Will 2019 be the Year of Retirement Reform – The SECURE Act
It has been 13 years since Congress enacted the Pension Protection Act of 2006, the last piece of major legislation affecting retirement plans. Significant provisions affecting retirement plans were included in various versions of President Trump’s tax reform bill enacted in 2017, but Congress ultimately punted, and none of them made it into the final bill.
This past May, the House passed, by a near unanimous vote (417 – 3), the “Setting Every Community up for Retirement Enhancement Act” (The “SECURE Act”). Such strong support in the House suggests this legislation has an excellent chance of becoming a law before the end of the year. This is now contingent on Senate action. Although many of the provisions in this bill have strong support in the Senate, under the Senate’s arcane procedural rules, a single Senator could tie this legislation up in committee.
A number of important provisions in this bill have appeared in past bills and have strong bipartisan support. Thus, regardless of whether the House bill becomes law this year, it is almost certain that the majority of these provisions will be enacted at some point in the not too distant future.
Some of the more important provisions of this bill include:
Multiple Employer Plans (“MEPs”) for Unrelated Employers - The bill would overturn Department of Labor guidance, preventing unrelated employers from establishing multiple employer plans. Many small employers do not sponsor retirement plans and this is yet another attempt by Congress to encourage them to do so by offering them a more efficient alternative to establishing individual plans.
Notice of Lifetime Income - Sponsors of defined contribution plans would be required to provide participants with an annual notice disclosing the estimated monthly annuity income their account balance could generate at retirement. The intent is to ensure that participants are better informed about how much they need to save for their retirement. Nationally, the average participant in a 401(k) plan is currently saving enough to replace less than 50 percent of his/her projected income at retirement, even when social security benefits are included.
Safe Harbor for Lifetime Income Option - Few defined contribution plans offer an annuity option that provides a lifetime income stream to participants commencing at retirement. One of the major reasons for this is plan sponsors’ concerns about fiduciary liability in the event that the insurance company becomes insolvent at a future date. In 2008, the Department of Labor published a safe harbor for selecting an annuity provider, but this was not viewed as providing sufficient protection to plan fiduciaries. The bill would specify the steps plan sponsors must take in selecting an annuity provider. If these steps are taken, the plan sponsor would be deemed to have satisfied its fiduciary responsibilities.
Part Time Employees - Current law permit plan sponsors to exclude part-time employees from retirement plans. The bill would require sponsors to allow long term part-time employees to participate. Long term part-time employees are defined as employees who work at least 500 hours in three consecutive years.
Tax Credit Increased for Plan Start-Up Costs - The bill would increase the existing tax credit for plan startup costs for small employers with no more than 100 employees. The credit will increase from $500 to $5,000 over three years. There would be an additional $500 credit if the plan includes an auto enroll feature.
Remove Age Limit for Traditional IRAs - Under current law, individuals cannot make deductible contributions to a traditional IRA after reaching age 70 1/2. There is no age restriction for Roth IRAs. The bill would repeal this age restriction.
Age for MRDs Pushed Back – The age at which minimum required distributions must commence would be pushed back from age 70 ½ to 72. This is a popular change, but it has been criticized as only benefitting wealthy tax payers with relatively large amounts of deferred tax savings who do not need to make withdrawals to cover living expenses.