On August 31, 2018, President Trump signed an Executive Order on Strengthening Retirement Security in America.
Summarizing, the order does three things:
Agencies to consider authorization of Open MEPs: It instructs the Secretary of Labor to “examine policies” that would eliminate ERISA regulatory obstacles to the creation of Open MEPs; and it instructs the Secretary of the Treasury to “consider proposing amendments to regulations” that would address the “one bad apple” Open MEP qualification issue.
Agencies to review notice and disclosure rules: It instructs both DOL and Treasury to review retirement plan notice and disclosure rules to make them more understandable while reducing the costs and burdens they impose.
Update RMD tables: It instructs Treasury to examine the life expectancy and distribution period tables currently used to determine required minimum distributions and determine whether they should be updated.
In what follows we briefly review each of these issues – Open MEPs, notice and disclosure rules and RMD tables – and the significance of changes to them for sponsors.
An 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.
There is bipartisan support in Congress for the authorization of Open MEPs (under certain conditions). They are viewed by many – including the Trump Administration – as a way to reduce the cost of providing retirement benefits to employees of small employers.
Open MEPs are effectively prohibited under a current 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).Open MEPs also face anobstacleunder the Internal Revenue Code: IRS currently applies a “one bad apple” rule to MEPs – a qualification violation that applies to only one participating employer may disqualify the entire plan.
Both of these obstacles to offering Open MEPs could be fixed by regulation. Some policymakers have expressed concern, however, that the elimination of the nexus requirement (especially) may present an opportunity for abuse by some Open MEP providers. In the view of many, rules to guard against that sort of abuse – e.g., rules as to which providers could offer Open MEPs and clarification of fiduciary and reporting and disclosure obligations with respect to them – would require legislation. The issue of Open MEP safeguards is thus likely to be one of the main issues DOL will take up in its examination (as directed by the Executive Order) of this issue.
The Executive Order frames Open MEPs as a way for “small and mid-sized businesses” to reduce the cost of maintaining 401(k) plans, and it is likely that whatever relief DOL/Treasury propose will be limited to small employer defined contribution plans. That has been the approach taken in the Congressional proposals to authorize Open MEPs (see, e.g., our article Bipartisan savings legislation introduced in Senate).
If, however, Open MEPs are authorized (either through regulation or legislation), and they succeed, in practice, in reducing the cost of providing 401(k) plan benefits, larger plan sponsors may begin to view them as a viable alternative to an employer-maintained plan.
The EO directs DOL and Treasury to take action on these issues within 180 days.
Reforming notice and disclosure rules
Many have criticized DOL electronic disclosure rules, which currently generally require that the participant affirmatively consent to electronic disclosure. The variety of notices that must be provided on termination of employment have also been criticized, as have certain reporting requirements (e.g., the Summary Annual Report) that some believe have little or no utility.
There is bipartisan support in Congress for reform of retirement plan reporting and disclosure requirements, although there is also opposition to some specific proposals.
Reform in this area would be welcome by most sponsors and providers, although much will depend on what changes are proposed.
The EO directs DOL and Treasury to take action on these issues within one year.
Updating RMD tables
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.
In 2014, the Society of Actuaries adopted new mortality tables that reflected significant increases in life expectancy. While IRS, in 2017, updated the mortality tables used for funding and the determination of lump sums to reflect the new SOA tables (our most recent article on this topic is IRS finalizes mortality table guidance for 2018), it has not updated the life expectancy tables used to determine required minimum distributions since 2002.
Thus, the update directed by the EO should extend the period over which required distributions may be made, providing participants with greater flexibility as to how much they take in distributions each year.
The EO directs Treasury to take action on this issue within 180 days.
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We will continue to follow these issues.