for the first three years), and very small employers (10 or fewer employees) are exempt from this requirement.
Matching contributions and student loans under 401(k) plans
On August 18, 2018, the Internal Revenue Service released Private Letter Ruling (PLR) 201833012, concluding that a 401(k) plan that provided for “an employer non-elective contribution on behalf of an employee conditioned on that employee making student loan re-payments” did not violate the Internal Revenue Code section 401(k) prohibition on conditioning a benefit on an employee making elective contributions.
While this ruling was viewed by many as solving at least one major regulatory issue with respect to student loan repayment programs, a number of technical issues remain. The new proposal would solve a number of those outstanding issues by (generally) allowing treatment of those student loan repayment-related 401(k) contributions as matching contributions for purposes of, e.g., Internal Revenue Code nondiscrimination rules, including (where other requirements are met) for purposes of meeting nondiscrimination safe harbor requirements.
Changes to the RMD rules – higher limits and special rules for annuities
The new proposal increases the required beginning date for required minimum distributions from 72 to 75 and provides that (other than with respect to defined benefit plans) the RMD rules would not apply to participants with IRA/DC balances of up to $100,000 at age 75.
In addition, it allows certain (currently generally prohibited) increases in payments under a commercial annuity, as follows:
Increases by a constant percentage of less than 5% annually (such a feature would, in effect, implicitly address inflation risk).
Payment of a lump sum (subject to certain conditions).
Increases in an amount that is in the nature of a dividend (based on actuarial experience).
Making a final payment upon death as a return of premium.
(The Treasury Secretary is instructed to make changes to the required minimum distribution regulation under section 401(a)(9) to reflect these new rules.)
Finally, the new proposal would instruct the Treasury Secretary to amend the longevity annuity regulations (allowing, under the RMD rules, certain deferred annuities – e.g., an annuity that does not begin until age 85) to –
Eliminate the provision (under the current regulation) that limits premiums paid for longevity annuities to 25% of the participant’s account balance.
Increase the dollar limit on those premiums from $125,000 to $200,000 and to adjust that limit for inflation going forward.
Allow continuation of qualified joint and survivor treatment through a divorce where ex-spouse continues as joint annuitant (subject to certain conditions).
Allow a “short free look period” that allows rescission of an annuity purchase within 90 days.
Retirement Savings Lost and Found
The new proposal includes (with a number of revisions) the “Retirement Savings Lost and Found” proposal of Senators Warren (D-MA) and Daines (R-MT). Under the new proposal –
The Secretaries of Labor, the Treasury, and Commerce are to establish an Office of the Retirement Savings Lost and Found, to be managed by the Pension Benefit Guaranty Corporation. The RSLF is to“develop and maintain an online searchable database of unclaimed vested benefits of participants and beneficiaries.” Individuals would be allowed to search the database for plan contact information.
The database would contain information from PBGC’s missing participant program and from plans’ annual registrations, and the annual registration requirement would be expanded to include certain additional information with respect to distributions to, e.g., separated participants and plan distributions.
The new proposal would also require that IRS, DOL, and PBGC jointly issue, within one year, guidance defining who is a “lost or missing participant.” And plans would generally be relieved of obligations under the Internal Revenue Code and ERISA that they cannot meet because a participant is (by the terms of that definition) lost or missing.
The ERISA fiduciary rules are amended to require that, for relief under ERISA section 404(c) with respect to the investment (post-transfer) of a mandatory distribution from a plan to an IRA, the transferred amount must be invested in a “target date or life cycle fund.”
Finally, the new proposal would (1) raise the cap on mandatory cash-outs from $5,000 to $6,000 and (2) require that, where the participant does not affirmatively elect otherwise, mandatory cash-outs up to $1,000 be transferred to the RSLF.
Other provisions affecting single employer retirement plans
The new proposal would also –
Increase the small plan startup credit for certain small employers (no more than 50 employees) and adda (limited) credit for employer contributions for the first four years.
Simplify and increase the Saver’s Credit, to 50% of the first $3,000 of contributions (to be indexed for inflation), phased out for incomes over $40,000 (single filers)/$80,000 (joint filers). The Treasury Secretary is instructed to promote this credit.
Increase the 401(k) catch-up contribution limit for individuals age 60 and over – from $6,500 (still applicable from ages 50-59) to $10,000 (age 60 and over).
Provide an exemption from the 401(k) general prohibition on contribution incentives other than matching contributions for “de minimis financial incentives” (e.g., a gift card in a small amount). (A related statutory prohibited transaction exemption is also provided.)
Provide a safe harbor for correcting deferral errors “in implementing an automatic enrollment or automatic escalation feature,” allowing (subject to certain conditions) correction within 9 1/2 months after the close of the plan year.
Reduce the service requirement for long-term part-time employees – SECURE generally requires sponsors of 401(k) plans to cover employees working more than 500 but less than 1,000 hours per year for three consecutive years. The new proposal would reduce that service requirement to two consecutive years.
Revise Internal Revenue Code and ERISA rules to allow flexibility in the treatment of plan overpayments.
Reduce the excise tax on failure to make an RMD from 50% to 25%, further reduced to 10% where the required distribution is ultimately made before the earlier of (1) initiation of an audit or (2) the end of the second taxable year after the end of the year in which the tax is imposed.
Allow use of a blended benchmark for asset allocation funds (e.g., target date funds), subject to certain conditions.
Allow simplified annual disclosure for “unenrolled” DC participants (participants who, e.g., are covered by a 401(k) plan but do not contribute to it).
Expand the Employee Plans Compliance Resolution System (EPCRS).
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The Securing a Strong Retirement Act contains a number of proposals that will have the support of many sponsors, e.g., addressing issues under student loan repayment 401(k) programs, relaxing certain RMD rules, and providing a solution (of sorts) to the missing participant problem.
There is considerable uncertainty – as of this writing – as to whether we will be dealing with a divided government. The fate of this proposal, and other bi-partisan retirement policy legislation, may depend on, e.g., whether Republicans or Democrats control the Senate in the next Congress.
We will continue to follow these issues.