It could get much easier for small companies to offer 401k plans if new bipartisan legislation introduced March 29 by the House Ways & Means Committee becomes law.
Ways & Means Committee Chairman Richard Neal (D-MA), Rep. Ron Kind (D-WI), Ways & Means Committee Ranking Member Kevin Brady (R-TX), and Rep. Mike Kelly (R-PA) introduced the landmark legislation to strengthen Americans’ long-term financial security, called the “Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019.”
The SECURE Act, which pulls from a number of stalled bipartisan bills introduced during the last Congress, would also expand and improve the portability of lifetime income options from one plan to another.
“With this legislation, we’re taking bold, bipartisan action to address our nation’s retirement crisis,” saidChairman Neal. “Providing more, and easier, ways to save allows workers to actively plan for their futures and avoid falling into poverty later in life. Boosting Americans’ financial security in retirement supports families and strengthens our economy.”
American Council of Life Insurers President and CEO Susan Neely expressed support for the SECURE Act’s key retirement provisions and urged swift passage.
“This bipartisan proposal to address the retirement concerns of average Americans is timely and important,” Neely said. “The bill’s retirement provisions will result in tangible benefits for all workers regardless of where and how they work, their life stage, or the economic status of their household. They will make it easier for employers to sponsor a retirement plan, encourage employees to save, and help them prepare for a secure retirement through lifetime income solutions.”
Chairman Neal announced that the committee will convene a markup on Tuesday, April 2, to consider several bills, including the SECURE Act.
Editor’s Note–April 2 Update: On Monday, the Senate Finance Committee introduced the Retirement Enhancement and Savings Act (RESA) of 2019, which mirrors the House Ways & Means Committee’s SECURE Act of 2019, which was unanimously approved in a vote by that committee on Tuesday.
With both acts receiving bipartisan support, industry advocates are viewing this as the best opportunity for retirement security legislation to pass Congress in more than a decade, with one of the only potential roadblocks to enactment being busy floor schedules in Congress.
Here are some of the key provisions currently contained in the SECURE Act:
- Increasing the Auto Enrollment Safe Harbor Cap: The legislation increases the cap from 10% to 15% of employee pay that required automatic escalation of employee deferrals go no higher than under an automatic enrollment safe harbor plan.
- Simplification of Safe Harbor 401k Rules: The legislation changes the non-elective contribution 401k safe harbor to provide greater flexibility, improve employee protection and facilitate plan adoption. The legislation eliminates the safe harbor notice requirement, but maintains the requirement to allow employees to make or change an election at least once per year.
- Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs: To make it more affordable for small businesses to set up retirement plans. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.
- Small Employer Automatic Enrollment Credit: The legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401k plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under present law and would be available for three years. The credit would also be available to employers that convert an existing plan to an automatic enrollment design.
- Repeal of Maximum Age for Traditional IRA Contributions: The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 701⁄2.
- Portability of Lifetime Income Options: Permits qualified defined contribution plans, section 403b plans, or governmental section 457b plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.
- Allowing Long-term Part-time Workers to Participate in 401k Plans: Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. Except in the case of collectively bargained plans, the bill will require employers maintaining a 401k 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 three consecutive years of service where the employee completes at least 500 hours of service.
- Increase in Age for Required Beginning Date for Mandatory Distributions: The bill increases the required minimum distribution age from 701⁄2 to 72.
- Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year: Permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year. The additional time to establish a plan provides flexibility for employers considering adopting a plan.
- Combined Annual Reports for Group of Plan: The legislation directs the IRS and DOL to effectuate the filing of a consolidated Form 5500 for similar plans. Plans eligible for consolidated filing must be DC plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries. The change will reduce aggregate administrative costs, making it easier for small employers to sponsor a retirement plan.
- Disclosure Regarding Lifetime Income: The legislation requires benefit statements provided to DC plan participants to include a lifetime income disclosure at least once during any 12-month period. Disclosure in terms of monthly payments will provide useful information to plan participants in correlating the funds in their defined contribution plan to lifetime income. Plan fiduciaries, plan sponsors, or other persons will have no liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance under the provision and that include the explanations contained in the model disclosure, which the Secretary of Labor is directed to develop.
- Fiduciary Safe Harbor for Selection of Lifetime Income Provider: Provides certainty for plan sponsors in the selection of lifetime income providers, a fiduciary act under ERISA. Under the bill, fiduciaries are afforded an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a DC plan.
Missing MEPs
Notably missing from the SECURE Act at this point is any provision to provide for multiple employer plans (MEPs), although it could be added during the April 2 markup.
House Ways & Means Committee Members Reps. Vern Buchanan (R-FL) and Ron Kind (D-WI) reintroduced their Retirement Security for American Workers Act on March 28 that would permit businesses to join together in MEPs with pooled plan providers to share the administrative burden and costs of offering retirement plans.