What are the prospects for retirement plan legislation this year?

by Randy Hardock, partner, Davis & Harman, LLP

As we reach mid-year, it is a good time to look ahead at retirement plan changes that will be considered in Washington this year. The first in a two-part series, this article discusses potential legislation this year. In the next issue, we will discuss possible regulatory activity in 2018.

Randy Hardock

When it comes to most legislation, there are so many variables that predicting the short-term future is virtually impossible. Still, as last year’s swift two-month process of enacting massive tax reform legislation demonstrates, the timing of legislative change often follows a common pattern. Starting with the point at which proposals or themes are first discussed, it can appear for long periods of time that nothing is happening. But then, often when you least expect it, a proposal moves through Congress with surprising speed, often as part of a larger “must pass” bill or as a response to a perceived crisis.

In many of those cases, what really happened is that a legislative proposal was planted and allowed to germinate, and then some of the ideas ripened and were harvested by Congress. It can take years for a proposal to evolve, gain broader acceptance, and then await the moment when the right political environment and a suitable legislative vehicle exist to carry it through to fruition.

Legislative activity expected in 2018

Over the last few years, a number of targeted changes to the laws governing retirement plans have been proposed and, in some cases, they have attracted significant bipartisan support. Now, over the remainder of 2018, there is a real possibility that some of those changes may find a way across the finish line. But before that happens, any package of retirement proposals still must overcome many significant political and procedural hurdles.

Any retirement package that could be considered this year will almost certainly be based on ideas contained in the Retirement Enhancement and Savings Act (RESA). RESA (S. 2526) is a package of about 30 discrete proposals that has won the strong support of Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR). In 2016, RESA was reported unanimously by the Finance Committee and since then has won support among many stakeholders in the retirement space.

Retirement Enhancement and Savings Act (RESA) proposals include:

An increase in retirement plan coverage by allowing unrelated employers to be brought together in a single multiple employer plan under ERISA (open MEPs), while also generally eliminating a rule that potentially penalizes all employers in a MEP for the errors of any one employer (the “one bad apple” rule).
Mandated annual lifetime income disclosures for plan participants.
Changes in the nondiscrimination automatic enrollment safe harbor rules, including allowing for the automatic escalation of employee contributions in excess of 10% of pay.
Modifications to the fiduciary safe harbor for plan sponsors selecting an annuity provider.
An increase in the small employer retirement start-up credit from $500 to up to $5,000, depending on the number of workers covered under the plan.
A revenue-raising proposal that would shorten the required minimum distribution period to five years for certain non-spousal beneficiaries.

Despite RESA’s progress in the Senate, retirement legislation has generally been on the back burner in the House during this Congress. Now that appears to be changing. On May 16, the House Education and the Workforce (E&W) Committee’s subcommittee with jurisdiction over ERISA held a hearing on four targeted retirement bills. Those bipartisan bills include two key ideas contained in RESA (the open MEP and annuity provider selection safe harbor provisions); a proposal to increase the existing $5,000 cash-out limit to $7,600 (with future automatic inflation adjustments); and modernization of the rules related to the e-delivery of required documents.

Perhaps the most interesting aspect of the E&W’s subcommittee hearing was that Republicans and Democrats were largely in agreement—a dramatic contrast from the heated partisan debates in the E&W Committee over the last few years with respect to health care and the Department of Labor’s fiduciary rule. Hopes of possible House action on retirement issues this year have been further bolstered by a series of increasingly positive statements by Ways and Means Committee Chairman Kevin Brady (R-TX) on the subject.

Hurdles to legislative action

Still, significant barriers to legislative action on even bipartisan retirement changes remain. The legislative calendar is short (with only 47 legislative days scheduled from June through the November elections); and the legislative agenda is packed with controversial items that will quickly consume most of those legislative days. Moreover, there is still a great deal of work ahead to achieve consensus in the House on the specific elements of any retirement package, and any House package would need to be reconciled with what the Senate wants.

But the biggest impediment to enactment of legislation this year may well be political. Legislative activity in Washington is always heavily influenced by electoral politics, especially in election years. And, 2018 is no exception. This year the upcoming election is exerting a greater-than-usual influence on Congress because both parties believe that the Republicans’ continued control of Congress is very much in question. Historically, that type of uncertainty has led to more rhetoric than action.

The political dilemma is illustrated by the difficulty of removing common-sense improvements to the retirement plan rules from the larger and more heated tax debate. For example, many of Chairman Brady’s favorable statements on improving retirement savings have been raised in the context of what he refers to as Tax Reform 2.0—legislation that would build on last year’s tax reform legislation. Both Chairman Brady and the Trump Administration have said that they hope to have that legislation ready before the August recess. But Tax Reform 2.0 will likely involve a wide range of issues, including controversial proposals such as making permanent all of the individual tax cuts and tax increases that were part of last year’s tax reform, which will make Senate passage of a large tax bill highly unlikely this year.

If retirement plan reforms are included in that broader House tax reform bill, it may be difficult to later extract those retirement issues from that highly partisan tax and budget debate. But, if those partisan political obstacles can be avoided, there may be opportunities to move some non-controversial retirement proposals late in this congressional session. For example, retirement plan changes could be added to government funding bills or Federal Aviation Administration authorization legislation that must be enacted this year. Alternatively, such changes might move as stand-alone legislation before the election or even in a lame duck session (if one is held). Although that would be a difficult path due to the probable requirement for unanimous consent in the Senate, retiring Chairman Hatch’s desire to build on his legacy makes it a possibility.

There is little question of the need to keep looking for ways to strengthen retirement plans and increase retirement savings. But, even if Congress does not act on any of those ideas this year, the ideas that germinate and blossom in 2018 will be that much closer to being harvested when a new Congress convenes in January 2019.

Randy Hardock is a regular columnist for Workplace Insights focusing on legislative and regulatory matters affecting employee benefit plans. He is a partner in the Washington, D.C., law firm of Davis & Harman, LLP, having previously served as Benefits Tax Counsel at the Treasury Department and as Tax Counsel to the Senate Committee on Finance. The opinions expressed are Mr. Hardock's and do not necessarily reflect the opinions of Bank of America Merrill Lynch. Davis & Harman, LLP is not an affiliate of Bank of America Corporation.

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