Retirement And Beyond: Congress Considers Changes To The Way Americans Save

by: AllianceBernstein (AB)

By Karen W. Scheffler

With the midterm elections looming and an executive order that underscores President Trump's interest in how Americans save for retirement, it's increasingly possible that Congress could approve substantive retirement reform in the coming weeks.

The House of Representatives passed the Family Savings Act of 2018 (FSA) on September 28 as part of a broader push that some are calling Tax Reform 2.0. While the FSA contains many provisions that are also in the Retirement Enhancement and Savings Act (RESA), which was first introduced in the Senate in 2016 and reintroduced in March 2018, it also contains some new provisions. RESA is unlikely to pass in its current form, but now that the FSA has been passed by the House, the House and Senate will likely try to reconcile the differences between the two bills and pass something that satisfies both chambers.

Momentum for change is building outside Capitol Hill, too. The US Department of Labor, responding to the president's executive order, submitted a proposed rule to the Office of Management and Budget for review that would expand access to multiple employer retirement plans. The public will get to see and comment on the proposal after OMB approves it.

With all this momentum building, now is the time for plan sponsors and financial advisors to learn how these changes could affect the issues they care about most.

Clearing the Way for Lifetime Income Options

Both the FSA and RESA contain provisions to encourage more plan sponsors to offer employees the option to invest in products that will convert their retirement savings into lifelong monthly payments. Currently, employees who choose a plan with a lifetime income stream may have to pay fees, taxes, or penalties if their employer stops offering the investment. Both the FSA and RESA would allow certain defined contribution (DC) plans to make trustee-to-trustee transfers to an IRA or another employer-sponsored plan to avoid these payments. After an amendment to the FSA shortly before passage, both bills also provide a safe harbor for employers in choosing an annuity provider, thus shielding them from liability as long as they follow certain procedures.

Unlike the FSA, RESA would also require DC plans to tell participants how much they could expect to receive in monthly payments at retirement based on their current balance.

Good Things Come in Multiples… Multiple Employer Plans (MEPs), That Is

Both RESA and the FSA contain provisions that would make it easier for small businesses to join forces and offer a common DC plan.

Both bills would remove the requirement that small businesses in a so-called open MEP have a relationship to one another, such as through a trade association. Additionally, these plans would no longer be subject to the "one bad apple" rule, a major disincentive that calls for an entire plan to be penalized if one member company breaks federal rules. Unrelated businesses could offer a new type of MEP called a pooled employer plan (PEP). Annual reporting would be simplified for PEPs that cover fewer than 1,000 participants, but only if no single employer in the plan has 100 or more participants covered by the plan.

One major difference between the two bills is the start date: 2020 for the FSA and 2022 for RESA.

Required Minimum Distributions

Currently, participants are required to start making withdrawals from their retirement plans and IRAs at the age of 70 1/2. The FSA would exempt people with less than $50,000 saved across all their retirement accounts from these required minimum distributions.

RESA (but not the FSA) includes a provision related to required distributions that would offset some of the cost of the bill. With several exceptions, including spouses and minor children (under the age of 18), those who inherit retirement accounts worth more than $450,000 would have to withdraw the money within five years of the death of the account holder.

Simpler Nondiscrimination Rules

Both RESA and the FSA would provide relief from nondiscrimination rules for frozen defined benefit plans.

Safe Harbor 401(k)s

Both bills eliminate the safe harbor notice requirement. They also make it easier for sponsors to make certain changes to their plans.

Relaxed IRA Contribution Rules

Both RESA and the FSA would allow older workers to continue contributing to their IRAs after turning 70 1/2. Additionally, non-tuition stipends and fellowship payments would be treated as compensation for IRA purposes, helping graduate and postdoctoral students save for retirement.

Beyond Retirement: Unique Features of the FSA

Universal savings account: Recognizing that people often need to draw upon their nest eggs before they retire, the FSA provides for the creation of universal savings accounts. Participants could contribute up to $2,500 in after-tax income to these accounts annually and withdraw money from them tax-free at any time. The investment gains on these accounts would also not be taxed.

New child allowance: The FSA would also allow withdrawals of up to $7,500 from retirement accounts without early-withdrawal penalties while a woman is pregnant with a child or within one year of the birth or adoption of a child.

529 expansion: The FSA would green-light tax-free withdrawals from 529 plans to pay for expenses related to apprenticeships or homeschooling, private elementary or secondary school tuition, or student loan bills.

Caps and Credits: Unique Features of RESA

Removal of automatic-deduction cap: RESA would remove a 10% cap on automatic deductions from employees' paychecks after the first year they participate in the plan.

Increase in small-business tax credit: RESA offers a larger tax credit for small businesses (fewer than 100 employees) that start a retirement plan.

These are some of the major provisions of the FSA and RESA, but negotiations are ongoing and the details may change. One thing that's clear, however, is that retirement and savings matters are top of mind in Washington and should also be top of mind for plan sponsors and financial advisors.