In our last article we discussed Congressman Neal’s (D-MA) Retirement Plan Simplification and Enhancement Act, introduced in the House at the end of last year. In this article we discuss his Automatic Retirement Plan Act of 2017 (“Automatic Plan bill”), introduced at the same time, which would (with some very limited exceptions) require every US employer to maintain an “automatic contribution” retirement plan. The bill would also create a framework for “open” multiple employer plans (Open MEPs).
The themes of Congressman Neal’s proposal
The three major policy innovations in Congressman Neal’s proposal are all designed to expand small employer plan coverage:
The proposed automatic contribution plan requirement effectively mandates this result for all but the smallest employers.
The creation of a new 401(k) “deferral only” safe harbor provides, in effect, a “lite” 401(k) testing safe harbor, requiring no employer contributions.
The authorization of Open MEPs is intended to (1) reduce small employer plan-related administrative costs and (2) relieve very small employers (with no more than 100 employees) of most fiduciary responsibility.
Requirement to maintain an automatic contribution plan
Under the Automatic Plan bill, all employers would generally be required to maintain an “automatic contribution plan.” The penalty for not maintaining such a plan would be an excise tax of $10 per day/per employee, applicable to any employer with more than 10 employees.
The automatic contribution plan would have to:
1. Be a defined contribution plan qualified under Tax Code section 401(a), 403(a) or 403(b).
2. Either: (1) be a “deferral only plan;” or (2) qualify as a deferral only plan except that it provides for employer contributions, in which case it would have to satisfy applicable Tax Code nondiscrimination (ADP and ACP tests) and top heavy requirements.
A deferral only plan would be, in effect, a new 401(k) safe harbor plan that only allows participant deferrals (that is, does not allow employer contributions). It would have to provide for automatic contributions at a default rate starting at 6%, escalating to 10% over four years, and cap all contributions at $8,000. Employees would have to be re-defaulted into contributing at the default rate at least every three years.
3. Generally cover all employees.
4. Default investment of contributions to a qualified default investment alternative (QDIA), e.g., a target date or balanced fund or managed account.
5. Allow a participant to elect to receive at least 50% of her account as a “lifetime income,” defined as either (1) a guaranteed annual income for the life of the employee or the joint life of the employee and a designated beneficiary, or (2) an annuity for life/joint life.
6. Not charge a participant an unreasonable fee solely because (1) his account is small or (2) the employer’s provision of the plan is mandatory.
The bill provides that an employer that maintains an automatic contribution plan is generally not subject to state payroll deduction programs (e.g., state auto-IRA programs). There is, however, a carve-out for pre-existing state laws.
Federally-financed matching contribution for low-paid savers
The bill would also provide for a “credit” (in effect, a tax-financed matching contribution) of 50% of the first $1,000 of “qualified savings contributions” made by certain low-paid individuals. Joint filers with modified adjusted gross income of $65,000 or less would be eligible for the full credit, and the credit would then be phased out for joint filers earning between $65,000 and $85,000.
Unlike the current Saver’s Credit, which is simply a tax credit, this credit would be contributed either to (1) a Roth IRA or Roth 401(k) designated by the individual or (2) where there is no designation, a Treasury “retirement bond” that would get Roth IRA treatment.
Open MEP proposal
Congressman Neal’s bill would also provide a comprehensive solution to the current issues presented by Open MEPs.
By way of background, a MEP is a multiple employer plan, defined as a plan for (non-union) employees of unrelated employers. An “Open MEP” would, generally, be a provider-based multiple employer plan in which the participating employers do not have any special relationship with each other or with the provider.
Open MEPs are effectively prohibited under a current DOL rule requiring that a MEP be “tied to the contributing employers or their employees by genuine economic or representational interests unrelated to the provision of benefits.” Open MEPs also face a Tax Code obstacle: IRS currently applies a “one bad apple” rule to MEPs – a qualification violation that applies to only one participating employer may disqualify the entire plan.
The Automatic Plan bill would allow defined contribution plan Open MEPs (“Pooled Employer Plans”) that meet certain requirements and that are provided by a “Pooled Plan Provider.”
Pooled Plan Providers
To qualify as a Pooled Plan Provider, the Open MEP provider must:
Be designated under the terms of the plan as a named fiduciary, as the plan’s administrator and as the person responsible for performing all necessary administrative duties (including conducting necessary testing of the plan and the employees of each participating employer).
Before beginning operations, register with Treasury and DOL and provide any required information.
Acknowledge that it is a named fiduciary and the plan administrator.
Ensure compliance with ERISA bonding requirements.
DOL and Treasury are instructed to develop model Open MEP plan language.
Pooled Employer Plans
To qualify as a Pooled Employer Plan, the Open MEP must:
Designate a trustee (e.g., a bank) that meets IRA trustee requirements.
State that (subject to an exception for employers with no more than 100 employees) each participating employer retains fiduciary responsibility for the selection and monitoring of the Pooled Plan Provider and the investment and management of that employer’s share of the plan’s assets (to the extent not otherwise delegated to another fiduciary by the Pooled Plan Provider and subject to ERISA section 404(c)).
Provide that participating employers and participants are not subject to unreasonable restrictions, fees, or penalties for ceasing participation, receiving distributions or transferring assets.
Require the Pooled Plan Provider to make required disclosures.
Small employer exemption from fiduciary rules
Employers with no more than 100 employees are generally not fiduciaries with respect to a Pooled Employer Plan, including with respect to the selection and monitoring of service providers and investments, provided the Pooled Plan Provider receives no more than reasonable compensation and agrees to comply with the Pooled Plan Provider requirements and to assume all fiduciary responsibilities not retained by the employer.
Solution to the “one bad apple” problem
Finally, the bill would provide a procedure for dealing with individual employers that fail to comply with Tax Code rules.
Also included in the bill
The bill also includes provisions changing current law to facilitate the portability of lifetime income options, increasing the small employer plan startup credit and adding a new small employer automatic enrollment credit.
There is bipartisan agreement that increasing small employer plan formation is a retirement security priority. The most controversial element of Congressman Neal’s proposal is (certainly) the “employer mandate” – the requirement that all but the smallest employers maintain a retirement plan. Other elements, e.g., the “deferral only” safe harbor and authorization of Open MEPs, are likely to garner broader support.
We will continue to follow these issues.