Wintrust Retirement Plan Services - Update from the Hill

Just over a month ago, we joined a group of colleagues from around the country on our annual trip to D.C. in support of the Employee Benefits and Retirement Plan Industries.  For over 5 years now the National Association of Plan Advisors (NAPA) & the American Retirement Association (ARA) have met annually with decision makers on Capitol Hill to enhance the current retirement plan system and to discuss the effects legislation will have on plan sponsors and most importantly employees & plan participants.  Over the past few years the focus of our discussions has been the Department of Labor’s “Conflict of Interest” or “Fiduciary Rule”.  With the implementation date of many aspects of this rule now behind us (June 9th, 2017) the attention of retirement policy experts has quickly transitioned to the impact of potential tax reform proposals.

Needless to say there were many items on the agenda in Washington, from modifications to the Affordable Care Act to tax reform and the upcoming debt ceiling debate.  For the purpose of our comments we focused on the potential influence qualified retirement plans may have related to the on-going tax reform debate and pending legislation.  With the help of our friend at the American Retirement Association and the National Association of Plan Advisors, we have provided the following information to bring you up to speed on what a tax reform package may mean to the retirement plan industry.  Obviously this is a very fluid situation and various proposals will be created in the months to come.  That said we believe qualified retirement plan contribution types and limits will need to be included in any proposal intended to be revenue neutral and as updates are made available we will be sure to pass them along.  In the meantime, you may also follow us on LinkedIn  for related articles and information.  

Republicans control the White House and Congress for the first time in more than a decade, which has elevated the tax reform debate. The White House, Senate, and House of Representatives all aim to come to agreement on essential tax reform concepts this fall. Much uncertainty about the details remain as pressure to make progress on this issue continues to build for the GOP. The ARA GAC team has been actively lobbying all involved parties to explain how the current tax incentives underpin the financial security of the tens of millions of working Americans that participate in workplace retirement plans.

In April, the White House released a one-page tax reform proposal. The proposal aims to lower businesses tax rate to 15 percent, and reduces the individual income tax brackets from seven to three: 10, 25 and 35 percent. It would eliminate nearly all tax deductions, including those at the state and local level, but protect charitable and mortgage deductions. When directly asked about 401(k) contribution deferral status, the Administration clarified that the plan would not affect 401(k) contributions.

In June, National Economic Council Director Gary Cohn reiterated that the White House expects Congress to act on tax reform this year, and promised the White House will deliver ''...a very detailed, drafted tax plan to be delivered to Congress by when they get back from the August recess." As Treasury and the White House work on this plan, ARA will serve as a resource and continue to monitor developments.

Speaker of the House Paul Ryan (R-WI, 1st), Chairman of the House Ways & Means Committee Congressman Kevin Brady (R-TX, 8th), and staff continue to work on reforms to the federal tax code. The Committee has already held two tax reform hearings this year on broad based topics with two more scheduled for July prior to an expected release of a more detailed proposal this fall.

We expect that this proposal will largely be based on the Better Way Blueprint that was issued in June 2016. On the business side, the Blueprint's revenue raisers face significant problems. Large retailers have been fiercely lobbying Members to speak out against the proposed border adjustment tax (BAT) included in the Blueprint. Likewise, large utilities and other impacted f1r s are waging lobbying campaign against the Blueprint's net interest deduction proposal.

On the individual side, the Blueprint includes significant cuts in the tax rates on both wage and non-retirement investment income. These changes could alter the cost-benefit calculus that a small business owner uses to determine the worth of sponsoring a retirement plan. The Blueprint pledges, however, to "continue the current incentives for savings." In addition the Blueprint directs the Ways & Means Committee “to consolidate and reform the multiple different retirement savings provisions in the current tax code to provide effective and efficient incentives for savings and investments." This could spell trouble for 403(b) and 457 plans that enjoy more generous contribution rules.

The Senate GOP is currently focused on a repeal and replacement of the Affordable Care Act, but a comprehensive reform of the tax code remains a key legislative priority for the caucus. Senate Majority Leader Mitch McConnell (R-KY) has publicly expressed skepticism that Senate Democrats will be willing to cooperate in the process. This is a strong signal that the GOP leadership in Congress will plan to use a procedural tool known as budget reconciliation that will give the GOP leadership the ability to pass tax reform legislation in the Senate using only GOP votes.

Both the House GOP's Better Way Blueprint and the Trump Administration's tax reform proposal seek to cap the tax rate on pass-through business income at a rate lower than the ordinary or wage income tax rate. The White House has proposed lowering this rate to 15% while Speaker Ryan and Chairman Brady of the Ways and Means Committee are working for a rate of 25%. Our concern is that if a successful business owner in is taxed at a higher rate on their 401(k) deferred money at withdrawal than today's lower pass-through rate, and can avoid compliance, reporting, and audit responsibility, they could be strongly discouraged from setting up a retirement plan. This problem can be corrected by applying the pass-through income tax rate on retirement plan distributions associated with retirement plan contributions that would otherwise be pass-through income if not contributed. As Congress works on tax reform, whatever rate a business owner has, Congress should ensure tax incentives to put a retirement plan in place are preserved or increased.

As this tax-code writing process continues, ARA will remain vigilant in our tireless effort to educate policymakers on the nature of the retirement savings tax incentives and how they differ from other tax incentives. Now, more than ever, Congress is in particular need of the valuable expertise that ARA (and only ARA) can bring to the table.

The majority of congressional bills signed into law in the 115th Congress have been passed through the Congressional Review Act (CRA), a procedure which allows Congress to repeal regulations imposed by the executive branch and former administration.
In April, Congress passed and the President signed into law H.J. Res.67 - "Joint Resolution disapproving the rule submitted by the Department of Labor relating to savings arrangements established by qualified State political subdivisions for non-­ governmental employees" which repeals a January 2017 Department of Labor (DOL) rule that exempted municipal retirement plans from ERISA. In May, Congress and President Trump also enacted H.J. Res. 67, which abolished a similar rule for state facilitated retirement plans for private sector workers.

In June, the House passed H.R. 10, the Financial CHOICE Act of 2017, which includes provisions to dismantle parts of Dodd-Frank, limit authority of the Federal Reserve, restructure the Consumer Financial Protection Bureau and repeal the DOL Fiduciary Rule. H.R. 10 passed in the House 233-186 and was sent to the Senate.

In February Congressmen Vern Buchanan (R-FL, 16th), Richard Neal (D-MA, 1st), Jim Renacci (R-OH, 16th), and Ron Kind (D-WI, 3rd) re-introduced the Retirement Security for American Workers Act (H.R. 854). The legislation creates pooled employer plans (PEPs) which allows for two otherwise unrelated private employers to join a common retirement plan. The bill requires a designated pooled plan provider (PPP) to be responsible for the operation of the plan. The PPP would be the named fiduciary to the plan and would act as a 3(16) plan administrator. The PEP would have a single plan document, single Form 5500 filing and be subject to a single plan audit. The legislation also includes a procedure to spin­ off assets of non-compliant participating employers without tainting the entire plan. This legislation mirrors a provision in the Retirement Enhancement and Savings Act (RESA) that cleared the Senate Finance Committee by a unanimous 26-0 vote in September 2016.

As a result of efforts by ARA, a coalition of other organizations, and various companies to educate Congress about how increases to PBGC premiums are harmful to the private defined benefit pension system, Rep. Jim Renacci (R­ OH, 16th) and Rep. Mark Pocan (D-WI., 2nd) re-introduced the Pension Budget and Integrity Act (H.R. 761) in the 115th Congress. H.R. 761 would halt the use of PBGC premium increases as a budget gimmick to raise fake revenue. The ARA GAC team is active on Capitol Hill in support of this legislation.

On June 20, Senate Aging Committee Chair Susan Collins CR-ME) and Sen. Bill Nelson (D-FL),a senior member of the Senate Finance Committee, reintroduced the Retirement Security Act, which seeks to make it easier for small businesses to offer retirement plans and for individuals to save more for retirement.

Pushing what may be one of the most talked-about retirement policy proposals over the past year, the bill would make it easier for businesses to join a multiple employer plan (MEP) by eliminating the so-called "nexus" provision requiring businesses to have some connection in order to join. This change would allow businesses to share the administrative duties of sponsoring a retirement plan and help lower costs, among other benefits.

Like its predecessor from January 2015, the bill also would shield members of a MEP from losing the tax-qualified status of the entire plan if one employer in the MEP is non-compliant and fails to meet their requirements under the plan. In addition:

  • the Treasury would be directed to “simplify, clarify, and consolidate required notices to lessen costs" of maintaining a retirement plan;
  • the IRS would be prevented from challenging the tax benefits of plans that provide employees with an employer match on contributions of up to 10°/o of their pay; and
  • to ensure that current measures to encourage savings are functioning as they were intended, the Treasury Department would be directed to make the Saver's Credit available to Form 1040 EZ filers.

Please let us know if you have any questions or would like additional information.  

Daniel Peluse, AIF®, CPFA, C(k)P, CBFA, CRPS®
Director of Retirement Plan Services  |  Wintrust Wealth Management
231 S. LaSalle St, 13th Floor,  Chicago, Illinois 60604
Phone: 312.373.7003  |  Fax: 855.362.3918

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