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Lame Duck Retirement Package Draws Fire


With only about two weeks left in the legislative calendar, the House of Representatives is expected to approve a revised tax and retirement savings package as early as today. But can the legislation be enacted in its current form?

House Ways and Means Committee Chairman Kevin Brady (R-TX) unveiled a nearly 300-page legislative package Nov. 26 that combines a wide array of tax provisions with bipartisan retirement savings reforms. In general, the legislation is divided into two parts — the Retirement, Savings, and Other Tax Relief Act of 2018 and the Taxpayer First Act of 2018 — that contain:

  • retirement savings tax incentives and reforms;
  • extensions of various expiring tax provisions (the so-called “tax extenders”);
  • tax relief to victims of recent disasters;
  • start-up business tax incentives;
  • technical corrections to the 2017 Tax Cuts and Jobs Act; and
  • IRS administration and procedural reforms.

Retirement Reforms

The Retirement, Savings, and Other Tax Relief Act of 2018 draws heavily from the bipartisan Retirement Enhancement and Savings Act (RESA), as well as the Family Savings Act that was passed by the House in September. Key components include:

  • allowing two or more unrelated employers to join a pooled employer plan (an open MEP);
  • giving employers up until the due date of their tax return to adopt a qualified retirement plan for the prior year;
  • increasing the small employer pension plan start-up credit up to $1,500; and
  • creating a new $500 credit to encourage small employers to automatically enroll their workers into a plan.

Other provisions from the Family Savings Act include easing the required minimum distribution rules and creating a new waiver from additional tax on retirement account distributions to pay for childbirth and adoption expenses.

Notably, the broader legislation does not include the creation of a new Universal Savings Account (USA) that Chairman Brady and others had previously championed in the Family Savings Act. With a price tag of $8.6 billion over the 10-year period 2019-2028, that provision may have been viewed as a “non-starter” in the Senate.

Additionally, the Taxpayer First Act incorporates reforms to overhaul the IRS’s operations and tax administration systems that were previously approved by the House in April 2018. In general, the legislation directs the IRS to redesign the organizational structure of the agency, create an independent appeals process, revamp its enforcement procedures, and enhance tax-filing assistance programs. The legislation also includes provisions to strengthen the agency’s cybersecurity and taxpayer identity protection measures and upgrade its information technology and electronic systems.

Noteworthy Opposition

When the House was preparing to bring the legislation up for debate on Nov. 28, Ways & Means Committee Ranking Member Richie Neal (D-MA), who will replace Brady as chairman of that committee for the 116th Congress, expressed opposition to it. While noting that he supports many of the changes in the package, Neal argued that it is being pushed through as part of a “rushed and lopsided process.”

“It’s critical that the Ways & Means Committee return to regular order. And one of the priorities for the next Congress will be to have oversight hearings on this tax law. Before making any changes, we’ll examine each fix thoroughly to determine whether it is substantive or technical — that’s how I think we can avoid the problems that we are witnessing today,” Neal stated, referring to the proposed corrections to the Tax Cuts and Jobs Act.

While Neal’s opposition is not necessarily a death knell, it does not bode well for the legislation’s overall chances for enactment. Passage in the House — where only a simple majority is required — is still likely, but in the Senate the legislation will need some support from Democrats.

However, Senate Finance Committee ranking Democrat Ron Wyden (OR) expressed his displeasure with the process, along with Sen. Ben Cardin (D-MD), who believes that certain tax provisions are “problematic.”

In addition, congressional Democrats have pointed to a Congressional Budget Office estimate showing that the legislation would add nearly $55 billion to the deficit over the period 2019-2028 as further reason for opposing.

And time is short. Congress is tentatively scheduled to adjourn by Dec. 13, but it must also address a must-pass funding bill by Dec. 7 to avoid a government shutdown.
Nevertheless, the retirement components of this legislation do stand a good chance of enactment at some point — whether it’s in this session of Congress or the next one.

Retirement, Savings, and Other Tax Relief Act of 2018

Below are highlights of the key retirement-based components of the Retirement, Savings, and Other Tax Relief Act of 2018.

MEPs and PEPs. Based on provisions in the Family Savings Act, the bill would ease the commonality rules for multiple employer plans (MEPs) that have a pooled plan provider and eliminate the one-bad-apple rule.

Under the bill, employers could still form a MEP under the existing commonality rules or they could join a covered MEP as part of a pooled employer plan (PEP) that is managed by a pooled plan provider (PPP). The ERISA requirements regarding the types of employers that may participate together in a MEP would be expanded for pooled provider plans to eliminate any requirement that the employers in the plan be related to each other in some fashion.

In addition, a PPP would be required to agree to be a fiduciary of the plan and serve as the plan administrator. In the event that one employer in a PPP violates one of the tax-law requirements, the other employers would not be affected by that failure.

The bill also provides that each employer in the plan retains fiduciary responsibility for the selection and monitoring of the PPP and any other designated named fiduciary of the plan. Each employer in the plan would also retain fiduciary responsibility over the investment and management of the portion of the plan’s assets attributable to the employees of that employer, to the extent that responsibility was not otherwise delegated to another fiduciary by the PPP.

The provision would be effective for plan years beginning after Dec. 31, 2019.

Election of safe harbor 401(k) status. Employers would have until the 30thday before the close of the plan year to choose to use the non-elective contribution safe harbor for the year. In addition, employers would have until the end of the following plan year to choose this safe harbor if the employer provides an enhanced non-elective contribution of at least 4% of the employee’s compensation (instead of 3% as generally required under the safe harbor). The provision would be effective for plan years beginning after Dec. 31, 2018.

Increase in 10% cap for automatic enrollment safe harbor after first plan year. For automatic enrollment safe harbor plans, the 10% cap on the allowable automatic escalation of employee deferrals after an employee’s first plan year would be increased to a 15% cap of employee pay, effective for plan years beginning after Dec. 31, 2018.

Under current law, safe harbor provisions for employers to automatically enroll employees in DC plans up to a specified percentage of the employees’ compensation start at 3% in an employee’s first year of employment and increase by 1% every year during the subsequent three years of employment, capped at 10%. Some in Congress, including Rep. Neal, have called for removing the cap altogether.

Increase in credit limitation for small employer pension plan startup costs. The annual limit on the credit provided to small employers for starting a retirement plan for employees would be increased to the greater of $500 or the lesser of either $1,500, or $250 multiplied by the number of non-highly compensated employees of the employer who are eligible to participate in the plan.

The credit applies for up to three years. The provision would apply to tax years beginning after Dec. 31, 2018.

Small employer automatic enrollment credit. The small employer retirement plan start-up tax credit would be increased by $500 per year for employers that create new 401(k) or SIMPLE IRA plans that include automatic enrollment features. The credit would also be available to employers that add automatic enrollment features to an existing plan. The provision would apply to tax years beginning after Dec. 31, 2018.

Fiduciary safe harbor for selection of lifetime income provider. A safe harbor would be afforded to fiduciaries with respect to the selection of a lifetime income provider. Among other things, the fiduciary would be required to obtain written representations from the insurer that they are licensed to offer such contracts and that they operate under a certificate of authority from the insurance commissioner of its domiciliary state.

Lifetime income disclosure. DC plan sponsors would be required to provide a lifetime income disclosure to each participant in a manner to be specified by the Department of Labor. The disclosure would provide information about the lifetime income stream equivalent of a participant’s total account balance if he or she were to purchase an annuity.

Portability of lifetime income investments. Employers could allow current employees who have their DC accounts invested in annuities to keep that investment by rolling the annuity into an IRA if the employer discontinues the annuity as an investment option under the retirement plan. The provision would be effective for plan years beginning after Dec. 31, 2018.

Extend qualified plan adoption up to due date of tax return. If an employer adopts a qualified retirement plan after the close of a tax year but before the tax return filing due date, the employer may elect to treat the plan as having been adopted as of the last day of the tax year.

Modification of nondiscrimination rules to protect older, longer service participants. In general, the bill would provide nondiscrimination testing relief to certain employers with closed defined benefit plans, provided they give new employees a comparable benefit in a DC plan. The proposal treats a closed or frozen applicable DB plan as meeting the minimum participation requirements if the plan met the requirements as of the effective date of the plan amendment when the plan was closed or frozen.

In addition, the proposal treats make-whole contributions under a DC plan to be tested on an equivalent benefit accrual basis (without having to satisfy the threshold conditions under present law), subject to certain requirements.

Treatment of custodial accounts on termination of 403(b) plans. Treasury would be required to issue guidance ensuring that there is no disruption when an employer terminates a 403(b) plan so that its assets are contributed to a custodial account with an IRS-approved nonbank trustee.

Elective deferrals by members of the Ready Reserve of a reserve component of the Armed Forces. Contribution limits would apply separately to contributions to the Thrift Savings Plan accounts and to contributions to all other plans in which the reservist may participate, effective for plan years beginning after Dec. 31, 2018.

Additional changes. Other retirement reforms in the Retirement, Savings, and Other Tax Relief Act of 2018 would:

  • Provide for penalty-free withdrawals from retirement plans for individuals in case of birth of child or adoption
  • Prohibit qualified employer plans from making loans through credit cards and other similar arrangements
  • Clarify retirement income account rules relating to church-controlled organizations
  • Modify PBGC premiums for CSEC plans
  • Provide exemption from RMD rules for individuals with total defined contribution or IRA account balances of $50,000 or less
  • Treat certain taxable non-tuition fellowship and stipend payments as compensation for IRA purposes
  • Repeal maximum age for traditional IRA contributions