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PSCA Executive Reports

September 28, 2018

Tax Reform 2.0

On Thursday, September 13, 2018, the House Ways and Means Committee approved a package of three bills that comprise leadership’s efforts to move a Tax Reform 2.0 package before the mid-term elections. The legislation is primarily intended to make permanent the individual tax rate reductions included in the Tax Cuts and Jobs Act, which passed last year. The Joint Committee on Taxation estimates that the centerpiece of the tax reform package, making the individual cuts permanent, would cost $657 billion over 10 years.

One of the bills – the Family Savings Act (H.R. 6757, “FSA”) – contains numerous retirement provisions. Notably, the FSA differs in material ways from the Retirement Enhancement and Savings Act (S. 2526; H.R. 5282; “RESA”) currently being considered by the Senate. The key provisions of the FSA are as follows:

  • Pooled Employer Plans. The FSA would facilitate “open” MEPs by eliminating the ERISA requirement that employers participating in a single plan have a nexus of commonality unrelated to their participation in the plan. It would also direct Treasury to issue regulations to address situations in which one participating employer has a qualification failure that puts the entire plan at risk (i.e., the “one bad apple” rule). RESA includes a similar open MEPs provision, but the legislative language in the FSA is not entirely consistent with RESA as there are some technical modifications. Also, the FSA provision would be effective immediately while the RESA provision has a delayed effective date.
  • Safe Harbor 401(k)s. The FSA would relax rules regarding electing a safe harbor 401(k) plan. This provision is consistent with a provision of RESA.
  • IRAs. The FSA would allow taxable non-tuition stipends and fellowship payments to be treated as compensation for IRA purposes. It would also allow older workers to contribute to traditional IRAs by repealing the age 70 ½ maximum age for contributions. These provisions are consistent with provisions of RESA.
  • Plan Loans. The FSA would prohibit plans from making loans using credit cards. This provision is similar to a provision in RESA, but, unlike RESA, the FSA provision does not grandfather existing arrangements. 
  • Portability of Lifetime Income Options. The FSA permits certain defined contribution plans (i.e., 401(k), 403(b), or governmental 457(b) plans) to make direct trustee-to-trustee transfers to another employer-sponsored retirement plan or IRA of certain lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity where the lifetime income investment is no longer authorized to be held as an investment option under the plan. The purpose of the provision is to allow participants to keep their lifetime income investments and avoid surrender charges. This provision is consistent with a provision of RESA.
  • Terminated 403(b)s. The FSA provides a method for terminating 403(b) plans to preserve assets that cannot be distributed. Specifically, it deems certain custodial accounts to be IRAs. This provision is consistent with RESA.  
  • Church 403(b) Plans. The FSA would clarify the individuals who may be covered by 403(b) church plans. This provision is consistent with a provision of RESA.
  • Required Minimum Distribution (“RMD”) Exemption. The FSA provides an exemption from the RMD rules prior to death if an individual has $50,000 (indexed) or less of total savings in all of his/her IRAs and tax-qualified individual account retirement savings plans. 
  • Governmental Plan Pick-up Rules. The FSA would allow a contribution to a governmental plan to be treated as a pick-up contribution with respect to an employee even though the employee made an irrevocable election between two formulas with the same or different levels of employee contributions. 
  • Reservist Deferrals. The FSA would allow Ready Reservists to make contributions to both the Thrift Savings Plan and a private-sector plan subject to separate limits, including separate catch-up contribution limits. 
  • Plan Adoption Date. The FSA would allow an employer to adopt a new plan by the employer’s tax return due date. This provision is consistent with a provision of RESA.
  • Frozen Plans. The FSA would provide relief from the nondiscrimination rules for certain frozen defined benefit plans. The provision is intended to address situations where plans are frozen to new entrants but still allow benefit accruals for existing participants. As these participants progress through their careers, certain plans may fail nondiscrimination testing as the participants become more highly compensated. This provision is consistent with a provision of RESA.
  • PBGC Premium Study. The FSA would direct the Social Security Administration or another independent agency selected by the PBGC Board to study the PBGC premium structure for single-employer plans and determine, among other things, whether PBGC premium levels are sufficient and whether premiums should be adjusted based on new factors (e.g., the type of plan investments or the creditworthiness of the employer).  This provision is materially different than a provision in RESA that would reduce premiums for CSEC plans. 
  • Universal Savings Accounts. The FSA would create a new type of savings account that permits individuals to make post-tax contributions up to $2,500 (indexed) but not to exceed the individual’s compensation includible in gross income. Contributions for dependents are not permitted. Distributions can be made at any time for any purpose on a tax-free basis. However, distributions generally must be made in cash or property with a readily ascertainable value. 
  • 529 Plans.  The FSA would expand 529 plans to allow tax-free distributions for expenses for certain apprenticeship programs, homeschooling, additional elementary or secondary schools, and student loans. 
  • Child Birth or Adoption Withdrawals. The FSA would permit individuals to take penalty-free withdrawals from their IRAs and tax-qualified, individual account retirement savings plans for expenses related to the birth or adoption of a child.  The distributions could also be recontributed to eligible plans, subject to certain requirements.

Importantly, the FSA does not contain some key provisions in RESA. Specifically, the FSA would not –

  • create a fiduciary safe harbor for plan sponsors electing to include a lifetime income investment option in their plans; 
  • require participants’ annual statements to include a lifetime income disclosure (i.e., an estimate of the monthly income an individual’s account could produce in retirement);
  • limit the use of “stretch” IRAs, which was used to offset the cost of RESA;
  • eliminate the 10 percent automatic escalation cap on Qualified Automatic Contribution Arrangements (QACA); 
  • provide an enhanced tax credit for small businesses establishing new retirement savings plans; or 
  • eliminate the need for certain small businesses to file duplicate Forms 5500.

Although the Senate has indicated that it has no plans to take up the full Tax Reform 2.0 package, there is strong bipartisan interest in passing retirement legislation this year. In particular, Senate leadership is relatively confident the upper chamber can pass RESA this year, given that the bill was approved unanimously by the Senate Finance Committee in 2016. We expect the full House to pass the FSA later this month, and that will likely set the stage for negotiations between the House and Senate on a compromise package. It is possible that Congress could take up a final package in the lame duck, though that will require negotiators to move quickly to bridge the gaps between RESA and the retirement provisions in the FSA.

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