In the waning days of the 115th Congress, the bipartisan duo of Sens. Rob Portman (R-OH) and Ben Cardin (D-MD) unveiled one of the most comprehensive pieces of retirement security legislation proposed in this congressional session.
The 121-page “Retirement Security and Savings Act of 2018,” introduced Dec. 19, includes nearly 60 provisions designed to:
- increase savings in 401(k)s and IRAs;
- help improve coverage in the small employer market and among part-time workers;
- reduce barriers to lifetime income retirement options; and
- allow employees to keep retirement savings in a qualified plan or IRA for a longer period instead of being subject to the RMD rules at age 70½.
The legislation goes beyond what is currently included in the Senate’s Retirement Enhancement and Savings Act (RESA), as well as the House’s Retirement, Savings, and Other Tax Relief Act of 2018 (H.R. 88) and Family Savings Act (H.R. 6757), which both include some components of RESA. The most comparable legislation in this Congress would be the Retirement Plan Simplification and Enhancement Act of 2017 (RPSEA) introduced in the House by Rep. Richie Neal (D-MA), who will take over as Ways and Means Committee chairman in January.
“We applaud and support the continued leadership by Senators Portman and Cardin in promoting retirement security for working families,” notes Brian Graff, Executive Director of NAPA and CEO of the American Retirement Association.“This proposal is an important step in simplifying and expanding retirement security.”
Portman and Cardin, who have worked together on retirement policy issues going back to their days in the House more than two decades ago, introduced the legislation as a “marker,” with the idea of gathering additional feedback. In a release, the senators noted that they will continue their efforts to improve this legislation, which establishes a foundation for a broader bipartisan, bicameral retirement policy debate next Congress.
Retirement Security and Savings Act
The legislation is divided in sections relating to:
- expanding coverage and increasing retirement savings;
- preservation of income;
- simplification and clarification of retirement plan rules;
- defined benefit plan reforms;
- reforming plan rules to harmonize with IRA rules; and
- administrative provisions.
Key provisions in the bill include the following.
Establish a new automatic safe harbor. A cornerstone provision is the establishment of a new automatic safe harbor, entitled “Secure Deferral Arrangements.” This provision seeks to address concerns that the current safe harbor automatic default deferral rate of 3% during the first year is too low and has resulted in employers setting the deferral amount at this level even though they could set it higher, when studies suggest that most Americans should be saving more to ensure a financially secure retirement.
The minimum default level of contributions would be 6% in the first year, then 7% in the second year, 8% in the third year, 9% the fourth year, and 10% in all subsequent years. There would be a 10% cap on the default level of contributions in the first year, but no cap would apply thereafter.
In addition, employers would be required to make matching contributions on behalf of all eligible non-highly compensated employees, phased in such that some level of matching contributions are provided on employee or elective contributions up to 10% of pay.
Under the legislation, the matching contribution arrangement would apply as follows:
- 100% of the elective contributions of the employee to the extent such contributions do not exceed 2% of compensation;
- 50% of the contributions that exceed 2%, but do not exceed 6% of compensation; plus
- 20% of the contributions that exceed 6%, but do not exceed 10% of compensation.
For this new safe harbor, the nonelective contribution option available with respect to the existing automatic contribution safe harbor would not apply. The rationale is that employees should have an incentive to contribute up to 10%; otherwise, that incentive would not exist if the employer could use the nonelective contribution option.
In addition, a special tax credit would also apply to employers with 100 or fewer employees with respect to matching contributions under the new safe harbor for the first five years of participation, up to 2% of a non-highly compensated employee’s compensation.
Saver’s Credit. The bill would make the Saver’s Credit refundable (currently you must have a tax obligation against which to offset the credit) and generally would require that the credit be contributed directly to a retirement plan or Roth IRA, though it would not mandate that a plan or Roth IRA has to accept the contributions. It also would expand the income limits eligible for a 20% credit (instead of a 10% credit, as under current law), and simplify the lookback period regarding distributions that offset contributions eligible for the credit. Individuals also would be permitted to claim the credit on Form 1040-EZ, rather than on Form 1040.
Allow long-term part-time employees to participate in a 401(k) plan. Except in the case of collectively bargained plans, the bill would require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule) or two consecutive years of service where the employee completes at least 500 hours of service.
In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules. As such, employers would be allowed to test participants who have not met the minimum statutory age and service requirements separately for determining required top-heavy contribution requirements.
Increase in age for RMD beginning date and update the mortality rules. The bill would increase the RMD age from 70½ to 72 for calendar years 2023-2029. For calendar years after 2029, the age would increase to 75. In addition, the Treasury would be directed to update the mortality tables underlying the RMD regulations by no later than one year after the date of enactment and every 10 years thereafter.
This provision appears to build on President Trump’s Executive Order directing the Treasury to examine the life expectancy and distribution period tables on RMDs and determine whether they should be updated.
Enhancement of the Small Employer Start-Up Credit. Like RESA, the bill would increase the cap for the start-up tax credit for small employers from $500 to $5,000. In addition, the limit on the start-up cost percentage would rise from 50% to 75% for employers with 25 or fewer employees.
Credit for re-enrollment in plans provided by small employers. Under the bill, automatic re-enrollment at least every three years would be encouraged by providing an additional three-year, $500 per year tax credit for small firms (i.e., with 100 or fewer employees). The credit period with respect to any eligible employer is the three-taxable-year period beginning with the first tax year for which the employer includes a re-enrollment provision in an eligible automatic contribution arrangement.
Treatment of student loan payments as elective deferrals for purposes of matching contributions. This provision appears to piggyback off legislation introduced Dec. 18 by Sen. Ron Wyden (D-OR), ranking Democrat on the Senate Finance Committee.
It essentially opens the door for student loan repayments to qualify for matching contributions, but also provides that a 401(k) plan which provides these matching contributions may continue to qualify as a safe harbor plan for nondiscrimination testing purposes.
In general, the student loan repayment would not be treated as an elective contribution to the plan, but any matching contribution made with respect to such repayment would be treated as a matching contribution for all purposes. The amount of student loan repayments taken into account for this purpose cannot exceed the applicable current law limit on the employee’s elective contributions to the plan, reduced by the employee’s actual elective contributions. In addition, the employee must certify to the employer that he or she has a qualifying student loan and the amount of any repayment for which a matching contribution is sought.
Expansion of EPCRS. Under the legislation, retirement plan administrators would be permitted under certain circumstances to self-correct under the IRS’ Employee Plans Compliance Resolution System (as described in Revenue Procedure 2018-52) all inadvertent plan violations without additional submissions to the IRS, except to the extent that such failure was identified by the Treasury Secretary prior to any actions to implement a self-correction.
The American Retirement Association has long advocated for changes to the EPCRS. Expansion of the EPCRS was previously introduced by Sens. Portman and Cardin in August 2018.
Simplification and consolidation of notices. The legislation calls for a review by the Treasury and the Labor Department of existing reporting and disclosure requirements, and directs them to develop regulations that would allow for the consolidation of two or more employee notices, including:
- the qualified default investment alternative (QDIA) notice;
- participant fee and investment disclosures;
- the nondiscrimination testing safe harbor notice;
- the auto enrollment safe harbor notice; and
- the permissive withdrawal notice.
This provision also appears to harmonize President Trump’s Executive Order directing the Treasury and Labor departments to conduct a review of the existing notice regimes and develop regulations as appropriate.
Next year is shaping up to be a watershed moment for the prospects of enacting major retirement security legislation. While many thought that a version of RESA/Family Savings Act would be attached to a year-end, catch-all spending bill, on Dec. 19 the Senate failed to agree on a government funding bill for the remainder of the fiscal year, settling instead on a scaled-back continuing resolution (CR) providing funding through Feb. 8. With members of Congress eager to adjourn the current lame-duck session, all signs indicate that retirement legislation will not be addressed by the 115th Congress. Nevertheless, it it sure to be back on the table in the 116th Congress.
That session of Congress will feature a new chairman of the House Ways & Means Committee (Rep. Richie Neal (D-MA), who has announced plans to make retirement security legislation a priority. In addition, there will be a new chairman of the Senate Finance Committee (Sen. Chuck Grassley, R-IA), who previously was chairman when the Pension Protection Act of 2006 was enacted. Both Sens. Portman and Cardin serve on the Finance Committee with Grassley. Moreover, the committee’s Ranking Member, Sen. Ron Wyden (D-OR), said in introducing legislation regarding matching student loan repayments that he was doing so “in preparation for next year, when it is expected that broader conversations on how to improve retirement policies will be debated in the 116th Congress.”