House Passes Retirement Plan Reform Legislation on Bipartisan Vote
On May 23, 2019, the U.S. House of Representatives passed by an overwhelming margin (417-3) the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act (H.R. 1994). The bill, which has the support of various industry groups, including the U.S. Chamber of Commerce, contains provisions designed to increase retirement plan coverage for employees and ease administrative and financial burdens for employers providing such plans. In the Senate, the chairman and ranking member of the Finance Committee have introduced a companion bill with similar provisions, which indicates a strong likelihood that the legislation could be enacted during this session of Congress.
Overview of SECURE Act
Key retirement plan provisions of the SECURE Act include:
- Multiple Employer Plans. The bill would promote the use of multiple employer plans (MEPs) by overriding U.S. Department of Labor and Internal Revenue Service (IRS) guidance that has prevented unrelated employers from participating together in the same MEP. The bill would also amend the Internal Revenue Code to provide a procedure for ensuring that qualification issues relating to a single participating employer would not result in the disqualification of the entire MEP.
- Coverage of Long-Term Part-Time Workers. The bill would require an employer maintaining a non-collectively bargained 401(k) plan to allow part-time employees who complete at least 500 hours of service in three consecutive 12-month periods to participate in the plan. The bill would permit employers to exclude such employees from testing under the nondiscrimination and top-heavy plan rules.
- Lifetime Income Disclosures and Investment Options. The bill would require employers to provide defined contribution plan participants with an annual estimate of the monthly payment the participant would receive if the total account balance were used to provide a lifetime income stream, including a qualified joint and survivor annuity and a single life annuity. The bill would direct the Department of Labor to develop a model disclosure and related guidance, and would exempt plan sponsors and fiduciaries who provide lifetime income disclosures in accordance with such guidance from liability under the Employee Retirement Income Security Act (ERISA). The bill would also establish a fiduciary liability safe harbor under ERISA for employers who elect to include lifetime income options in their defined contribution plans, and would permit participants to make trustee-to-trustee transfers to other plans, or individual retirement accounts (IRAs), of a lifetime income investment if the investment were no longer authorized to be held as an investment under their current plan.
- Tax Credits for Small Employers. The bill would increase the existing tax credit for small-employer pension plan startup costs, while creating a new tax credit of up to $500 per year to employers to defray startup costs for new auto-enrollment 401(k) plans and SIMPLE IRA plans. The new tax credit would be available for the three-taxable-year period beginning with the first taxable year for which the employer includes an eligible automatic contribution arrangement in the plan.
- Safe Harbor 401(k) Rules. The bill would eliminate the requirement that an employer sponsoring a nonelective safe harbor 401(k) plan provide an annual notice to eligible employees informing them of their rights and obligations under the plan. The bill would also permit a plan to be amended to become a nonelective safe harbor 401(k) plan on any date prior to the 30th day before the close of the plan year, while permitting an amendment after such date in limited circumstances. This is a marked difference from the current state of the law, which requires elections and notifications to be made prior to the commencement of the plan year.
- Nondiscrimination Testing of Frozen Plans. The bill would modify the nondiscrimination rules with respect to plans that are closed to new participants in order to allow existing participants to continue to accrue benefits.
- Adoption Date for New Retirement Plans. The bill would provide employers with additional time to establish plans by allowing employers to treat qualified retirement plans adopted before the due date (including extensions) of their tax return as having been adopted as of the last day of the taxable year to which the return relates.
- Consolidated Form 5500 Annual Reports. The bill would direct the Internal Revenue Service and the Department of Labor to effectuate the filing of a consolidated Form 5500 for similar defined contribution plans. Plans eligible for consolidated filings would need to have the same trustee, named fiduciary (or named fiduciaries) and plan administrator, and would need to use the same plan year and provide the same investment options to plan participants and beneficiaries.
- Increased Failure to File Penalties. The bill would increase penalties for failing to file a Form 5500 annual report, failing to provide required withholding notices, failing to file registration statements for deferred vested benefits, and failing to provide required notices of changes to deferred vested benefits.
The legislation also contains provisions affecting individuals who hold retirement savings in IRAs, including provisions that would repeal the maximum age for contributing to traditional IRAs and modify the required minimum distribution rules.
Senate Finance Committee Chairman Chuck Grassley has indicated in statements to the press that he expects swift passage of his Senate companion bill to the SECURE Act, the Retirement Enhancement and Savings Act of 2019, or RESA (S. 972). In addition, Senate Finance Committee members Rob Portman and Ben Cardin recently introduced the Retirement Security and Savings Act (S. 1431). Like the SECURE Act, the Portman-Cardin bill expands coverage of part-time workers under 401(k) plans. It also allows small businesses to self-correct all inadvertent plan violations under the IRS’ Employee Plans Compliance Resolution System without paying IRS fees or needing formal submissions to the IRS.
At a recent Finance Committee hearing, Senator Portman expressed support for passing RESA as is but then considering the Portman-Cardin legislation as part of a broader, more sweeping effort to help older Americans save for retirement. However, provisions of the Portman-Cardin bill could be included as the Senate takes up the SECURE Act.
The Senate is expected to move quickly on these bills, and passage of legislation could occur as early as before the August recess. It is unclear whether President Donald Trump will sign legislation approved by both houses of Congress, although the expectation in Washington is that he would not oppose such legislation.
Stroock’s employee benefits and executive compensation team are tracking these and other bills closely and are available to address your employee benefit and compensation concerns.
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