House Passes Family Savings Act to Ease Retirement Plan Rules

Supporters seek reconciliation with the Senate's Retirement Enhancement Savings Act

Stephen Miller, CEBS By Stephen Miller, CEBS October 1, 2018
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On Sept. 27, the U.S. House of Representatives voted to approve the Family Savings Act (H.R. 6757), mostly along party lines, 240-177. The bill, which proposes to ease compliance burdens for employer-sponsored retirement plans and promote retirement savings, is similar to a measure awaiting a Senate vote.

The Society for Human Resource Management (SHRM) "appreciates Congress' acknowledgement that employers play an important role in incentivizing and encouraging employees to save for retirement," said Chatrane Birbal, SHRM's director of congressional affairs for health and employee benefits policy. House passage of the Family Savings Act "is a significant step toward enactment of much-needed comprehensive retirement security legislation," she added. "We urge the Senate to pass S. 2526, the Retirement Enhancement and Savings Act, and to reconcile it with the Family Savings Act by the end of this year."

The Family Savings Act incorporates 11 of the 33 provisions in the Senate's more-expansive bill.

The American Benefits Council, an employer's group, also praised the House vote. "We hope the Family Savings Act will be conferenced on a bipartisan basis with RESA—the Retirement Enhancement and Savings Act of 2018—following hoped-for approval of that measure by the Senate," wrote James A. Klein, the council's president.

"House and Senate lawmakers and staff are already talking about how to reconcile the Family Savings Act with RESA," said Geoff Manville, a principal in HR consultancy Mercer's law and policy advisory group. "Beyond the common provisions in the bills, it's not clear what might survive in a final package during a lame-duck session."

A legislative alert from benefits consultancy Buck noted, "Although it is unlikely that the House and Senate will finish work on a conference before the elections in November, observers seem confident that Congress will come to agreement by year end."

House Republicans introduced the Family Savings Act on Sept. 10, following up on an executive order from President Donald Trump intended to boost retirement savings. The House Ways and Means Committee advanced the measure on Sept. 13 as part of a package of bills that Republicans are calling Tax Reform 2.0.

Multiple Employer Plans: Take Two

Similar to the Senate's RESA measure, the Family Savings Act would simplify defined-contribution retirement plan rules. One way would be to make it easier for small employers in different industries to partner in a common multiple-employer plan (MEP) that would be less expensive and burdensome to administer than a single-employer plan. Currently, only "closed" MEPs are allowed; participating employers have to share common organizational relationships such as membership in an established trade association, perhaps within a specific geographic region.

The Family Savings Act "will provide small employers the ability to offer retirement savings benefits to their employees by eliminating barriers which restricts the types of employers who are permitted to band together to offer a retirement plan through a MEP," Birbal said.

The measure would also protect employers in a shared plan from Employee Retirement Income Security Act (ERISA) liability created by a single noncompliant employer, known as the "one bad apple" rule.

Trump's executive order directed the Labor and Treasury Departments to update regulations to permit "open" MEPs, in which unrelated employers can participate. However, regulators can do only so much without Congress's authorization.

"Assuming adequate consumer protections, this long-standing bipartisan 'open MEP' proposal should encourage broader coverage, although few expect it to have a dramatic impact," wrote Mark Iwry, who oversaw retirement policy at the U.S. Treasury Department from 2009 to 2016, in an opinion column for The Hill.

An Omnibus Bill

Also like the Senate's RESA bill, the Family Savings Act would:

  • Excuse employees over the age of 70½ from having to take required minimum distributions (RMDs) from qualified retirement plans, such as 401(k)s or individual retirement accounts (IRAs), if assets in their combined retirement accounts do not exceed $50,000. It also would reduce RMDs for larger account holders.  "An expanded timeframe for employees to take money out of their retirement plans makes sense, given that people will likely live longer than they have been planning," said Terry Dunne, senior vice president and managing director of retirements services at Millennium Trust Co.

    Iwry called the proposed RMD changes a "significant bright spot," noting it was part of an earlier Obama administration legislative proposal, later taken up and expanded by Ways and Means Ranking Member Richard Neal, D-Mass. The provision, Iwry wrote, "dramatically and progressively simplifies RMDs by completely exempting seniors with moderate account balances," so that "the average retiree, who needs to spend these savings to maintain a reasonable standard of living in retirement, should no longer have to worry about RMD compliance."
  • Allow families to access their 401(k) and similar accounts to pay expenses related to a new child, whether through birth or adoption, with the ability to replenish those accounts in the future. No penalties would be assessed.
  • Expand Section 529 education accounts to pay for apprenticeship fees to learn a trade, cover the cost of home schooling and help pay off student debt. Employees contribute money to Section 529 plans, often through direct payroll deposits. The provision "should increase employees' interest in using 529 plans when employers offer them," Dunne said.
  • Allow employees who have an annuity in a 401(k) or similar plan to transfer it to an IRA without paying taxes on the transferred amount. Providing greater portability for 401(k) annuity investments would also let participants avoid surrender charges and other expenses when rolling these investments into an IRA. "We support the protection and portability provisions that are in both the Family Savings Act and in RESA," said Bob Melia, executive director of the Institutional Retirement Income Council, an annuities industry think tank. "This provision preserves guaranteed benefits for Americans who invest in income products, a form of investment that is becoming more common in our defined contribution plans."
  • Provide a safe harbor for selecting annuity providers. Originally, the Family Savings Act did not protect plan sponsors from liability if they prudently select an annuity provider, as some employer and industry groups had sought and as the proposed Retirement Enhancement Savings Act would provide. "Without a safe harbor for plan sponsors, the inclusion of annuities by plan sponsors would be much less likely," Dunne said. However, before House passage, the bill was amended to clarify how plan sponsors can satisfy their fiduciary responsibilities when selecting annuity providers.

RESA also has a requirement that plan participant statements include a retirement-income projection based on the account's value if used to purchase an annuity. "The Family Savings Act does not currently have such a provision," Melia said. "Participants save more when they have a better understanding of the income they can expect in retirement," he contended.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Relief for 'Frozen' Pension Plans

In another provision similar to the Senate's RESA bill, the Family Savings Act addresses a long-standing complaint by sponsors of "frozen" defined-benefit pension plans that have been closed to new hires. It would modify pension nondiscrimination rules by permitting older, longer-service, and generally higher-paid employees to continue to accrue benefits under a plan even though younger, shorter service and generally lower paid employees are not accruing these benefits.

"We are very pleased the bill includes nondiscrimination testing reform for defined-benefit pension plans in which newly hired employees do not participate," said American Benefits Council President James Klein in a letter to Ways and Means Committee leaders.

Universal Savings Accounts

Unlike the RESA bill, the Family Savings Act would create a new universal savings account. Participants could make annual contributions up to $2,500 of after-tax money, which could be invested in bonds and equities and grow without being taxed. The money could be withdrawn tax-free at any time for any need, not just at retirement. "High-income people would universally take advantage of this new tax break—mostly without saving more—by shifting taxable savings into the new vehicle," Iwry said.

SHRM Supports Several Provisions

The Society for Human Resource Management (SHRM) supports expanding access to benefits, including retirement savings, said Chatrane Birbal, SHRM's director of congressional affairs for health and employee benefits policy.

"As lawmakers consider Tax Reform 2.0 efforts, we support, through the creation of multiple employer plans, removing barriers that prevent small businesses from offering retirement plans and increasing the age for the required minimum distributions to reflect increases in life expectancy."

SHRM also supports tax incentives to expand education assistance, Birbal said, but is "concerned that universal savings accounts, which are designed to incentivize general savings, will discourage retirement savings and potentially serve as a catalyst to lower limits on contributions to traditional 401(k)s and IRAs."

Political Outlook

The Retirement Enhancement Savings Act "has broad support in the Senate. Its leading sponsor, Senator Hatch, one of the leaders on retirement policy in the Senate, is retiring at the end of the current Congress, and passage of RESA (or something like it) before he leaves is likely to be one of his priorities," according to an online post by October Three Consulting, a retirement plan advisory firm.

"There is strong bipartisan interest in addressing retirement security in Congress, and that gives them a real chance at passing something this year," said Manville. 

SHRM will "continue to advocate to ensure that a compromise bill includes proposals that will support and encourage employer-provided retirement benefits," Birbal said.


Related SHRM Articles:

Trump Executive Order Calls for Changes to Retirement Accounts, SHRM Online, August 2018

Congress Weighs Last-Ditch Effort at Pooled 401(k)sSHRM Online, July 2018

Risk vs. Readiness: The 401(k) Plan Annuity ConundrumSHRM Online, February 2018

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