Retirement plans under Tax Reform 2.0: How the Family Savings Act could affect employers

This article originally appeared in the November/December 2018 issue of Employee Benefit Plan Review.

On September 13, 2018, the House Ways and Means Committee introduced and approved a trio of bills, referred to collectively as “Tax Reform 2.0." All three bills were approved by the House of Representatives in late September and referred to the Senate Finance Committee for consideration. One of these bills, titled the Family Savings Act of 2018 (the “FSA”), includes numerous provisions relating to employer-sponsored retirement plans.[1]

Although the FSA was approved out of committee on a party-line vote, it contains a number of provisions that have received bipartisan support in prior legislative sessions. For example, provisions relating to frozen defined benefit plans and the expansion of access to multiple employer plans were included in the Retirement Enhancement and Savings Act of 2018, a prior version of which was unanimously approved by the Senate Finance Committee in 2016. An Executive Order issued by President Trump on August 30, 2018 calls for the expansion of access to multiple employer plans as well as modification of the requirement minimum distribution requirements.

Many of the FSA’s provisions have been proposed or endorsed by the American Benefits Council. Now that the midterm elections are behind us and lawmakers are returning to work, it is quite possible that some or all of the provisions of the FSA will eventually be adopted in some form.

The following is a list of eight key provisions of the FSA that could impact employers sponsoring qualified retirement plans.

Multiple employer plans

A multiple employer plan is a retirement plan maintained by more than one unrelated employers that is intended to satisfy the qualification requirements under Section 401(a) of the Internal Revenue Code of 1986, as amended (“Code”). Currently, a certain level of “commonality” is required among unrelated employers in order to maintain a multiple employer plan. Certain qualification requirements (e.g., eligibility, exclusive and vesting) are applied as if the unrelated employers are a single employer. Other qualification requirements (e.g., coverage and nondiscrimination testing) are performed by each of the unrelated employers as if it maintained a separate plan for its employees. If any of the participating employers violates the qualification requirements, there is a risk that the multiple employer plan will be disqualified as to all employers.

Under the FSA, a multiple employer plan is a defined contribution plan that (i) is maintained by employers that have a common interest (other than the plan), or (ii) has a registered “pooled plan provider” which meets specified requirements, including being designated as the ERISA named fiduciary of the plan.

The FSA provides that the violations of one employer will not result in the disqualification of the multiple employer plan. Instead the plan assets attributable to the employees of the noncompliant employer will be transferred to a separate plan or arrangement and only the noncompliant employer will be liable for plan liabilities attributable to its employees.

The FSA provides that, except for the administrative duties assigned to the pooled plan provider, each participating employer will serve as the plan sponsor of the plan with respect to the portion of the plan attributable to its employees. The Secretary of the Treasury will provide future guidance with respect to the administrative duties required to be performed by the pooled plan provider.

Safe harbor 401(k) plans

Currently, the rules applicable to safe harbor 401(k) plans require that an annual notice be provided to each participant setting forth the participant’s rights and obligation under the plan. Under the FSA the safe harbor notice is eliminated for 401(k) plans achieving safe harbor status via nonelective contributions (“nonelective 401(k) safe harbor plans”). The annual notice requirement is retained for 401(k) plans achieving safe harbor status via matching contributions (“matching 401(k) safe harbor plans”). The FSA also provides that a 401(k) plan can be amended to become a nonelective 401(k) safe harbor plan at any time before the 30th day prior to the close of the plan year unless the 401(k) plan was previously a matching 401(k) safe harbor plan for such year.

Lifetime income investments

Currently, if a plan no longer offers a lifetime income investment under the plan, a participant may be required to liquidate the investment and pay a surrender charge. The FSA provides that, if a lifetime income investment may no longer be held under a plan, a participant may elect a qualified distribution of the lifetime income investment, via a direct trustee-to-trustee transfer, to another employer-sponsored retirement plan or an IRA within the 90-day period ending on the date the lifetime income investment may no longer be held under the plan.

Custodial accounts upon termination of a Section 403(b) plan

Section 403(b) plans are plans maintained by charitable tax-exempt organizations and educational institutions of state or local governments. Typically, 403(b) plans use contributions to purchase annuity contracts or provide that contributions will be held in custodial accounts for employees. The FSA provides that if an employer terminates a 403(b) plan which holds contributions in custodial accounts, and the custodian is an IRS approved nonbank trustee, the custodial accounts will be automatically deemed to be IRAs as of the date of the plan termination.

Required minimum distribution rules exemption

The required minimum distribution rules generally provide that distributions from a qualified retirement plan must being by April 1 following the later of (i) the calendar year in which a participant reaches age 70½, or (ii) the calendar year in which the participant terminates employment. The FSA provides that, if the value of a participant’s interest under all applicable eligible retirement plans does not exceed $50,000 on the last day of a calendar year, the required minimum distribution rules will not apply to the participant for such year. The $50,000 limit is subject to indexing. An applicable eligible retirement plan includes a qualified retirement plan under Code Section 401(a) (other than a defined benefit plan), IRAs, individual retirement annuities, tax-sheltered annuities under a 403(b) plan and a governmental 457(b) plan. IRA holders would also qualify for this exemption.

Deadline for adopting new plans

Currently, a qualified retirement plan must be adopted by the last day of the taxable year for which it becomes effective. This is true even if the first contribution to the plan is not made until the due date of the employer’s tax return for such taxable year. The FSA provides that, if an employer adopts a qualified retirement plan no later than the due date of the employer’s tax return for a taxable year (including extensions), the plan is treated as adopted as of the last day of such taxable year.

Closed and frozen defined benefit plans

Currently, defined benefit plans that are closed to new participants (“closed plans”) and defined benefit plans that provide no future benefit accruals (“frozen plans”) continue to be subject to the minimum participation requirements and nondiscrimination tests applicable to qualified retirement plans.[2] However, over time, it may become difficult for closed or frozen plans to satisfy the minimum participation requirements or nondiscrimination tests. For example, the group of employees that continue to accrue benefits under a closed defined benefit plan may become skewed in favor of highly compensated employees.

The FSA contains a number of provisions specifically targeted to “applicable defined benefit plans.”[3] Specifically the FSA would

• Treat closed or frozen applicable defined benefit plans as satisfying the minimum participation requirements if such requirements were met as of the date the plan was closed or frozen.
  
  
• Ensure that the benefits, rights or features provided to a closed class will not fail the nondiscrimination tests if (i) in the plan year in which the class closes and the two succeeding plan years, the benefits rights and features satisfy the nondiscrimination requirements without application of the FSA relief, and (ii) any plan amendment after the date of closure that modifies the closed class or the benefits, rights and features of the plan does not discriminate in favor of highly compensated employees.
  
  
• Allow the benefits provided to a closed class to be aggregated and tested with one or more defined contributions plans if (i) for the plan year in which the class closes and the two succeeding plan years, the plan satisfies the plan coverage and nondiscrimination requirements without application of the FSA relief, and (ii) any plan amendment after the date of closure that modifies the closed class or the benefits provided to such class does not discriminate in favor of highly compensated employees.
  
  
• Provide special testing rules with respect to benefits, rights and features and benefit accruals under closed or frozen plans. If a portion of an applicable defined benefit plan that is eligible for the relief described above is spun-off to another employer, the relief will continue to apply to the spun-off plan provided the requirements for relief continue to be satisfied.

Withdrawals from retirement plans for birth of child or adoption

The FSA provides an exception from the 10% early withdrawal tax in the case of a “qualified birth or adoption distribution” from an applicable eligible retirement plan. For this purpose, applicable eligible retirement plans include qualified retirement plans (other than defined benefit plans), 403(b) plans, governmental 457(b) plans, and IRAs. A qualified birth or adoption distribution is a distribution not exceeding $7,500 made during the one-year period beginning on the date of birth of the participant’s child, or finalization of a legal adoption of an eligible child by the participant. An eligible child is any individual who has not attained age 18 or is physically or mentally incapable of self-support. Qualified birth or adoption distributions may also be recontributed to an applicable eligible retirement plan.

Conclusion

On a bipartisan basis legislators have expressed support for many of the above provisions. Adoption of one or more provisions in the FSA would provide welcomed flexibility to employers with respect to the administration of qualified retirement plans.

[1] H.R. 6757, 115th Congress, Second Session, introduced on September 13, 2018.

[2] Temporary nondiscrimination relief was provided to defined benefit plans that were closed to new participants before December 13, 2013 and such relief was extended several times, most recently via Notice 2018-69.

[3] An applicable defined benefit plan includes a plan that was (i) closed or frozen before April 5, 2017, or (ii) in effect for at least five years as of the date the class was closed or the plan frozen, and during the five-year period prior to closure there was no substantial increase in the benefits, rights or features under the plan (for purposes of the relief for benefits rights and features testing) and no substantial increase in coverage or benefits (for purposes of the relief under the minimum participation requirements and for benefits testing).

Lori Jones is the chair of Thompson Coburn’s Employee Benefits practice.