Bipartisan legislation proposing many changes to IRAs and employer-sponsored retirement plans has been introduced by Senate Finance Committee Chairman Orrin Hatch (R-UT) and Committee Ranking Member Ron Wyden (D-OR). The Retirement Enhancement and Savings Act (RESA) of 2018 is very similar to a bill approved unanimously by the Senate Finance Committee in 2016, but not considered by the full Senate. With Senator Hatch leaving Congress, there may be an urgency to enact some form of this legislation. A companion bill was also recently introduced in the House of Representatives and is being reviewed to determine if there are any differences between the two. A general summary of the Senate bill is provided below.
Incentives to Establish or Enhance Employer Plans
Many of RESA’s provisions are intended to make it less complicated and less expensive to establish a plan and to reduce fiduciary exposure for employers establishing a retirement plan. To accomplish these objectives, RESA would
- enhance an employer’s ability to participate in a multiple employer plan, or MEP (the new but equivalent term “pooled employer plan” is coined by RESA). This would allow sharing of administrative responsibility, expense, and liability. RESA would eliminate the current requirement that participating employers have common purpose or ownership (effective for 2022 and later years);
- allow an employer to establish a plan (e.g., a pension plan or profit sharing plan) by its business tax filing deadline, including extensions. Current rules require employers to establish a plan by the last day of their business year. The extension would not apply to certain plan provisions, such as elective deferrals (effective for taxable years beginning after 12/31/2018);
- increase the maximum small employer retirement plan start-up tax credit from $500 to up to $5,000 per year, available for three years (effective for taxable years beginning after 12/31/2018);
- provide a $500 per year tax credit for up to three years, beginning with the first year a 401(k) plan or SIMPLE IRA plan includes an automatic enrollment feature (effective for taxable years beginning after 12/31/2018);
- allow employers up to 30 days before the end of a plan year to elect a 401(k) safe harbor plan provision without providing a pre-plan year notice if they make a three percent nonelective safe harbor contribution. Employers making a four percent nonelective safe harbor contribution would have until the deadline for removing excess contributions for such year to elect a safe harbor provision (effective for plan years beginning after 12/31/2018);
- specify a fiduciary safe harbor for plans offering lifetime income investment options in order to offer employers greater protection from fiduciary liability for investment provider selection (effective date is not specified in the bill text); and
- provide nondiscrimination testing relief for defined benefit pension plans that are closed to new participants; generally such employers offer a defined contribution plan as an alternative for new employees (effective for plan years beginning after 12/31/2013, if the plan sponsor elects).
Enabling Participants to Save More
RESA includes provisions intended to lead to greater saving by retirement plan participants. To accomplish this objective, RESA would
- eliminate the current 10 percent deferral limitation for plans with qualified automatic contribution arrangements (effective for plan years beginning after 12/31/2018), and
- require defined contribution plan benefit statements to include a lifetime income estimate at least once every 12 months (effective for statements provided more than 12 months after issuance of guidance by the Secretary of the Treasury).
Provisions Affecting IRAs and Employer Plans
Some provisions would affect participants or beneficiaries of both employer plans and IRAs, or would in some manner connect an employer plan and an IRA. These include provisions that would
- require nonspouse beneficiaries of IRAs and employer plans to withdraw amounts that together exceed $450,000 within five years. Exceptions to this rule—allowing certain beneficiaries to distribute and be taxed over their life expectancy—would include the disabled, the chronically ill, and a beneficiary who is no more than 10 years younger than the participant. Minors would begin their required five-year distribution period upon reaching the age of majority (generally effective for payouts as a consequence of deaths after 12/31/2018);
- treat custodial accounts of terminated 403(b) plans as IRAs, as of the termination date (effective for terminations after 12/31/2018); and
- allow plan participants invested in lifetime income investments to roll over the investments to an IRA or to another retirement plan if a plan is no longer authorized to hold such investments (effective for plan years beginning after 12/31/2018).
A limited number of RESA’s provisions would affect only IRAs, and would enhance either contribution or investment options. These provisions would
- eliminate the end of Traditional IRA contribution eligibility at age 70½ (applies to contributions for taxable years beginning after 12/31/2018);
- remove restrictions and allow any IRA owners to invest in S-Corporation bank securities (effective 1/1/2018); and
- treat graduate student or doctoral candidate stipend, fellowship, and similar payments as “earned income” for IRA contribution eligibility purposes (effective for taxable years beginning after 12/31/2018).
RESA contains several provisions less high-profile in nature, provisions that chiefly deal with employer plans. Such provisions would
- treat most retirement plan loans enabled through credit card programs as distributed from the plan (effective for plan years beginning after 12/31/2018);
- increase the following retirement plan reporting failure penalties
- Form 5500: $100 per day to a maximum of $50,000,
- Form 8955-SSA (reporting deferred vested benefits): $2 per participant per day to a maximum of $10,000,
- Withholding notices: $100 per failure to a maximum of $50,000 (effective for returns, statements, or notifications required to be filed after 12/31/2018);
- accelerate PBGC defined benefit (DB) pension plan insurance premiums to improve the agency’s solvency (application date to be determined);
- clarify PBGC insurance premiums for DB plans of cooperative and small employer charities (effective for plan years beginning after 12/31/2017); and
- clarify that employees of church-controlled organizations may be covered by a 403(b) plan that consists of a retirement income account (effective for all plan years, including before RESA enactment).
RESA’s prospects for enactment appear enhanced by the fact that it is known to be a high priority of Sen. Hatch, who will retire after his current Senate term. Furthermore, there could be an opportunity to attach its provisions to congressional appropriations legislation that must be approved by March 23, 2018, in order to avoid another government shutdown. The legislation could also certainly move forward as a stand-alone bill. Visit www.Ascensus.com for the latest developments.