On March 8, 2018, Senators Hatch (R-UT) and Wyden (D-OR), Chairman and Ranking Member of the Senate Finance Committee, introduced the Retirement Enhancement and Savings Act of 2018 (RESA), addressing a number of important retirement policy issues. The bill has bipartisan support in the Senate and could be included in omnibus spending legislation expected to pass Congress this month. Support for the legislation in the House is less clear.
In this article we review key provisions of the proposal.
Authorization of DC Open MEPs
By way of background, a MEP is a multiple employer plan, defined as a plan for (non-union) employees of unrelated employers. 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.
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.” Open MEPs also face a Tax Code obstacle: 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.
RESA would allow defined contribution plan Open MEPs (“Pooled Employer Plans”) that meet certain requirements and that are provided by a “Pooled Plan Provider.”
To qualify as a Pooled Plan Provider, the Open MEP provider must:
Be designated under the terms of the plan as a named fiduciary, as the plan’s administrator and as the person responsible for performing all necessary administrative duties (including conducting necessary testing of the plan and the employees of each participating employer).
Before beginning operations, register with Treasury and DOL and provide any required information.
Acknowledge that it is a named fiduciary and the plan administrator.
Ensure compliance with ERISA bonding requirements.
DOL and Treasury are instructed to develop model Open MEP plan language.
To qualify as a Pooled Employer Plan, the Open MEP must:
Designate a trustee (e.g., a bank) that meets IRA trustee requirements.
State that each participating employer retains fiduciary responsibility for the selection and monitoring of the Pooled Plan Provider and the investment and management of that employer’s share of the plan’s assets (to the extent not otherwise delegated to another fiduciary by the Pooled Plan Provider and subject to ERISA section 404(c)).
Provide that participating employers and participants are not subject to unreasonable restrictions, fees, or penalties for ceasing participation, receiving distributions or transferring assets.
Require the Pooled Plan Provider to make required disclosures.
RESA would also provide a procedure for dealing with non-complying employers, solving the “one bad apple” problem.
Authorization of consolidated 5500 reporting
The legislation instructs DOL and Treasury to modify annual report (Form 5500) rules to allow a group of DC plans sponsored by unrelated employers to file a single aggregated annual report. To qualify for this treatment, the plans must have the same trustee, the same named fiduciaries, the same plan administrator and the same plan year, and they must provide the same investments or investment options.
Mandatory lifetime income disclosure
RESA 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
As a general matter, many DC plan sponsors have been reluctant to add an annuity option because of possible fiduciary liability – perhaps years after the selection of the annuity carrier – based on a claim that the fiduciary should have known that the carrier was not “financially capable of satisfying its obligations.”
In 2008 DOL finalized a regulation providing a safe harbor for the purchase of annuities in a DC plan. While that rule improved on DOL’s “safest available annuity” standard, it still imposed significant duties on plan fiduciaries, including that the fiduciary appropriately conclude that “at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract.” (Emphasis added.)
In the view of many sponsors, this regulation did not solve the problem of fiduciary risk, and most 401(k) plans still do not offer in-plan annuities.
RESA would address this issue by, generally, deferring to state insurance regulation on the issue of the financial condition of the annuity carrier. Under the bill, a fiduciary would be deemed to satisfy the “financially capable” requirement if it obtains certain representations from the insurer (e.g., that it is appropriately licensed and has complied with certain state regulatory requirements). The insurer must notify the fiduciary of any relevant change in circumstance, and the fiduciary cannot be aware of other facts that would cause it to question the insurer representations.
Closed group relief
“Closed groups” – e.g., a limited group of participants who get grandfathered benefits under a DB plan or make-up benefits under a DC plan – present several problems under the Tax Code nondiscrimination rules. Very briefly (and oversimplifying a lot): while a closed group may be nondiscriminatory when it is “closed,” as some participants remaining in the group are promoted and get pay increases, and younger, lower-paid, non-closed group members join the plan, the closed group may over time become discriminatory. IRS has provided temporary relief with respect to this issue but not an adequate permanent solution.
To address this issue, under RESA, DB plans could be aggregated with DC plans and tested on a benefit accruals basis, without having to satisfy (burdensome) threshold conditions if:
For the year the class closed and the two preceding years the plan satisfied the nondiscrimination requirements.
Either the class was closed before September 21, 2016, or the plan has been in effect for at least five years before the class is closed and, during that five-year period, there has not been a substantial increase in the coverage or the benefits or other rights or features under the plan, other than in connection with certain transactions.
After the class was closed, either no discriminatory amendment is adopted to modify the class or the benefit accruals or benefits, rights, and features for the closed class, or the nondiscrimination requirements are otherwise met.
Similar relief is provided for closed groups receiving make-up benefits in DC plans.
In addition, a plan that meets these requirements would be deemed to satisfy the minimum participation requirements (the “50 employee” rule under Tax Code section 401(a)(26)) – another problem closed groups present that IRS has not addressed.
Other provisions of the bill
The bill would also –
Eliminate the 10% cap on the automatic escalation of contributions under the automatic contribution safe harbor.
Eliminate certain notice requirements with respect to nonelective contributions under 401(k) safe harbors.
In limited circumstances, extend the time for the election of 401(k) design-based safe harbors.
Increase the dollar limit on the small employer plan startup credit 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, with a limited grandfather provision for current credit card loan systems.
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.
Allow adoption of certain qualified retirement plans after year-end but before tax return due date.
Eliminate “stretch” payments under DC plans and IRAs with respect to balances over $450,000, generally requiring distribution of the excess within 5 years of the death of the employee. Exceptions are provided for beneficiaries who are spouses, children, disabled, chronically ill or not more than 10 years younger than the employee.
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As we noted, there is a possibility that this legislation could be included in omnibus spending legislation currently being finalized by Congress. There is bipartisan support for it in the Senate. Prospects in the House are less clear, and it’s possible that the proposal may be amended.
We will continue to follow this issue.