In July 2015, the Savings & Investment Bipartisan Tax Working Group (WG) of the Senate Finance produced a report for the Committee’s broader tax reform project. The WG report provides a useful inventory of current bipartisan defined contribution plan policy proposals. In this article we summarize the report.
Background – DC reform as a policy priority
The WG was to focus on four areas – the tax treatment of capital gains and dividends, financial products, defined benefit pension plans, and private retirement savings accounts. But because of political divisions between the two parties on the first three issues, it focused solely on private retirement savings – generally, defined contribution plan policy. This decision by the group is significant, indicating that DC legislation is viewed by key policymakers in both parties as an area where – in a time of general partisan gridlock – progress can be made.
In what follows we describe the issues and policy proposals the WG considered. With respect to some, the WG stated explicitly that it “supported consideration” by the Finance Committee. In other cases, proposals were simply identified and briefly discussed. Moreover, there was no attempt to score (for budget effect) any of these proposals, and any given proposal’s viability will certainly depend in part on how much it costs. Thus, while any of these proposals may be included, in some form, in future legislation, there is certainly more work to do before we see a bill.
Almost all of the proposals discussed have been included in bills introduced in previous Congresses or in the Administration’s budget. In that regard, we have provided a detailed review of Senator Hatch’s (R-UT and Chairman of the Senate Finance Committee) 2013 proposal, Congressman Neal’s (D-MA) 2013 proposal, Senator Collins’s (R-ME) 2014 proposal and the Administration 2016 budget proposal, and we refer readers who want more detail on specific proposals to those articles.
The report focuses on three general areas:
Increasing participation and contribution levels.
“Preserving savings and making them last through retirement” – generally, retirement income policy.
Increasing access to plans
The WG identified three general policy initiatives aimed at increasing plan formation.
Open multiple employer plans (MEPs): Multiple employer plans are, generally, non-union plans for participants of unrelated employers. They are viewed by many as a way to make the qualified plan system generally and DC plans in particular more accessible – that is cheaper and easier to administer – to smaller employers. There are (at least) two major regulatory obstacles to using MEPs this way. First, current Department of Labor rules provide that MEPs may only be established where there is a ‘nexus’ between employers (e.g., all the employers in the MEP are in the same industry). And second, current Tax Code regulations apply a ‘one bad apple’ rule to MEPs – a qualification violation that applies only to one employer may disqualify the entire plan. Senator Hatch, Senators Collins and Nelson (D-FL) and Senators Harkin (D-IA) and Brown (D-OH) all introduced bills in the last session of Congress to eliminate these rules and otherwise streamline MEP administration.
Start-up and matching credits and safe harbors for small businesses that offer a plan: The current plan startup incentive is a three-year, $500 per year tax credit for small employers. This credit appears to be totally ineffective: according to the WG the “total credit value claimed by taxpayers usually totals half a million dollars annually.” There are proposals to significantly increase this credit. The Administration has also proposed credits for, e.g., adding an auto-enrollment provision and for starting-up an Auto-IRA program.
New 401(k) safe harbor: Current 401(k) discrimination testing safe harbors have been criticized for encouraging auto-enrollment and auto-escalation at too low a level and capping automatic contributions at 10%. In the last Congress there were proposals (both from Senator Hatch and Senators Collins and Nelson and, in the House, from Congressman Neal) to add a new safe harbor with higher auto-enrollment/escalation targets and no cap. (For details on these proposals, see our articles referenced above.)
Increasing participation and contribution levels
The WG identified two general policy initiatives aimed at increasing plan participation and the amount participants contribute to plans.
Cover part-time workers: The Administration’s budget and Congressman Neal’s bill included proposals to require that sponsors allow part-time employees to make 401(k) contributions, although part-time employees could still generally be excluded for nondiscrimination testing purposes.
Saver’s Credit: Currently, the Saver’s Credit 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 credit is not refundable – so if the low-income individual does not have a tax liability, the credit cannot be taken. There have been several proposals to expand the Saver’s Credit. The WG “suggested consideration” of Congressman Neal’s proposal, which generally would: (1) make the credit refundable; (2) significantly increase the Saver’s Credit income limits; (3) reduce the amount of the credit (although with an increase over time); and (4) double the credit where the credit is contributed to a “designated retirement account.” The Administration’s budget has included similar proposals.
We note that, arguably, the proposals for a new 401(k) safe harbor (included in our discussion above on Increasing access to plans) are also designed to increase contributions levels.
Preserving savings and making them last through retirement
The WG identified five general policy initiatives to encourage the use of annuities (and other lifetime income payout options) in DC plans and two ‘leakage’ initiatives.
Exclusion of annuity payments: The WG ‘supported consideration’ of proposals “allowing a percentage of otherwise taxable lifetime annuity payments received by an individual from an IRA or any type of defined contribution plan to be excluded from gross income.” This is simply a tax incentive for the use of annuities in a DC plan or IRA. Former Congressman Pomeroy (D-ND) introduced such a proposal in 2009, but it has not been included in more recent comprehensive DC reform proposals. Its inclusion in the WG report is interesting.
Ease rules on portability of annuities: These proposals would allow distribution of an annuity (to another plan or IRA) when the carrier is no longer an “authorized investment” under the plan. Both Senator Hatch’s bill and the Administration’s budget included proposals on this issue.
Improve lifetime income disclosure: The WG supported “consideration of policies that encourage retirees to be knowledgeable about and select distributions that provide a stream of income payments over the course of their retirement.” There are several proposals on this issue, including a DOL regulation project.
Ease DC annuity fiduciary rules: As we have discussed in prior articles, DOL has made several attempts to address sponsor concerns about possible fiduciary liability in connection with the use of annuities in DC plans. (See, most recently, our article DOL FAB provides guidance on DC annuity fiduciary obligations.) The WG noted that both Republican and Democrat Senators have proposed new DC annuity safe harbors (see, for instance, our article on Senator Hatch’s bill referenced above).
Lifetime income as a DC default: The WG also “discussed the potential for proposals that, similar to auto-enrollment features, would automatically place retirees in lifetime savings options upon retirement, with the opportunity to opt-out.” We are not aware of any recent proposed legislation on this issue. In the more distant past, however, there have been proposals to apply DB-like qualified joint and survivor rules (requiring, e.g., spousal consent for a non-QJSA distribution) to DC plans.
Leakage: The WG “supported consideration” of proposals to extend the period (post-termination of employment/distribution) that a loan could be paid back. The “Shrinking Emergency Account Losses Act of 2015,” introduced by Senators Michael Enzi (R-WY) and Bill Nelson (D-FL), included such a proposal. The WG also noted (and classified as a ‘leakage’ proposal) the proposals, in Senator Hatch’s bill and in the bill introduced by Senators Nelson and Enzi, to eliminate the 6-month holdout (contribution prohibition) rule for 401(k) hardship withdrawals.
We will continue to follow these issues.