Intro: Welcome to the EY DC Dynamics podcast series, where we discuss the latest legislative and regulatory insights covering tax and health care policy and what to expect in Washington.
Ray Beaman: Welcome to another edition of DC Dynamics. I’m your host, Ray Beaman from Washington Council EY. Today we’re returning from a brief hiatus, and we’re going to take a little detour down the road of pension and retirement policy, which is an issue that is always simmering in the background in Congress and sometimes bubbles up to the forefront of the legislative agenda. And now is one of those times. To put things into context, as part of a year-end package in December of 2019, Congress passed the Secure Act, which is short for setting every community up for retirement enhancement. Don’t worry, there’s not going to be a quiz on this later.
That legislation included provisions to help smaller employers band together in multiple employer plans and provisions on auto enrollment, annuities, and required distributions. So, fast forward two years and the House has just passed, you guessed it, Secure 2.0, which technically goes by the name Securing a Strong Retirement Act. The bill was approved by Ways and Means back in May of 2021, and included an expansion of auto enrollment and auto escalation by requiring all newly created plans to incorporate both features, as well as an increase in the so-called catch-up contribution limit for individuals aged 62 to 64. And that’s among other provisions. Senators Cardin and Portman sponsor a similar bill, the Retirement Security and Savings Act, which will be reflected in any final package that actually gets enacted. And just for some historical perspective, their partnership on this issue goes back more than 20 years to when, as House and Ways and Means Committee members, they provided the retirement piece of the 2001 tax cut bill known as EGTRRA.
Now, pension issues fall within the jurisdiction of both the tax writing committees and the labor committees in Congress. So there are more than a few cooks in this kitchen. The House Education and Labor Committee approved Retirement Improvement and Savings Enhancement, or Rise Act, was folded into the House passed bill, including establishing a Labor Department retirement lost and found database to help workers locate their retirement savings as they move from job to job. Interestingly, retirement issues can be bipartisan, which is bucking the typical pattern of partisan gridlock in Congress these days. And this bill passed 414 to 5, which doesn’t often happen these days. In addition to the Finance Committee, the Senate Help Committee held a hearing on retirement issues this week, and Chairman Murray said she will be releasing a bill soon with ranking member Burr. So, joining me now to provide some of the details is my colleague, Dave Kashgarian, who handles retirement issues at Washington Counsel EY and knows this stuff as well as anyone in DC, definitely better than I do. So, Dave, at a high level, these provisions are meant to expand coverage, help people find lost plans and more. Is that right?
Dave: That’s right, Ray. The pending legislation in Congress, known as Secure 2.0 as you said, includes several provisions intended to promote the creation of plans by small businesses and encourage their employees to participate. Some key features include increases in the tax credit for small businesses that create a new plan, and making those tax credits available to companies that join a PEP. That’s a pooled employer plan. Or a MEP, a multiple employer plan. There are new auto enrollment safe harbor provisions. There are expansions of the Saver’s credit that rewards low and moderate income workers who contribute to their retirement savings. The bills would raise the age at which individuals must begin to take distributions from retirement savings accounts from 72, which it was increased to in this first secure bill to 75, and exempt the individuals whose aggregate retirement savings do not exceed $100,000 from the required minimum distribution rules at all. The bill would provide an increase in the catch-up contribution from the current $6,000 to $10,000, but allow employers to make matching contributions to their retirement plan based on an employee’s payments on a student loan, and expand retirement plan eligibility for part time employees by lowering the current three years of working at least 500 hours to just two years. Would create a retirement lost and found registry to help individuals locate their retirement savings accounts from former jobs, and it would require plans to send at least one benefit statement per year in paper form rather than electronically.
Ray: Wow, that’s quite a list of retirement policy, Dave. Some of those provisions sound like they might carry a revenue cost. Do these bills include measures to offset these revenue losses?
Dave: Yes, Ray, several of these provisions would carry significant revenue costs. The JCT scored the Ways and Means bill provisions as reducing revenues by $36 billion. The bill would offset those costs with two principal proposals. One would require that catch up contributions, those made by individuals over age 50 who have contributed the maximum amount to the 401(k) plan, must be so-called Roth contributions. The other would allow, but not require, employers who make matching contributions to their employees’ contributions in Roth form. Employers are currently barred from making matching contributions as Roth’s.
And just by way of refreshing everyone’s recollection, Roth account contributions are an after-tax dollars, but distributions are tax free, as opposed to the case with traditional 401(k)s or IRAs, where the contributions roll in tax free, but distributions are taxable. There actually may be a quiz about that. And, by the way, some folks have been critical of the use of the timing difference for the taxation of Roth accounts to pay for this bill since it is just a timing difference.
Another possible revenue raiser included in the Cardin-Portman bill in the Senate, but not the House bills, would change the rules governing the ability of employers to transfer funds from Overfunded defined benefit pension plans to help pay retiree health benefits. Under current law, plans must maintain a funded level of at least 120% to make such transfers, and that authority expires in 2025. The Cardin-Portman bill would extend that authority through 2031 and would, in limited circumstances, allow plans with funding levels above 110%, instead of the current 120%, to transfer funds.
Ray: So Dave, we talked about the House passing its bill. What exactly are the next steps?
Dave: The ball is squarely in the Senate’s court. It’s a square ball. But things don’t roll so quickly in the Senate, so maybe it’ll still work.
We expect to help Committee bill to be released soon. Senate markups in the finance and Health committees on their portions of Secure 2.0 could happen in late April or early May, after Congress returns from its spring break. Final congressional approval of the legislation, though, would likely not happen until year end during the post-election lame duck session. There are no guarantees about that, but some of the longtime champions of retirement security legislation are expected to retire at the end of this Congress and will push for this legacy achievement. Senator Portman has announced that he is not seeking re-election this year, and Senator Burr said during the Help committee hearing that he will spend his remaining months in Congress trying to get something done on retirement policy.
And if the House of Representatives flips to Republican control in the November elections, as many believe is likely, Richie Neal, the Ways and Means Chairman, may retire. One thing that will not happen in this Congress, Representative Neal’s legislation to require all employers with more than five employees to provide a retirement plan. The proposal, known as Auto-IRA or Auto-K, was included in the original Build Back Better legislation in the Ways and Means Committee, but was ultimately dropped before House passage.
Ray: Now, beyond the legislative activity, Dave, I understand there are also some developments on the regulatory side?
Dave: Yeah that’s right, Ray. You’re batting a thousand, and you said you didn’t know much about this stuff.
Switching gears to the regulatory front, the retirement community is watching closely to see what the Department of Labor does with respect to several issues. Most prominently, DOL is expected to take another crack at revising the rules around the definition of fiduciary for investment advisers for participants in employer retirement plans and IRAs.
As our listeners may recall, after a painful six-year process, the Obama administration DOL’s regulatory proposal, which sought to overhaul the long standing five-part test required of fiduciaries, including a new private best interest contract requirement relating to IRAs, was struck down by the Fifth Circuit Court of Appeals, which ruled that the department had overstepped its authority.
The Trump Dol basically reinstated the five-part test along with a new prohibited transaction exemption.
The Biden administration has put the Trump proposal on hold and signaled its intention to issue new regulations. In addition to the restrictions imposed by the Fifth Circuit decision, the department must also take into consideration how any new regulation IT issues would interact with the SEC’s Reg BI, that’s Reg Best Interest, which has been in effect since June of 2020.
Another area in which DOL’s actions are being watched closely relates to environmental, social and governance, or ESG investments. The Trump administration issued rules that were seen as limiting the ability of plans to include mutual funds that emphasize ESG factors in their investment options they offer to their employees.
The Biden administration shelved the Trump rule, and in October proposed its own new rule, which is seen as clearing the path for the widespread use of ESG funds. The issue has attracted attention in Congress as well, with Democrats interested in enacting legislation supporting ESG investments. That proposal has thus far not enjoyed Republican support.
Ray: Okay, so with all those developments, legislative and regulatory, it’s important to remember the Build Back Better Act has a retirement piece as well. Are those provisions on hold right now with the rest of the bill, Dave?
Dave: Yeah. Pretty much. The BBB has passed by the House included several revenue raising provisions affecting retirement savings. So not the type of coverage expanding provisions we were just talking about. There’s no clearer outlook for the provisions than the general post BBBA reconciliation outlook, which is that Senator Manchin said that he may support a bill that splits revenue raised from both reforming the tax system and lowering prescription drug costs between deficit reduction and spending on ten-year policies, probably dealing mostly with climate change. The House passed BBB would target so-called Mega IRAs. The name Mega IRA belies the fact that the provision would apply to all defined contribution retirement savings, including 401(k)s. For individuals with retirement savings accounts in excess of $10 million, Bill would bar new contributions, not including earnings. It would also require distributions to bring the aggregate account balances of IRAs, Roth IRAs and 401(k) type accounts below the $10 million threshold.
More stringent distribution requirements would apply for individuals whose aggregate accounts exceed $20 million. The bill would require a complicated calculation of excess amounts, focused most directly on Roth accounts, designed to force distribution of sums above the $10 million and $20 million thresholds. The provisions have broad support among Democrats, but lack buy in on the Republican side, meaning that they are not likely to find a path forward outside of democratically controlled reconciliation bill.
Ray: That is some great insight, Dave. Thank you so much. And while Secure 2.0 couldn’t move with the recently enacted omnibus appropriations bill, it does seem promising for a bill to happen this year. Just in general, pensions can seem complicated with many definitions and rules, but at the heart of it is the goal of making hard work pay off down the road and helping people amass a nest egg that can sustain them through their golden years. And because Dave is such a huge fan, and aren’t we all, we’re going to quote the boss. So, take us home, Dave.
Dave: I work five days a week, girl, loading crates down on the dock. I take my hard-earned money and meet my girl down on the block. And Monday when the foreman calls time, I’ve already got Friday on my mind.
Ray: All right. And that’s all for now. Thank you, Dave. And until next time, I’m Ray Beeman. And this has been DC Dynamics.
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