Bipartisan SAVE Act Looks to Help Small Biz Retirement Plans
With just days to go before the end of the 113th Congress, two senior members of the House Ways & Means Committee have introduced a bipartisan comprehensive retirement bill.
The Small Businesses Add Value for Employees (SAVE) Act of 2014 (H.R. 5875), sponsored by Reps. Ron Kind (D-Wis.) and Dave Reichert (R-Wash.), is geared towards encouraging smaller employers to offer a retirement savings vehicle for their employees but would also make a variety of other changes to existing retirement law. The legislation contains many provisions that mirror those included by Sen. Orrin Hatch (R-Utah) in Title II of the SAFE Retirement Act (S. 1270)
. Now on to the specifics.
The bill adds a new SIMPLE 401(k) deferral-only safe harbor for small employers that is similar to the Starter 401(k) provision contained in the Hatch bill. The arrangement requires the automatic enrollment of participants and allows for elective deferrals up to $10,000 (with no catch-up contributions). Plan loans would not be permitted, and hardship distributions would only be available in extremely limited circumstances.
The SAVE Act also makes changes to an existing safe harbor for 401(k) plans while creating a new 401(k) plan automatic enrollment safe harbor. Specifically, the legislation increases the deferral percentages for the qualified automatic contribution arrangement (QACA) so that participants would be automatically enrolled in QACA at a minimum of 4% of pay, up from 3%, with automatic escalation at a rate of 1% per year capped at 15% of pay instead of the current 10%.
The new “Secure Deferral Arrangement” safe harbor would automatically enroll participants at 6% of pay and automatically escalate participants’ deferrals at a rate of 2% per year to 10% of pay. The safe harbor includes employer matching contributions for non-highly compensated employees equal to 100% on the first 1% of pay, 50% on deferrals between 1% and 6% of pay, and 25% on deferrals between 6% and 10% of pay. The legislation provides a tax credit for small employers under the arrangement, the amount of which is equal to 2% of pay for each of the employees who participate in the arrangement within the first five years of participating.
The bill would also permit the operation of so-called “open” multiple employer plans (MEPs), provided that each employer involved in the plan has less than 500 employees (with a five-year grace period). Also, the bill requires that the MEP annual report contains the name and identifying information of each employer maintaining the plan and clarifies each employer’s fiduciary responsibilities.
SIMPLE IRA Changes
The bill includes reforms to the rules relating to SIMPLE IRA plans, including:
- eliminating the current restrictions on rollovers from SIMPLE IRA plans to other retirement savings vehicles;
- allowing businesses to terminate SIMPLE IA arrangements mid-year;
- eliminating the higher tax penalty on early SIMPLE IRA distributions; and
- increasing the SIMPLE IRA contribution limits to the levels allowed under full-blown 401(k) arrangements.
The legislation creates a new “automatic deferral IRA” arrangement that allows employers to automatically enroll eligible employees (defined as any employee that makes at least $5,000 per year) into a payroll deduction IRA arrangement. The arrangement automatically enrolls participants in the plan at 3% of pay, and then automatically escalates that salary deferral at a rate of 1% per year up to a maximum of 15% of pay (as long as the amount deferred does not exceed the IRA deduction limits).
The arrangement does not require any employer contributions, but does specify administrative and notice requirements and imposes tax penalties if contributions are not remitted to the IRA accounts of the participating employees in a timely manner. The bill clarifies that this arrangement is not subject to ERISA, and also expands the small employer pension plan startup cost credit to apply it to the new “automatic deferral IRA” arrangement, making it more generous for the eligible employer plans under current law.
The bill contains a provision that allows prior year compensation to be taken into account to determine an individual’s retirement savings deduction. The bill allows a limited transfer of an unused balance contained in a flexible spending account to be rolled into a qualified retirement plan. Finally, the bill contains a provision that creates an annuity selection safe harbor in qualified plans designed to encourage lifetime income options in retirement.
Andrew Remo is the Congressional Affairs Manager at ASPPA and NAPA.