Now that the presidency is settled, we have a better sense of how Congressional bills could change the retirement plan landscape.
Post-Election Impact on Employer Provided Retirement Plans
With the presidential election over, and with virtually no change to the Senate or House, let’s revisit provisions tucked into legislative bills that could impact benefit programs and employers. While some of these bills are still working their way through the legislative process, now that the presidency is settled, we have a better sense of how these bills could change the retirement plan landscape.
Mandatory retirement
The Automatic IRA Act of 2012 (H.R. 4049) is an existing bill working its way through Congress. If it is passed and signed into law, it would significantly impact individuals and employers, as the bill would require individuals to save for retirement through automatic individual retirement arrangements (IRAs).
In proposed form, employers with 10 or more employees that do not provide an employer sponsored retirement plan would need to make an automatic IRA arrangement available for each employee. Governments, churches, or a convention or association of churches would be exempt. Under the proposed bill, these arrangements would not be treated as an employee pension benefit plan or pension plan as defined by the Employee Retirement Income Security Act (ERISA) if certain requirements are met.
There is a lot of skepticism as to whether this bill will become reality. However, if passed, individuals will be required to save for retirement, which on the heels of health care reform, may compound the impact to an individual’s household income.
Reduce 401(k) plan leakage
The Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, or the “SEAL” Act, is a proposed bill intended to help ensure retirement savings in 401(k) plans extend throughout a participant’s retirement, by changing the participant loan and hardship withdrawal rules. Currently there are two Senate bills (S. 1020 and S. 1121) and one House bill (H.R. 3287) winding through Congressional committees.
The SEAL Act proposes to allow terminated participants with an existing participant loan to contribute the outstanding loan amount to an individual retirement arrangement (IRA) by the time they file their taxes for that year (versus defaulting on the loan and incurring tax penalties, or having to immediately repay the loan balance upon termination of employment). This bill would also reduce the number of loans a plan participant may take at one time to three, instead of allowing employers to make this determination.
In addition, it would eliminate the six month deferral rule pertaining to hardship distributions and allow a participant to continue to make elective deferrals to a 401(k) plan following a hardship. Finally, it would ban any products that promote leakage of retirement funds, such as a 401(k) debit card.
Retirement plan contribution cap
The Moment of Truth, a report published by the National Commission on Fiscal Responsibility and Reform in December 2010, provides recommendations to Congress on several items that address the economic health of America. One of the Commission’s recommendations would impact retirement plan savings and an employer’s tax deduction, by proposing a cap on retirement plan contributions to the lower of $20,000 or 20 percent of income.
Employer-provided health care and retirement plans make up a significant percentage of tax expenditures. Cutting tax expenditures is a means for Congress to address reducing the deficit.
Changes impacting single employer defined benefit plans
The Moving Ahead for Progress in the 21st Century Act, otherwise known as MAP-21, was signed into law by President Obama on July 6, 2012. While mainly a transportation bill to help the Federal Motor Carrier Safety Administration, it includes significant changes for single employer defined benefit plans. These changes include:
- Modified valuation interest rates to be used in calculating the minimum required contribution
- Increases to the Pension Benefit Guaranty Corporation (PBGC) premiums
- Additional disclosure requirements for the annual funding notice
- The ability to transfer excess pension assets to retiree health (for plans that are at least 125 percent funded)
There are many factors a plan sponsor of a single defined benefit plan should already be aware of, as the new rules are effective for the 2012 plan year. As part of the transportation bill that was intended by Congress to increase revenue, plan sponsors need to understand and evaluate the impact the changes have to their funding liability in both the short- and long-term, and the impact to their tax deduction.
Common themes in bills
While it is hard to know if any of these bills, or provisions within them, will have enough political support to thrust them into law, the common themes within these bills are to expand personal retirement savings, decrease tax expenditures, and decrease the deficit. CliftonLarsonAllen is monitoring these bills to understand the impact in the event they get passed. Stay tuned.
Kelly Davis, Employee Benefit Plans Manager
kelly.davis@cliftonlarsonallen.com or 480-615-2383