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On February 9, 2016, the Administration released its 2017 fiscal year budget. The new budget includes a number of proposals affecting retirement plans – most are carry-overs from prior years, but two are new: a change in the Administration’s position on Pension Benefit Guaranty Corporation single employer premiums and an “open MEP” proposal.
Unlike previous budgets, the 2017 budget does not call for increases in single employer PBGC premiums. The DOL 2017 “Budget in Brief” states:
The Administration believes additional increases in single-employer premiums are unwise at this time and would unnecessarily create further disincentives to maintaining defined benefit pension plans.
DB plan sponsors will welcome this change in the Administration’s position. As we have discussed (see, for instance, our article DB plan termination as a strategy – part 1), prior PBGC premium increases have been a significant driver of de-risking and plan termination decisions. There remains a risk, however, that notwithstanding the Administration’s concern about DB plan “disincentives,” Congress will increase premiums again, to raise revenues for unrelated projects.
Under the 2017 budget, premiums for multiemployer plans would, in contrast, be increased dramatically: the budget directs the PBGC to raise $15 billion over 10 years from multiemployer plans.
As highlighted in a pre-budget announcement, the Administration is proposing changing the rules for multiple employer plans (MEPs) to expand their availability.
A MEP is a plan for multiple, unrelated, non-union employers. Their use is currently limited by two rules. First, the Department of Labor currently imposes a “commonality” requirement: the unrelated employers in the multiple employer plan must share some sort of “common bond” (e.g., they are all in the same industry). Second, IRS imposes a “one bad apple” qualification standard. As the Department of the Treasury explains in the 2017 budget Green Book, “a qualification failure with respect to a portion of a MEP covering employees of one employer affects the qualification of the MEP as a whole.”
The Administration is proposing to “amend ERISA” to eliminate the commonality requirement, provided certain conditions are met. Those conditions include:
The unaffiliated employers eligible to participate … would be employers that had not maintained a qualified plan within the previous three years.
The provider would be required to be a regulated financial institution that agrees in writing to be both a named fiduciary … and the ERISA plan administrator [responsible for] nondiscrimination testing and other duties necessary to maintain the plan as tax-qualified.
[T]he provider would be required to register with [DOL] …, meet applicable bonding requirements, and provide required disclosures.
The plan … provide[s] that an employer would not be subject to unreasonable fees or restrictions if it ceased participation.
Participating employers would retain fiduciary responsibility for (1) selecting and monitoring the MEP provider and (2) investing plan assets, unless that responsibility is delegated, e.g., to the MEP provider.
DOL would be authorized to issue guidance with respect to disclosure, capitalization, and bonding requirements for providers and simplified annual reporting.
Under the Administration’s proposal, DOL would, in consultation with Treasury, develop guidance identifying “circumstances in which a provider would be either permitted or required to spin off the portion of a plan attributable to a particular employer to address violations by that employer.” Presumably this guidance would allow the MEP provider to address a “one bad apple” problem without disqualifying the entire MEP.
Obviously the Administration proposal is designed for employers not currently maintaining a plan (hence the “no plan in the last three years” requirement). Why would the wider availability of MEPs matter to a sponsor that already maintains a qualified plan? MEP providers might develop plans that have lower costs and have a lower administrative/fiduciary overhead, and those plans may appeal to some sponsors currently maintaining “regular” single employer plans that wish to exchange control and individualization for cost containment.
The budget also includes a number of proposals carried over from prior budgets, including:
Capping “accumulated amounts within the tax-favored retirement system” at $3.4 million.
Capping the value of itemized deductions and other tax preferences at 28 percent. This cap would apply to employee contributions to DC plans; taxpayers would get basis to reflect the additional tax.
Repealing the deduction for dividends paid with respect to employer stock held by a public company ESOP.
Eliminating stretch-IRA treatment.
Eliminating required minimum distributions (RMD) for balances of $100,000 or less. The rules for RMDs would also be simplified somewhat.
Expanding penalty-free withdrawals for the long-term unemployed.
Simplifying (and easing) rollover rules for non-spouse beneficiaries.
Implementing Auto-IRAs for employers who do not maintain a qualified plan. This proposal would apply to employers with more than 10 employees that have been in business for at least two years. In connection with this proposal the Administration would increase the small employer plan start-up and Auto-IRA credits.
Requiring inclusion in a plan of part-time employees who work at least 500 hours per year for 3 years. No employer contributions would be required and employers would “receive nondiscrimination testing relief” with respect to these employees.
Setting aside $6.5 billion “to allow a few states to pilot and evaluate state-based 401(k)-type programs or automatic enrollment in individual retirement accounts.”
For a fuller discussion of these proposals see our article Retirement benefits provisions of Administration FY 2016 budget.
There is bipartisan support in Congress for open MEPs. In the current environment, however – general legislative gridlock, a Presidential election and a likely fight over a Supreme Court nomination – passing open MEP legislation may be difficult. Relief for open MEPs could be accomplished via regulation, but the Administration appears to have concerns that can only be addressed through legislation. Bottom line: even with Administration and Congressional support, open MEPs may be a longshot for this year.
The budget proposals that are carryovers from prior years have not been adopted by prior Congresses and are unlikely to be adopted by this one. They do provide a template, however, for Democratic retirement policy and tax reform proposals, and some of them have been explicitly adopted by the two Democratic Presidential candidates (see our article Candidates tax proposals and 401(k) “tax appeal” Part 3 – Democratic proposals).
We will continue to follow these issues.