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On September 10, 2018, House Republicans released their “Tax Reform 2.0” proposal, a package of three bills: the Family Savings Act of 2018 (H.R. 6757); the Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760); and the American Innovation Act of 2018 (H.R. 6756).
The Family Savings Act (FSA) contains a number of provisions affecting retirement plans. We review those provisions in this article, consider their significance for plan sponsors and conclude with a brief consideration of the possibility of major retirement policy legislation this year.
In March, a bipartisan group of Senators (including Senators Hatch (R-UT) and Wyden (D-OR), Chairman and Ranking Member of the Senate Finance Committee) introduced the Retirement Enhancement and Savings Act of 2018 (RESA). A number of the proposals in the FSA were adapted from RESA, including:
A MEP is a multiple employer plan, defined as a plan for employees of unrelated employers (other than a plan maintained pursuant to a collective bargaining agreement). An “Open MEP” would, generally, be a provider-based multiple employer plan in which the participating employers do not have any special relationship with each other or with the provider.
Open MEPs face two regulatory obstacles: A DOL rule requiring that a MEP be “tied to the contributing employers or their employees by genuine economic or representational interests unrelated to the provision of benefits” (sometimes called the “nexus” requirement). And an IRS rule that applies a “one bad apple” rule to MEPs – a qualification violation that applies to only one participating employer may disqualify the entire plan.
The FSA Open MEP proposal is generally the same as the one in RESA, allowingdefined contribution plan Open MEPs (“Pooled Employer Plans”) that meet certain requirements and that are provided by a “Pooled Plan Provider.”
To qualify as a Pooled Plan Provider, the Open MEP provider must:
Be designated under the terms of the plan as a named fiduciary, as the plan’s administrator, and as the person responsible for performing all necessary administrative duties (including conducting necessary testing of the plan and the employees of each participating employer).
Before beginning operations, register with Treasury and DOL and provide any required information.
Acknowledge that it is a named fiduciary and the plan administrator.
Ensure compliance with ERISA bonding requirements.
Treasury is instructed to develop model Open MEP plan language.
To qualify as a Pooled Employer Plan, the Open MEP must:
Designate a trustee (e.g., a bank) that meets IRA trustee requirements.
State that each participating employer retains fiduciary responsibility for the selection and monitoring of the Pooled Plan Provider and the investment and management of that employer’s share of the plan’s assets (to the extent not otherwise delegated to another fiduciary by the Pooled Plan Providerand subject to ERISA section 404(c)).
Provide that participating employers and participants are not subject to unreasonable restrictions, fees, or penalties for ceasing participation, receiving distributions or transferring assets.
Require the Pooled Plan Provider to make required disclosures.
The FSA would also provide a procedure for dealing with non-complying employers, solving the “one bad apple” problem.
President Trump’s recent Executive Order on Strengthening Retirement Security in America also instructed DOL and Treasury to consider the possible elimination of regulatory obstacles to the creation of Open MEPs.
“Closed groups” – e.g., a limited group of participants who get grandfathered benefits under a DB plan or make-whole benefits under a DC plan – present several problems under Internal Revenue Code nondiscrimination rules. Very briefly (and oversimplifying a lot): while a closed group may be nondiscriminatory when it is initially “closed,” as some participants remaining in the group are promoted and get pay increases, and younger, lower-paid, non-closed group members join the plan, the closed group may over time become discriminatory; that is, the group of employees currently benefiting under the plan may be too heavily weighted toward highly compensated employees. IRS has provided temporary relief with respect to this issue but not an adequate permanent solution.
To address this issue, under the FSA (tracking RESA), DB plans could be aggregated with DC plans and tested on a benefit accruals basis, without having to satisfy (burdensome) threshold conditions (sometimes referred to as gateways) if:
For the year the class closed and the two preceding years the plan satisfied the nondiscrimination requirements.
Either the class was closed before April 5, 2017, or the plan has been in effect for at least five years before the class is closed and, during that five-year period, there has not been a substantial increase in the coverage or the benefits or other rights or features under the plan, other than in connection with certain transactions.
After the class was closed, either no discriminatory amendment is adopted to modify the class or the benefit accruals or benefits, rights, and features for the closed class, or the nondiscrimination requirements are otherwise met.
Similar relief is provided for closed groups receiving make-whole benefits in DC plans.
In addition, a plan that meets these requirements would be deemed to satisfy the minimum participation requirements (the “50 employee” rule under Internal Revenue Code section 401(a)(26)) – another problem closed groups present that IRS has not addressed.
For sponsors with DB plans that are subject to a “soft freeze” (in which grandfathered participants continue to accrue benefits) or otherwise provide benefits to a closed group, or with DC plans that provide “make-whole” contributions, adoption of these provisions would provide significant relief.
The FSA would also:
Eliminate certain notice requirements with respect to nonelective contributions under 401(k) safe harbors.
In limited circumstances, extend the time for the election of 401(k) design-based safe harbors.
Prohibit credit card loans from qualified plans
Allow the distribution of certain annuity contracts, generally when the annuity is “no longer authorized to be held as an investment option” under the plan.
Allow adoption of certain qualified retirement plans after year-end but before tax return due date.
The FSA also includes certain retirement plan-related proposals that are not in RESA:
$50,000 exemption from RMD rules: Internal Revenue Code section 401(a)(9) generally requires that distributions under a qualified plan begin as of the required beginning date (generally, the later of age 70 1/2 or when a participant retires) and continue over a period not exceeding the life (or life expectancy) of the participant or joint life (or joint life expectancy) of the participant and a designated beneficiary. The FSA provides that these RMD requirements generally do not apply where the aggregate value of an employee’s interest under eligible retirement plans (as of the prior year-end) does not exceed $50,000 (adjusted for inflation). The FSA also adds a reporting requirement, requiring the plan administrator, by January 31 of each year, to report, with respect to each participant who has attained age 69 (as of the prior year-end), (1) plan and plan administrator identification information and (2) the name, address, and taxpayer identification number of the participant, and her account balance as of the prior year-end. This report must also be furnished to the participant.
This proposal would give an RMD “pass” to participants with relatively small accounts – depending on the plan, possibly a very significant number of participants.
Study of PBGC single employer program: The FSA instructs the Pension Benefit Guaranty Corporation to contract with the Social Security Administration (or “any other agency or organization that such Board determines is independent from the [PBGC] and has the expertise to conduct the study”) to:
(1) examine the current structure and level of premiums required to be paid by single employer plans … to evaluate whether such premiums are sufficient for the [PBGC] to pay [guaranteed benefits].
(2) evaluate whether there are alternative structures and levels of premiums that would better account for the risks posed by various categories of single employer plans, including on the basis of – (A) industry, ownership structure, or size of the plan sponsor, (B) plan funded status, risk or volatility of plan investments, or credit worthiness of the plan sponsor, or (C) a combination of [those] factors.
(3) evaluate whether other methods of estimating the value of assets and liabilities should be used in [PBGC] financial statements.
Given that the PBGC single employer fund is likely very soon to be showing a surplus, and that PBGC’s financial crisis is in its multiemployer fund, this proposal is troubling – some see it as possibly laying the predicate for more single employer program premium increases.
Penalty-free withdrawals for birth or adoption: The FSA would create an exception to the (10%) early distribution tax rules, limited to $7,500, for distributions made during the year after a child is born to or adopted by the taxpayer receiving the distribution.
RESA has broad support in the Senate. Its leading sponsor, Senator Hatch, one of the leaders on retirement policy in the Senate, is retiring at the end of the current Congress, and passage of RESA (or something like it) before he leaves is likely to be one of his priorities.
The FSA represents (among other things) the adoption by House Republican leadership of a number of key provisions of RESA. But the FSA is paired with other House Republican Tax Reform 2.0 proposals (e.g., the Protecting Family and Small Business Tax Cuts Act, which makes most of the 2017 tax cuts permanent) that are likely to face significant opposition from most Democrats.
In addition, current spending authorization runs out at the end of this month. It looks like Congress will not pass all of the (12) spending authorization bills needed by the September 30 deadline and will therefore have to pass a continuing resolution, likely to delay any debate over spending authorization until after the election.
Congress is also currently considering what to do about the multiemployer plan financial crisis. Proposed legislation from the Joint Select Committee on Solvency of Multiemployer Pension Plans (authorized by the Bipartisan Budget Act of 2018 and chaired by Senator Hatch) is due by November 30, 2018. Many Congressional policymakers will care very much about this legislation.
Any of these legislative initiatives may provide a legislative vehicle for the proposals we have discussed in this article.
Bottom line: The current situation is relatively fluid. On the one hand, even in areas where there is almost complete agreement between the two major parties in Washington, anything but a “clean” bill focused on retirement topics could prove difficult to get through Congress. On the other, finding a legislative vehicle for such a “clean” bill may prove difficult. Thus, the fate of comprehensive retirement policy legislation in 2018 remains uncertain.
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We will continue to follow these issues.