House of Representatives Advances Retirement Plan Reforms for Small Businesses and Investors
Most Sweeping Retirement Changes Since 2006
- Creates a new 401(k) plan for small business and provides a tax credit for starting a new 401(k) plan
- Requires 401(k) plans to extend coverage to long-term part-time employees.
- Expands 529 education funding accounts
- Delays the date retirees must take mandatory distributions from IRAs and 401(k)s
- Permits IRA contributions after age 70 ½
Ways and Means Committee Chair Richard Neal (D-MA) advances bipartisan legislation focused on increasing retirement plan coverage by small businesses, expanding IRAs and 529 education savings plans. The legislation is expected to pass the House of Representatives this summer. It is likely the Senate will act on the legislation later in the year. The effective date of most of the provisions is 2020 but this could change depending on Senate action.
Key provisions of the legislation include:
New 401(k) Plan Called a “Pooled Plan”.
Neal’s legislation creates the first new 401(k) plan in 45 years. The pooled plan would allow businesses of any size to join a central 401(k) plan sponsored by a mutual fund company, investment advisor, bank or insurance company. The idea behind the proposal is that employers joining the plan will share administration costs and as assets grow enjoy lower investment fees. In addition, adopting employers would be relieved of much of their fiduciary duties regarding plan administration and investing as long as they deposit employee contributions on a timely basis. The promise of reduced fiduciary risk and lower administration responsibilities and investment costs will be attractive to small businesses. In anticipation of the legislation, many national and regional financial firms are planning to offer pooled plans on a national level after the legislation becomes law.
Tax Credit for Starting a New 401(k) Plan and Auto Enrolling Employees.
The legislation would provide a tax credit up to $5,000 per year for three years to pay for costs associated with starting a new 401(k) plan as well as an additional tax credit of $500 for three years if the plan auto enrolls employees. These tax credits could be used to offset income taxes paid by the business.
401(k) Coverage of Part Time Employees.
Requires 401(k) sponsors to enroll employees who work at least 500 hours per year over a three-year period. Current rules require participation after 1,000 hours of service.
Expansion of 529 Education Saving Plans.
Permitted expenses would be expanded to include:
- Certain home-schooling expenses,
- Certified apprenticeship programs,
- Elementary or secondary education at public, private, or religious schools, and
- Student loan payments up to $10,000.
Required Distributions From IRAs and 401(k)s.
The age retirees would be required to start distributions would increase from 70 ½ to 72.
Permits IRA contributions after age 70 ½.
The legislation repeals the restriction on IRA contributions that prohibits IRA contributions beyond age 70 ½.
It is important to note that the Senate has not scheduled action on the legislation. However, the Senate Finance Committee passed similar legislation on a bipartisan basis in 2016. With both houses of Congress familiar with the legislation, it certainly provides momentum for Congress to act this fall. We will track its progress and keep you up to date.
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2019. Doug is Director of Retirement Policy at the American Retirement Association. In this role, Doug works with the ARA membership to protect, advise and grow their businesses through ideation and advocacy in the benefits area. Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
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