Surveys consistently report that about half of all American households are not saving enough for retirement. Lawmakers are acting to address this issue. The Retirement Enhancement and Savings Act (RESA) has been introduced in the Senate. On the House side, the Setting Every Community up for Retirement Enhancement (SECURE) Act has passed the Ways and Means committee. Both bills claim to be a step towards helping Americans fund their retirement.
Advocates call the proposed legislation the most comprehensive retirement reform since the Pension Protection Act of 2006. The Insured Retirement Institute says the bills are based on common-sense measures that will help average Americans by expanding opportunities to save for retirement in a tax-advantaged way.
What the 2019 RESA Legislation Includes
RESA failed to pass Congress last year, despite bipartisan appeal. The 2019 version of the legislation includes some significant modifications. A detailed overview breaks out the sections of the Employee Retirement Income Security Act and the Internal Revenue Code, which would impact RESA. The full text of the legislation is nearly 140 pages, but here are some of the important highlights:
Sections 101 and 102
This section increases retirement plan access for workers in small companies by authorizing broader use of multiple employer plans (MEPs). MEPs would become more attractive by eliminating compliance barriers and improving the quality of MEP service providers.
Simplifies safe harbor 401(k) plan rules. The bill permits amendments if it provides:
- a nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and
- the plan is amended no later than by the close of following plan year.
Creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE individual retirement account (IRA) plans that include automatic enrollment.
Repeals the prohibition on contributions to a traditional IRA by an individual who has reached age 70 ½.
Permits an IRA to hold shares in an S corporation that qualifies as a bank and revises the prohibited transaction rules to permit such holdings.
Permits qualified defined contribution 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. The change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.
Allows a qualified retirement plan adopted before the due date (including extensions) of the tax return for the business’ taxable year to be treated as having been adopted as of the last day of the taxable year.
Creates a new fiduciary safe harbor for selection of lifetime income providers. Fiduciaries are protected from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract.
Modifies required minimum distribution rules with respect to defined contribution plans and IRA account balances upon the death of the account owner. The account balance will be required to be distributed and included in income by the beneficiary by the end of the fifth calendar year following the year of the employee’s or IRA owner’s death. The requirement does not apply to distributions to the surviving spouse of the employee (or IRA owner).
Some lawmakers would like to see the country return to widespread pension coverage. Both RESA and SECURE encourage employers to include annuities as an option their employees can buy with their payroll retirement contributions. Retirees essentially purchase their own pensions from an annuity provider and receive that money back as a regular stream of income throughout their retirement. A retiree today could buy an annuity; however, lawmakers are concerned the fees may be high, and employees may feel they lack the knowledge to choose a good product.
Employers can offer annuities as part of their 401(k) offerings today and negotiate for a group rate that would lower fees; however, many employers don’t offer this option out of concern that offering annuities exposes them to considerable risk. They are worried that they will be on the hook for annuity payments if the annuity provider they selected for their workers goes broke. RESA and SECURE address this concern by offering a protection from this liability.
Passage of any legislation is always uncertain. Many of the provisions in these bills have been introduced in some version in earlier legislation that didn’t pass. RESA itself stalled last year despite wide support. This year could be different.
- The new legislation would allow contributions to an IRA after a worker turns age 70 ½.
- RESA provides some protection for employers who offer an annuity option to participants in the company’s retirement plan.
- The new bill would eliminate the stretch IRA, forcing beneficiaries to empty an inherited IRA by the end of the fifth calendar year following the year of the owner’s death.