Major bipartisan retirement policy legislation introduced in the Senate and the House
In the last two weeks, major bipartisan retirement policy legislation has been introduced in both houses of Congress. In the Senate, Senators Grassley (R-IA) and Wyden (D-OR), the Chairman and Ranking Member (respectively) of the Senate Finance Committee introduced the Retirement Enhancement and Savings Act of 2019 (RESA 2019) (S. 972), legislation substantially similar to the proposal introduced last year (in the 115th Congress) by Senators Hatch (R-UT and then Chairman of the Committee) and Wyden.
On April 2, 2019, the House Ways & Means Committee passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (H.R. 1994). This bill, which is sponsored by Ways and Means Chairman Neal (D-MA) and cosponsored by Ranking Member Brady (R-TX) and Representatives Kind (D-WI) and Kelly (R-PA), pulls together proposals from a number of other bipartisan retirement policy reform efforts (including RESA).
These two bills – S. 972 and H.R. 1994 – are likely to be the principal legislative vehicles for retirement policy legislation in 2019. In this article we review the House bill, providing links to more detailed discussions of specific proposals. For a discussion of the details of the Senate proposal, see our discussion of 2018 RESA legislation.
SECURE Act– “Expanding and Preserving Retirement Savings”
The House bill includes a number of proposals aimed at expanding retirement plan coverage and increasing retirement savings:
Authorization of DC Open MEPs: Generally, the bill 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. This proposal is substantially similar to the Open MEP proposal in RESA 2018.
Require coverage of long-term part-time employees: The bill would generally require sponsors of 401(k) plans to cover employees working more than 500 but less than 1,000 hours per year for three consecutive years. Internal Revenue Code nondiscrimination and top-heavy rules would, however, generally not apply to these employees, and the rule would generally not cover collectively bargained employees. This proposal is substantially similar to proposals made in a number of other bills, including Representative Neal’s 2017 Retirement Plan Simplification and Enhancement Act.
Increase the mandatory distribution age to 72: Internal Revenue Code section 401(a)(9) generally requires that distributions under a qualified plan begin as of the later of age 70 1/2 or when a participant retires. The proposal would increase the Code’s “required beginning date” to age 72, effective in 2020.
Penalty-free withdrawals for birth or adoption: The bill would create an exception to the (10%) early distribution tax rules, limited to $5,000, for distributions made during the year after a child is born to or adopted by the taxpayer receiving the distribution. A similar proposal (with a higher, $7,500 limit) was included in the Family Savings Act of 2018 (H.R. 6757), part of House Republicans 2018 “Tax Reform 2.0” effort.
The bill would also –
Increase the cap on the automatic escalation of contributions under the automatic contribution safe harbor from 10% to 15%.
Eliminate certain notice requirements with respect to nonelective contributions under 401(k) safe harbors and, in limited circumstances, extend the time for the election of the 401(k) design-based safe harbors.
Increase the plan startup tax credit for small employers 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.
Generally prohibit credit card loans.
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.
The following proposals for “Administrative Improvements” included in the bill are substantially identical to proposals included in RESA 2018:
Mandatory lifetime income disclosure: The bill 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. The bill instructs DOL to issue model disclosures. The proposal would also provide protection against sponsor and plan-fiduciary liability.
DC annuity safe harbor: This proposal would 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.
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.
Other administrative proposals: The bill would allow adoption of certain qualified retirement plans after year-end but before tax return due date and instructs DOL and Treasury to modify annual report (Form 5500) rules to allow (subject to certain conditions) a group of DC plans sponsored by unrelated employers to file a single aggregated annual report.
The bill would eliminate certain “stretch” payments to beneficiaries under DC plans, generally requiring payment over 10 years after the participant’s death, with exceptions for the participant’s surviving spouse and (minor) children, disabled or chronically ill individuals, and individuals not more than 10 years younger than the participant. RESA 2019 includes a somewhat different provision targeted at the same issue. The House bill would also increase the Form 5500 late filing penalty from $25 per day, not to exceed $15,000, to $105 per day, not to exceed $50,000. (A (nearly) identical provision is included in RESA 2018.)
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As we said, these Senate (S. 972) and House (H.R. 1994) bills are likely to be the principal legislative vehicles for retirement policy legislation in 2019. They include a number of provisions that sponsors have been advocating for for years. They also include some proposals – e.g., lifetime income disclosure – that many sponsors view as problematic.
We will continue to follow this legislation.