Rep. Richard Neal (D-MA), the ranking democrat on the House Ways and Means Committee, recently introduced the Automatic Retirement Plan Act of 2017 (ARPA). The bill, if enacted, would have significant retirement savings plan implications. ARPA is a step beyond Rep. Neal’s past legislative efforts, which have included introducing bills to require employers with no retirement plan to establish automatic enrollment IRA programs.
ARPA would require many employers to maintain an automatic contribution (AC) plan. An AC plan is a 401(k) or 403(b) plan that would be subject to new rules, all of which are intended to expand the number of workers who have access to, and are enrolled in, employer-sponsored deferral plans.
In addition to requiring AC plans, ARPA would enhance employers’ ability to participate in multiple employer plans (MEPs), limit formation of new state-sponsored automatic-enrollment IRA programs, and propose certain other miscellaneous retirement plan provisions.
Highlights of AC Plan Provisions
All employers — except those with 10 or fewer employees, those in business less than three years, and governmental and church employers — would be required to maintain AC plans for their employees beginning in 2020 (2022 for employers with 100 or fewer employees earning at least $5000 in the prior year). Employers who fail to maintain an AC plan would generally be assessed a $10 per employee-per-day penalty.
Qualified plans, 403(b) plans, simplified employee pension (SEP) plans and savings incentive match plan for employees of small employers (SIMPLE) IRA plans in existence on the date ARPA is signed into law and that have been maintained for at least one year would generally be considered “grandfathered” AC plans. Grandfathered AC plans could continue to be maintained, as is, for six years from the date of enactment (eight years for employers with 100 or fewer employees earning at least $5000 in the prior year). After such period the relaxed eligibility rules and the prohibition against unreasonable fees (both described below) that apply to AC plans would apply to grandfathered AC plans.
General AC Plan Requirements
AC plans would generally be required to
- include all part time and full time employees—except employees under age 21, nonresident alien and seasonal employees, certain union employees, and employees employed less than one month;
- include automatic-enrollment beginning with a minimum deferral of six percent (but no more than 10 percent) and include automatic increases;
- invest plan assets in a QDIA in the absence of a participant investment election; and
- permit participants to elect to receive at least 50 percent of their account balance in the form of a distribution that guarantees them lifetime income.
The bill would also prohibit charging unreasonable fees to participants because they have small account balances or because the employer was required to establish an AC plan.
Special Rules for Deferral Only AC Plans
AC plans that permit only elective deferrals would be
- required to limit elective deferrals to $8,000 annually ($9,000 for participants age 50 and older),
- exempt from ADP testing,
- treated as not being top-heavy, and
- eligible—no matter how many employees an employer has—to file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.
ARPA’s Multiple Employer Plan (MEP) Provisions
Until now, regulatory requirements have prevented many employers from taking advantage of the economies of scale offered by MEPs. ARPA would broaden employers’ ability to join together in such plans (called “pooled employer plans” or “PEPs” in the bill), and provide the following.
- A common ownership or common business purpose would not be required to participate.
- One employer’s compliance failure would not jeopardize the entire plan.
- The IRS/Treasury Department would provide a model plan document for such arrangements.
- The IRS would provide guidance on a common plan administrator’s (pooled plan provider’s) duties.
- Small employers participating in such PEP arrangements would not be considered fiduciaries.
State Automatic IRA Plan Preemption
ARPA would limit future expansion of state-sponsored automatic IRA plans. Specifically, IRA-based automatic-enrollment plans established by states for private sector workers could continue in operation if their statutes were enacted before enactment of ARPA. Plans established under state statutes enacted after ARPA, or pre-ARPA plans that are later materially changed, would be preempted, and such states’ employers would not be bound by such state laws.
Miscellaneous ARPA Provisions
ARPA makes numerous proposed changes to several other rules. These changes are also designed to expand coverage, encourage automatic contribution features and promote lifetime income features. The most significant changes include the following.
- The start-up tax credit of up to $500 annually for three years that is available to certain small employers that establish a plan would increase to up to $5,000 annually, for as many as five years. The credit would cover 100 percent of costs for qualifying employers with 25 or fewer employees and 50 percent of plan costs for qualifying employers with more than 25 employees but not more than 100 employees.
- A small employer maintaining an AC plan (excluding a grandfathered AC plan) plan could claim a $500 credit during a five-year period that begins with plan adoption.
- The Saver’s Credit would be required to be contributed directly to a Roth IRA or designated Roth account within a plan.
- The IRS would be authorized to require additional Form 5500 reporting designed to help it determine the effect of nondiscrimination safe harbors on contributions for rank and file employees.
- 401(k) qualified automatic contribution arrangements could be designed to automatically increase elective deferrals more rapidly, and rise above 10 percent.
- All safe harbor 401(k) plans could provide a matching contribution on elective deferrals above six percent.
- Plans that cease to offer lifetime income or managed-account investments would be allowed to offer a direct rollover option for such investments.
Rep. Neal has long been an active and avid supporter of enhancing retirement saving opportunities, as demonstrated by numerous past bills introduced during his tenure in Congress. As for immediate prospects for ARPA, there is little time left in the 2017 congressional session, and with Congress preoccupied with tax reform Rep. Neal and those who support his legislation will likely be looking to consider it during 2018. Ascensus will continue to monitor this legislation. Visit www.Ascensus.com for the latest developments.