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On September 27, 2018, the House passed the Family Savings Act (FSA) (part of House Republicans’ Tax Reform 2.0 proposal), after making two significant retirement policy related changes to the bill approved by the Ways and Means Committee.
There are several other significant retirement savings policy initiatives in the current Congress, many with bipartisan support, the most comprehensive of which is the Senate’s Retirement Enhancement and Savings Act (RESA)
We’ve covered these (and other) proposals extensively over 2017-2018. In this article we begin by briefly discussing the changes made to the FSA when it passed the House and the political outlook for retirement policy legislation before the end of the year. We then provide an inventory of some of the key retirement policy proposals that may be included in any year-end 2018 retirement policy legislation.
Before passing the FSA, the House adopted an amendment offered by Ways and Means Chairman Brady (R-TX) making two significant retirement policy-related changes to the bill:
DC annuity fiduciary safe harbor added: Current Department of Labor rules require that, where a DC plan offers an in-plan annuity, plan fiduciaries must conclude that “at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract.” The amendment to the FSA adds a proposal (nearly identical to the one in RESA), addressing this issue by generally deferring to state insurance regulation on the issue of the financial condition of the annuity carrier.
PBGC study subtracted: As passed by the Ways and Means Committee, the FSA included a requirement that the Pension Benefit Guaranty Corporation contract with the Social Security Administration (or another independent agency or organization) to: (1) examine the current structure and level of single employer plan premiums; (2) evaluate whether there are better alternative premium structures/levels (based on “credit worthiness,” funded status, risk of plan investments, etc.); and (3) evaluate other methods of estimating PBGC financial statement assets and liabilities. There was some concern that this provision signaled a willingness to, e.g., consider another PBGC premium increase, and its removal will be welcomed by most sponsors.
While the September 27 House approval ofthe FSA only received 10 Democratic votes, that is likely because it was positioned as part of the Republicans’ “Tax Reform 2.0” package. A number of the proposals included in it have significant bipartisan support. RESA has broad bipartisan support in the Senate and is co-sponsored by Senator Hatch (R-UT) and Senator Wyden (D-OR), the Chairman and Ranking Member, respectively, of the Senate Finance Committee.
Clearly, passage of retirement policy legislation before the November elections is out of the question. But there is a possibility of action after the election, in a lame duck session.
In addition to the (in some cases broad) bipartisan support for many of these proposals, two factors increase the possibility of such action. First, Senator Hatch is retiring at the end of the current Congress (at the age of 84 and having served in the Senate for more than 40 years). RESA has been one of his top legislative priorities, and he will no doubt feel some urgency to try to get it (or something like it) passed this year.
Second, Congress is 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 (both Democrats and some Republicans) will care very much about this legislation.
The election could affect prospects for legislation in a number of (at this point) unpredictable ways. The new Congress will, of course, not take office until next year, but the election may settle or conceivably exacerbate year-end political divisions.
Bottom line: There is a significant (but not necessarily a more-likely-than-not) chance that Congress will pass bipartisan retirement savings legislation in the post-election lame duck session.
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Certainly, the proposals with the greatest chance of passage are those that are inboth the FSA and RESA. Proposals that have not made it onto that “short list” – especially if they have not been included in either proposal – are a longer shot for inclusion.
In what follows, we inventory bipartisan proposals (1) that are in both the FSA and RESA or (2) that are either in the FSA or RESA (but not both). We provide brief summaries of some of the more significant of these proposals; for a more extensive discussion, please see our comprehensive articles on the FSA and RESA. We conclude with (3) a discussion of three significant proposals that are in neither the FSA norRESA.
The following proposals are included in both the FSA and RESA:
Closed group relief: To address the nondiscrimination problems presented by “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), this proposal would allow DB plans to 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 certain conditions are met.
Authorization of DC Open MEPs: This proposal would authorize “Pooled Plan Providers” to offer defined contribution plan “Open” multiple employer plans (MEPs) by eliminating the current DOL “nexus” rule and providing a solution to IRS’s “one bad apple” rule for qualifying plans (“Pooled Employer Plans”), subject to certain conditions.
DC annuity safe harbor: This proposal would (as stated above) generally defer to state insurance regulation with respect to the issue of the financial condition of the annuity carrier selected by a plan fiduciary to offer annuities under a DC plan.
Other proposals: Both bills also include proposals that would: 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; and allow adoption of certain qualified retirement plans after year-end but before tax return due date.
The following proposals are included in the FSA only:
$50,000 “exemption” from Internal Revenue Code required minimum distribution (RMD)requirements: Internal Revenue Code section 401(a)(9) generally requires that minimum 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). The proposal provides that these RMD requirements generally would 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). It also adds a reporting requirement with respect to participants age 69 or older.
Penalty-free withdrawals for birth or adoption: The proposal 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.
The following proposals are included in RESA only:
Mandatory lifetime income disclosure: This proposal would require DC plan administrators to annually provide participants a description of the monthly “income stream” they would receive if their account balance were paid in the form of a single life annuity and joint and surviving spouse annuity, based on assumptions specified in DOL guidance. Many industry organizations have raised concerns about this proposal.
Other proposals: RESA also includes proposals that would: eliminate the 10% cap on the automatic escalation of contributions under the automatic contribution safe harbor; increase the dollar limit on the small employer plan startup credit from $500 to $5,000; add a new small employer plan automatic enrollment credit of $500 per year for three years beginning with the year the automatic enrollment provision is included in the plan; eliminate “stretch” payments under DC plans and IRAs with respect to balances over $450,000, generally requiring distribution of the excess within 5 years of the death of the employee.
There are a number of other proposals that are in neither the FSA nor RESA. As we said, the likelihood of the inclusion of any of these in year-end retirement policy legislation is more remote. We would, however, note three as particularly significant:
Electronic participant disclosure: At the end of 2017, a bipartisan group of Representatives introduced the Receiving Electronic Statements to Improve Retiree Earnings Act (discussed in our June 2018 Legislative update), under which any document required or permitted to be furnished to a participant under ERISA could be provided in electronic form provided certain requirements (including a participant right to ask for paper disclosure) are met. This legislation would significantly relax DOL electronic disclosure rules, which currently generally require an affirmative participant election. President Trump’s Executive Order on Strengthening Retirement Security in America also highlighted this issue.
Open MEP s__mall employer exemption from fiduciary rules: Congressman Neal’s (D-MA) Automatic Retirement Plan Act of 2017 included an Open MEP proposal that provided a (partial) exemption from ERISA fiduciary rules for small employer plans. Under it, employers with no more than 100 employees would generally not be fiduciaries with respect to a Pooled Employer Plan, including with respect to the selection and monitoring of service providers and investments, provided thePooled Plan Provider receives no more than reasonable compensation and agrees to comply with the Pooled Plan Provider requirements and to assume all fiduciary responsibilities not retained by the employer. A similar provision was included in SenateOpen MEP legislation co-sponsored by Senators Booker (D-NJ), Cotton (R-AK), Heitkamp (D-ND) and Young (R-IN).
Missing participant legislation: On February 28, 2018, Senators Warren (D-MA) and Daines (R-MT) introduced the Retirement Savings Lost and Found Act of 2018, providing for the establishment of a federal missing participant clearinghouse and guidance as to how sponsor fiduciaries are to deal with (and search for) missing participants.
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We will continue to follow these issues.