What’s Actually in the Retirement Enhancement and Savings Act of 2019?

The bipartisan leadership of the Senate Finance Committee has introduced a new version of the Retirement Enhancement and Savings Act, known as “RESA.”

Retirement reform advocates have called the legislation the most comprehensive retirement security measure proposed at the federal level since the Pension Protection Act of 2006. Among the most vocal advocates for the legislation has been the Insured Retirement Institute (IRI), which says the proposal is based on common-sense measures that will help Main Street Americans by expanding opportunities to save for retirement in a tax-advantaged and high-support setting.  

With the introduction earlier this year in the House of Representatives of a virtually identical bill, active pieces of legislation in both Senate and House once again contain many measures popular among retirement industry professionals, analysts and other stakeholders—for example increasing access to lifetime income products in defined contribution plans and allowing small employers to come together to create larger, more cost-efficient collective retirement plans.

The Senate bill is now technically called the Retirement Enhancement and Savings Act of 2019. The House version was just amended last week with additional provisions to create a new measure, the Setting Every Community Up for Retirement Enhancement Act of 2019 or “SECURE Act.”  The SECURE Act is scheduled for a House committee vote this week.

In a statement marking the introduction of the Senate Bill, Paul Richman, IRI chief government and political affairs officer, says passage of a comprehensive retirement security measure this year is “now well within reach.”

Notably, the popular and bipartisan Retirement Enhancement and Savings Act failed to pass in the last Congress—and this despite the fact that many Washington watchers said they expected the legislation to succeed based on its bipartisan appeal and the more or less universal industry agreement about the solutions included in the proposal. As the last Congress closed without any final action on RESA, industry lobbyists and consumer advocates alike bemoaned the failure, but they pledged to continue working for RESA in 2019.

According to a summary provided by the Senate, the new version of the legislation includes a few significant technical modifications. The summary suggests the most significant of these are updates to the effective dates; modifications to the exception to the required minimum distribution rules in section 501; and the deletion of section 505 (of Senate Bill 2526 of the 115th Congress), which provided for an acceleration of Pension Benefits Guaranty Corporation (PBGC) premiums. 

What’s in RESA, anyway?

The Senate’s detailed overview breaks out the sections of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC or Code) which would impact or be impacted by RESA. The full text of the legislation is nearly 140 pages, and is broken down as follows:  

Sections 101 and 102 – Addresses the potential to increase retirement plan access for workers in small companies by authorizing broader use of multiple employer plans, known as MEPs, under Section 413 of the Code and Sections 3 and 103-104 of ERISA. The legislation makes MEPS more attractive by eliminating compliance barriers to the use of MEPS and improving the quality of MEP service providers.

Section 103 – Expands retirement savings opportunities by removing the automatic enrollment/escalation safe harbor cap, under Section 401(k) of the Code. The legislation removes the cap that required automatic escalation of employee deferrals go no higher than 10% of employee pay under an automatic enrollment safe harbor plan

Section 104 – Provides for a simplification of safe harbor 401(k) plan rules, under Section 401(k) of the Code. The legislation changes the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The legislation eliminates the safe harbor notice requirement, but maintains the requirement to allow employees to make or change an election at least once per year.  The bill also permits amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year.

Section 105 – Increases credit limitation for small employer pension plan start-up costs, under Section 45E of the Code. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.

Section 106 – Creates a new small employer automatic enrollment tax credit, under a new Section 45S of the Code. The legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE individual retirement account (IRA) plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under present law and would be available for three years. The credit also would be available to employers that convert an existing plan to an automatic enrollment design.

Section 107 – Treats certain taxable non-tuition fellowship and stipend payments as compensation for IRA purposes, under Section 219 of the Code. Currently, stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions.

Section 108 – Repeals the maximum age for traditional IRA contributions, under Section 219 of the Code. The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70 1/2. 

Section 109 – Expands opportunity for IRA ownership of S Corporation bank stock, under Sections 1361 and 4975 of the Code. The legislation permits an IRA to hold shares in an S corporation that qualifies as a bank, and revises the prohibited transaction rules to permit such holdings. 

Section 110 – Prohibits qualified employer plans from making loans through credit cards and other similar arrangements, under Section 72(p) of the Code. New limitations on existing arrangements include disqualification of transactions of $1,000 or less or transactions with or on the premises of a liquor store, casino, gaming establishment or adult-entertainment establishment. The change ensures that plan loans are not used for routine or small purchases, thereby preserving retirement savings.

Section 111 – Addresses the portability of lifetime income options, under Sections 401(a), 403(b) and 457(d) of the Code. The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans, to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.

Section 112 – Addresses the treatment of custodial accounts on termination of Section 403(b) plans, per Section 403(b) of the Code. No later than six months after enactment, the Treasury Department is required to issue guidance that permits an employer that terminates a 403(b) plan to distribute the account assets in kind to the new custodial account of the participant or beneficiary.  This change provides a mechanism for the termination of a section 403(b) plan in a manner that preserves the assets that cannot otherwise be distributed, such as annuity contracts or mutual funds held in the participant’s name, in a tax-favored retirement savings vehicle.

Section 113 – Clarifies retirement income account rules relating to church-controlled organizations, under Section 403(b)(9) of the Code. The legislation clarifies the individuals who may be covered by plans maintained by church controlled organizations. Covered individuals include duly ordained, commissioned, or licensed ministers, regardless of the source of compensation; employees of a tax-exempt organization, controlled by or associated with a church or a convention or association of churches; and certain employees after separation from service with a church, a convention or association of churches, or an organization described above.

Section 201 – Establishes that plans adopted by the filing due date for a given year may be treated as being in effect as of the close of the year, under Section 401(b) of the Code. The legislation permits a business to treat a qualified retirement plan adopted before the due date (including extensions) of the tax return for the business’ taxable year to treat the plan as having been adopted as of the last day of the taxable year.  The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.

Section 202 – Permits combined annual reports for group of plans, under Section 6058 of the Code and Section 104 of ERISA. The legislation directs the IRS and the DOL to effectuate the filing of a consolidated Form 5500 for similar plans.  Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries.

Section 203 – Addresses disclosure rules regarding lifetime income, under Section 105 of ERISA. The legislation requires benefit statements provided to defined contribution plan participants to include a lifetime-income disclosure at least once during any 12-month period.  The disclosure will illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime-income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse as well as a single-life annuity.  The Secretary of Labor is directed to develop a model disclosure.  

Section 204 – Creates a new fiduciary safe harbor for selection of lifetime income providers, under Section 404 of ERISA. Under the bill, fiduciaries are afforded an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract. 

Section 205 – Modifies nondiscrimination rules with the stated goal of protecting older, longer-service employee participation in retirement plans, under Section 401(a)(4) of the Code. The legislation modifies the nondiscrimination rules with respect to closed defined benefit plans to permit existing participants to continue to accrue benefits.

Section 206 – Modifies PBGC premiums for cooperative and small employer charity (CSEC) plans, under Section 4006 of ERISA. In 2014, different funding rules were adopted for three types of pension plans: single-employer, multiemployer and cooperative and small employer charity plans. The legislation establishes individualized rules for calculating PBGC premiums. For CSEC plans, the legislation specifies flat-rate premiums of $19 per participant, and variable rate premiums of $9 for each $1,000 of unfunded vested benefits.

Sections 301 to 308 – Makes modifications relating to benefits of employees of United States Tax Court. These provisions modify retirement and other benefits provided to U.S. Tax Court judges.

Section 401 – Addresses benefits for volunteer firefighters and emergency medical responders, under Section 139B of the Code. The legislation reinstates for one year the exclusions for qualified state or local tax benefits and qualified reimbursement payments provided to members of qualified volunteer emergency response organizations and increases the exclusion for qualified reimbursement payments to $50 for each month during which a volunteer performs services.

Section 501 — Modifies required minimum distribution rules, under Section 401(a)(9) of the Code. The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA account balances upon the death of the account owner.  Under the legislation, the account balance is required to be distributed and included in income by the beneficiary by the end of the fifth calendar year following the year of the employee’s or IRA owner’s death.  The requirement does not apply to distributions to the surviving spouse of the employee (or IRA owner) or to beneficiaries who are disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or the child of the employee (or IRA owner) who has not reached the age of maturity. An exception to the five-year distribution deadline is provided for each beneficiary to the extent that the balance of the account they receive from the deceased employee or IRA owner does not exceed $400,000, valued as of the date of death.  The modification limits the tax benefit for bequests of retirement savings, while protecting the needs of surviving spouses and certain other beneficiaries, and continuing to encourage retirement savings by beneficiaries of such accounts.  The legislation also adds new reporting requirements on the account balances held by beneficiaries of deceased employees and IRA owners to ensure compliance.

Section 502 – Increases the penalty for failure to file, under Section 6651(a) of the Code. The legislation increases the failure to file penalty to the lesser of $400 or 100% of the amount of the tax due.  

Section 503 – Increases penalties for failure to file retirement plan returns, under Sections 6652(d), (e), and (h) of the Code. The legislation modifies the failure to file penalties for retirement plan returns.  Failure to file a Form 5500 results in a penalty of $100 per day, not to exceed $50,000. Failure to file a registration statement would incur a penalty of $2 per participant per day, not to exceed $10,000.  Failure to file a required notification of change would result in a penalty of $2 per day, not to exceed $5,000 for any failure. Failure to provide a required withholding notice would result in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. Increasing the penalties encourages the filing of timely and accurate information returns and statements and the provision of required notices, thereby improving overall tax administration.

Section 504 – Increases information sharing to administer excise taxes, under Section 6103(o) of the Code. The legislation allows the IRS to share returns and return information with the U.S. Customs and Border Protection for purposes of administering and collecting the heavy vehicle use tax.