The Latest from Washington

The Latest from Washington

by Dani Kehoe, Counsel to NAIFA

Fingernails are being bitten to the quick here in Washington as Tuesday’s election nears. No one quite trusts the polls, despite never-ending stories about how and why things are different than they were in 2016. Control of the Senate is up for grabs. The 2021 agenda—while profoundly different as between the two parties—is guaranteed going to be crazy-busy regardless of who wins. And to top it all off, the huge number (almost 100 million as of November 1) of early votes and the differing timelines for counting them, along with a number of potentially very close races, mean a delay in knowing the election results is all but certain. No wonder partisan nerves are the one thing that is absolutely dominant in the nation’s capital this week!

            But despite all this, “normal” legislative activity continued last week—there were three different “marker bills”—legislation signaling 2021 intentions—introduced last week. One was a bipartisan retirement savings bill. A second is a long-term care insurance measure. And a third is a House Republicans health bill. None is expected to advance this year, and all are subject to modification as the legislative process next year gets underway. And, the Trump Administration released a health cost disclosure rule that is important. Summaries of all these initiatives follow.

            Neal-Brady Retirement Savings: On October 27, the House Ways & Means Committee’s leaders, Reps. Richard Neal (D-MA), chairman, and Kevin Brady (R-X), ranking member, introduced new retirement savings legislation, the Securing a Strong Retirement Act (SSRA). The measure includes many provisions strongly supported by NAIFA members and their clients.

The bill’s provisions include:

• Automatic enrollment, subject to employee opt-out protection, in 401(k), 403(b), and SIMPLE plans.
• The auto enrollment provisions would allow employees to decline to participate, or to participate at lower levels.
• Auto-enrollment would require employee contributions of at least three percent but no more than 10 percent in an employee’s first year of participation; automatic contribution levels (again subject to employee opt-out) would automatically increase by one percent per year until the contribution level reaches 10 percent of compensation.
• The auto-enrollment provisions would apply to new plans only — existing plans would be grandfathered.
• The auto-enrollment rules would apply to all businesses with more than ten employees. Employers that have been in business for fewer than three years would be exempt, as would church and governmental plans.
• The SSRA would make required minimum distributions (RMDs) take effect at age 75, up from current law’s age 72.
• The bill also reduces the penalty tax for failure to take RMDs from 50 percent to 25 percent, and to 10 percent if the failure to take an RMD from an IRA is corrected in a timely manner.
• The small employer pension plan start-up cost tax credit would be enhanced—from 50 percent of administrative costs up to an annual cap of $5,000 to 100 percent of administrative costs for employers with 50 or fewer employees.
• An additional tax credit for employer contributions on behalf of employees would be available to employers of 100 employees or fewer—this tax credit is capped at $1,000 per employee, and would start at 100 percent of employer contributions in the first and second years, 75 percent in the third year, 50 percent in the fourth year and 25 percent in the fifth year for employers with 50 or fewer employers—the credit phases down for employers of between 51 and 100 employees.
• The bill makes the start-up credit available to employers joining a multiple employer plan (MEP), or a pooled employer plan (PEP), even if the MEP or PEP itself has been in existence for too long to claim the credit.
• Indexing and expansion of catch-up contribution rules—the bill indexes the IRA catch-up contribution amount, starting in 2022. It also allows for higher catch-up contributions for those over age 60—to $10,000 ($5000 for SIMPLE plans) and indexes the catch-up contribution amounts.
• Saver’s Credit—the SSRA modifies the current law Saver’s Credit—the modifications include a restructure so that the current tiered credit rate would be replaced with a single credit rate of 50 percent, increases the maximum credit amount from $1,000/person to $1,500/person, increases the maximum income eligibility amount, and indexes the creditable contribution amount. The provision also directs the Treasury Department to increase public awareness of the Saver’s Credit.
• Authority for 403(b) plans to participate in multiple employer plans (MEPs).
• Expansion of investment rule limits on 403(b) plans to allow such plans’ custodial accounts to invest in collective investment trusts; necessary securities law changes to facilitate a 403(b) plan’s ability to invest in collective investment trusts would also be made.
• The bill would allow employers to make matching contributions to 401(k), 403(b), or SIMPLE IRA plans based on a plan participant’s repayment of qualified student loans.
• The SSRA would allow for “de minimus” financial incentives (e.g., a small gift card) to encourage employee participation in a retirement savings plan.
• The bill provides a safe harbor to allow employers to correct elective deferral mistakes.
• The bill modifies the long-term part-time employer rule so that employees who complete at least 500 hours of service per year would be eligible to participate in the employer’s retirement savings plan after two years (down from three years) of consecutive service.
• The SSRA eliminates certain minimum distribution barriers to the election of life annuities—e.g., guaranteed annual increases of only one or two percent, return of premium death benefits, and period certain guarantees for participating annuities.
• The bill modifies Treasury regulations governing qualified longevity annuity contracts (QLACs) by repealing the 25 percent limit and raising the $135,000 limit to $200,000.
• Electronic disclosure would continue to be permitted for three quarterly statements, but paper disclosures would be required at least once annually. Participants/beneficiaries would remain able to get their disclosure on paper rather than electronically, should they so elect.
• The SSRA expands the rules governing charitable contributions to allow for them to a split-interest entity and to include distributions from qualified plans in the rule that allows for direct charitable gifts from IRAs. It also raises the limit on permissible direct IRA (and other plan) charitable distributions from $100,000 to $130,000.
• The bill gives most plan sponsors until 2022 to make plan amendments required by the provisions in the SSRA (governmental plans would have until 2024), so long as the plan operates in accordance with such amendments as of the effective date of a bill requirement or amendment.

            The legislation also makes changes to the rules governing the sale of employer stock to employee stock ownership plans (ESOPs) sponsored by S corporations; creates a tax credit for employers that accelerate eligibility and vesting for military spouses; expands the definition of governmental plans to include certain first responders—e.g., firefighters, emergency medical technicians, and paramedics; directs Treasury to update its exchange-traded funds (ETF) regulations so that ETFs can be used by individual variable annuities; and eases overpayment recovery rules. Further, it directs the Department of Labor (DOL) to modify its performance benchmark for asset allocation funds regulation; and requires Treasury, DOL, and the Pension Benefit Guaranty Corporation (PBGC) to review their reporting and disclosure requirements and make recommendations to Congress to consolidate, simplify, standardize and improve those regulations.

            There are also a variety of administrative “clean-up” provisions, including one that eliminates the need for defined contribution plans to provide intermittent ERISA or Internal Revenue Code notices to unenrolled participants; creation of a national online “lost and found” database to make it easier for people to find retirement benefits owed them by former employers that may have moved, changed names or merged; expansion of the Employee Plans Compliance Resolution System; changes to various 457(b) governmental plan rules; and other largely technical rules changes.

Toomey Long-Term Care Insurance: Sen. Pat Toomey (R-PA) offered legislation, the Long-Term Care Affordability Act, that would allow purchasers of qualified long-term care insurance to use up to $2,500 of 401(k), 403(b), or IRA funds to pay for their policies. Under current law, amounts withdrawn from retirement savings plan before the plan participant turns age 59 ½ are subject to an early withdrawal penalty tax. There are a few exceptions to the penalty tax rule. The Toomey bill would add a new one, for the purchase of qualified long-term care insurance, up to a maximum of $2500.

McCarthy-Brady Health Bill: The measure is billed as a Republican way to address health care/health reform issues. These two key GOP lawmakers (Rep. Kevin McCarthy (R-CA) is the House Republican Leader; Rep. Kevin Brady (R-TX) is the Ways & Means Committee’s ranking member) see this bill as a way to achieve widespread, affordable health care. The bill contains a bunch of provisions that are outside our issue area, but it also includes provisions that would:

* Continue the ban on use of preexisting conditions

* Allow unused 2020 FSA amounts to be rolled into 2021

* Increase (more than double) the dependent care provision that allows amounts deferred for dependent care expenses to be excluded from taxable income

* Increase (more than double) the contribution limits applicable to HSAs

* Allow use of HSA money to pay for employment-related expenses (dependent care) for 2020 and 2021

* Allow both spouses to make catch-up contributions to one HSA account

* Repeal the ceiling on deductibles and out-of-pocket expenses for an HDHC policy (that must accompany an HSA)

* Reduce the Sec 213 limit on the deduction for unreimbursed medical expenses—per the bill, in 2020 and 2021, the above-the-line deduction would be available for medical expenses in excess of five percent of AGI; after 2021, the deduction would be available for medical expenses in excess of 7.5 percent of AGI

* Create a refundable payroll tax credit for 50 percent of the costs incurred by a business for COVID-19 testing, PPE, disinfecting, extra cleaning, and reconfiguring workspaces—the credit would be capped at $1000/employee for the first 500 employees; $750/employee for employees 501-1,000; and $500/employee for employees 1001 and beyond.

Regulation/Health Care Costs: On October 29, the Administration released a final rule coordinated among the Treasury Department, the Department of Labor (DOL), the Employee Benefits Security Administration (EBSA), the Centers for Medicare and Medicaid Services {CMS) and the Department of Health and Human Services (HHS). The rule requires sponsors of group health insurance plans and health insurers to disclose cost-sharing information upon request. Thus, a group or individual health insurance beneficiary may demand information on the individual’s out-of-pocket health care costs. Such costs would include co-pays and deductibles.

            The rule provides that health plans and plan sponsors must make cost-sharing information available on an internet website and, if requested, on paper. The rule also requires disclosure of in-network provider negotiated rates, historical out-of-network allowed amounts, and drug pricing information. In addition, the rule finalizes amendments to medical loss ratio (MLR) rules that allows health insurance issuers to get credit in their MLR calculations for savings they share with plan enrollees that result from enrollees shopping for and receiving care from lower-cost and/or higher-value providers.

            The final rule will take effect early in 2021—60 days after the final rule is published in the Federal Register. That is likely early in November, resulting in an early January effective date.