Here’s a quick roundup of recent legislative and regulatory developments relating to employee benefits and compensation:
The Further Consolidated Appropriations Act of 2020, which President Trump signed into law on December 20, 2019, includes a number of changes relating to employee benefits. In addition to a package of retirement-related provisions known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the bill makes some headline-grabbing changes to the Affordable Care Act (ACA).
Specifically, the bill repeals the ACA’s:
- 40% excise tax on high cost employer-sponsored health insurance coverage, popularly known as the “Cadillac Tax” (which never actually took effect);
- Medical device tax, effective for sales after December 31, 2019; and
- Annual fee on health insurance providers, effective for calendar years beginning after December 31, 2020.
Even though the Cadillac Tax never took effect, it has loomed over health plan design decisions ever since it was enacted in 2010. Employers can now move forward without fear of eventually being forced to choose between making deep benefit cuts or having their plans subject to a substantial excise tax. The repeal of the medical device tax and health insurer fee should help ease the related cost pressures that would otherwise be passed on to end users.
Highlights from the SECURE Act are as follows:
Lifetime Income Options in Defined Contribution Plans
- Portability of Lifetime Income Options: Amends the Internal Revenue Code (“IRC”) to permit defined contribution plans to make trustee-to-trustee transfers of a lifetime income investment, or to distribute lifetime income investments in the form of a qualified plan distribution annuity contract (defined as an annuity contract purchased for, and distributed to, a participant). Effective for plan years beginning after December 31, 2019.
- Lifetime Income Disclosure: Amends ERISA’s participant benefit statement rules to require defined contribution plans to include a lifetime annuity income disclosure at least once per year. The required disclosure would be the qualified joint and survivor annuity value of the participant’s accrued benefit, determined using assumptions to be specified in rules by the Department of Labor. These rules, including a model disclosure, are to be published within one year of the enactment of the SECURE Act. The new requirement will not apply until guidance is issued by the Department of Labor.
- Fiduciary Safe Harbor for Selecting Lifetime Income Provider: Amends the ERISA fiduciary rules to create a safe harbor for individual account plan fiduciaries to satisfy the care, skill, and prudence requirement when selecting an insurer to provide a guaranteed retirement income contract. The safe harbor requires considering the financial capability of the insurer to fulfill its obligations, as well as the cost of the contract relative to its benefits and features. As part of the financial capability assessment, the insurer will have to agree to update the fiduciary on any future relevant changes of circumstance and the fiduciary will have to periodically review the appropriateness of the insurer. The safe harbor specifically does not require fiduciaries to select the lowest cost contract. If the safe harbor’s requirements are satisfied, the fiduciary will not be liable for losses to participants resulting from the insurer’s ultimate inability to meet its obligations under these contracts. The SECURE Act does not specify an effective date for this provision, which generally means it is effective immediately.
These provisions are designed to encourage employers to offer lifetime income options in 401(k) and other individual account plans, and for participants to take advantage of them. The fiduciary safe harbor helps eliminate some of the ambiguity that may have been affecting employers’ willingness to add lifetime income options to their plans. The lifetime income disclosure requirement may create more employee demand for these options, but also could lead to confusion among employees who do not have a lifetime income option and/or cannot obtain a lifetime income benefit under terms as favorable as the assumptions required for the disclosures.
Enhancing Access to and Participation/Savings Opportunities in 401(k) Plans and IRAs
- Open Multiple Employer Plans (MEPs): Amends the IRC and ERISA to promote the formation of “pooled employer plans,” defined as individual account plans (i.e., not defined benefit plans) established or maintained to provide benefits to the employees of 2 or more employers that do not otherwise have a common interest, so long as the plan meets certain specific requirements. Effective for plan years beginning after December 31, 2020.
- 401(k) Plan Participation: Amends the 401(k) plan rules to require plans to allow employees with 500 or more hours of service per year for at least 3 consecutive 12 month periods to participate. Effective for plan years beginning after December 31, 2020. However, 12-month periods beginning before January 1, 2021 do not have to be taken into account.
- Automatic Enrollment Safe Harbor Cap: Amends the 401(k) plan automatic enrollment safe harbor to increase the maximum automatic deferral from 10% to 15% after the first year of the participant’s automatic election. Effective for plan years beginning after December 31, 2019.
- Maximum Age for Traditional IRA Contributions: Amends the IRC to eliminate the requirement that an individual be less than age 70.5 in order to make a deductible contribution to an Individual Retirement Account (IRA). Applies to contributions made for taxable years beginning after December 31, 2019.
The new open MEPs rule might enable small and mid-size companies to offer 401(k) plans that are more competitive, and achieve comparable economies of scale, with larger employers’ plans. The increased maximum automatic deferral cap of 15% will enable plans to offer enhanced savings opportunities to automatic enrollees who fail to make affirmative elections.
Plan Loans and Distributions
- In-Service Distributions from Defined Benefit Plans: Amends IRC section 401(a)(36) to permit in-service distributions from pension plans beginning at age 59.5 instead of age 62, effective for plan years beginning after December 31, 2019.
- Required Beginning Date for Mandatory Distributions: Amends the IRC section 401(a)(9) mandatory distribution rules to increase the required beginning date for mandatory distributions from age 70.5 to age 72. Employees who are not 5% owners can still delay mandatory distributions until retirement if they keep working beyond age 72. Effective for distributions required to be made after December 31, 2019, but only with respect to individuals who attain age 70.5 after December 31, 2019.
- Qualified Plan Loans: Amends the qualified plan loan rules to prohibit plans from making loans through credit cards or similar arrangements. Applies to loans made after the SECURE Act’s date of enactment.
- Restrictions on “Stretch” IRA’s: Stretch IRA’s permitted non-spouse IRA beneficiaries to receive distributions over their lifetime thereby extending the distribution period and allowing for the possibility of funds to grow tax-free for long periods of time. The SECURE Act severely restricts the ability to continue these arrangements other than for a select group of beneficiaries of IRA owners who pass away prior to 2020. For IRA owners that pass away in 2020 or later, the use of stretch IRA’s is limited to a beneficiary who is an individual and who is either the IRA owner’s surviving spouse or minor child, or an individual who is disabled, chronically ill, or not more than 10 years younger than the IRA owner.
- Penalty Free Distributions Upon Birth or Adoption of Child: Amends the IRC section 72(t) 10% penalty tax to permit penalty-free distributions of up to $5,000 for a qualified birth or adoption of a child. Effective for distributions made after December 31, 2019.
The new in-service distribution rules for pension plans might give employers more flexibility to offer phased retirement options. Individuals should review beneficiaries and tax implications of the “stretch” IRA changes and in some situations consider conversions to a Roth.
Plan Administration and Nondiscrimination Testing
- Single Aggregated Form 5500 Filing for Group of Plans: Requires IRS and the Department of Labor to develop rules by January 1, 2022 permitting all members of a “group of plans” to file a single aggregated Form 5500 annual report. This option will apply only to defined contribution plans that have the same trustee(s), named fiduciar(ies), administrator(s), plan year, and that offer the same investments or investment options to participants.
- Nondiscrimination Testing Relief for Certain Closed Defined Benefit Plans: Amends the IRC to provide nondiscrimination testing relief for certain closed defined benefit pension plans. Effective upon enactment, but eligible plan sponsors may elect the new rules to apply to plan years beginning after December 31, 2013.
The nondiscrimination testing relief, while limited in scope, will provide much needed relief for sponsors of certain plans that are closed to new participants but still providing valuable benefits.
Robert Davis is a managing director in Deloitte Consulting LLP and leads the Washington Rewards Policy Center of Excellence, dedicated to informing practitioners and clients about legislative and regulatory developments relating to employer-sponsored rewards programs.