Lame Duck House Tax Proposal Includes Numerous Retirement Plan Provisions
On November 26, 2018, House Ways and Means Committee Chairman Kevin Brady (R-Texas) introduced a substantial tax package consisting of two main divisions: the Taxpayer First Act of 2018, and the Retirement, Savings, and Other Tax Relief Act of 2018. Chairman Brady released an amendment late yesterday evening that added a new provision to the tax package.
The Taxpayer First Act of 2018 would significantly modify many of the rules under the Internal Revenue Code of 1986, as amended (the “Code”). The Retirement, Savings, and Other Tax Relief Act of 2018, in addition to including several provisions related to employee benefits, extends various expiring provisions, contains disaster relief provisions (which provide relief for recent disasters such as Hurricanes Florence and Michael as well as the recent wildfires, among other disasters), includes special provisions for start-ups, and technical corrections to the Tax Cuts and Jobs Act of 2017. The legislation breaks no new ground; its provisions were included in either the Retirement Enhancement Savings Act of 2018 (“RESA”) or the Family Savings Act.
Items in the tax package include the following:
- Access to defined contribution multiple employer plans is encouraged by the elimination of the “one bad apple rule,” under which a failure by one participating employer could adversely affect the tax-qualified status of other participating plans. The Department of Labor (“DOL”) could not address this in its recently issued proposed regulations because it falls under Internal Revenue Service (“IRS”) purview. The arrangements are referred to as pooled employer plans and the pooled employer plan provider would be the plan administrator and named fiduciary for each of the participating plans. The IRS would provide a model plan document for pooled employer plans. While participating employers would have limited fiduciary obligations, the proposed legislation explicitly states that they would have the fiduciary obligation to prudently select and monitor the pooled service provider.
- With respect to safe harbor 401(k) plans, the tax package permits amendments to provide for non-elective contributions at any time before the 30th day prior to the close of the plan year. Amendments after that time would be permitted if the amendments: (i) provide for a non-elective contribution of at least four percent of compensation (rather than at least three percent) for all eligible employees for that plan year; and (ii) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of the following plan year. This provision would apply to plan years beginning after December 31, 2018.
- Certain taxable stipends and non-tuition fellowship payments received by graduate and postdoctoral students would be treated as compensation for IRA contribution purposes, which would be effective for taxable years beginning after December 31, 2018.
- Repeal of the prohibition on contributions to a traditional IRA by an individual who has attained age 70-1/2, which would apply to contributions made for taxable years beginning after December 31, 2018.
- Prohibit the distribution of plan loans through credit cards or similar arrangements, effective for loans made after the date of enactment.
- Permit qualified defined contribution plans, 403(b) plans, and governmental 403(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. This provision would apply to plan years beginning after December 31, 2018.
- Amounts held by IRS-approved non-bank trustees upon termination of a 403(b) plan are deemed to be an IRA or Roth IRA. This provision would apply to terminations occurring after December 31, 2018.
- Increase the 10% cap for automatic enrollment safe harbor contributions to 15% after the first plan year. This increase would be effective for plan years beginning after December 31, 2018.
- Increase the credit for small employer pension plan startup costs by changing the flat dollar amount limit to the greater of: (i) $500, or (ii) the lesser of (x) $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or (y) $1,500. As a result, if at least six or more non-highly compensated employees are eligible to participate in the plan, the credit will be $1,500. The credit is available for up to three years. This credit increase would be effective for taxable years beginning after December 31, 2018.
- Creation of a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) and SIMPLE IRA plans that include automatic enrollment. This credit would be in addition to the plan startup credit and would be available for three years. The credit is available not only to new plans, but also to employers that convert an existing plan to an automatic enrollment design. The new credit would apply to taxable years beginning after December 31, 2018.
- Creation of an exemption from the Code’s required minimum distribution requirements for individuals with account balances of $50,000 or less (as indexed) under all eligible retirement plans. This provision would apply to distributions required to be made in calendar years beginning more than 120 days after the date of enactment.
- Extend the time period for adopting a new plan from to the employer’s due date for filing its tax return (including extensions) for the year. This provision would apply to plans adopted after taxable years beginning after December 31, 2018.
- Many so-called soft-frozen defined benefit pension plans, i.e., plans that have been closed to new participants but allow existing employees to continue to accrue benefits, have difficulty satisfying the applicable nondiscrimination requirements simply as a result of attrition. The IRS has issued proposed regulations to address this issue, but has not yet issued final regulations. The legislation would modify the nondiscrimination testing rules to make it easier for these plans to continue to satisfy the applicable nondiscrimination tests.
- Provide an optional safe harbor for fiduciaries that would satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract. Use of this safe harbor would protect the applicable fiduciary from liability for any losses that might result to a participant or beneficiary due to an insurer’s future inability to satisfy its financial obligations under the terms of the contract.
- Require benefit statements to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period. The disclosure would illustrate the monthly payments that the individual 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 his or her spouse and a single life annuity. The DOL would develop a model disclosure.
- Penalty-free distribution, not to exceed $7,500, could be made from retirement accounts for individuals in the event of the birth or adoption of a child. The amount distributed could also be repaid to the plan. This provision would apply to distributions made after December 31, 2018.
- Chairman Brady’s amendment to the tax package proposes a retroactive repeal of Code Section 512(a)(7) which provided for an increase in unrelated business taxable income for qualified transportation fringe benefits.
The package will likely be brought to a vote before the lame duck session ends on December 13th. There appears to be bipartisan support for most of the employee benefits provisions. However, because this is omnibus legislation, it is difficult to predict the likelihood of its passage before Congress adjourns, particularly since it will require 60 votes for the legislation to be enacted by the Senate. If the legislation is not enacted during the lame duck session, some type of bipartisan employee benefit legislation will likely be introduced in the next Congress.