Congress Searches for Ways to Increase Contractor Participation in Plans

The American Benefits Council responded to a request for information from Senator Bill Cassidy, R-Louisiana, providing recommendations on how retirement benefits can be improved for independent contractors, including so-called gig workers.

The RFI issued June 5 asked for “feedback from stakeholders on ways to modernize federal law to allow independent workers access to portable workplace benefits like retirement and health care.” According to the RFI, there are “at least 27 million Americans engaged in independent work.”

Specifically, stakeholders were asked for their views on how to define independent contractor, how legal uncertainty undermines workers, what legal obstacles exist to offering contractors benefits, and what benefits they most value, among other items.

The ABC responded with a five-point plan to improve benefit access for contractors that seeks to build on the existing benefits system: “We believe that what is needed is not an overhaul of the system but rather specific fine-tuning of the excellent framework that Congress has already established.”

The council’s response included suggestions such as making better use of pooled employer plans, which were introduced for defined contribution plans in the SECURE Act 2.0 of 2022, and promoting policies to make individual 401(k) savings more attractive to independent or gig workers.

PEP Push

The first point that the ABC raised was leveraging pooled employer plans, which could be used by companies who hire contractors to organize them into a single plan. By using a PEP, which is administered by a pooled plan provider as opposed to the firm itself, a company could make contributions to the PEP by way of payroll deductions while not carrying the burden of the being the plan sponsor.

In order to maintain legal certainty, Congress may have to clarify that such PEP arrangements would not compromise the contractor status of the workers involved.

The ABC also suggested that PEP rules be revised to be more palatable to employers with independent contractors. PEPs typically require an audit from an independent qualified public accountant once they reach 100 participants; the ABC recommends that a PEP whose participating employers have less than 100 employees be exempted from this. Since contractors are considered businesses with a single employee, a PEP could conceivably have any number of contractors in it and still not require a costly audit.

Improving the System

In terms of individual saving options, the ABC noted that independent contractors can already make a 401(k) for themselves via a SIMPLE individual retirement account or a simplified employee pension plan. But in reality, many contractors are not aware of this or do not have the wherewithal to make one, the organization noted. Congress would have to push for agencies to promote these programs, as well as PEPs, on their websites and in other venues to increase uptake.

The ABC also proposed a similar change for contractors participating in a defined contribution group. DCGs allow plans with certain identical features to file a consolidated Form 5500. The ABC recommended that independent workers be allowed to file a consolidated audit as well.

The ABC’s last point was that Congress should increase the threshold at which a business owner is not required to file a Form 5500. Under current rules, a business owner can file a Form 5500-EZ, an abbreviated Form 5500, if the plan only covers the owner and their spouse.

But if the balance of the plan is $250,000 or less, the business owner does not need to file the form. The ABC wrote that this limit was set in 2007, but with inflation, it should now be about $375,000, a threshold that would permit more contractors to avoid filing if they chose to sponsor their own personal plan. The ABC recommended that Congress change the threshold to align with the current market.

Cassidy’s office, which will be reviewing responses, has not yet disclosed other responses it received.