Alert / Retirement
Congress looks to overhaul retirement system

Congress looks to overhaul retirement system for first time in more than a decade

On May 23, the House of Representatives took its first step toward expanding workers’ retirement security by overwhelmingly passing the Setting Every Community Up for Retirement Enhancement Act of 2019 (“the SECURE Act”).

The SECURE Act, the first significant retirement bill taken up by Congress since 2006’s Pension Protection Act, looks to:

  • Increase access to employer-sponsored retirement plans.
  • Expand the ways workers can save within their plans.
  • Expand worker investment options.
  • Increase the financial education of workers. 

Major provisions

The SECURE Act changes impacting employer-sponsored retirement plans include:

OPEN MEPS/POOLED EMPLOYER PLANS

Allows unrelated employers to participate in a single defined contribution multiple employer plan (MEP), called a “pooled employer plan.” The plan must use a “pooled plan provider” (PPP) responsible for performing all administrative duties necessary to comply with ERISA and the Internal Revenue Code. PPPs would be a named fiduciary and plan administrator, and be subject to registration, audit, examination and investigation by Treasury and the Department of Labor (DOL). Each employer would be treated as the sponsor of the portion of the plan attributable to their employees. The proposal would generally eliminate the MEP “one bad apple” rule in which one employer’s compliance problem impacts all others. In the case of a noncompliant sponsor, the assets attributable to the “bad apple employer’s” plan are spun off from the MEP to a separate plan or IRA. These changes would apply to plan years beginning after Dec. 31, 2020.

HIGHER AUTO ENROLLMENT SAFE HARBOR CAP INCREASE

Increases the automatic escalation safe harbor cap from 10% to 15% of employee pay, though in the first plan year, the default contribution rate still could not exceed 10%. These changes would apply to plan years beginning after Dec. 31, 2019.

SAFE HARBOR 401(K) RULES SIMPLIFICATION

Eliminates the nonelective safe harbor notice but maintains the requirement to allow employees to make or change elections at least once per year. Permits amendments to nonelective status at any time before the 30th day before the plan year closes. Amendments after that would be allowed if they provide a nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year. These changes would apply to plan years beginning after Dec. 31, 2019.

MORE SMALL EMPLOYER PENSION PLAN START-UP COSTS CREDIT INCREASES

Changes the calculation of the flat dollar amount credit limit to the greater of:

  • $500 or
  • $250 multiplied by the number of the eligible employer’s eligible nonhighly compensated employees or $5,000, whichever is less.

The credit applies for up to three years. These changes would apply to taxable years beginning after Dec. 31, 2019.

SMALL EMPLOYER AUTOMATIC ENROLLMENT CREDIT

Gives employers a new tax credit of up to $500 per year to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan startup credit allowed under present law and would be available for three years. The credit would also be available to employers adding automatic enrollment to an existing plan design. This change would apply to taxable years beginning after Dec. 31, 2019.

PLAN LOAN CREDIT CARDS PROHIBITED

Plan loans made using credit cards or other similar arrangements would be treated as distributions. This change would apply to loans made after the date of enactment.

LIFETIME INCOME OPTIONS PORTABILITY

Participants in qualified defined contribution plans, 403(b) plans and governmental 457(b) plans could take lifetime income investment distributions without withdrawal restrictions if the plan sponsor elects to discontinue offering the lifetime income investment through the plan. The distribution must be directly rolled over to an IRA or other retirement plan or, in the case of an annuity contract, through direct distribution to the individual. These changes would apply to plan years beginning after Dec. 31, 2019. 

401(K) PLAN PARTICIPATION FOR LONG-TERM PART-TIME WORKERS

Currently, employers may exclude part-time employees (those who work less than 1,000 hours per year). Except for collectively bargained plans, employers would need a dual eligibility requirement under which employees must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service with at least 500 hours of service. In the case of employees eligible solely due to the latter new rule, employers may exclude such employees from nondiscrimination testing and from top-heavy vesting and benefit rules. An employer would also not be required to make matching or nonelective contributions, and could continue to impose a requirement that the employee attain age 21 before participating. These changes would apply to plan years beginning after Dec. 31, 2020, except that, for purposes of the new eligibility criteria, 12-month periods beginning before Jan. 1, 2021, shall not be considered.

PENALTY-FREE WITHDRAWALS FOR BIRTH OR ADOPTION

Provides penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions.” This change would apply to distributions made after Dec. 31, 2019.

REQUIRED MANDATORY DISTRIBUTION AGE INCREASE

The required minimum distribution age changes from 70½ to 72. This would apply to distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70½ after such date.

PLAN ADOPTION DATES CHANGES

An employer could adopt a plan for a taxable year if done by the due date for the employer’s tax return for that year (including extensions). This change would apply to plans adopted for taxable years beginning after Dec. 31, 2019.

COMBINED ANNUAL REPORTS FOR GROUP OF PLANS

Directs the IRS and DOL to allow a consolidated Form 5500 filing for similar plans. Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries. The ability to file consolidated Forms 5500 shall be implemented no later than Jan. 1, 2022, and shall apply to returns for plan years beginning after Dec. 31, 2021.

LIFETIME INCOME DISCLOSURE

Requires participant benefit statements to include a lifetime income disclosure at least once during any 12-month period. The disclosure 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, and a single life annuity. The DOL must develop a model disclosure. Plan fiduciaries, plan sponsors or other persons will have no liability under ERISA for providing lifetime income stream equivalents if they are derived using the provision’s assumptions and guidance and include the model disclosure’s explanations. The requirement to provide lifetime income disclosures would apply to benefit statements furnished more than 12 months after the latest of the DOL’s issuance of interim final rules, a model disclosure or permissible assumptions.

FIDUCIARY SAFE HARBOR FOR LIFETIME INCOME PROVIDER SELECTION

A statutory safe harbor would be added to ERISA allowing defined contribution plan fiduciaries to rely on insurers’ written representations regarding their status under state insurance law when evaluating the insurers’ financial capabilities. It would also not require fiduciaries to select the lowest-cost contract, instead allowing consideration of the value provided by the insurer’s other features and benefits.

Finally, it would clarify that fiduciaries need not review the selection’s appropriateness after the purchase of a contract for a participant or beneficiary. This change would take effect on the date of enactment.

FROZEN PLAN NONDISCRIMINATION RULES MODIFIED

Nondiscrimination rules for closed plans would permit existing participants to continue to accrue benefits. These changes would generally take effect on the date of enactment, regardless of whether any plan modifications referred to in the amendments are adopted or effective before, on or after the enactment date. Certain exceptions to the preceding sentence, including for plan sponsors who elect for the changes to apply to plan years beginning after Dec. 31, 2013, are provided.

“STRETCH” REQUIRED MINIMUM DISTRIBUTION CHANGES

Upon an IRA owner’s or defined contribution plan participant’s death, the individual beneficiary would be required to draw down his or her entire inherited interest within 10 years. This rule would apply regardless of whether RMDs had begun prior to the owner/participant’s death. The new rules would not apply to defined benefit plans but would apply to IRA annuities. Significantly, the 10-year rule would not apply to any portion payable to an “eligible designated beneficiary” if:

  • Such portion will be distributed over the beneficiary’s life, or
  • A period not exceeding his or her life expectancy, and
  • Such distributions begin within one year of the death.

(If the eligible designated beneficiary is the surviving spouse, then distributions would not need to begin earlier than the date on which the participant/IRA owner would have attained age 70½, which is changed to 72 by another provision of the bill.) These changes would apply generally with respect to deaths after 2019.

PENALTIES FOR FAILURE TO FILE RETIREMENT PLAN RETURNS INCREASED

  • The Form 5500 penalty would be $105 per day, not to exceed $50,000.
  • Failure to file a registration statement would incur a penalty of $2 per participant per day, not to exceed $10,000.
  • Failure to file a required change notification would result in a penalty of $2 per day, not to exceed $5,000 for any failure.
  • Failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.

These changes would apply to required fillings of returns, statements, and notifications, and to required notices, after Dec. 31, 2019.

LOCKTON’S TAKE

Through some version or another, this legislation has been proposed for nearly five years. This is the farthest it has gone, but some last-minute drama almost got in the way. Teachers’ unions pushed heavily to remove a provision allowing 529 plan dollars to pay for homeschooling. Some GOP members threatened to pull support if that provision was removed. However, a late compromise removed the homeschooling in exchange for repealing an unrelated provision of 2017’s Tax Cuts and Jobs Act. That provision raised taxes on many dependent children and college students with unearned income from sources including military survivor benefits and scholarships used for non-tuition purposes. This compromise brought back the GOP members who felt a reversal of unfair and unexpected high taxes on Gold Star families, low-income scholarship recipients and children of fallen first responders, among others, was a palatable compromise. The real centerpiece is the multiple-employer defined-contribution plans expansion. Time will tell whether this will drastically increase the number of small employers offering 401(k) plans or whether the ones that do today obtain real savings through economies of scale. 

Next steps

The SECURE Act now lies with the Senate where Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Oregon) are working on their own version, called the Retirement Enhancement and Savings Act (RESA). Both also support the SECURE Act and, if no Senator objects, it can be quickly approved. Even if the Senate does not pass the House bill, because both SECURE and RESA accomplish the same goals, passage of something is likely this year.

 

The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute US federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.

This document contains the proprietary work product of Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.

Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. 

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