House passes big retirement savings bill, first in 13 years

Old_Joe

A current article by Kathleen Pender, in the San Francisco Chronicle, reports that:

The U.S. House of Representatives on Thursday passed a bill that, if signed into law, would represent the first major change to retirement plans since 2006. A similar bill has been introduced in the Senate. Both have bipartisan support and are aimed at getting more employees into retirement plans.

The House bill would increase the tax credit employers can get when they set up their first plan and make it easier for small employers to participate in a plan with other employers. It also would allow more part-time workers into 401(k) plans, but they wouldn’t necessarily be entitled to employer contributions that full-timers may get. For individuals, it would delay by 1.5 years the age at which people must begin taking taxable withdrawals from regular (not Roth) Individual Retirement Accounts and 401(k)-type plans and let people still working past age 70.5 contribute to a regular IRA.

The bill would make it easier for employers to form or join multiple-employer defined contribution plans. Under current law, employers in the same industry or geographic area can band together and offer a single 401(k) plan that potentially offers more choice and lower fees than what they could offer individually.

However, each employer has a fiduciary duty to the plan and its participants. “If one employer violated its fiduciary duty, then all employers violated it,” said Will Hansen, chief government affairs officer with the American Retirement Association, a trade group. “That is a huge barrier” to the creation of plans, he said. The bill “would eliminate it.”

The bill also would remove the “commonality” requirement, so that 401(k) administrators could offer a nationwide, cost-effective plan to small employers. These changes [could] “drastically increase the number of small employers that provide a plan to employees.

The bill would encourage plans to offer “lifetime-income” options, such as insurance annuities that guarantee a certain monthly income in exchange for an up-front cost. It essentially says that if the annuity provider goes bust, the employer won’t be held liable if it properly vetted the provider. This provision would reduce the risk of outliving your savings and help people who have saved enough but are afraid to touch it. The annuity [allows them] to spend some of it on a monthly basis.

The bill also lets seniors who are still working at age 70.5 contribute to a regular IRA. Today they can’t, although they can contribute to a Roth IRA as long as they’re working.

“I think the biggest potential for real impact in the legislation is the development of multiple-employer retirement plans, though there’s a lot of messiness in how exactly they’re created and rolled out, as to whether they’ll gain traction,” said Michael Kitces a partner with Pinnacle Advisory Group.

The bill would [also] eliminate a provision of the federal Tax Cuts and Jobs Act that took effect last year, raising taxes on many dependent children and college students who had unearned income from various sources. That act was intended to simplify the so-called kiddie tax, and it lowered the tax for some families but raised it for others. The House bill reverses the kiddie tax provision for tax years starting in 2019.

The above are selected excerpts from the SF Chronicle article, and have been substantially edited for brevity.