Early in the last session of the 115th United States Congress, House Republicans have put forward a sweeping bill that includes potentially significant retirement reforms, such as broadening the opportunity for small businesses to join open multiple employer retirement plans (MEPs).
The proposal was submitted by House Ways and Means Committee Chairman Kevin Brady, R-Texas, and the consensus in early commentary is that the new proposal appears to closely align with bipartisan legislation enjoying significant support in the Senate.
Covering nearly 300 pages, the first section of the proposal seek to extend or otherwise modify many of the temporary tax cuts provided by the Tax Cuts and Jobs Act of 2017. The wide-ranging text of Title I of the proposal addresses such topics as the energy efficient homes credit; the classification of certain race horses as three-year property; a special allowance for second generation bio-fuel plant property; the energy efficient commercial buildings deduction; elections to expense advanced mine safety equipment; and many more niche topics.
Title II addresses tax relief provisions applying during disasters and emergencies. One provisions in Title II applies directly to the retirement plan industry and deserves the close scrutiny of industry stakeholders—Section 202. Among many other elements, this subsection declares the aggregate amount of distributions received by an individual which may be treated as qualified disaster distributions for any taxable year.
Title III of the new proposal is extensive and expressly dedicated to retirement savings reforms, including language to simplify the establishment of tax-qualified plans run on behalf of private employers by “pooled plan providers.” These pooled plans seem to include many of the salient features of “open MEPs.” Importantly, the proposal would get rid of the “one bad apple” rule that has held back the wider embrace of pooled plans and MEPs, under which a single mistake or instance of wrongdoing by a one employer in the pooled plan could disqualify the entire plan.
According to the text of the proposal, in the case that one participating employer runs afoul of any qualification requirements associated with running a tax-advantaged plan, “the assets of the plan attributable to employees of such employer (or beneficiaries of such employees) will be transferred to a plan maintained only by such employer (or its successor), to an eligible retirement plan as defined in section 402(c)(8)(B) for each individual whose account is transferred, or to any other arrangement that the Secretary determines is appropriate, unless the Secretary determines it is in the best interests of the employees of such employer (and the beneficiaries of such employees) to retain the assets in the pooled plan.”
The proposal goes on to define what “pooled plan provider” means in this context. A pooled provider must be designated by the terms of the plan as a named fiduciary within the meaning of section 402(a)(2) of the Employee Retirement Income Security Act (ERISA). It also must be named as the plan administrator, and as the person responsible to perform all administrative duties (including conducting proper testing with respect to the plan and the employees of each employer in the plan) which are reasonably necessary to ensure that the plan meets it regulatory requirements.
The pooled plan provider also must ensure each employer in the plan “takes such actions as the Treasury Secretary or such person determines are necessary for the plan to meet the requirements described in subclause (I), including providing to such person any disclosures or other information which the Secretary may require or which such person otherwise determines are necessary to administer the plan or to allow the plan to meet such requirements.”
Additionally, the pooled plan provider must register as such with the Treasury Department, and provide any other information to the Secretary as the Secretary may require, before beginning operations as a pooled plan provider. Other requirements include being bonded in accordance with ERISA Section 412. Among numerous other elements impacting pooled provider plans, the proposal directs the relevant regulatory authorities to publish model plan language to aid compliance. Furthermore, this part of the proposal confirms the employers in a pooled plan would not have to demonstrate a commonality of geography, industry or interests.
There are numerous other retirement-focused provisions in the bill, as follows:
- Section 302 addresses rules relating to election of safe harbor 401(k) status.
- Section 303 addresses certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes.
- Section 304 addresses the repeal of maximum age for traditional IRA contributions.
- Section 305 addresses qualified employer plans being prohibited from making loans through credit cards and other similar arrangements.
- Section 306 addresses improving the portability of lifetime income investments.
- Section 307 addresses the treatment of custodial accounts on termination of section 403(b) plans.
- Section 308 addresses clarification of retirement income account rules relating to church-controlled organizations.
- Section 309 addresses an increase to a 10% cap for automatic enrollment safe harbor after the first plan year.
- Section 310 addresses an increase in credit limitation for small employer pension plan startup costs.
- Section 311 addresses small employer automatic enrollment credit.
- Section 312 addresses exemptions from required minimum distribution rules for individuals with certain account balances.
- Section 313 addresses elective deferrals by members of the Ready Reserve of a reserve component of the Armed Forces.
Retirement industry reaction
Among the first offer commentary on the fresh proposal was Cathy Weatherford, president and CEO of the Insured Retirement Institute.
“Chairman Brady’s proposal is a dramatic development that we hope will fuel momentum in the waning days of this session of Congress to advance comprehensive retirement security legislation,” she said. “The latest House retirement security proposal includes provisions that were not contained in an earlier House measure, the Family Savings Act, which passed in September. The new legislation contains language addressing key IRI concerns including providing retirement plan participants with an illustration of how current savings would translate into an income stream in retirement, and provisions to help small employers save on retirement plan administrative costs, and enhancements to automatic enrollment and contribution escalation features in retirement plans.”
According to IRI analysts, this latest House proposal closely aligns with the Retirement Enhancement and Savings Act (RESA). Weatherford notes that a House version of RESA has more than 80 bipartisan cosponsors, while a Senate version unanimously passed in committee in the previous Congress.