Washington is looking to make changes to the nation’s retirement system. Earlier this year, the bipartisan Retirement Enhancement and Savings Act (RESA) was introduced in the House and Senate. Then President Trump issued an Executive Order on August 31, directing the Departments of Labor and Treasury to look at specific retirement plan issues. Finally, House Ways and Means Committee Chairman Kevin Brady (R-TX) rolled out the House Republicans’ Tax Reform 2.0 package on September 10.
Chairman Brady hopes Tax Reform 2.0 will build on the Tax Cuts and Jobs Act. H.R. 6757 – The Family Savings Act of 2018 (Family Savings Act) is part of the Tax Reform 2.0 package. Key aspects of the Family Savings Act include the following proposed defined contribution retirement plan provisions:
- Multiple Employer Plans — The Family Savings Act would loosen the commonality rule and make favorable changes to the multiple employer plan (MEP) rules, to encourage smaller employers to adopt retirement plans in MEP form.
- Comment: Several bills addressing MEPs, including RESA, have been introduced in Congress in recent years. Changes in the MEP rules enjoy bipartisan support in Congress. Furthermore, President Trump’s Executive Order also touched on MEPs. Finally, industry trade groups have long favored loosening the MEP rules, making MEP reform a popular idea.
- Safe Harbor Nonelective Plans — The Family Savings Act would eliminate the notice requirement for plans that provide for safe harbor nonelective contributions. In addition, the act would allow for greater employer flexibility to adopt safe harbor nonelective contribution plans.
- Comment: RESA contains similar provisions.
- Later Adoption of Start-Up Plans — Under current law, a new retirement plan must be adopted before the last day of the plan year. The Family Savings Act would extend this deadline to the due date for filing the employer’s tax return. In other words, an employer would be able to adopt a new plan after the last day of the plan year.
- Comment: This is also a broadly popular idea borrowed from RESA.
- Eliminate Age 70-1/2 Prohibition on Traditional Pre-Tax IRA Contributions — Currently, a worker is not permitted to make a pre-tax traditional IRA contribution after attaining age 70-1/2. The Family Savings Act would repeal this age 70-1/2 rule.
- Comment: This provision is similar to RESA.
- RMD Distribution Rules — Workers would be exempt from the required minimum distribution (“RMD”) rules if they have $50,000 or less in retirement savings.
- Comment: Congress and the President have shown interest in tweaking the RMD rules to allow workers to receive smaller RMD payments and/or to receive no RMD payments at all.
While many Congressional watchers see enactment of Tax Reform 2.0 as a bit of a long-shot due to partisan politics, RESA, on the other hand enjoys bipartisan support and might be more likely to pass at some time. In addition to the above-discussed provisions, RESA would make changes that would encourage employers to implement automatic contribution features, and to increase the tax credit for a small employer wanting to adopt a retirement plan.
Union Bank & Trust’s Retirement Plan Services team will continue to keep you updated on these bills and other significant developments relating to retirement plans.