House Bill Seeks Retirement Plan ‘Simplification and Enhancement’

Alongside numerous changes, the bill seeks to eliminate the current 10% cap on automatically-increased deferral rates of employees who are automatically enrolled in a plan.

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.

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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.

Benefit Limitations for Plans Covering Puerto Rican Residents Announced

Retirement plan sponsors with participants in U.S. territories should familiarize themselves with any differences in law.

On December 15, 2017, the Puerto Rico Treasury Department issued Circular Letter of Tax Policy 17-02 formally announcing the key pension limits for 2018, as required by the Puerto Rico Internal Revenue Code of 2011. 

According to a Groom Law Group Benefits Brief, for plans qualified only in Puerto Rico (PR-only plans), the limits on elective deferrals, catch-up and after-tax contributions, and the highly compensated employee threshold all remain unchanged for 2018, while the limits on annual benefits, annual contributions, and plan compensation all increased for 2018. These limits are different than limits for U.S.-qualified or dual-qualified plans. For example, the 2018 limit on elective deferrals to PR-only plans is $15,000, rather than the $18,500 limit for U.S.-qualified and dual-qualified plans. The limit for catch-up contributions for both PR-only and dual-qualified plans is $1,500.

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Juan Luis Alonso, of counsel with Groom Law Group Chartered, in Washington, D.C., whose practice is almost exclusively related to Puerto Rico plans, explains that Puerto Rico has its own Treasury Department, and a separate Internal Revenue Code provides rules and regulations for qualified plans in Puerto Rico. “The Puerto Rico Internal Revenue Code is based on the U.S. Code, but hasn’t kept pace,” he tells PLANSPONSOR. “A couple of amendments brought the Code closer to the U.S. Code, but there are still some differences.”

Retirement plans that cover Puerto Rican residents must file with the Puerto Rico Treasury Department for qualification. According to Alonso, this includes PR-only plans and dual-qualified plans. Unlike the U.S. Treasury, the Puerto Rico Treasury Department still requires determination letters for new plans and for plans updated by amendments. In June 2016, the U.S. Internal Revenue Service eliminated the five-year remedial amendment cycles for individually designed plans and made other changes to its determination letter program.

Alonso explains that different limits and rules for plans qualified in Puerto Rico do cause some operational issues for plan sponsors. Puerto Rico plans are subject to provisions of Title I of the Employee Retirement Income Security Act (ERISA) in the same way as U.S. qualified plans, but in case of defined benefit (DB) plans, some Puerto Rico plans have received a letter allowing them not to be subject to Title IV of ERISA. “Not only does this mean they do not have to pay premiums to the PBGC [Pension Benefit Guaranty Corporation], but they may also request a refund of any premiums paid in the prior six years,” he says. Another difference that can be an issue for dual-qualified plans is that in Puerto Rico, the average deferral percentage (ADP) test is required, but there is no average contribution percentage (ACP) test requirement.

According to Alonso, as the Puerto Rico Code gets closer to the U.S. Code, it gets easier for dual-qualified plans to comply. Still, some plan sponsors choose to maintain separate plans for U.S. residents and Puerto Rican residents.

As for other U.S. territories, Alonso says the U.S. Virgin Islands have a mirror Code of the U.S. Code, so benefit limitations and ERISA fully apply, but he is not as familiar with the laws in other U.S. territories.

Retirement plan sponsors with participants in U.S. territories should familiarize themselves with any differences in law.

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