Setting Every Community Up for Retirement Enhancement (SECURE) Act - H.R.1994

BACKGROUND: The Ways and Means Committee reported the bill by voice vote (H Rept 116-65, Pt. 1). The Education and Labor Committee has not acted on the measure. The House passed legislation to boost retirement savings last year by a 240-177 vote, with Democrats opposing the measure because it excluded a number of bipartisan provisions.

    Numerous mechanisms have been established by Congress to encourage taxpayers to save for specified purposes on a tax-preferred basis and reduce an individual's tax liability — particularly for retirement (such as IRAs, Roth IRAs, and employer-sponsored 401(k) plans), health care expenses (such as HSAs), and education (such as 529 plans and Coverdell savings accounts).

    While these tools are widely used, many taxpayers still find it difficult to save for these types of activities. With regard to retirement, for example, many Americans do not have access to retirement plans through their employers, and about half of working age adults say they don't expect to have enough funds to live comfortably when they retire. Meanwhile, many Americans find it difficult to save for possible emergency expenses. A recent study found that about 40% of the population would not be able to cover an emergency expense of $400.

    Consequently, members of both parties have proposed making it easier and more convenient for Americans to build up savings for those and other purposes.

    The measure as reported on a bipartisan basis by the Ways and Means Committee includes many provisions included in GOP retirement savings legislation last year. Some Democrats, however, object to provisions in the reported bill that would expand the use of 529 education savings for certain homeschooling and private school expenses. Consequently, Democratic leaders have decided to drop those provisions, while also adding language to fix a provision of the 2017 tax overhaul (PL 115-97) that inadvertently raised taxes on children receiving military survivor benefits. Many Republicans are unhappy that the 529 plan homeschooling and private school provisions are being dropped.

SUMMARY: Following is a summary of the bill as reported. The measure is expected to be modified, however, perhaps through a self-executing rule that automatically modifies the bill when the floor rule is adopted (see Amendments section, below).

    This bill includes numerous provisions intended to boost the ability of individuals to take advantage of tax-favored retirement accounts, including by making it easier for small businesses (including unrelated businesses) to offer retirement savings plans for their employees, allowing individuals to continue making contributions to a regular IRA after reaching the age of 70 and one-half, increasing from 70 and one-half to 72 the age at which individuals must take required minimum distributions from their retirement accounts, expanding and creating tax credits for small employers to set up retirement plans and automatic enrollment, and requiring employers to allow certain part-time employees to participate in their retirement savings plans.

    It also seeks to make it easier for individuals and families to save for other purposes, including by modifying 529 education plans to allow them to be used to pay for student loans and to cover expenses associated with apprenticeship programs; and by allowing individuals to withdraw up to $5,000 from their retirement plans, without penalty, to help pay for the expenses of a new baby or adopted child.

    Finally, the measure includes provisions to offset the bill's costs by raising federal revenue, including by increasing penalties for failing to file income tax returns and other tax documents.

Retirement Savings Plans

    The bill provides for the establishment of "pooled" retirement plans by unrelated small businesses that are not in the same trade or industry, and it reduces obstacles and reporting requirements for those and other multiple employer retirement plans. It also modifies requirements on required minimum distributions from retirement accounts, and modifies eligibility to contribute to IRAs.

Multiple Employer Plans

    The bill makes it easier for small businesses to offer retirement savings plans for their employees, including by enabling unrelated businesses to offer a single, combined "pooled provider" retirement plan — which would become effective for calendar year 2020.

    Under the measure, unrelated small businesses could band together to offer a tax-preferred retirement plan to their employees that would be considered a multiple employer plan, which is currently allowed under existing law. A multiple employer plan is generally a single retirement plan maintained by two or more unrelated employers in the same trade or industry; such plans are also used by professional employer organizations (PEOs) to provide qualified retirement plan benefits to employees working for PEO clients.

    Each employer in a pooled employer plan would be treated as the plan sponsor with respect to the portion of the plan attributable to that business's employees. And the entity that administers the pooled plan must be designated as a fiduciary for the plan under the Employee Retirement Income Security Act of 1974 (ERISA, which sets the requirements employers must meet to offer qualified plans with tax-favored status), must register with the Labor Department as the pooled plan provider, and must ensure that all persons who handle plan assets or are plan fiduciaries are bonded in accordance with ERISA requirements.

    Designated trustees of the plan (other than the employers) would be responsible for collecting contributions to, and holding the assets of, the pooled retirement plan.

    The Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) estimate that allowing multiple employer and pooled employer retirement plans would reduce revenue by $3.4 billion over 10 years.

Bad Apple Rule

    The measure provides relief to multiple employer retirement plans (including pooled plans) from the so-called "one bad apple" rule, in order to encourage more small businesses to band together to offer multiemployer retirement plans to their employees.

    Under that rule, the qualified status of the plan under ERISA can be threatened — and the plan loses its tax-favored status — if one of the employers that maintains the plan fails to satisfy a qualification requirement, such as by having an error in plan documents or in plan operation and administration. JCT notes that as a practical matter, the IRS rarely disqualifies a plan for such errors and has a process under which the employer can come into compliance.

Annual Reporting Requirements

    The bill modifies annual reporting requirements for multiple employer plans, including by applying that reporting requirement to pooled employer plans, with the required Form 5500 to be sent to the Labor Department to specify the entity that serves as the pooled plan provider. For both multiple employer plans and pooled plans, the forms must also detail aggregate account balances attributable to each employer in the plan. (Already required under current law are a list of employers in the plan and a good faith estimate of the percentage of total contributions made by the participating employer during the plan year.)

    It also expands the number of plans that qualify for simplified reporting using Form 5500-SF (Short Form) by allowing multiple employer plans that cover fewer than 1,000 participants to do so, but only if no single employer in the plan has 100 or more participants. Use of simplified reporting for pension plans currently applies only to plans with fewer than 100 participants.

Other Retirement-Related Provisions

    The bill allows individuals to continue making contributions to a regular IRA after reaching the age of 70 and one-half, beginning for calendar year 2020. Currently, persons once they reach that age may not continue making such contributions, although they may make nondeductible contributions to a Roth IRA, subject to income limits. (JCT and CBO estimate this provision would reduce revenues by $83 million over 10 years.)

    It also increases from 70 and one-half to 72 the age at which individuals are required to take minimum distributions from their retirement accounts, also beginning for calendar year 2020. Currently, required minimum distributions from retirement accounts (except Roth IRAs) must begin by April 1 of the calendar year after the year in which the individual turns 70 and one-half. (JCT and CBO estimate these provisions would reduce revenues by $8.9 billion over 10 years.)

Small Employer Retirement Plan Tax Credits

    In an effort to encourage more small employers to set up retirement plans, the bill increases the credit to small employers for start-up costs and it establishes a new tax credit for small employers to start up retirement plans that include automatic enrollment.

    Specifically, the measure increases to at least $500 and at most $5,000 the tax credit small employers can receive for setting up retirement plans. (JCT and CBO estimate this provision would reduce revenue by $29 million over 10 years.)

    It also establishes a tax credit of up to $500 each for three years for small employers who set up automatic enrollment in new 401(k) retirement plans and SIMPLE IRA plans or who convert existing plans to automatic enrollment. (JCT and CBO estimate this would reduce revenue by $5 million over 10 years.)

401(k) Plan Nondiscrimination Safe Harbors

    Under current law, the IRS conducts nondiscrimination tests to ensure that all employees are taking advantage of a business's 401(k) plan, and not just those with high-paying jobs, by comparing the average percentage of income contributed by highly compensated employees with the contributions made by other employees. If it is too high, the IRS can force corrective actions.

     Current law also provides a "safe harbor" for employers from this test, deeming the test to be satisfied for the 401(k) plan if the employer provides a match to the employee's voluntary contribution (fully matching 3% of contributions and 50% of additional contributions up to 5%), or if the employer provides an automatic contribution of 3% or more.

    The bill eliminates a requirement that employers, in order to qualify for the safe harbor from the nondiscrimination test, notify their employees that they will provide an automatic contribution of 3% or more to the employee's 401(k) plan. It also allows employers, at any time prior to the 30th day before the close of the plan year, to modify their 401(k) plan to become an automatic contribution plan rather than a matching contribution plan. It allows the plan to be modified after that date under certain circumstances, including if the employer will be making automatic contributions of at least 4% (rather than the 3% requirement).

    The measure also increases from 10% to 15% of employee compensation the maximum cap for safe harbor automatic enrollment in 401(k) accounts. The 15% maximum applies after the first plan year; the 10% maximum is retained for that first year.

    These safe harbor provisions would be effective for plan years beginning in 2020. (JCT and CBO estimate they would have a negligible budget effect.)

    Separately, the measure also modifies the nondiscrimination rules for closed plans in order to allow existing participants to continue to accrue benefits. The change is meant to protect these benefits for older, longer-service employees that are nearing retirement.

Long-Term Part-Time Workers

    Current law allows employers to exclude part-time employees (those who work fewer than 1,000 hours per year) from their defined contribution retirement plans.

    The bill requires employers that maintain 401(k) retirement plans to allow part-time employees to participate in these plans. Employers must either allow part-time employees who complete 1,000 hours of service in a year or who complete three consecutive years of at least 500 hours of service each to enroll in the retirement plan.

    For employees eligible to participate only because of this provision, employers are allowed to exclude these employees from testing under the nondiscrimination and coverage rules.

    These changes would not apply to employees who are subject to collectively bargained retirement plans. The provision would take effect starting in 2021, with service before Jan. 1, 2021, not being taken into account.

    (JCT and CBO estimate these provisions would reduce revenue by $769 million over 10 years.)

Home Health Care Workers

    Under current law many home health care workers' income is exempt from taxation because it falls under so-called "difficulty of care" payments that are legally exempt. However, that exemption also means that this income is not eligible for investment in a defined contribution plan or IRA.

    The bill allows difficulty of care payments to be treated as compensation for the purposes of calculating contribution limits to a defined contribution retirement plan or IRA.

    (JCT and CBO estimate this would reduce revenue by $249 million over 10 years.)

Community Newspapers

    The bill allows certain community newspapers to effectively reduce the annual amount they are required to contribute to employee pension plans by increasing to 8% the interest rate that is used to calculate funding obligations and by increasing from seven to 30 years the amortization period.

    To be eligible, a newspaper must publish one or more daily community newspapers in a single state, must serve a metropolitan area with a population of at least 100,000, cannot be a company whose stock is publicly traded, must be controlled by family members or a nonprofit organization residing primarily in the state where the paper is published, and cannot control a newspaper in another state.

    (JCT and CBO estimate this authority would increase revenue by $9 million over 10 years.)

Fiduciary Safe Harbor

    The measure allows plan sponsors (i.e. employers) to meet their fiduciary responsibility and to be protected from liability for any losses arising from an insurer's inability to meet its financial obligations (the safe harbor) if the sponsor takes certain steps with regard to defined contribution retirement plans.

    To meet the safe harbor requirements with respect to the selection of an insurer for a guaranteed retirement income contract, the sponsor must conduct a search for an insurer that considers the insurer's financial capability and the cost of the contract, and must obtain written confirmation from the insurer regarding its license, certificate of authority and required reserves. The insurer must also confirm that it undergoes a financial examination at least every five years, and that it will notify the sponsor if any of these circumstances changes.

Miscellaneous Provisions

    The bill also includes provisions that do the following:

•     Counts as compensation an individual's graduate fellowships and stipend payments for purposes of determining eligibility to contribute to a regular IRA (the amount that can be contributed to an IRA is currently capped by the person's compensation, and an individual who has no compensation income generally can't make IRA contributions even if they have other income that counts towards gross income). (JCT and CBO estimate this provision would reduce revenue by $3 million over 10 years.)

•     Prohibits employer plans from making qualified loans from the plan to participants through the use of a credit card or similar mechanism, instead requiring that it be considered a deemed distribution from the plan that is taxable as income.

•     Clarifies that certain restrictions regarding retirement income accounts do not apply to duly ordained, commissioned, or licensed ministers of a church in the exercise of his or her ministry, or employees of organizations controlled by or associated with a church or association of churches.

•     Allows businesses to treat qualified retirement plans they adopt after the end of a tax year but before the tax filing date for that year as if they were in effect for the last day of that tax year. (JCT and CBO estimate this would reduce revenue by $113 million over 10 years.)

•     Allows consolidated tax filing on Form 5500 for similar plans. The plans must be defined contribution plans, have the same trustee, same plan year and provide the same investment options.

•     Requires benefit statements to provide a lifetime income disclosure at least once a year that would detail the monthly payments the beneficiary would receive if the total account balance were used.

    In addition, the measure includes provisions to help protect the rights and benefits of employees covered by defined benefit pension plans if their company switches to a defined contribution plan or the company is sold or merged with another company.

New Baby Expenses

    The bill allows individuals to withdraw up to $5,000 from their retirement plans, without penalty, to help pay for the expenses of a new baby or adopted child.

    Under current law, distributions from qualified retirement plans made before the individual is 59 and one-half years old are subject to a 10% early withdrawal tax, and the amount withdrawn is taxable.

    Under the measure, both spouses could each withdraw up to $5,000 from their accounts within a year of the child's birth or adoption, and those funds could later be repaid to their retirement accounts without any penalty. (JCT and CBO estimate these provisions would reduce revenues by $1.2 billion over 10 years.)

529 Education Plans

    A 529 plan is a tax-advantaged savings plan intended to encourage saving for future education costs that are sponsored by states, state agencies, or educational institutions, and is used for prepaid tuition plans and tuition savings accounts.

    The plans are established for the benefit of designated beneficiaries (often young children), with contributions made by others not being tax deductible — but earnings and qualified distributions being tax free. Distributions can be made for tuition, books, fees, room and board and other qualified college and other higher education expenses, or up to $10,000 a year for tuition in connection with elementary or secondary public, private or religious schools.

    The bill modifies 529 plans to allow them to also cover the expenses associated with apprenticeship programs and homeschooling (with a $10,000 annual limit for homeschool expenses), as well as for books, supplies, fees and other expenses associated with enrollment at elementary or secondary public, private or religious schools. [The bill is expected to be modified, perhaps through a self-executing amendment when the floor rule is adopted, to drop provisions allowing 529 plan funds to be used for homeschooling and non-tuition expenses of private or religious schools.]

    It also allows $10,000 a year from 529 plans to be used to cover the costs of student loans, as well as a separate $10,000 a year to cover the student loan costs of a sibling of the 529 beneficiary — such as a brother, sister, stepbrother or stepsister. (JCT and CBO estimate the bill's 529 plan provisions would reduce revenues by $245 million.)

Volunteer Firefighters & Emergency Medical Responders

    The measure reinstates for one year — calendar year 2019 — an existing income tax exclusion for volunteer firefighters and emergency medical responders, and it increases the value of that exclusion.

    Under current law, which lapsed at the end of 2010, an individual who actively volunteers as a firefighter or emergency medical responder could have $30 per month in stipends associated with their volunteer service (such as for transportation) excluded from taxable income. The bill increases that exclusion to $50 for calendar year 2019.

    (JCT and CBO estimate this exclusion would reduce revenue by $32 million.)

Pension Benefit Guaranty Corporation

    The PBGC helps protect the pensions of beneficiaries covered by private company defined benefit retirement plans through two insurance programs — one for single-employer pensions and the other for multiemployer plans. Those programs help pay the pension benefits of individuals who worked at companies with underfunded plans. It is financed through the assets of terminated plans and amounts recovered from those companies, as well as through insurance premiums from current companies with pension plans.

    Although many charities and cooperative associations have established retirement plans for their employees through defined multiemployer plans guaranteed by the PBGC, these cooperative and small employer charity pension plans (CSEC plans) are not subject to the same rules that were established under the 2006 Pension Protection Act (PL 109-280) to help improve the PBGC's solvency. CSEC plans were deliberately left out of the rules of that 2006 law, and in 2014 Congress enacted the Cooperative and Small Employer Charity Pension Flexibility Act (PL 113-97) to ensure CSEC plans would be able to continue functioning as intended.

    The bill sets PBGC premiums for charity and cooperative association plans. Under the measure, starting this year the annual premium for each individual participating in such plans would be $19, and the variable rate premium would be $9 for each $1,000 of unfunded vested benefits.

    (JCT and CBO estimate the premium changes would reduce revenue by $1.3 billion over 10 years.)

Offsets

    The bill includes four provisions intended to offset the bill's costs by raising federal revenue, including by increasing penalties for failing to file income tax returns and other tax documents.

    [The measure is expected to be modified, perhaps through a self-executing amendment when the floor rule is adopted, to add an additional offset and modify several of the bill's existing offsets.]

Minimum Distribution Requirements

    This bill modifies the minimum distribution rules that take effect upon the death of the account owner of a defined contribution retirement plan.

    Under the measure, the inheritor of the plan must take full distribution by the end of the tenth calendar year following the beneficiary's death. It exempts certain inheritors from this requirement, including the following: the beneficiary's spouse or minor child, disabled or chronically ill individuals, and individuals who are less than 10 years younger than the beneficiary.

    This provision would generally accelerate the distribution of inherited defined contribution retirement plans, therefore increasing available taxable income. (JCT and CBO estimate this would raise $15.7 billion in revenue over 10 years.)

Failure to File

    The measure increases penalties for failure to file federal tax returns and other required tax documents, starting Jan. 1, 2020.

    Specifically, it increases to $400 or 100% of tax due (whichever is less) the penalty for failure to file tax returns by the due date. The current penalty is the lessor of $205 or 100% of tax due. (JCT estimates this would increase revenue by $257 million over 10 years.)

    It increases penalties on retirement plan sponsors that fail to file retirement plan tax returns, raising the penalty for failure to file a Form 5500 from $25 to $105 per day, not to exceed $50,000 (up from $15,000 under current law). [The manager's amendment would further raise the daily penalty to $250 per day and the maximum to $150,000.]

    The penalty for failure to file a registration statement would double from $1 to $2 per participant per day, not to exceed $10,000 (up from $5,000), while the penalty for failure to file a required notification of change would also double from $1 to $2 per day, not to exceed $5,000 for a single failure (up from $1,000). [The manager's amendment would further raise the penalty for registration statements to $10 per day, up to a maximum of $50,000.]

    Finally, the penalty for failure to provide a required withholding notice would increase tenfold, from $10 to $100 for each failure, not to exceed $50,000 per calendar year (up from $5,000). (JCT and CBO estimate these changes would increase revenue by $128 million over 10 years.) [The manager's amendment would further raise the penalty maximum penalty for a year to $10,000.]

Information Sharing

    The bill authorizes the IRS to share tax returns and tax return information with the U.S. Customs and Border Protection to facilitate collection of the heavy vehicle use tax.

    (JCT and CBO estimate allowing this sharing of information would increase revenue by $163 million over 10 years.)

CBO and JCT Cost Estimates

    The Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) estimate that the bill as reported would increase direct spending by $1.3 billion over 10 years and increase revenues by $1.3 billion over the same period, for a net reduction in the deficit of $9 million. Because the legislation would affect both direct spending and revenues, pay-as-you-go procedures apply.

    The bill imposes no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA), but does impose two private sector mandates as defined in UMRA. JCT and CBO estimate those mandates would exceed the annual private sector threshold established in UMRA ($164 million in 2019, adjust annually for inflation).

AMENDMENTS: The Rules Committee is expected to recommend a closed rule that prohibits amendments. However, the measure is expected to be modified, perhaps through a self-executing rule that automatically modifies the bill when the floor rule is adopted.

    Following is a summary of a manager's amendment by Ways and Means Chairman Neal, D-Mass., posted on the House Rules website on Friday that may be self-executed under the recommended rule.

Manager's Amendment

    The amendment would make certain technical changes to the measure, eliminate two of the bill's expanded uses for 529 plans, add further cost offsets, and reduce taxes on certain payments that are made to children, including military survivor's benefits.

    With regard to tax deferred 529 education plans, the amendment drops provisions that would allow the use of 529 funding for homeschooling expenses and for non-tuition expenses of private or religious schools.

    It effectively reduces taxes for certain payments to children, treating the payments as earned income rather than unearned income (earned income is generally taxed at a lower rate than unearned income, which often applies to trusts and estates). Specifically, the following payments to children would be considered earned income for purposes of taxation: distributions from qualified disability trusts, certain Indian tribal payments, certain scholarships or fellowship grants, Alaska permanent fund dividends, and military survivor benefits (thereby correcting an inadvertent impact of the 2017 tax overhaul law). This tax treatment would also apply retroactively to any such payments made in calendar year 2018.

Offsets

    The manager's amendment provides further offsets to counter the bill's costs, including the amendment's increased costs of treating certain payments to children as earned income.

    Specifically, it includes a new offset that reduces the maximum amount an individual who is more than 70 and a half years old can claim as a tax deduction for charitable giving, and it expands three of the bill's existing offsets that increase penalties for failure to file federal tax returns and other required tax documents, as follows:

•     Increases to $250 the daily penalty for failure to file retirement plan returns, and increases to $150,000 the maximum cumulative penalty.

•     Increases to $10 per participant per day the penalty for failure to file a registration statement, and increases to $50,000 the maximum cumulative penalty.

•     Increases to $10,000 the maximum cumulative penalty for failure to file a required notification of change.