Family Savings Act Proposed to Loosen Retirement Plan Rules

Bill is part of GOP’s Tax Reform 2.0 push

Stephen Miller, CEBS By Stephen Miller, CEBS September 14, 2018

Following up on an executive order from President Donald Trump intended to boost retirement savings, House Republicans introduced the Family Savings Act, (H.R. 6757) on Sept. 10, and the 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.

The House is expected to vote on these measures by early October, although their Senate prospects are uncertain.

Like the proposed Retirement Savings and Enhancement Act (S. 2526), 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 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.

An Omnibus Bill

The Family Savings Act would also:

  • 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.
  • 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.
  • 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. However, the bill currently does not protect plan sponsors from liability if they do not "prudently select" an annuity provider, as some employer and industry groups had sought and as the prposed Retirement Enhancement Savings Act would require. "Without a safe harbor for plan sponsors, the inclusion of annuities by plan sponsors is much less likely," Dunne said.
  • Create a new universal savings account. Withdrawals could be made at any time, not just at retirement. 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 at any time for any need.
  • 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.

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

Relief for 'Frozen' Pension Plans

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.

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 (RESA) "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.

Although the Family Savings Act adopts a number of key provisions of RESA, it is paired with other House Republican Tax Reform 2.0 proposals—such as the Protecting Family and Small Business Tax Cuts Act, which makes most of the 2017 tax cuts permanent—"that are likely to face significant opposition from most Democrats," the firm's analysts noted. "Thus, the fate of comprehensive retirement policy legislation in 2018 remains uncertain."

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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