Washington Insights – Summer 2019
June 7, 2019 | By Jon Vogler
SECURE Act provisions
On May 23, 2019, the US House of Representatives overwhelmingly approved (by a vote of 417 to 3) the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act).1 Drawing from a number of bipartisan bills that were introduced in the last session of Congress (but never enacted), the SECURE Act, among other things, would:
- Establish open multiple employer plans (MEPs). The bill would allow otherwise unrelated employers to band together and participate in open MEP arrangements (referred to in the bill as “pooled employer plans” or “PEPs”).2
- Increase the auto-enrollment safe harbor cap on auto-escalation. It would raise from 10% to 15% the limit on automatic escalation of deferral rates after the first year of enrollment.
- Simplify safe harbor 401(k) rules. The bill would also eliminate the safe harbor notice requirement for 401(k) safe harbor plans using nonelective contributions (NECs) and permit delayed adoption of NEC safe harbor provisions.
- Expand small employer tax credits. It would increase the tax incentive for small businesses that start a qualified retirement plan and add a new tax credit for small businesses that automatically enroll participants.
- Allow IRA contributions based on non-tuition fellowship and stipend payments. The bill would expand the definition of compensation for purposes of making individual retirement account (IRA) contributions to include gross income attributable to payments for graduate or post-doctoral study.
- Repeal the maximum age for traditional IRA contributions. It would allow taxpayers to continue making contributions to traditional IRAs after reaching age 70½.
- Prohibit credit card plan loans. The bill would prohibit plans from making loans through credit cards or “similar arrangements.”
- Permit distributions upon elimination of certain lifetime income investment options. Participants in qualified defined contribution (DC) plans, 403(b) plans and governmental 457(b) plans would be allowed to take a distribution of a “lifetime income investment” without regard to any Internal Revenue Code withdrawal restrictions if the lifetime income investment is no longer authorized to be held under the plan. The distribution must be made via a direct rollover to an IRA or other retirement plan or, in the case of an annuity contract, through direct distribution to the individual.3
- Allow 401(k) plan participation by long-term part-time workers. The bill would require 401(k) plans (except for collectively bargained plans) to permit participation by employees who work at least 500 hours per year for three consecutive years. Such workers would not need to be included in testing for nondiscrimination and coverage requirements or application of the top-heavy rules. In addition, an employer would also not be required to make matching or nonelective contributions on behalf of such employees.
- Allow plan withdrawals for birth or adoption without early withdrawal penalty. It would add a new (optional) exception from the 10% early distribution penalty for qualified withdrawals from a DC plan or IRA for the birth or adoption of a child, provided that qualified withdrawals are limited to $5,000 in the aggregate across an individual’s accounts, the withdrawal is made within one year after the birth or adoption date and the distribution is allowed to be recontributed to an eligible retirement plan or IRA (subject to certain rules) and is treated as a rollover.
- Increase the age for required minimum distributions (RMDs). The bill would increase the age at which RMDs must begin (for both retirement plans and IRAs) from age 70½ to age 72.
- Allow qualified plans adopted by the filing due date to be treated as in effect as of the close of the year. An employer would be allowed to adopt a plan for a taxable year as long as it is adopted by the due date of the employer’s tax return for that year (including extensions).
- Permit consolidated Form 5500 reporting for similar plans. Under the bill, a group of similar plans would be permitted to file a single consolidated Form 5500 if all plans in the group are individual account or DC plans, have the same trustee, named fiduciary and administrator, use the same plan year and provide the same investment options.
- Require lifetime income disclosures. It would require DC plans to include an annual lifetime income stream estimate on participant benefit statements based on the participant’s total account balance. The bill would also require the Department of Labor to provide a model lifetime income disclosure.
- Provide a fiduciary safe harbor for selection of lifetime income provider. The bill would provide a fiduciary safe harbor for satisfying the prudence requirement with respect to the selection of an insurer for offering guaranteed income contracts under a plan.
- Expand 529 plans. It would also expand Section 529 plans to permit qualified distributions for certain specified apprenticeship program expenses and qualified education loan repayments for the designated beneficiary or a sibling of the beneficiary (but be limited to a total of $10,000 over the lifetime of an individual beneficiary). [Provisions to further expand 529 plans to permit qualified distributions for certain homeschooling expenses and more types of elementary and secondary school expenses (i.e., no longer limited to tuition expenses) were deleted from the SECURE Act before adoption by the full House.]
- Modify RMD rules for beneficiary payments (“stretch” RMD). The bill would modify RMD rules for post-death distributions from DC plans and IRAs to beneficiaries. It would require the account to be fully distributed within 10 years following the year of the participant’s or IRA owner’s death, unless the distribution is made to an “eligible designated beneficiary” (i.e., a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the participant or IRA owner, or a child of the participant or IRA owner who has not reached the age of majority).
Comparing the SECURE Act to RESA
Meanwhile, the bipartisan RESA was reintroduced in the Senate on April 1. The new Senate version of RESA closely tracks with the SECURE Act in the House, suggesting that the two chambers may be able to come up with a consolidated bill for the President’s signature in the coming weeks. An alternate approach discussed recently would be to have the Senate vote directly on the SECURE Act as passed by the House (rather than attempting to reconcile the two bills in a conference committee meeting).
Retirement Security and Savings Act
In other related news, Senators Rob Portman (R-OH) and Ben Cardin (D-MD) re-introduced their comprehensive Retirement Security and Savings Act on May 13. This bill includes more than 50 provisions designed to strengthen retirement security for Americans by addressing four major themes in the existing retirement system:4
- Allow people who have saved too little to set more aside for their retirement
- Help small businesses offer 401(k) and other retirement plans
- Expand access to retirement plans for low-income Americans without coverage
- Provide more certainty and flexibility during Americans’ retirement years
Portman and Cardin introduced their legislation the day before the Senate Finance Committee held a hearing on challenges within the retirement system. While much of the hearing centered on RESA, several senators and witnesses expressed support for the Portman-Cardin legislation.
Prospects for passage of retirement bills
Now that the House has approved the SECURE Act, it is anticipated that the Senate will either vote directly on the SECURE Act or craft an alternative bill containing components of RESA, the SECURE Act and possibly the Portman-Cardin bill (which all have some overlapping features) and present it for the President’s signature in the coming weeks, while a broader bill with additional elements from the more expansive Portman-Cardin legislation could move this summer. In this vein, House Ways and Means Chairman Richard Neal, D-MA, had previously announced that he and Ranking Member Kevin Brady, R-TX, will be working on a second, more comprehensive retirement bill (to help close the coverage gap, simplify the retirement system and help preserve assets in retirement). Their goal is to mark it up prior to the August recess.5
We’ll keep you posted.
1 Source: NAPA Net, “House overwhelmingly backs SECURE Act; focus now turns to Senate,” Ted Godbout, May 24, 2019
2 Source: Investment Company Institute (ICI), “House passes bipartisan retirement legislation,” Elena Barone Chism, May 24, 2019
3 Source: SPARK Institute, “Summary of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019,” Michael L. Hadley, April 5, 2019
4 Source: NAPA Net, “Portman-Cardin retirement reform bill resurfaces in Senate,” Ted Godbout, May 14, 2019
5 Source: Employee Benefits Adviser, “Retirement bill could prompt flood of new plans from small businesses,” Kenneth Corbin, April 3, 2019
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