Details from the Retirement Plan Simplification and Enhancement Act

Among the retirement reform proposals submitted late in 2017 by House Ways and Means Committee Ranking Member Richard Neal, D-Massachusetts, is the Retirement Plan Simplification and Enhancement Act of 2017.

The bill is tied to another recently published by the Democrat from Massachusetts, the “Automatic Retirement Plan Act of 2017,” which is also garnering the support of retirement plan industry lobbying groups. Very broadly speaking, the Simplification and Enhancement Act includes provisions aimed at expanding retirement plan coverage and increasing savings levels, preserving lifetime retirement income, simplifying and clarifying qualified retirement plan rules, and implementing more a limited set of defined benefit (DB) plan reforms.

The bill seeks to eliminate the current 10% cap on automatically-increased deferral rates of employees who are automatically enrolled in a plan. Related to this, the bill would require the Treasury Department to issue regulations or 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.”

Neal’s bill would require employers to expand retirement coverage in a variety of ways. Perhaps most significantly, employees who work for three consecutive years with at least 500 hours of service each year would have to be made eligible to participate in an employer’s plan, but would be excluded from coverage, top-heavy, and nondiscrimination testing. Further, 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.”

A team of experts with Ascensus provided this timely summary of some of the bill’s provisions. As they explain, some parts of the Retirement Plan Simplification and Enhancement Act deal exclusively with employer plans. Other elements would affect those who save for retirement in either an individual retirement account (IRA) or an employer plan.

“Non-spouse 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,” the Ascensus experts explain. “For non-spouse beneficiary rollovers to employer plans, a non-spouse 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.”

There are many more technical changes in Representative Neal’s bill. On the plan distribution side, the bill provides that retirement assets in IRAs and employer plans would be exempt from required minimum distributions (RMDs) until an individual’s aggregate balance exceeds $250,000. As Ascensus explains, 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 70.5 to age 73 by the year 2029, and increase thereafter as changes in life expectancy may warrant.”

“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% of retirement assets and the current $125,000 limit would be raised to $200,000, indexed,” Ascensus experts note. “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.”

Being Democrat-sponsored, it should be stated that the Retirement Plan Simplification and Enhancement Act, has little chance of earning consideration by the Republican majority during the mid-term election cycle. However, some experts have suggested that the stars could align in 2018 to propel a successful bipartisan reform effort.

Some other items of significance for readers include that 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, rather than only on the longer Form 1040. Further, the bill would allow more self-correcting for employer plans, establish a grace period for automatic-enrollment failures, and create a new 401(k) safe harbor plan correction option. Concerning this final item, 401(k) safe harbor plans that use the non-elective contribution formula “could correct certain excess contributions by increasing the standard safe harbor non-elective contribution from three percent to four percent,” Ascensus notes. Finally, individuals with earned income would be allowed to make Traditional IRA contributions after age 70.5, as with Roth IRAs.