Proposed Change To Dol Audit Requirement For Defined Contribution Plans
The IRS, Department of Labor and Pension Benefit Guaranty Corporation proposed changes to IRS Form 5500 intended to improve reporting on multiemployer defined benefit pension plan funding. These proposed changes would fundamentally change Form 5500 regulations and be beneficial to all plan sponsors. A defined benefit pension plan is a company pension plan where employee pension payments are calculated according to the employees length of service and the salary they earned at the time of their retirement.
The proposal, if finalized, would eliminate the requirement for independent audits of plans that have fewer than 100 participants with account balances as of the beginning of the plan year, beginning on or after January 1, 2022.
Under the proposal, defined contribution pension plans would make the determination of plan size based on the number of participants with account balances as of the beginning of the plan year. Those eligible to participate without account balances would not be included in the determination. Currently, the plan size measure for the audit requirement is based on the total number of participants at the beginning of the plan year, including those eligible even if they have not elected to participate and do not have an account balance.
The 2020 Elections Impact On Retirement: Whats Next
The election results are in. Plan sponsors may need to prepare for possible changes as we enter a new term with President-elect Biden.
America has just cast their ballot in what many might consider one of the more consequential elections in recent history. The economic impact of COVID-19, in particular, has brought heightened focus on long-term financial security for both individuals and businesses, putting greater emphasis on the policies that govern the retirement system, as well as the accessibility of plans and ease of saving for the future.
Even before the lockdowns and the resulting impact to the nations unemployment numbers, the fragility of the retirement system was already a concern for both sides of the political aisle. President-elect Bidens victory brings with it several reforms and proposals that aim to provide more equitable access to retirement accounts, and incentivize more people to save. These efforts could have a significant impact on both employers and employees by changing how benefits are offered and administered in the workplace. David Kemps, Executive DirectorGovernment Relations at Morgan Stanley, talks through three potential changes to the retirement system that may have some important implications for plan sponsors:
Secure Act : Retirement Security Is Again On The Congressional Agenda
Americans saw a number of changes to their retirement savings plans when the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, was passed two years ago. Get ready for more.
The House Ways and Means Committee recently voted unanimously to advance a second bill, the Securing a Strong Retirement Act of 2021, that would continue to enhance the rules for contributing to and withdrawing from retirement savings vehicles, while providing tax incentives for small business owners.
Nicknamed the SECURE Act 2.0, the legislation was introduced by Reps. Richard Neal, D-Mass, and Kevin Brady, R-Texas, and aims to encourage Americans to save more for retirement, in part by making that process easier, while keeping burdensome reporting requirements off plan sponsors. Its widely expected the bill will pass in Congress either later this year or in 2022, given its strong bipartisan support and the nearly unanimous backing of the original SECURE Act.
Key provisions of the SECURE Act 2.0 include the following:
Increase the Required Minimum Distribution Age againThe original SECURE Act raised the age at which you must start taking required minimum distributions from traditional IRAs, 401s and 403 plans from age 70½ to 72. The proposed legislation would again raise the age to begin taking RMDs, this time to age 75 over a decade. That means you could have more time for your money to grow tax free, but if you delay RMDs, your withdrawals may need to be larger.
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Senate Response To The Secure Act 20 Measure
On May 26, 2022, Senate Health, Education, Labor, and Pensions Committee Chair Senator Patty Murray and Ranking Member Senator Richard Burr released a discussion draft of the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Actlegislation focused on improving retirement security and enhancing emergency savings.
Similar to the SECURE Act 2.0, the RISE & SHINE Act, among other things, proposes:
- Bolstering savings by allowing employers to offer emergency savings accounts
- Expanding access to employer-provided retirement plans through multiple-employer plans, and through increased access to plans for part-time workers and
- Improving communications to retirement plan participants and transparency around lump-sum buyout offers for pension plan participants. Senator Murray and Senator Burr plan to introduce and mark up final legislation in the coming weeks. A full summary of the RISE & SHINE Act can be found here.
Secure 20 Surprise: The Roth Catch
SECURE 2.0 would reclassify all catch-up contributions as Roth-only in 2024, increase catch-up contributions to $10,000 only for ages 62 to 64, optionally treat employer matching contributions as Roth contributions, and offer a new safe harbor correction for auto-enrollment plans’ unintentional administrative flaws.
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What To Expect For 2021 And Beyond
While any proposed changes introduced during the campaign would still need to move through either the legislative process, the regulatory process , or both, before becoming law, there are a few key areas worth considering today that can help plan sponsors better prepare for and navigate a Biden administration retirement landscape:
Plan Participation.Under more equalized retirement savings tax incentives, plan sponsors could expect to see changes in the way prospective and active participants interact and engage with a companys 401 plan: more lower-income earners may feel incentivized to participate, while higher-income earners may adapt by incorporating into their overall retirement savings strategy Roth-style accounts where they can grow their money tax-free.
New Required Minimum Distribution:
Individuals whose combined IRA and 401 retirement accounts exceeding $10 million at years end would have to withdraw at least 50% of the excess the following year. Those with accounts over $20 million will have to withdraw from Roth IRAs and 401s first. This would only apply to those with incomes over the same limits as above more than $400,000 of taxable income, $425,000 for head of households, and $450,000 for married filing jointly taxpayers.
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Arbitration Of Erisa Claims Under The Microscope Where Are The Courts And Congress Headed
Due to the lack of Supreme Court guidance on these issues, it is still not clear the extent to which particular arbitration provisions may apply to ERISA fiduciary breach claims. However, several Circuit Courts of Appeal have now weighed in and a bill called the Employee and Retiree Access to Justice Act has been introduced in the House and Senate with the express purpose of making predispute and nonconsensual post-dispute arbitration clauses unenforceable. What is a plan sponsor favoring arbitration to do?
An Equalization Of 401 Tax Benefits Through A Tax Credit
President-elect Bidens retirement security proposal from his campaign calls for changes with the tax treatment of participant contributions made to a 401, proposing to replace tax deductions with a flat refundable tax credit. Under the current system, employers and individuals take an immediate deduction based on their contributions, and are not required to pay taxes on those contributions, and the earnings thereon, until their money is withdrawn or their benefits are paid out in retirement. However, the tax incentive for retirement savings increases not only with the size of the contribution to the plan but also with the earnings of the participant as well, making it more attractive to those employees in the higher marginal tax brackets.
Under the Biden proposal, a single earner in the top income-tax bracket would essentially get the same tax break as a single earner in a lower-income tax bracket.5 The move aims to make retirement planning more equitable across income levels and help lower and middle-income earners put more money away for their future. On the flip side, small-business owners may have less incentive to sponsor a retirement plan for their business if the tax incentives to them for doing so are curtailed, and they may potentially look to individual savings vehicles, like Roth-style accounts, to achieve their retirement savings goals, rather than sponsoring a plan at their business.
David Kemps, Executive Director
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Who Could Be Affected By These Tax Changes
The potential effects of the proposed tax changes go beyond the yearly income impacts noted above. In fact, the 2022 budget proposal may affect anyone who possesses the following qualifications:
- Adjusted gross income of at least $400,000
- Over $10 million in anticipated modified adjusted gross income
- IRAs or employer-provided retirement plans
- Ownership of a limited partnership or S corporation
- Current or planned trusts
- Itemized deductions on your federal tax return
As you can see from the above criteria, the proposed tax bill could affect very wealthy seniors and middle-class Americans with retirement savings invested in an IRA or retirement plan. All seniors facing these potential changes should research how their retirement planning could be affected in addition to any action they should take to protect their financial interests.
Rise And Shine Earn Acts: June 2022 Updates To Secure 20
Advancing the bill in June 2022, the Senate approved the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg Act. New provisions aim to build on SECURE 2.0 and include the following changes:
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Plan assets may be used to pay some incidental plan design expenses
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Mandatory cash-out distribution limits are raised from $5,000 to $7,000
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The addition of the Emergency Savings Act of 2022 , would allow 401 plans to include emergency savings accounts
Additionally, RISE and SHINE removes provisions from the House-approved version, including:
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Increasing catch-up contribution limits
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Raising the required minimum distribution age
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Permitting matching contributions on student loan payments
Additionally, the Senate Finance Committee unanimously passed an amended version of the Enhancing American Retirement Now Act in June 2022, which includes an additional 70 proposals. In addition to including catch-up contributions increases and matching contributions for student loan payments , the roughly $38 billion EARN Act includes the following key provisions:
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Qualified Longevity Annuity Contracts
QLACs let employees use a portion of their retirement savings to purchase an annuity starting as late as age 85 without violating RMD rules. The bill directs Treasury to amend its regulations on QLACs to provide more flexibility.
- Premiums. The bill would eliminate the requirement limiting QLAC premiums to 25% of the account balance and would increase the dollar limit on these premiums from $125,000 to $200,000 .
- Joint and survivor benefits after divorce. The bill would clarify the treatment of joint and survivor benefits for couples who get divorced after purchasing a QLAC but before commencing payment.
- Free look periods. The bill would permit rescission periods up to 90 days from the date of purchase.
Increased Savings Flexibility For Those 60 And Over
For those nearing retirement, the bill would increase how much and how long individuals can save.
Expanded catch-up contribution ages: The October 2020 proposal sought to increase catch-up contributions for those 60 and over to $10,000 for employer-sponsored 401s and 403s, or an additional $5,000 for SIMPLE plans. However, new legislation expands catch-up contributions to include participants aged 62, 63, or 64 by the end of the tax year.
IRA catch-up contribution indexed to inflation: The catch-up contribution limit to IRAs for those aged 50 and over would be indexed to inflation starting in 2023.
Increased mandatory RMD age from 72 to 75: Proposed legislation would bump the required minimum distribution age to 75 , allowing individuals to keep saving longer. The bill would eliminate the RMD for those who have less than $100,000 in their 401 or IRA at the end of the year before they turn 75, and it reduces the tax penalty for failing to take RMDs from 50% to 25%. And if failures to take an RMD are corrected in a timely manner, excise taxes are further reduced from 25% to 10%.
However, instead of immediately increasing the required minimum distribution age to 75, new provisions suggest staggering the increases of minimum distribution age to:
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73 starting on January 1, 2023
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74 starting on January 1, 2030
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75 starting on January 1, 2033
New proposals would allow charitable distributions to count as part of the annual RMD from a 401 once reaching a certain age.
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Senators To Propose Retirement Bill Tackling Emergency Savings
Murray and Barr bill would address retirement and emergency savings.
Reported by
Two senators have released a bipartisan retirement bill addressing workers financial security for the short term and the long haul.
Just prior to the Memorial Day recess, Senators Patty Murray, D-Washington, and Richard Burr, R-North Carolina, the chairwoman and ranking member, respectively, of the Senate Committee on Health, Education, Labor and Pensions, released a discussion draft of the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Eggtermed the RISE & SHINE Act. Lawmakers incorporated the Emergency Savings Act of 2022 into the draft, which Senators Cory Booker, D-New Jersey, and Todd Young, R-Indiana, introduced earlier this week.
The Booker-Young bill is supported by the ERISA Industry Committee, Bipartisan Policy Center and American Benefits Council, among other retirement industry organizations.
The RISE & SHINE Act includes several provisions to bolster short-term financial security and enhance retirement savings. Murray and Burr said in a statement that the bill builds on legislation passed in the House of Representatives, the Securing a Strong Retirement Act of 2021, called SECURE 2.0 the Retirement Improvement and Savings Act, called the RISE Act and the Retirement Security and Savings Act.
The senators said they plan to introduce and mark up final legislation in the coming weeks.
Other Notable Changes For Employers
New proposals would raise awareness of the Savers Credit. The proposed increasing and modernizing the Savers Credit, the existing federal tax credit for contributions to a retirement plan or IRA. As proposed, the Savers Credit will be set at 50% . May 2021 provisions will also require the Treasury Secretary to take steps to increase public awareness of the credit. It also requires the Treasury Secretary to report back to Congress within 90 days after enactment to summarize the impact of these efforts.
SECURE Act 2.0 would extend the time for employers to make beneficial discretionary retirement plan amendments. Under the proposal, if an employer amends an annuity plan, pension, profit-sharing, or stock bonus to increase benefits accrued under the plan in the preceding plan year , the amendment would not cause the plan to fail to meet qualification requirements. This would enable employers with existing 401 plans to make plans more favorable to rank-and-file workers after the end of a plan year.
It would reduce requirements for part-time workers by one year. The SECURE Act enabled long-term, part-time workers to participate in 401 plans. Under that provision, employers with a 401 plan were required to offer the plan to employees that complete either one year of employment or three consecutive years of employment where theyve worked at least 500 hours. New provisions would reduce that three-year rule to two years.
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Recovery Of Retirement Plan Overpayments
The bill would give retirement plan fiduciaries the latitude to decide not to recoup certain inadvertent benefit overpayments. Plan sponsors would also have the ability to amend the plan to increase past or future benefits for affected participants to adjust for inadvertent benefit overpayments. Participants and beneficiaries who rollover overpayments to an IRA or another plan would not have to unwind their rollovers if the plan decides to forgo recoupment.
Several provisions would simplify reporting and disclosure requirements:
Bipartisan Disaster Retirement Savings Act Introduced
The bipartisan Disaster Retirement Savings Act, introduced by Reps. Mike Thompson and Mike Kelly, who both sit on the tax-writing House Ways and Means Committee, would help survivors of natural disasters by allowing them to withdraw funds from retirement accounts to cover the unexpected and emergency costs related to disasters without incurring fees or penalties.
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What Are The Proposed Changes To Form 5500
When the Setting Every Community Up for Retirement Income Security Act passed in 2019, the act included the proposal of additional changes by the IRS, DOL and Pension Benefit Guaranty Corporation to Form 5500, including:
- Update Form 5500 financial reporting to make the financial information collected on the Form 5500 more useful and usable
- Enhance the reporting of certain tax qualification and other compliance information by retirement plans
- Transfer to the DOL Form M-1 and Certain Entities Claiming Exception ) participating employer information for multiple employer welfare arrangements that are required to file the Form M-1
- Change the rules for determining when a defined contribution pension plan is required to file as a large plan
- Attach an independent auditors report and audited financial statements to its Form 5500 annual return/report filing.
These proposed changes will affect Form 5500 filers, not Form 5500-SF or Form 5500-EZ filers.
Dc Plan Distribution Changes
The bill would make the following changes to DC plan distribution rules:
- Three-year limit for repaying qualified birth or adoption distributions . Current law does not limit the period during which a QBOAD may be repaid to the plan and qualify as a rollover contribution. The bill would restrict the repayment period to three years after a participants receipt of a QBOAD.
- Self-certification of hardship. Employers could rely on an employees certification that:
- The employee has experienced one of the events identified in Treasury regulations as a deemed hardship under the rules for 401 or 403 plans or an unforeseeable emergency under the rules for governmental 457 plans, and
- The distribution does not exceed the employees financial need, and the employee has no other reasonably available alternative means of satisfying that need.
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