Representative (Rep.) Richard Neal (D-MA), Ranking Democrat on the influential House Ways and Means Committee, has introduced the Retirement Plan Simplification and Enhancement Act of 2017 (RPSEA). The legislation would significantly modify current rules for individual retirement arrangements (IRAs) and employer-sponsored retirement plans. The bill aims to expand retirement plan coverage, preserve retirement income, and simplify retirement plan rules.
Although the 2017 session of Congress has come to an end, the proposals made in this bill have support among both Democrats and Republicans. Given this fact—and the common-sense nature of the bill’s provisions—there is a good possibility that Congress could act upon this legislation or elements of it in 2018. Following are some of RPSEA’s significant provisions.
Changes for Both IRAs and Employer Plans
Some parts of RPSEA deal exclusively with employer plans. Other elements—like those below—would affect those who save for retirement in either an IRA or an employer plan.
- Nonspouse beneficiary indirect rollovers: nonspouse beneficiaries of IRAs or employer plans could move assets by indirect (60-day) rollover, rather than only by plan-to-IRA direct rollovers or IRA-to-IRA direct transfers.
- Nonspouse beneficiary rollovers to employer plans: a nonspouse beneficiary could directly roll over inherited employer plan assets to an employer plan in which the beneficiary is a participating employee. These inherited rollover assets would continue to be distributed under the beneficiary payout rules.
- No RMDs for certain individuals: retirement assets in IRAs and employer plans would be exempt from required minimum distributions (RMDs) until an individual’s aggregate balance exceeds $250,000.
- Increased RMD age: the age when Traditional and SIMPLE IRA owners and retirees and certain owners in employer plans must begin distribution would increase in steps from age 70 ½ to age 73 by the year 2029, and increase thereafter as changes in life expectancy may warrant.
- Qualifying longevity annuity contract (QLAC) enhancement: longevity annuities begin payout at an advanced age, and are excluded from RMD requirements. Amounts used to purchase such annuities would no longer be limited to 25 percent of retirement assets and the current $125,000 limit would be raised to $200,000, indexed.
- Lifetime income streams: to encourage greater use of lifetime income investments, RMD rules would be modified to accommodate annuities that offer accelerating distribution options, including lump-sum payments.
Contributions and Credits
- Saver’s credit and simplified tax filing: taxpayers eligible for the saver’s credit for IRA contributions and deferrals made to an employer plan could claim this credit on Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents, rather than only on the longer Form 1040, S. Individual Income Tax Return.
Employer Plan and IRA Corrections
- More self-correcting for employer plans: the IRS’ Employee Plans Compliance Resolution System (EPCRS) correction program would be expanded to allow more self-correction options and to include IRAs; changes would include certain RMD, loan, and rollover failures.
- Grace period for automatic-enrollment failures: employers whose deferral plans have automatic-enrollment or automatic-escalation features would have 9½ months after the end of the plan year to correct failures related to enrolling or increasing employee elective deferrals.
- New 401(k) safe harbor plan correction option: 401(k) safe harbor plans that use the nonelective contribution formula could correct certain excess contributions by increasing the standard safe harbor nonelective contribution from three percent to four percent.
Traditional IRA Provisions
Individuals with earned income would be allowed to make Traditional IRA contributions after age 70-½ (as with Roth IRAs).
Employer Plan Provisions
The goal of simplifying rules for establishing and maintaining employer retirement plans has been an elusive one, despite widespread agreement that doing so will lead to greater financial security for workers in retirement. Rep. Neal’s bill includes a number of items aimed at simplifying employer plan provisions.
- Encourage higher employee deferral rates: the legislation would eliminate the current 10 percent cap on automatically-increased deferral rates of employees who are automatically enrolled in a plan.
- Simplify notice requirements: the Treasury Department would be required to issue regulations, or other guidance, simplifying the timing for providing notices to automatically-enrolled employees; in particular, in plans that permit immediate participation, or that have multiple payroll systems.
Eligibility and Coverage
- Covering less-than-fulltime workers: employees who work for three consecutive years with at least 500 hours of service each year would be allowed in an employer plan, but would be excluded from coverage, top-heavy, and nondiscrimination testing.
Incentive to allow early plan entry: When determining the top-heavy status of any of its plans, an employer may exclude participants who have not yet met the minimum age and service requirements (age 21 and 1 year of service) if the employer satisfies the top-heavy minimum contribution separately for those participants.
Miscellaneous Plan Administration
- More time to set up a plan: most retirement plans must be established by the last day of the business year, though they can be funded later. The deadline for establishing a plan would be extended to the business’ tax return deadline, including filing extensions.
- Simplified reporting and disclosure: the legislation directs the Secretaries of the Treasury and Labor, as well as the Pension Benefit Guaranty Corporation, to study and report to Congress on opportunities to standardize, consolidate, simplify, and improve reporting and disclosure requirements that apply to retirement plans.
- Adoption, amending of Safe Harbor 401(k) plans: a 401(k) plan could adopt safe harbor status for a plan year as late as the deadline for distributing excess contributions for such year and without having given a prior-year notice, if the plan provides a nonelective safe harbor contribution to participants.
- Simplifying 403(b) plan termination: participants in a terminating 403(b) plan could distribute their 403(b) custodial account in-kind and still retain their 403(b) account’s tax-deferred nature if the 403(b) rules continue to be followed.
RPSEA Proposes More Aggressive 401(k) Design
Automatic-enrollment and automatic-increase features in 401(k)-type retirement plans are widely considered important in leading workers to save more, and to be better-prepared for a financially secure retirement. Rep. Neal’s bill builds on existing safe harbor plan designs with the Secured Deferral Arrangement (SDA). Like existing safe harbor designs, an SDA would be exempt from nondiscrimination and top-heavy testing if no other employer contributions are made. Its features include the following.
- Automatic enrollment beginning at a minimum of 6 percent—but not more than 10 percent—allowing opt-out at any time.
- No 10 percent cap on automatically-increasing deferral rates.
- A graduated employer match on deferrals, equaling 4½ percent for those who defer at least 10 percent of pay (but no match on deferrals above 10 percent).
Many on both sides of the political aisle are likely to support some—if not all—of its provisions. But with the 2017 session of the 115th Congress having come to an end, further progress on changes like these will have to await the arrival of the 2018 session. As always, Ascensus will continue to monitor any and all legislation that could have an effect on IRAs, employer plans, and other tax-advantaged savings arrangements. Visit www.Ascensus.com for the latest developments.