Senators Cardin and Portman introduce broad bipartisan retirement policy reform legislation
There is clear bipartisan support for retirement policy improvement in both the House and the Senate, but will Congress be able to synthesize their different versions of reform and move legislation forward?
On May 21, 2021, Senators Cardin (D-MD) and Portman (R-OH) introduced broad bipartisan retirement policy reform legislation, the Retirement Security and Savings Act of 2021 (RSSA). The bill incorporates some proposals from SECURE 2.0 legislation recently reported out of the House Ways and Means Committee but also includes a number of other proposals.
In what follows we review this proposed legislation.
Defined contribution highlights
New 401(k) ADP testing safe harbor: The RSSA would add a new 401(k) actual deferral percentage (ADP) testing auto-enrollment/escalation safe harbor. To qualify for this safe harbor, the plan would have to default employees into saving at the following rates:
Default contribution rate
Initial period (year of initial contribution and next plan year)
At least 6% (but not greater than 10%)
2nd full plan year
At least 7%
3rd full plan year
At least 8%
4th full plan year
At least 9%
After 4th full plan year
At least 10%
And the plan would have to provide matching contributions for non-highly compensated employees (NHCEs) at the following rates:
NHCE contributions (as a % of pay)
Matching contribution rate
Contributions above 2% and not in excess of 6%
Contributions above 6% and not in excess of 10%
Small employer matching contribution credit: The proposal would provide for a tax credit for small employers (generally, employers with 100 employees or less) with respect to matching contributions made under the above safe harbor for NHCEs, for the first 5 years of participation, of up to 2% of each NHCE’s compensation.
Simplification of auto-enrollment/escalation rules: Treasury would be instructed (generally) to simplify auto-enrollment/escalation rules (including notice rules) and (specifically) to simplify current rules that apply differently to different employees at the same employer.
Expansion of the Saver’s Credit: The Saver’s Credit currently provides for a non-refundable tax credit equal to up to 50 percent of the first $2,000 of contributions by certain low-income individuals to a 401(k) plan, IRA, or certain other retirement programs. The RSSA would increase the income limits applicable to the Saver’s Credit; make the credit refundable; and require that, instead of being credited directly to the taxpayer, the credit would be paid to a qualified plan or other “applicable retirement plan” on a “Roth” basis.
Increase the small plan startup credit: The proposal would increase the percentage-of-startup-costs limit from 50% to 75% for employers with 25 or less employees.
Small employer re-enrollment credit: The proposal would provide small employers (100 or fewer employees) with a $500 per year tax credit for each 3-year re-enrollment period implemented. During re-enrollment, generally, participants that are not contributing at the new-employee default contribution rate in an eligible automatic contribution arrangement would be re-defaulted at that rate.
Increase catch-up contribution: The 401(k) catch-up contribution limit – which currently allows participants age 50 or older to contribute an additional $6,500 – would be increased to $10,000 for eligible participants who have attained age 60.
Defined benefit plan highlights
Clarification of the projected interest crediting rate rule for cash balance plans using a variable interest crediting rate: For market-based cash balance plans (under which interest is credited based on the actual returns on trust assets or on one or more specified outside funds), there is broad consensus that projecting interest based on a current or recent rate of return could produce unreasonable outcomes when applying certain Internal Revenue Code rules, such as for the 133-1/3% anti-backloading rule. The proposal would provide that for these plans as well as for other cash balance plans that use a variable interest crediting rate (e.g., the rate on 30-year Treasury bonds) “the projected interest crediting rate shall be a reasonable projection of such variable interest crediting rate, not to exceed 6 percent.”
Plans with more-generous-than-required lump sum valuation interest rate may change lookback month: The proposal would increase the flexibility in choosing the lookback month for determining the interest rate used to value DB lump sums for plans that use a more generous interest rate than required by regulations.
Limit on IRS mortality improvement assumption: Treasury would be instructed to amend its mortality assumptions to limit the assumed future mortality improvement at any age to .78 percent (or the rate used by the Social Security Administration). Current rules provide for assumed future mortality improvement as high as 1.35 percent.
Reduce/de-index PBGC variable rate premium: The PBGC variable-rate premium is, effectively, a percentage of a DB plan’s unfunded vested benefits (UVBs) – 4.6% ($46 per $1,000) of UVBs in 2021. Currently, that percentage is (nearly all agree, irrationally) indexed for inflation. The proposal would eliminate indexing of the VRP and freeze it at its 2018 level – 3.8% ($38 per $1,000) of a plan’s UVBs.
Extend the period for DB surplus transfers to health and welfare arrangements: The proposal would extend the period during which certain transfers of DB surplus could be made to fund certain health and life benefits from (currently) December 31, 2025 to (proposed) December 31, 2031. It would also allow certain de minimis transfers from plans below the (current) 125 percent overfunding requirement that are at least 110 percent overfunded.
SECURE 2.0 proposals incorporated
We have posted an article reviewing Congressman Neal’s (D-MA) bipartisan Securing a Strong Retirement Act of 2021 (SECURE 2.0), recently reported out of the House Ways and Means Committee.
The RSSA incorporates a number of proposals from that bill, including SECURE 2.0’s: student loan repayment proposal; Retirement Savings Lost and Found proposal; instruction to DOL, Treasury, and the PBGC to recommend ways to “consolidate, simplify, standardize, and improve” reporting and disclosure requirements; instruction to DOL to modify regulations to allow the use of blended benchmarks; simplified annual disclosure for “unenrolled” DC participants; reduction of the service requirement for “long-term part-time employees” from 3 to 2 years; and new rules for recovery (or non-recovery) and rollover of overpayments.
Changes related to RMD rules
With respect to the Internal Revenue Code’s required minimum distribution (RMD) rules, the bill includes proposals that would:
Increase the mandatory commencement age from (currently) 72 to (proposed) 75, for calendar years after 2031.
Instruct Treasury to eliminate the (current) limitation on qualified longevity annuity contracts (QLACs) to 25 percent of an individual’s account balance and increase the dollar limit on QLACs from $135,000 to $200,000.
Instruct Treasury to amend the RMD rules to allow more flexible annuity terms (e.g., allowing certain post commencement lump sum payments) and to allow the coordination (for RMD purposes) of annuity payments and account-based distributions.
Reduce the excise tax on failure to make an RMD from 50% to 25%.
Provide that the RMD rules do not apply to participants with DC/IRA account balances of $100,000 or less at the applicable age (72 or 75, see above). The $100,000 amount is indexed and subject to a $10,000 “phase-out.”
Provide that the RMD rules would not apply before death to qualified plan Roth accounts.
Also in RSSA
The RSSA would also:
Allow employees to elect to pay (or not pay) for retirement planning services without triggering “constructive receipt” of income.
Apply the Internal Revenue Code’s minimum participation rule (which currently requires that a plan cover at least 50 employees or 40% of employees in the employer’s controlled group) separately to “bona fide separate subsidiaries or divisions.”
Allow “small immediate financial incentives” (e.g., a toaster) for 401(k) plan contributions.
Instruct DOL and Treasury to adopt regulations allowing for the consolidation of certain Internal Revenue Code- and ERISA-required notices. The proposal would also instruct Treasury to simplify current distribution notice rules.
Instruct Treasury to modify Internal Revenue Code compensation rules applicable to 401(k) plans to facilitate the use of base pay or rate of pay in determining contributions or benefits.
Instruct Treasury to amend current regulations to allow terminated employees to make certain 401(k) contributions with respect to severance or back pay.
Conform certain plan rules to more generous IRA rules – certain charitable distributions from plans would not be included in gross income; a spouse would be allowed to treat a deceased participant’s plan account as his or her own; and rollover of Roth IRA balances to qualified plans would be permitted.
* * *
Outlook: Clearly there is bipartisan support for retirement policy improvement in both the House and the Senate. The big questions are, will the House and Senate be able to (1) synthesize their different versions of reform and (2) move that (synthesized) legislation either as a standalone bill or as part of some other (moving) legislation. We will have to wait until later in the Summer to get an idea of the answers to those questions.
We will continue to follow this issue.