House OKs big changes to retirement accounts

The House of Representatives passed a bill Thursday that, if signed into law, would represent the first major change to retirement plans since 2006.

The bill, HR1994, passed 417-3. A similar bill in the Senate also has bipartisan support. Both are designed to get more employees covered by retirement plans, especially at smaller companies that don’t offer one. But experts are divided on how big a dent they can put in the huge gap in retirement savings.

Among its many provisions, the House bill would increase the tax credit employers can get when they start a plan, and make it easier for small employers to participate in a plan with other employers. It also would allow more long-term, part-time workers into 401(k) plans, but they wouldn’t necessarily be entitled to the employer contributions that full-timers may get.

For individuals, it would delay by 1½ years the age at which people must begin taking taxable withdrawals from regular individual retirement accounts and 401(k)-type plans, and let people still working past age 70½ contribute to a regular IRA.

To help pay for the bill, it would require many people who inherit IRAs, and 401(k)-type accounts to withdraw

the money over 10 years and pay any tax due. Today, any heir named as the account’s beneficiary can withdraw the money over their life expectancy — a benefit called the “stretch IRA.” The new 10-year deadline wouldn’t apply to some heirs, including the account owner’s surviving spouse or minor children.

This will probably be the most controversial provision, even though many heirs deplete their accounts in fewer than 10 years. The bill’s authors “never took into account how many beneficiaries take it out on the way to the funeral,” quipped IRA expert Ed Slott.

At any moment in time, about half of American workers are in jobs that don’t have a retirement plan. At retirement, two-thirds of households have some source of income other than Social Security and onethird don’t, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

The last time Congress tried to narrow this gap was in the 2006 Pension Protection Act, which ushered in auto-enrollment in retirement plans. Munnell said she’s happy to see Congress working together on any retirement legislation, but is not sure how effective this bill would be. “My view is, this is a big bill that will have a relatively small, but positive impact,” she said.

The bill’s centerpiece 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 has more choices 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 financial institutions that run 401(k) plans could offer a nationwide, cost-effective plan to small employers. Whether they would is the make-or-break question.

Hansen said these changes would “drastically increase the number of small employers that provide a plan to employees.”

Munnell is not so sure. “Small business has a lot to worry about,” she said, and in some cases “their employees might even prefer cash to benefits.”

The bill also would increase the tax credit employers can claim when they start up a retirement plan from $500 to as much as $5,000 a year for three years. They would get an extra $500 a year for three years if they automatically enroll employees, unless they opt out. It’s unclear whether they’d get the credit for joining a multiple-employer plan, Hansen said.

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 “gives them permission to spend some of it on a monthly basis,” Munnell said.

“The whole part of saving up over your lifetime it to draw it down in retirement and live decently,” she added.

Many people forget that, which is why so many people complain when they have to start taking mandatory withdrawals from their regular IRAs and 401(k) plans at age 70½. The bill would delay these required minimum distributions to 72.

Slott said the change would delay taxable withdrawals “for a bit, and get rid of the halfyear,” which is “an unnecessary complication” that causes errors.

The bill, nicknamed the Secure Act, also lets seniors who are still working past age 70½ 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,” said Michael Kitces, a partner with Pinnacle Advisory Group.

He said the “most overblown” provision is the delay in required minimum distributions. “Most retirees need their IRAs to live on,” he said. The number “who can leave them untouched in their 70s is not likely very large. And even then, the (distributions) in the first two years (age 70 and 71) amount to barely more than 3.6% (of the account balance) per year.”

In an unrelated move, the bill would eliminate a provision of the federal Tax Cuts and Jobs Act that took effect last year. This provision raised taxes on many dependent children and college students who had unearned income from sources including military survivor benefits and scholarships used for non-tuition purposes.

The act was intended to simplify what is known as the kiddie tax, and it lowered the tax for some families but raised it for others. The House bill would reverse the kiddie tax provision for tax years starting in 2019. For 2018, families could compute their tax under either rate structure and use whichever is most beneficial.

House Ways and Means Committee Chairman Richard Neal, D-Mass., one of the bill’s authors, said in a statement that he was proud to “incorporate a much-needed fix to reverse unfair and unexpected high taxes on Gold Star families, low-income scholarship recipients, and children of fallen first responders, among others. I encourage the Senate to follow our lead and swiftly pass this important bill that goes a long way in helping American families prepare for a financially secure retirement.”