Legislative Update Winter 2019
Jan. 25, 2019 | By Jon Vogler
Legislative recap for 2018
Bipartisan Budget Act of 2018 [Public Law 115-123]
This broad-based budget bill had a few retirement provisions related to hardship distributions. Among other items, it (a) deleted the six-month suspension of elective deferrals after a hardship distribution, (b) provided that a plan participant would no longer have to take available loans from the plan (and all other plans of the employer) prior to taking a hardship distribution, and (c) modified Internal Revenue Code Section 401(k) to allow withdrawal of earnings on elective deferrals, as well as withdrawal of qualified matching contributions (plus earnings) and qualified nonelective contributions (plus earnings) upon hardship.
Upcoming in 2019
In December 2018, the House passed the Retirement, Savings and Other Tax Relief Act of 2018 and the Taxpayer First Act of 2018 which combined a wide array of tax provisions with bipartisan retirement savings reforms.1 Taken as a package, the legislation contains:
- Retirement savings tax incentives and reforms
- Extensions of various expiring tax provisions (the so-called “tax extenders”)
- Tax relief to victims of recent disasters
- Startup business tax incentives
- Technical corrections to the 2017 Tax Cuts and Jobs Act
The bills draw heavily from the bipartisan Retirement Enhancement and Savings Act (RESA) introduced in the Senate early in 2018, as well as the Family Savings Act that was passed by the House in September 2018. Key components include:
- Allowing two or more unrelated employers to join a pooled employer plan (similar to an “open” multiple employer plan, or MEP)
- Giving employers up until the due date of their tax return to adopt a qualified retirement plan for the prior year
- Increasing the small employer pension plan startup credit up to $1,500
- Creating a new $500 credit to encourage small employers to automatically enroll their workers into a plan
Other retirement provisions in the bills include:
• An increase in the 10% cap for automatic enrollment safe harbor
• A fiduciary safe harbor for selection of a lifetime income provider
• A lifetime income disclosure, with information about the lifetime income stream equivalent of a participant’s total account balance if he or she were to purchase an annuity
• Portability of lifetime income investments
• Modification of nondiscrimination rules to protect older, longer-service participants
• Provision for penalty-free withdrawals from retirement plans for individuals in case of the birth of a child or adoption
• Prohibition of qualified employer plans from making loans through credit cards
• Expansion of 529 plans (allowing for homeschooling and apprenticeship expenses, and that the beneficiary of an account can be an unborn child)
• Provision of an exemption from required minimum distribution (RMD) rules for individuals with total defined contribution or individual retirement account (IRA) balances of $50,000 or less
• Treatment of certain taxable non-tuition fellowship and stipend payments as compensation for IRA purposes
• Repeal of the maximum age (70-1/2) for traditional IRA contributions
The bill did not get voted on in the Senate or passed into law in 2018, due in part to opposition from Democrats related to the tax provisions in the package, as well as dueling priorities (such as the mid-term elections and the need to approve appropriations bills in an attempt to avoid a government shutdown).
Even though the Retirement, Savings and Other Tax Relief Act was not passed in 2018 in the “lame duck” session, there’s still hope for a major bipartisan retirement bill passing in the new Congressional session which began in January 2019. That’s the case in part because, due to the mid-term election results shifting the House to a Democratic majority, Rep. Richard Neal, D-MA is the incoming chair of the House Ways and Means Committee, which has primary jurisdiction over retirement bills in that chamber. He is one of the foremost champions of retirement legislation, having introduced several retirement-related bills. Neal’s staff has already affirmed that retirement legislation will be his first priority.
One bill of particular interest that Neal introduced in 2018 (and which may be reintroduced in 2019) is the Automatic Retirement Plan Act, which would require employers (with certain exceptions, such as for smaller and newer employers) to sponsor a 401(k) or 403(b) plan. While many in Congress (especially Republicans) are historically opposed to mandates, some may deem this approach acceptable in lieu of having several different state plans.
Elsewhere on the legislative front, other retirement-related bills which we may see again this year include a retirement bill from Sen. Portman, R-OH, and Sen. Cardin, D-MD. It includes (among other items) (1) establishing a new automatic safe harbor contribution (referred to as “secure deferral arrangements”), (2) making the saver’s credit refundable, (3) increasing the age for RMDs and updating the mortality rules, (4) enhancing the small employer startup credit, (5) treating student loan payments as elective deferrals for the purposes of matching contributions, and (6) simplifying and consolidating notices.
The Women’s Pension Protection Act from Sen. Murray, D-WA, would generally require spousal consent for distributions in defined contribution (DC) plans and require plan sponsors to offer participation to long-term part-time employees. The Encouraging Americans to Save Act would enhance retirement savings incentives by restructuring the existing, nonrefundable saver’s credit into a refundable, government-matching contribution of up to $500 a year for lower- and middle-income workers who save through 401(k) type plans or IRAs. The legislation would also reestablish the MyRA, a program established in 2014 to create starter retirement savings accounts for people without access to a 401(k) plan at work. The MyRA was discontinued by the current administration in July 2017 on the grounds of limited take-up and excessive administrative costs.
The Receiving Electronic Statements to Improve Retiree Earnings (RETIRE) Act was reintroduced in the Senate in the last week of December 2018. The bill would permit retirement plan sponsors to automatically enroll participants in electronic delivery for plan communications, while providing an opt-out option for employees who prefer to continue receiving paper documents. The bill has strong bipartisan support and may be reintroduced early in this session of Congress.
Among other provisions, the bipartisan, comprehensive RESA introduced in the Senate in early 2018 would provide for a fiduciary safe harbor to plan sponsors for selection of a lifetime income provider in retirement plans.
According to Michael Kreps, Principal at Groom Law Group, the proposed provision answers concerns from employers about an insurance company’s inability to pay an annuity, while requiring plan sponsors to review considerations prior to offering the lifetime income options, in order to avoid fiduciary liability.2
According to Mr. Kreps, plan sponsors feared that if they offered in-plan annuities, but the insurer was not able to complete the financial obligation or pay for the annuity, they could be held liable for the outstanding annuity and possibly sued by plan participants. While several pieces of guidance have been issued to avoid possibly unsafe annuity purchases, the proposed 2018 legislation is apparently the only one that would safeguard plan sponsors from liability issues stemming from any losses from the insurer’s inability to meet its financial obligations.2
The RESA provision would mandate plan sponsors to obtain several indications of an insurer’s financial good standing, including a report indicating the insurer is not under supervision by the state and has not been for the past seven years. The safe harbor provisions of RESA (as introduced in 2018) would also lay out a few things that plan sponsors need to consider, including a written report from the insurer stating that the insurer is licensed to issue the contract and received audited financial statements in accordance with state law. Another feature of the provision would measure a provider’s creditworthiness, to see whether the entity has completed financial obligations in the past.
If applied in 2019 or later, many observers believe that the safe harbor provisions in RESA will likely advance the adoption and availability of annuities within DC plans.
Multiple employer plans
On the regulatory front, in 2018 the Department of Labor (DOL) released proposed rules intended to expand the use of MEPs to provide workplace retirement benefits.
MEPs allow several employers to share a common retirement plan, helping to drive down plan costs and reduce administrative and fiduciary liability. Under the DOL proposal, an association (under certain conditions) would be permitted to “stand in the shoes” of an employer and sponsor a DC plan (such as a 401[k]) for its members. These conditions include the following:
• The group or association must have a purpose other than offering benefits, although that can be its primary purpose.
• The group or association cannot be a bank or trust company, insurance issuer, broker-dealer or other similar financial services firm (including pension record-keepers and third-party administrators).
The proposal would also clarify that MEPs can be sponsored by professional employer organizations (PEOs), which are human resources companies that contractually assume certain employment responsibilities for their clients. In addition, the proposal would permit certain working owners without employees to participate in a MEP sponsored by a group or association; this would help extend coverage to individuals in the “gig” economy.
The proposal allows employers to participate in a MEP if they are in the same industry, trade, line of business or profession. It also allows them to share in a MEP if they “have a principal place of business within a region that does not exceed the boundaries of the same state or the same metropolitan area.”
While the proposal appears to loosen the conditions for MEP membership under the Employee Retirement Income Security Act of 1974 (ERISA) and could make more small businesses eligible to participate in MEPs, it does not go nearly as far as an “open” MEP proposal, which would not require companies participating in the same plan to share any such commonalities.3 The Retirement, Savings and Other Tax Relief Act, as well as the Family Savings Act and RESA, would all provide for open MEPs.
Under the proposal, the underlying sponsor (whether an association or PEO) will be required to be a named fiduciary, taking on most of the fiduciary obligations and administrative responsibilities of running the plan. Employers, however, will still maintain limited fiduciary duties, such that they would be required to engage in a “prudent process” in selecting and monitoring the sponsor, and making contributions on a timely basis.4
The proposal follows a notice from the Treasury Department that it is planning a draft rule to eliminate the so-called “one bad apple” MEP provision, under which the tax qualification of a MEP is threatened if one participating employer falls out of compliance. (Legislatively, the Retirement, Savings and Other Tax Relief Act and RESA would also eliminate the one bad apple rule.)
The DOL, the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) all have their own rules about locating missing plan participants. Currently, it appears that there is not necessarily any one approach a plan sponsor can take that would satisfy all three of the regulators.5 A major concern is the lack of formal guidance on the steps needed to search for missing participants in ongoing DC plans. The Government Accountability Office (GAO) has set forth its own recommendations.
Proposed legislation has also been introduced to elaborate on employer and plan administrator responsibilities in this area. The Retirement Savings Lost and Found Act was reintroduced in 2018 by Sen. Warren, D-MA, and Sen. Daines, R-MT, who noted that many Americans leave their jobs each year without giving their employers directions about what to do with their retirement accounts. Among other items, the bill would (a) create a national, online registry for Americans’ retirement accounts, (b) allow employers to more easily invest abandoned accounts into target date funds rather than money market funds, and (c) allow for uncashed checks of less than $1,000 to be transferred to Treasury securities, so that individuals can locate this money and continue to save for their retirement.
Retirement industry groups continue to collect best practices from their members in an attempt to influence more formal DOL guidance. Hopefully, a consensus can be reached on what are reasonable and appropriate methods for complying with plan rules and reuniting missing plan participants with their accounts.
DOL fiduciary rule
On March 15, 2018, a three-judge panel of the Fifth Circuit Court of Appeals issued its long-awaited decision in the lawsuit against the DOL regarding its fiduciary rulemaking. In a 2—1 decision, the court ruled to vacate (or essentially, nullify) the fiduciary rule in its entirety.
The court majority opinion included two key rulings: (a) that the DOL did not have the authority to adopt the new fiduciary advice definition, and (b) that in adopting the fiduciary rule, it acted arbitrarily and capriciously. In effect, the court struck down both the new fiduciary advice definition and the package of exemptions that came with it.6
At the time, the March 15 decision resulted in three basic avenues. The DOL could: (a) appeal the verdict to the full Fifth Circuit (an “en banc” hearing), (b) appeal directly to the Supreme Court (on the grounds that there was a “circuit split” in light of other circuit courts’ rulings favoring the DOL fiduciary rule), or (c) decide to take no action by the April 30 deadline, in which case the court ruling would be expected to be effective on or about May 7 (unless a third party intervened in place of the DOL to defend the rule).
In late April, in the absence of DOL action, AARP and the attorneys general of California, New York and Oregon filed motions to intervene in the case in defense of the rule, but on May 1, their attempt was rejected by the court. This initially meant that the ruling to vacate the DOL fiduciary rule would likely become effective on or around May 7.
Also on May 7, the DOL issued guidance (Field Assistance Bulletin 2018-02) that provided that the DOL would not take any enforcement action against an entity that has been “working diligently and in good faith” to comply with the impartial conduct standards for transactions that would have been exempted in the Best Interest Contract (BIC) exemption and principal transactions exemption (which would be vacated along with the entire DOL fiduciary rule by the Fifth Circuit Court’s order). This relief was intended to run from June 9, 2017 until further guidance was issued.
The court ultimately issued a certification in June 2018 to enforce the court mandate to nullify the DOL fiduciary rule plus related exemptions. Attention shifted to the proposed Security and Exchange Commission (SEC or Commission) standards of conduct for broker-dealers and investment advisors issued on April 18.
The DOL’s regulatory agenda (released late in 2018) referred to additional fiduciary rule guidance in September 2019. It is unclear whether this additional guidance will come in the form of prohibited transaction exemptions or an attempt to harmonize rules with the pending SEC proposal on standards of conduct.
SEC proposed standards of conduct for broker-dealers and investment advisors
In an April 2018 press release, the SEC said the standards of conduct proposals were “designed to enhance the quality and transparency of investors’ relationships with broker-dealers and investment advisors while preserving access to a variety of types of advice relationships and investment practices.”7
Under proposed Regulation Best Interest (BI), a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities. Regulation BI was designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.
In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation BI, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisors owe to their clients.
Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary. Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.
Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors. Investment advisors and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.
Initial reaction to the SEC proposals was mixed. Many financial services firms had maintained all along that the SEC (rather than the DOL) was the proper source for this type of guidance and expressed support for the new standards of conduct for broker-dealers and investment advisors. Some consumer groups were worried that the SEC rule relied too much on disclosure; while brokers would be required to disclose and mitigate conflicts, the rule would not require them to broadly eliminate the conflicts.
The comment period for the SEC proposal ended in August 2018. The SEC is still reviewing the massive amounts of comment letters it received. SEC Chairman Jay Clayton said in November 2018 that while the Commission doesn’t have a definitive timeline on when the agency’s advice package will be finalized, the SEC is aiming to get it done by September 2019, if not sooner.8
President’s executive order on retirement policy
An executive order signed by President Donald Trump on Aug. 31, 2018 directed the DOL and the Treasury to consider changes to make it easier for businesses to join together to participate in MEPs.9
The executive order also:
• Directed the Treasury to review the rules on RMDs from retirement plans (to see if retirees could keep more money in 401[k]s and IRAs longer). The Treasury was instructed to examine the life expectancy and distribution period tables in RMD regulations, which could result in smaller RMDs after age 70-1/2, helping to preserve assets in retirement.
• Directed the Treasury and the DOL to consider ways to improve notice requirements to reduce paperwork and administrative burdens. The review specifically required “an exploration of the potential for broader use of electronic delivery as a way to improve the effectiveness of disclosures and to reduce their associated costs and burdens.”
Preliminary reaction to the executive order was favorable in the retirement industry. The idea of relaxing access requirements to MEPs already has support in Congress. As previously noted (see the Multiple employer plans section in this edition), MEPs are a key provision in RESA, a broad-based retirement security bill. The RMD provision was somewhat surprising, in the sense that the government may temporarily forego tax revenue if the period for taking RMDs is extended, but retirees may appreciate the ability to defer distributions longer. The retirement industry has long promoted the concept of advancing electronic disclosures, in the name of streamlining administrative requirements and cutting costs for plan sponsors and participants.
This August 2018 action by the executive branch was intended to expand access to retirement plans (especially among smaller employers), rework “outdated distribution mandates” which force retirees to make “excessively large withdrawals from their accounts (potentially leaving them with insufficient savings in their later years),” and reduce the number and complexity of employee benefit plan notices and disclosures to ease regulatory burdens.10
Student loan repayment and 401(k) plans
An Aug. 17, 2018 IRS decision allowing an employer to offer a student loan repayment benefit as an element of its retirement plan could help clear the way for other employers to offer similar benefits.
Prior to the decision, a few plan sponsors already initiated plan features providing that employees who do not make elective contributions to the plan (i.e., salary deferral) but who regularly pay down student debt may be eligible for employer contributions made to the plan on their behalf. The latest IRS decision, while in the form of a private letter ruling (PLR) which does not officially set precedent for other employers, may allay concerns from employers interested in offering a tax-free student loan benefit through their 401(k) programs.
The PLR follows increasing concern that employees with considerable student loan debt may be foregoing their employers’ matching contributions because their outsized student loan payments make them unable to afford contribution to their 401(k) plans.
Under the particular program described in the PLR, the employer would make a 401(k) contribution of 5% of compensation on a worker’s behalf if the worker was making a student loan payment of at least 2% of their salary for a given pay period. The employer contribution would be made regardless of an employee’s contribution to a 401(k).
In effect, the letter permits the employer sponsor to address those workers who may be paying down student debt in lieu of saving for retirement. (Employees enrolled in the program would still be permitted to make elective contributions to the plan, but they would not receive matching contributions on those contributions.)
While a growing number of employers have added student loan perks to their benefits packages, only a small percentage of employers currently offer their employees some form of assistance or incentive to repay student loans, according to the Society for Human Resources Management in 2017.11
The IRS ruling may prompt more companies to follow suit. A PLR technically only applies to the facts and circumstances of the particular case at hand, but it is indicative of how the IRS might approach similar cases.
The industry trade organizations ERIC (ERISA Industry Committee) and the American Benefits Council have already asked the IRS to issue guidance allowing all 401(k) plans to implement a benefit similar to the one described in the PLR.
On this topic, Sen. Wyden, D-OR, and Sen. Cardin, D-MD, introduced legislation late in 2018 that would allow 401(k), 403(b) and Savings Incentive Match Plan for Employees (SIMPLE) retirement plan sponsors to use their plans to provide student loan repayment benefits to employees.12
According to a summary of the bill, the Retirement Parity for Student Loans Act would permit these plan sponsors to make matching contributions to workers as if their student loan payments were salary reduction contributions. If an employer chooses to offer this benefit, then it must be made available to all workers who are eligible to make salary reduction contributions to the retirement plan and receive matching contributions on those salary reduction contributions. The benefit cannot be provided to workers who are not eligible to participate in the retirement plan.
The benefit only applies to repayments of student loan debt that was incurred by a worker for higher education expenses, and it is only available to employees who provide evidence to their employer of their student loan debt payments. The Treasury Department would be authorized to issue regulations prescribing the conditions under which employers may rely on evidence of student loan debt submitted by workers.
The bill calls for the rate of matching for student loans and for salary reduction contributions to be the same. For example, if a 401(k) plan provides a 100% matching contribution on the first 5% of salary reduction contributions made by a worker, then a 100% matching contribution must be made for student loan repayments equal to 5% of the worker’s pay. (Special rules apply if a worker makes both salary reduction contributions and student loan repayments. Under those rules, student loan repayments are only taken into account to the extent that the worker has not made the statutory maximum annual contribution to the retirement plan.)
The bill as introduced in 2018 also provides that a 401(k) plan that provides these matching contributions may continue to qualify as a safe harbor plan for nondiscrimination testing purposes.
1 ASPPA.net, "Lame duck retirement package draws fire," Ted Godbout, Nov. 29, 2018
2 PlanSponsor, "Future regulation holds the key for lifetime income options in DC plans," Amanda Umpierrez, Dec. 19, 2018
3 Ignites, "DOL proposal would expand, not open, MEPs,'" Emile Hallez, Oct. 23, 2018
4 NAPA Net, "DOL proposes expanded access to MEPs," Ted Godbout, Oct. 22, 2018
5 PlanSponsor, "In focus at DOL: missing and terminated participants," John Manganaro, Jul. 16, 2018
6 Drinker Biddle Reath, "Fifth Circuit vacates fiduciary rule," Mar. 20, 2018
7 Investment Company Institute, "Summary of SEC proposals on standards of conduct for broker-dealers and investment advisors," Dorothy M. Donahue, Apr. 26, 2018
8 Think Advisor, “SEC, DOL share details on plans for advice standards,” Melanie Waddell, Nov. 28, 2018
9 BenefitsPRO, "Trump's executive order instructs Labor to set table for open MEPs," Nick Thornton, Aug. 31, 2018
10 The White House, "Executive order on strengthening retirement security in America," Aug. 31, 2018
11 Bloomberg, "IRS clears path for student loan repayment tied to 401(k)," Madison Alder, Aug. 20, 2018
12 PlanSponsor, "Bill would allow use of retirement plans to provide student loan repayment benefits," Rebecca Moore, Dec. 19, 2018
This does not constitute advice of any kind, including tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. The information presented is based on current interpretation of pending retirement legislation and regulations. State laws may differ.
All material is compiled from sources believed to be reliable and current but accuracy cannot be guaranteed. This document is for informational purposes only and is not to be construed as an offer to buy or sell any financial instruments.
The opinions expressed are those of Jon Vogler, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.