SBCA Finds Potential Problem With Reintroduced RESA Legislation

Section 501 of the Retirement Enhancement and Savings Act would give non-spouse beneficiaries five years to take distributions of inherited accounts over $450,000 before they would be taxed.

Senators Orrin Hatch, D-Utah, and Ron Wyden, D-Oregon, have reintroduced the Retirement Enhancement and Savings Act (RESA).

RESA includes a proposal for pooled employer plans (PEPs), or open multiple employer plans (MEPs). It would treat them as one plan under the Employee Retirement Income Security Act (ERISA) and take care of the “one bad apple” rule to prevent one participating employer from disqualifying the whole plan.

It also includes a proposal to require lifetime income estimates at least annually on participants’ retirement plan statements; a fiduciary safe harbor for the selection of lifetime income providers for retirement plans; limits on stretch individual retirement accounts (IRAs) that allow beneficiaries to take out retirement plan assets over their lifetime; a proposal to allow more time for participants who terminate with an outstanding loan to rollover the loan and pay it off without it being a deemed distribution; as well as other proposals that would affect nondiscrimination rules, the automatic enrollment safe harbor default rate and the treatment of 403(b) custodial accounts upon plan termination.

However, the Small Business Council of America (SBCA) sent a letter to members of Congress to express the group’s concerns about Section 501 of RESA. This section “would basically require that all funds in defined contribution plans and IRAs over $450,000 at the time of the owner’s death be brought into the income of most beneficiaries (other than spouses) within five years.  We are concerned that this dramatic change in the treatment of inherited plans will trigger the freezing or termination of hundreds of thousands of small business retirement plans,” says SBCA Chair Paula Calimafde.

The SBCA contends that, if the proposal becomes law, accountants and other advisers will tell their clients to not save any more in a retirement plan than what they are sure to use during their lifetimes.  The council says most small business owners regard the contributions they make for their staff as the price of being able to have a qualified plan to save in for their own retirement, and it fears that once they reach the advised amount of savings, small business owners will close or freeze their plans. For the employees, this will mean that they will not receive the retirement plan contributions (or the option to save in a plan) nor will they get the foregone contributions as additional salary.

The SBCA also says there are principles of fairness in play, particularly for older Americans who have saved in retirement plans for years and will be informed that the tax treatment available to their children has suddenly been drastically changed for the worse.

To lessen this unfairness, the SBCA urges Congress to, at a minimum, provide children with at least 20 years to remove funds from an inherited plan in order to be able to spread out the income taxation.

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