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Comprehensive Retirement Simplification, Auto 401(k) Legislation Introduced

A key House Democrat introduced two bills on Dec. 1 that seek to implement automatic 401(k)s and simplify administration and improve retirement savings opportunities across the spectrum of plans, including both DB and DC plans.

Rep. Richie Neal (MA), who has been a strong proponent for improving the retirement security system and is currently the ranking Democrat on the House Ways & Means Committee, introduced the Retirement Plan Simplification and Enhancement Act of 2017 (RPSEA) and the Automatic Retirement Plan Act of 2017 (ARPA).

“The retirement crisis in America is real and will only worsen unless we make saving easier and do more to encourage workers to begin saving for retirement earlier,” Rep. Neal said in introducing the legislation. “These bills simplify our retirement system and create more opportunities for people to save.”

Retirement Plan Simplification and Enhancement Act

The RPSEA pulls together many of the bipartisan pieces of legislation that have been pending on Capitol Hill for the last several years, including several provisions from Senate Finance Committee Chairman Orrin Hatch’s (R-UT) Retirement Enhancement and Savings Act (RESA), which has not yet been reintroduced in this Congress.

The American Retirement Association’s Government Affairs Committee has been working closely with Rep. Neal and his staff to secure the inclusion of several ARA-supported provisions in the legislation (several of which were also included in ASPPA’s December 2013 Proposals to Enhance the Private Retirement Plan System).

Among the provisions the ARA worked to include in the bill are:

Sec. 108 – Additional time to adopt a qualified plan. The bill would permit an employer to adopt a qualified plan up to the due date (including extensions) for filing its tax return for the employer’s taxable year in which the first plan year ends.*

Sec. 112 – Increase in credit limitation for small employer pension plan startup costs. Current law offers a small business that adopts a new qualified plan a tax credit, which can apply for up to three years, equal to the lesser of either $500 or 50% of the employer’s start-up costs. The bill would modify the cap to be equal to the greater of either $500 or the lesser of either: (1) $5,000 or (2) $250 for each non-highly compensated employee eligible to participate in the plan. In addition, the 50% limit would be increased to 100% for employers with 25 or fewer employees.*

Sec. 113 – Safe harbor for corrections of employee elective deferral failures. The bill would allow a grace period to correct, without penalty, reasonable errors in administering automatic enrollment and automatic escalation features if they are corrected prior to the date that is 9½ months after the end of the plan year in which the mistakes were made.

Sec. 304 – Consolidation of defined contribution plan notices. The bill would direct the Secretaries of Labor and the Treasury to adopt final regulations within 18 months of enactment providing that a plan may consolidate two or more of the specified notices required under ERISA and the Internal Revenue Code into a single notice and/or consolidate such notices with the SPD or SMM.

Sec. 311 – Rules relating to election of safe harbor 401(k) status. The bill would eliminate the notice requirement for non-elective contributions and gives small business owners the flexibility to switch to plans with non-elective contributions.*

Sec. 312 – Use of forfeitures to fund safe harbor contributions. The bill would clarify that forfeitures can be used to fund employer contributions under certain safe harbor arrangements.

Sec. 313 – Treatment of custodial accounts on termination of section 403(b) plans. The bill provides a mechanism under which the plan termination may proceed without forcing assets out of the custodial account.*

(Provisions marked with an asterisk (*) were also included in Sen. Hatch’s RESA legislation.)

Other provisions in the RPSEA that will be of interest to the professional retirement community include the following.

Title I, Expanding Coverage and Increasing Retirement Savings

Sec. 101 – Modify and establish a new automatic enrollment safe harbor.
Sec. 102 – Provide alternative method for secure deferral arrangements to meet nondiscrimination requirements.
Sec. 106 – Separate application of top heavy rules to defined contribution plans covering part-time employees.
Sec. 111 – Increase in age for required beginning date for mandatory distributions.
Sec. 114 – Clarify and provide fiduciary safe harbor for economically targeted ESG investments.

Title II, Preservation of Income

Sec. 201 – Clarify the law with respect to the availability of distribution options.
Sec. 202 – Clarify portability of lifetime income and managed account options that cease to be offered by a plan.
Sec. 203 – Clarify unintended glitches in qualifying longevity annuity contract rules.

Title III, Simplification and Clarification of Qualified Retirement Plan Rules

Sec. 301 – Provide exception from required distributions where aggregate retirement savings do not exceed $250,000.
Sec. 305 – Make target date disclosure more effective by requiring the use of a performance benchmark for asset allocation funds.
Sec. 309 – Make 402(f) notices on rollover options more understandable.
Sec. 310 – Provide guidelines addressing overpayment recoupment practices.

Title IV, Defined Benefit Plan Reforms

Sec. 401 – Clarify the application of IRC rules, such as backloading and section 415, as they relate to hybrid plans that credit variable interest.
Sec. 402 – Align the use of lookback months to determine interest rates to provide parity for employers that provide more generous lump sum benefits.
Sec. 403 – Align employer pension contribution due date with corporate return due date.

The legislative text of the RPSEA can be found here and a summary of the legislation can be found here.

Automatic Retirement Plan Act

Rep. Neal also introduced the ARPA, which generally would require all employers to maintain a 401(k) or 403(b) plan, subject to certain exceptions, such as being a small employer.

According to a summary, governments, churches, small employers (10 or fewer employees) and new businesses not in existence for three years would be exempt from the requirement to maintain a plan.

In addition, the legislation would provide a start-up credit to help employers cover the cost adopting a plan, with a more generous credit for covering 100% of small employer (25 or fewer employees) costs for five years.

The bill would allow for open multiple employer plans (MEPs), which under certain circumstances, would relieve small employers (up to 100 employees) of all fiduciary and administrative duties (other than passing on contribution amounts and conveying needed information, such as employee lists and payroll data). Moreover, the ARPA would provide relief from the one-bad-apple rule applicable to MEPs.

The legislation would also exempt current state auto IRA programs from the new rules. The legislation provides that the states that have already enacted state auto IRA programs can continue such programs, such that, for example, the state of Oregon could continue with its state auto IRA program.

The legislative text of the ARPA can be found here and a summary of the legislation can be found here.

In the previous Congress, Rep. Neal introduced legislation to require auto IRAs for those employers that do not offer a plan.

Both the RPSEA and the ARPA have been referred to both the House Ways and Means Committee, and the House Education and the Workforce Committee.

With Republicans in control of both the House and Senate, the likelihood of this legislation moving forward is less certain. Nevertheless, once the tax reform effort is complete, it is very possible that this legislation could serve as a starting point for further discussion on broad-based retirement security legislation. It’s worth reiterating that many of the provisions have previously been included in bipartisan legislation, including Senator Hatch’s RESA.