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In this article we review several bipartisan retirement policy initiatives being considered by Congress. We start with three bills introduced in 2017, in the 115th Congress, addressing the issues of lifetime income disclosure, leakage and plans with closed groups. We then review two proposals that were introduced in 2016, at the end of the 114th Congress – the Retirement Savings Lost and Found Act and the Retirement Enhancement and Savings Act.
We focus on three bill introduced in 2017, in the 115th Congress – the Lifetime Income Disclosure Act, the SEAL act and the Retirement Security Preservation Act.
The Lifetime Income Disclosure Act (LIDA) was introduced on April 6, 2017 in the House (by Congressmen Messer (R-IN) and Pocan (D-WI)) and the Senate (by Senators Isakson (R-GA) and Murphy (D-CT)). This legislation would require DC plan administrators to provide participants once a year with a description of the lifetime income stream equivalent of a participants’ total accrued benefits. “Lifetime income stream equivalent” is defined as the amount of monthly payments the participant would receive if the participant’s total accrued benefits were used to provide a qualified joint and survivor annuity or (alternatively) a single life annuity.
Other features of this legislation include –
Model disclosure: DOL would (within 1 year of enactment) be required to provide model disclosure explaining: that the lifetime income stream equivalent is only an illustration; that actual payments will depend on numerous factors and may vary substantially from the provided disclosure; and the assumptions used to determine the disclosure.
DOL-prescribed assumptions: DOL would also be required to prescribe the assumptions that may be used in making the lifetime income equivalency calculation. Under these rules, if a participant’s accrued benefit can be invested in a “lifetime income stream” under the terms of the plan, the administrator may in certain circumstances base disclosure on assumptions and methodologies used under that option.
Limitation of liability: Under the proposal, no plan fiduciary, plan sponsor or other person would have any liability solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with DOL assumptions and include the explanations contained in the model lifetime income disclosure provided by DOL.
As we discussed in our article DOL considering “lifetime income” illustration requirements for DC benefit statements, DOL was itself considering proposing a rule on DC lifetime income disclosure. That project seems, however, not to have been given priority.
In its Advance notice of proposed rulemaking with respect to the regulation project (published in 2013), DOL acknowledged that commenters with respect to an earlier (2010) Request for Information on the issue had stated that “mandating lifetime income illustrations would be expensive and may expose plan fiduciaries to litigation from plan participants and beneficiaries for a variety of reasons.” At that time (in 2013) DOL stated that it believed those concerns were “overstated.”
The LIDA bills are in some respects simpler than DOL’s proposal and do address concerns about sponsor liability.
In 2017, legislation has been introduced in both the House (by Congressmen Johnson (R-TX) and Neal (R-MA)) and the Senate (by Senators Enzi (R-WY) and Nelson (D-FL)) that would address three leakage issues. (In the Senate the legislation is called the “Shrinking Emergency Account Losses Act of 2017;” in the House it is called the “Savings Enhancement by Alleviating Leakage in 401(k) Savings Act.” In both cases, the acronym is “SEAL.”)
The legislation would: (1) extend the rollover period for unpaid loans in certain circumstances to the due date (including extensions) for filing the tax return for the year in which the plan treats the unpaid loan amount as distributed; (2) eliminate the 6-month holdout rule for 401(k) hardship withdrawals; and (in the Senate version) (3) ban 401(k) credit card loans.
Items (1) and (2) are generally regarded as important (if relatively minor) improvements to the current system.
Where an employer closes a DB plan to new participants (sometimes called a “soft freeze”), Tax Code nondiscrimination issues may over time arise with respect to the grandfathered benefits of the closed class, even where that class of participants is nondiscriminatory at the time of the freeze. This happens when lower paid members of the closed class subsequently leave, are terminated or become higher paid. In addition, over time, the number of participants in the “old plan” may shrink below the minimum participant requirements of Tax Code section 401(a)(26) (the “50 participant rule”). Finally, where, e.g., in connection with a “hard freeze” of all DB plan benefits, the sponsor establishes or enhances a DC plan, the sponsor may provide for “make whole” benefits for a closed class of some or all of the participants in the “old” DB plan, and nondiscrimination issues may over time arise with respect to that class. (These issues are discussed in detail in our article Frozen plan update.)
On April 5, 2017, the Retirement Security Preservation Act was introduced in the House (by Congressmen Tiberi (R-OH) and Neal (D-MA)) and the Senate (by Senators Cardin (D-MD) and Portman (R-OH)) to address this closed plan nondiscrimination issue. The proposal is very technical. Oversimplifying, the legislation provides relief from the nondiscrimination rules for DB plan closed groups, and for make whole contributions to DC plan closed groups, where –
For the plan year of the “closure” and the 2 succeeding plan years, the closed group meets applicable nondiscrimination requirements.
After the closure, benefits to/members of the closed group are not increased in a way that discriminates significantly in favor of highly compensated employees.
The closure took place before April 5, 2017.
Relief with respect to the minimum participation issue is also provided.
The Obama IRS proposed limited relief with respect to this issue, but most viewed that proposed relief as inadequate. A Trump IRS could conceivably provide more robust relief on this issue, without Congressional action.
We also want to review a couple of proposals from the 114th Congress that may come up again in the 115th Congress – legislation addressing the issue of “lost” benefits and Senator Hatch’s (R-UT) Retirement Enhancement and Savings Act of 2016.
In 2016, Senators Warren (D-MA) and Daines (R-MT) introduced the Retirement Savings Lost and Found Act of 2016. This legislation would (generally):
Establish a “Retirement Savings Lost and Found” that would maintain a database of participant benefits in ERISA retirement plans.
Require that plan administrators report (in the plan’s annual registration statement) the name and taxpayer identification number of –
Deferred vested participants that were paid benefits during the plan year.
Participants with respect to whom 401(a)(31)(B) distributions were made during the plan year. A 401(a)(31)(B) distribution is a mandatory distribution of a participant’s benefit in excess of $1,000 (but not in excess of $5,000), with respect to which the participant does not make an election. In that event, the plan administrator must transfer the benefit to an individual retirement plan (e.g., an IRA).
Participants with respect to whom an annuity contract was distributed during the plan year.
The registration statement must also specify the amount distributed and (where applicable) the IRA trustee and account number or the name and address of the annuity issuer.
The plan administrator must also, in the case of a 401(a)(31)(B) distribution, notify the IRA trustee that the distribution is a 401(a)(31)(B) distribution. And the IRA trustee must then report these amounts to the Director of the Retirement Savings Lost and Found.
The bill would add a requirement that, to get ERISA section 404(c) treatment of a 401(a)(31)(B) distribution (currently generally available one year after the transfer to an IRA is made), the distribution would have to be made to a target date or lifecycle fund or to another option specified by DOL.
The bill would raise the cap on 401(a)(31)(B) distributions from $5,000 to $6,000. And cashouts of amounts not in excess of $1,000 (which currently can simply be distributed as a check) would, if the participant makes no election, have to be transferred to the Retirement Savings Lost and Found.
Some have criticized this legislation as imposing administrative burdens on sponsors, administrators and providers, the cost of which may outweigh the benefits produced.
We note that, in 2016, the Pension Benefit Guaranty Corporation proposed a regulation that would address some of these issues.
We provided a detailed discussion of the Retirement Enhancement and Savings Act when (in September 2016) it was unanimously approved by the Senate Finance Committee. This legislation included proposals addressing a number of the same issues addressed in the 2017 legislation discussed above – e.g., lifetime income disclosure, leakage and closed groups. It also included proposals to: eliminate ERISA obstacles to “Open MEPs;” modify and supplement 401(k) safe harbor rules; provide a safe harbor for the selection and use of annuities in defined contribution plans; increase certain filing penalties; increase the small employer plan start-up and auto-enrollment tax credits; allow the distribution of certain annuity contracts; and allow combined annual reporting in certain circumstances.
Will any become law in the (relatively) near future? All of these proposals have (at least some) bipartisan support. But, given the current high level of Congressional partisanship, and current Congressional focus on the Affordable Care Act and tax reform, it’s hard to see a way forward for any of them, except as an add-on to what is likely to be partisan legislation.
We will continue to follow these issues.