Both Parties and Both Sides of Congress Agree on Retirement Savings Reform. What Now?
After years of work, both the House and the Senate have developed comprehensive, bipartisan retirement bills that lift some of the long-standing restrictions on retirement plans. Included are provisions to facilitate the creation of multiple employer plans and pooled employer plans, to allow contributions to traditional IRAs after age 70 ½, and to allow IRAs to hold shares in an S Corporation that qualifies as a bank.
The House bill is H.R. 1994, the “Setting Every Community Up for Retirement Enhancement Act of 2019” (SECURE), passed the House on May 23, 2019, on a vote of 417-3. The Senate companion bill, S. 972, entitled, “Retirement Enhancement and Savings Act of 2019” (RESA) is pending in the Senate Finance Committee and is sponsored both by Committee Chairman Charles Grassley, (R-IA) and Ranking Minority Member Ron Wyden (D-Oregon). The Senate Finance Committee has released a section-by-section summary of the bill, which is outlined below. “The Retirement and Savings Act would help Americans get on the path of saving for a secure retirement during their working years while making sure their savings will last throughout their retirement. It also would make it easier and more cost-effective for small employers to sponsor a retirement plan for their employees,” Grassley stated.
The Senate’s version, RESA, would reform retirement savings laws in these ways:
- Repeal the 70 ½ maximum age for traditional IRA contributions to allow the elderly to keep saving for retirement.
- Permit an IRA to hold shares in an S corporation that qualifies as a bank.
- Require a beneficiary of an IRA or 401(k) account other than a surviving spouse or child to distribute and include in income the balance in the account by the end of the fifth calendar year following the year of the employee’s or IRA owner’s death. An exception to the five-year distribution deadline is provided for each beneficiary if the balance of their account does not exceed $400,000, valued as of the date of death.
- Treat taxable non-tuition fellowship and stipend payments as compensation that can be contributed to an IRA.
- Improve “multiple employer plans” (MEPs) to make it easier for small employers to join together to sponsor a single retirement plan for their workers. The bill would remove compliance barriers for small employer plans and decrease their costs.
- Remove the automatic enrollment safe harbor cap that limits automatic increases in employee deferrals to no higher than 10% of employee pay.
- Encourage employees to increase their retirement savings annually through automatic increases in contributions to 401(k) plans. The bill also requires employers to provide estimates of how much an employee’s account would provide during retirement if it were invested in an annuity.
- Increase the credit limitation for small employer pension plan start-up costs by changing the calculation of the flat dollar amount limit 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.
- Create a new fiduciary “safe harbor” for employers that offer as part of a defined contribution plan an option for employees to invest in lifetime-income arrangements, such as annuities.
- Enhance the ability of employees to transfer their retirement plan assets to a new retirement plan when they change jobs.
- Direct the IRS and the Department of Labor to allow the filing of a consolidated Form 5500 for similar plans.
- Prohibit the distribution of plan loans through credit cards or similar arrangements, except under existing arrangements available before September 21, 2016.
Unlike most major tax bills, these retirement reform bills have such broad bipartisan support it is hard to imagine they won’t pass and that the President won’t end up with a bill on his desk to sign. However, all it takes is for one or two controversial changes to break down the cooperation, so tax professionals are watching this process closely.
Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments