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Lifetime Income Safe Harbor Now in Tax Reform 2.0 Mix

With the House of Representatives poised to take up the second round of tax reform, a couple of changes have been made to the retirement section of the legislation.

On Sept. 25, House Ways and Means Committee Chairman Kevin Brady (R-TX) offered a “manager’s amendment” to the Family Savings Act (H.R. 6757) to incorporate a safe harbor for the selection of a lifetime income provider within a defined contribution plan.

The manager’s amendment provides a safe harbor to limit fiduciary liability with respect to the selection of an insurer for a guaranteed retirement annuity contract, provided the fiduciary:

  • engages in an objective and thorough search in identifying insurers from which to purchase such contracts;

  • considers the financial capability of such insurer to satisfy its obligations under the contract;

  • considers the cost (including fees and commissions) of the guaranteed retirement income contract; and

  • concludes, on the basis of such examination, that the insurer is financially capable of satisfying its obligations and the relative cost of the selected guaranteed retirement income contract is reasonable.

The legislation also specifies that there is no requirement to select the lowest cost contract, such that a fiduciary may consider the value of a contract, including features and benefits of the contract, as well as attributes of the insurer.

H.R. 6757 is the retirement component of Brady's three-part “Tax Reform 2.0” initiative. The bill seeks to ease the commonality rules for multiple employer plans (MEPs) and eliminate the so-called “one bad apple” rule, as well as create a new Universal Savings Account (USA). It also includes a slew of other provisions designed to simplify the existing rules to make it easier for businesses to offer retirement plans and for individuals to save for retirement. Many of these provisions were drawn from the Retirement Enhancement and Savings Act (RESA) legislation introduced earlier this year.

During the Ways and Means Committee’s markup of H.R. 6757, Brady was criticized by Democrats and industry stakeholders for not including the lifetime income safe harbor provision, which had received bipartisan support and was originally included in RESA. The topic of eliminating barriers to providing annuity income solutions in DC plans has been a major focus among policymakers over the past couple of years as a way to address longevity risk and decumulation issues.

Section 529 Expansion

The manager’s amendment also includes a provision to expand designated beneficiaries under Section 529 qualified tuition accounts to unborn children. Under this provision, an unborn child would be defined as a “child in utero.” This would be effective for contributions made after Dec. 31, 2018.

What’s Next?

The House is scheduled to begin consideration of the three-part Tax Reform 2.0 Sept. 27. In addition to H.R. 6757, the other two bills are:

  • The Protecting Family and Small Business Tax Cuts Act (H.R. 6760) to make permanent the individual and small business tax cuts from the Tax Cuts and Jobs Act currently set to expire in 2025; and

  • The American Innovation Act (H.R. 6756) to spur innovation by helping new businesses with startup costs and capital expenditures.

The House is likely to approve all three bills, but their chances in the Senate are less certain. Many industry observers remain hopeful that the retirement bill will work its way through both chambers and be approved in a lame duck session following the Nov. 6 midterm elections.