The Senate Math That Could Block SECURE Act

Senate floor time is at a premium ahead of the 2020 presidential election—so much so that even legislation that passed the House with a near-unanimous bipartisan vote is not guaranteed to become law.

In his position as vice president of strategic communications for the Insured Retirement Institute (IRI), Dan Zielinski spends a lot of time tracking the happenings in Congress.

In recent months, Zielinski has been closely following the progress of the Setting Every Community Up for Retirement Enhancement Act, commonly referred to as the “SECURE Act.” That bill passed the House last month with a practically unanimous vote, and at the time some analysts said they expected very quick Senate passage, perhaps within just a week or two.

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As it turns out, those expectations were overly optimistic, and today the SECURE Act is stalled thanks to several Republican senators, among them Texas’ Ted Cruz and Pennsylvania’s Pat Toomey, placing what are called “holds” on the Senate leadership’s resolution to pass the bill under “unanimous consent.”

Senate mechanics are inherently complicated, but in basic terms, a bill can be passed without the usual process of debate and amendment if the full Senate, with no exceptions, agrees to pass the bill with unanimous consent. All it takes is one Senator to force the bill into the normal route of committee consideration and a full schedule of floor debates and votes.

According to what Zielinski has heard in the halls of the Capitol, Senator Cruz is probably the biggest roadblock to the SECURE Act being passed under unanimous consent. Among other issues, it seems that Senator Cruz is refusing to support the final version of the House bill because it no longer includes a provision that would allow people to use tax-advantaged savings in 529 college savings account to pay for home school expenses.

“We all had our hopes up that this would pass very quickly, but Senator Cruz threw in a hold,” Zielinski says. “We also heard of another Senator, Pat Toomey of Pennsylvania, who may also have put a hold on this, though his rationale has not been made clear as to why. My colleagues will be meeting with his staff in the coming weeks to try to gain more insight on all of this.”

Though he remains optimistic, Zielinski says the path ahead for the SECURE Act is far from clear.

“At this point, Senate floor time is at a real premium,” he explains. “When you have a deep partisan divide in the Senate, the side in the minority tends to want to slow things down as much as possible. This Senate, under majority leader Mitch McConnell, has been very focused on judicial appointments. And even though they have technically lifted the filibuster in that area, the Democrats are still afforded significant debate time for each appointment, something up to like 30 hours. That eats up a lot of the legislative days.”

This fact is why there was great interest in having the Senate do the SECURE Act consideration under unanimous consent.

“But as the name implies, as soon as one person objects, you don’t have unanimous consent anymore,” Zielinski says. “That’s where we are right now. The bill has great support, but it would have to go through regular order. That would mean the bill would have to be scheduled for floor debate, and, remember, at that point Senator Cruz could then debate it to great length. Even if he doesn’t want to do this, there is the potential for amendments, and Senator Cruz would offer some I think. The last thing the Senate wants to do is change the bill and require the House to vote again.”

What Zielinski and others have heard from Senator McConnell’s office is that leadership is working on trying to find a solution to this situation that will get the holds lifted.

“We don’t know what these are, but we imagine it’s something like, ‘If you drop your hold on this bill you can have a chance to address your issues through amendments to a must-pass, upcoming bill.’ We can only speculate at this point, but that’s probably what a solution would come down to, just given the way these things can go,” Zielinski says. “In the end, we do think that the senators with holds will want to go home and talk about this success. Right now we’re in a waiting game that nobody really saw coming, so there weren’t really any contingency plans in place.”

Potentially important to the fate of the SECURE Act is that the legislative session is quickly moving towards the August break, and after that, the presidential election year will already be looming. Furthermore, towards the end of the year, Congress will have to address the federal budget and the debt ceiling, not to mention the ongoing issues at the border. Will the SECURE Act be able to hold Senators’ attention?

According to David Levine, principal at Groom Law Group, there are “lots of different efforts being made in Congress to get these holds lifted,” but it’s not clear at this point that these will be successful.

“It seems that the majority leader is very focused on other issues, so unless these holds come off, the SECURE Act is not likely to come to the floor at this stage,” Levine suggests. “It’s an evolving landscape. Whenever a bill sits, there can be a myriad of reasons, but the longer it waits, the more challenging it becomes to advance, because of the pipeline of other priorities. There’s a lot of effort going on still to try and move this, so there’s still some room for optimism.”

Like Zielinski, Levine says the lack of floor time could prevent SECURE Act’s passage this year, even though the bill has so much support and would clearly pass should a vote actually occur.

“For all the talk about the Senate changing its norms and traditions in recent years, it’s still an institution where one or two members can really slow things down,” Levine says. “Something else to consider is the question of what could happen if SECURE Act fails. Might some of the other retirement-focused legislation jump over the SECURE Act? Right now the train tracks are backed up a little bit and it could come out in a few different ways.”

Among the provisions of the SECURE Act that are potentially most significant for plan sponsors are those that would allow unrelated plan sponsors to band together in pooled employer plans, otherwise known as “open” multiple employer plans (MEPs). Additionally, the bill would change the age participants have to start taking required minimum distributions to 72 and provide a new safe harbor for plan sponsors to select a lifetime income provider in order to offer annuities within their retirement plan.

Not immediately, but over time, with passage of open MEP legislation, experts say plan sponsors would see a significant change in service delivery. Their plan advisers will have to consider different distribution paths while plan providers will experience both innovation and disintermediation.

At the same time, while a variety of in-plan income options have been available for some time, in-plan guaranteed lifetime income solutions are not being used as much as they could, industry experts agree. Fewer than half of plan sponsors offer a retirement income solution as part of their defined contribution plan—typically a 401(k)—and only one-fifth of those offer a guaranteed income product, Prudential says. Other survey data shows sponsors are particularly concerned about the prospect of an annuity provider losing solvency in the future after participant assets have been annuitized—and that the plan sponsor could then again become liable for paying the promised benefit to participants.

Self-Correcting the Inevitable Mistakes

Even the most informed and dedicated retirement plan fiduciaries sometimes miss the target. The good news is, many mistakes can be fixed.

Lisa Tavares, employee benefits and executive compensation partner at Venable LLP and former attorney with the IRS Office of Chief Counsel, regularly assists clients with various self-correction programs, such as the IRS Employee Plans Compliance Resolution System (EPCRS) and the Department of Labor (DOL) Voluntary Compliance Program (VCP).

Looking back over the course of her career, Tavares says, the expectations put on retirement plan fiduciaries have radically evolved from the perspective of regulators, courts and employees. Unfortunately, many employers and even some service providers still assume that plan fiduciaries will be given the benefit of the doubt when their actions are called into question—so long as there is no evidence of willful wrongdoing or corruption.

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“There used to be a general understanding that fiduciaries had the last word, but in the last decade, this has changed,” Tavares warns.

Apart from the role of activist litigators and participants, regulators are also eager to ask questions about fiduciaries’ decisions and processes.

“The environment has caused employers of all types to be worried about litigation and regulatory sanctions, even when they are fully confident that they are running a generous and compliant retirement program,” Tavares says.

The best tip she can give fiduciaries in such an environment is to document their deliberations and their decision process. Practically, this often means fleshing out retirement plan committee minutes to better reflect what fiduciaries have decided and why.

“The notes have to be more than just stating that a fund change has happened,” Tavares says. “In this environment, you want to have a defensive strategy designed up front so that you can have a paper trail that can support you in the future, both in the event of employee inquiry and also in the case if there is litigation or an IRS or DOL investigation.”

Self-Correction Can Solve Common Problems 

Broadly speaking, Tavares says, the most common issues she comes across in her ERISA practice have to do with the untimely remittance of deferrals. When discovered, such issues tend to be minor—unless the issue has continued unnoticed for years—and, as such, they can be effectively and efficiently self-corrected.

Besides deferral problems, enrollment errors are common, as are mistakes made in the vesting of participants’ accounts. Frequently, an incorrect definition of compensation is being used, resulting in excessive or deficient deferrals being made.

Another common problem area pops up when a small employer’s plan moves over the 100-participant threshold, Tavares says, which means the plan now must run independent financial audits. Tavares’ firm does “quite a lot of work” that comes after a plan’s first independent review raises red flags.

“We often hear from small business owners that are surprised that they paid an auditor to identify issues, but then the auditor is not be able to help them remedy the issues,” Tavares says. “This has caused a lot of unexpected grief for a lot of CEOs and CFOs running these businesses. Auditors might not even identify all the problems, either. They will tell you the problems they think you have with what they sampled, but, in fact, it’s up to the business owner to go in and certify how big of a problem this may be.”

Tavares recommends that, at a minimum, plan fiduciaries should be correcting these minor errors within the guidelines of the various self-corrections programs, even if they are not going to decide to formally enter the program.

“This is what we’ll do for some clients that come in after having gotten what is called an invitation letter from either the IRS or DOL,” Tavares says. “Such letters literally invite the plan sponsor to enter the self-corrections program. There is some debate out there whether receiving such a letter is random or if it makes an audit more likely. The jury is out on that question, but such letters always cause a great deal of unease.”

Technical Guidance from IRS and DOL

As detailed on the IRS website, many mistakes in operating retirement plans can be self-corrected without filing a form with the IRS or paying a fee. Eligible operational failures include failure to follow the terms of the plan; excluding eligible participants; not making contributions promised under the plan terms; and loan failures.

Importantly, “document failures” aren’t eligible for self-correction. A document failure occurs when a plan sponsor doesn’t have a plan document up-to-date or if the plan document doesn’t fully comply with the tax law, the IRS explains. 

Also of note, while an insignificant operational failure can be self-corrected at any time, plan fiduciaries must self-correct significant failures within a certain timeframe, as defined by a publicly posted summary chart.

IRS staff determines “significance” based on the facts and circumstances, but general factors to consider include other failures in the same period (not how many people are affected); percentage of plan assets and contributions involved; number of years it occurred; participants affected relative to the total number in the plan; participants affected relative to how many could have been affected; and whether correction was made soon after discovery.

The IRS guidance in this area emphasizes that no single factor is determinative of significance, meaning, for example, that failures are not necessarily significant just because they occur in more than one year.” The IRS states directly that its staff “will not interpret these factors to exclude small businesses.”

The IRS website offers up some examples, including the following: “The benefits of 50 of the 250 participants in Plan A are limited by the IRC Section 415(c) compensation limits, but the plan’s contributions for three of these employees nonetheless exceeded the maximum contribution limitations. The sponsor contributed $3,500,000 for the plan year, and the excess contributions totaled $4,550. This failure is insignificant because of the small ratio of the number of participants affected by the failure relative to the total number of participants who could have been affected and the amount of the failure relative to the total employer contribution to the plan for the plan year. The failure is still insignificant if the same failure occurred for three separate plan years, or if the three different participants were affected in each of the three years.”

For its part, the Department of Labor has also published helpful guidance and fact sheets about its Voluntary Fiduciary Compliance Program. According to DOL staff, “anyone who may be liable for fiduciary violations under ERISA, including employee benefit plan sponsors, officials, and parties in interest, may voluntarily apply for relief from enforcement actions, provided they comply with the criteria and satisfy the procedures outlined in the VFCP.”

Can’t Correct Through ECPRS?

Plan sponsors should also be aware of the Voluntary Closing Agreement Program (VCAP)—an IRS program that assists fiduciaries with resolving certain income or excise tax issues involving tax-deferred retirement plans established under the Internal Revenue Code that can’t be corrected through EPCRS.

A VCAP user guide published on the IRS website notes that for plans subject to Title I of ERISA, the plan sponsor should first correct a prohibited transaction using the Department of Labor’s Voluntary Fiduciary Correction Program before making a request for a closing agreement. Additionally, all actions identified in the closing agreement must be completed by the date the taxpayer signs the closing agreement.

To increase the likelihood that the IRS will enter into a voluntary closing agreement, a taxpayer should be prepared to show “willingness to furnish necessary facts and documentation to establish its tax liabilities; that the agreement is in the best interest of both the IRS and the taxpayer; that the federal government will suffer no disadvantage from entering into the closing agreement; and that any Internal Revenue Code violation or tax deficiency was unintentional.”

According to an analysis published by Marcel Weiland, an attorney with Employee Benefits Law Group focusing on IRS and ERISA issues, “any situation involving income taxes or excise taxes due to retirement plan failures that cannot be fixed in EPCRS is appropriate for a voluntary closing agreement request under VCA.”

“The failure could involve any type of retirement plan, including a qualified plan under Internal Revenue Code section 401(a), Code section 403(b) plan, Simplified Employee Pensions (SEPs) and IRAs under Code section 408(k). Code section 457(b) and Code section 457(f) plans are not eligible for VCA,” Weiland explains.

One caveat here is that a VCA request does not prevent an IRS examination of the plan or the plan sponsor. This is unlike the situation when a plan sponsor submits an application in VCP under EPCRS, Weiland notes, in which case the IRS is prevented from auditing the plan with respect to the issues contained in the VCP application for a compliance statement.

“This is not the case with VCA,” Weiland says. “If you are audited while a VCA request is pending, you can still be subject to an examination. If you are audited by the IRS, you will need to inform the IRS agent that there is a VCA request pending and the IRS may or may not exclude the issue from examination depending upon the facts and circumstances. However, the fact that you had already begun to address the correction of the issue will be a significant factor to the IRS in considering a lower audit sanction penalty amount than they may have imposed if you had not filed the VCA request.”

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