The House approved a bipartisan package of reforms to retirement plan rules on May 23, moving Congress closer toward the potential enactment of a final product.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R. 1994
) passed the House of Representatives by an overwhelming 417-3 vote after a manager’s amendment removed a controversial expansion to Section 529 plans and added a repeal of the “kiddie tax” changes from the Tax Cuts and Jobs Act. A similar companion bill, the Retirement Enhancement and Savings Act (RESA) (S. 972
), now awaits in the Senate. A retirement package is one of a only a handful of tax priorities with a chance at passage this year, along with an extension of expired provisions, IRS reform, and perhaps a handful of technical corrections. There is a push in the Senate to quickly vote on the SECURE Act as passed by the House. However, the Senate may still opt to advance RESA or amend the SECURE Act, and then the two chambers would need to reconcile key differences between their bills.
The two bills share several core proposals, including:
- Easing restrictions on multiple-employer plans (MEPs)
- Simplifying 401(k) safe harbor rules
- Modifying the 10% cap on auto-escalation of employee contributions
- Repealing the 70.5-year age cap on making contributions to an individual retirement account (IRA)
- Barring plans from offering loans to employees that can be accessed through credit cards
The next step is Senate action. Immediately after House passage, the SECURE Act was submitted for a special Senate “hotline” procedural in an effort to pass it by unanimous consent before the Memorial Day recess. This effort was derailed by a few objections, mostly notable from Sen. Ted Cruz, R-Texas, who sponsored the Section 529 plan provision that was cut. The Senate is likely to try again to reach a unanimous consent agreement after reconvening. If this effort is unsuccessful, Senate leaders could seek to pass an amended version of the SECURE Act or pass their own RESA bill. In that case, the House and Senate would have to resolve the differences in their bills, through either a formal conference committee or by sending versions back and forth. Although hurdles remain, the overwhelming bipartisan support for the legislation gives it a decent chance of success this year.
The SECURE Act and RESA generally seek to give employers added flexibility to provide retirement plans to employees and improve existing plan offerings and coverage while easing some of the associated burdens. They also give individuals additional opportunities and incentives to increase their retirement savings contributions. More detailed descriptions of the SECURE Act and RESA provisions are offered below.
A central focus of the two bills is to encourage the use of MEPs. MEPs allow two or more employers to pool together and use a single plan, sharing the administrative costs and burdens that may be too cumbersome to bear individually. Under current law, however, MEPs are subject to limitations and strict regulations that may ultimately deter some small businesses from entering into them. Both bills include nearly identical provisions that would allow for “open MEPs” in which unrelated employers could participate (if certain conditions were satisfied) and would essentially repeal the “one bad apple” rule, under which the failure of a single employer to satisfy applicable qualifications requirements can result in the disqualification of the entire MEP.
Section 401(k) safe harbors
The SECURE Act and RESA also seek to simplify safe harbor 401(k) plans. Safe harbor 401(k) plans are exempt from certain annual nondiscrimination tests that traditional 401(k) plans must generally satisfy. These tests are intended to significantly limit the extent to which plans can disproportionately benefit owners and managers of a business at the expense of less compensated rank-and-file employees. Failing them can require corrective measures to be taken, such as refunding the excess contributions that resulted in the failure. For plans to qualify under the safe harbor, employers must meet specified non-elective contribution or matching contribution thresholds, which generally vest immediately, along with other administrative requirements. The SECURE Act and RESA propose easing the latter. Both eliminate a notice requirement that mandates employees be informed of their rights and obligations under the plan and be provided certain details concerning plan benefits. In addition, plans can be amended to provide non-election contributions at any time, up to 30 days before a plan year closes. Amendments can still be made thereafter, but only if the non-elective contribution equals at least 4% of an eligible employee’s compensation and the amendment is made by the close of the following plan year.
Both bills propose making changes to the first-year cap for the automatic 401(k) enrollment safe harbor. Also known as a qualified automatic contribution arrangement (QACA), the safe harbor grants an exemption from 401(k) nondiscrimination tests for employers who automatically enroll employees in a 401(k) plan with a specified minimum contribution percentage that increases annually. Currently, the contribution for an employee’s first full year must be at least 3% of that employee’s compensation, but cannot exceed 10%. The SECURE Act proposes raising the first-year cap to 15% while RESA would repeal it entirely.
Relaxed nondiscrimination rules for closed defined benefit plans
Both bills modify the nondiscrimination rules with respect to closed defined benefit pension plans to permit existing participants to continue to accrue benefits. Closed defined benefit pension plans are pension plans that provide ongoing benefit accruals, but have been amended to limit those accruals to some or all of the employees who participated in the plan as of a specified date. The employees who are not eligible for ongoing benefit accruals under the plan are often covered by a defined contribution plan maintained by the employer. In many cases, the defined benefit plan covers a higher number of highly compensated employees than the defined contribution plan, making it difficult or impossible for the defined benefit plan to satisfy the coverage and nondiscrimination requirements. The bills provide special rules and relief for purposes of applying the nondiscrimination requirements to closed defined benefit plans if certain conditions are met.
Lifetime income options in qualified retirement plans encouraged
Both bills would require benefit statements provided to defined contribution plan participants to include a lifetime-income disclosure at least once during any 12-month period. Although defined contribution plans would not be required to offer lifetime income options, the required disclosures would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime-income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse as well as a single-life annuity. The Department of Labor would be directed to develop a model disclosure. Both bills would also create a new fiduciary safe harbor for selection of lifetime income providers under the Employee Retirement Income Security Act. If the conditions for the optional safe harbor are met, the plan fiduciaries would be protected from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the annuity contract.
Modification of required minimum distribution rules
Both bills modify the required minimum distribution rules for retirement accounts upon the death of the account owner, but in different ways. The SECURE Act requires that account balances be distributed to beneficiaries by the end of the 10th calendar year following the year of the owner’s death, while RESA requires distribution by the end of the fifth year following the year of the owner’s death. Both bills exempt the owner’s surviving spouse, disabled or chronically ill individuals, the owner’s child who has not reached the age of majority, or individuals no more than 10 years younger than the owner. RESA includes an additional exception for beneficiaries to the extent the amount they each receive does not exceed $400,000, valued at the date of death.
Repeal of ‘kiddie tax’ provisions
The SECURE Act repeals changes made by the TCJA that treated unearned income of children in the same manner as trust and estate income. Congress modified the kiddie tax in the TCJA to simplify the rules. Under prior law, unearned income of children exceeding $2,000 (indexed for inflation) was subject to the same marginal tax rate as their parent. The change has come under fire recently because children of parents with lower incomes are paying more tax on things like taxable scholarships and survivor benefits than they did under the old kiddie tax regime, which was tied to their parent’s rate instead of the trust tax brackets. RESA does not include a provision to undo the kiddie tax changes made by the TCJA, but the Senate unanimously passed a separate bill that addresses the impact of the changes on Gold Star families. Under the Senate bill, military survivor benefits would be treated as earned income rather than unearned income, therefore exempting it from the kiddie tax. The SECURE Act does away with the TCJA changes for all taxpayers.
Other changes proposed in both bills include:
- Increasing the maximum allowable age for traditional IRA contributions from 70-1/2 to 72
- Barring plans from offering loans to employees through credit cards and other similar arrangements
- Allowing participants to roll an annuity investment into an IRA (or another employer's plans) if a plan eliminates the annuity as an investment option
- Deeming certain custodial accounts in a Section 403(b) plan that has been terminated to be an IRA
- Expanding the types of employees of nonqualified church-controlled organizations who may be covered under retirement income account 403(b) plans
- Extending the deadline for establishing a plan from the last day of the taxable year to the extended due date of the return for such year
- Increasing benefits for volunteer firefighters and emergency medical responders
- Allowing stipends and non-tuition fellowship payments to be included in income for IRA purposes
There are also several provisions that are only in one of the bills and not both:
- Raises the age for required minimum distributions from retirement accounts from 70-1/2 to 72
- Allows long-term part-time workers to participate in 401(k) plans
- Permits penalty-free withdrawals from 401(k) plans for qualified birth and adoption distributions
- Provides pension funding relief for community newspaper plan sponsors
- Treats tax-exempt difficulty of care payments received by home healthcare workers as compensation for determining retirement contribution limits
- Permits an IRA to hold S corporation bank stock
- Modifies calculation of Pension and Benefit Guaranty Corporation premiums for cooperative and small employer charity plans
- Modifies retirement and other benefits provided to Tax Court judges
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