NAGDCA News | Q3 2021

Fall Retirement Outlook

By Groom Law Group

On September 15, the House Ways and Means and Energy and Commerce Committees advanced components of the Democrats’ $3.5 trillion budget reconciliation package (“Budget Legislation” or “the Legislation”). The Legislation includes most of President Biden and Congressional Democrats’ “Build Back Better” social and economic policy priorities, touching everything from green energy tax credits to Medicare expansion to free community college and universal preschool. In addition, the Legislation would undo many features of Republicans’ Tax Cuts and Jobs Act of 2017 (“TCJA”) and raise tax revenues by approximately $3 trillion over 10 years.

Among the major tax changes contained in the Ways and Means title are:

• A return of the top individual tax rate to 39.6% from 37%;
• An increase in the top capital gains tax rate to 25% from 20% (28.8% when combined with the 3.8% net investment tax);
• A new 3% surtax on the income of certain high-income individuals and expansion of the net investment income tax;
• Changes to the tax treatment of carried interest of investment fund managers;
• Acceleration of the scheduled expiration of TCJA estate tax provisions;
• An increase in the corporate tax rate to 26.5% from 21% for businesses with gross income exceeding $5 million; and
• Various, significant international corporate tax increases.

The House Budget and Rules Committees and House Democratic leadership will now assemble the legislation passed by each House committee into a consolidated bill for a vote in the House this fall.  Among other things, the Budget Committee and leaders will be reviewing the legislation for possible budget reconciliation “Byrd rule” issues in the Senate.  In a letter to House Democrats, Speaker Pelosi indicated that House members should be prepared for adjustments to the top-line spending numbers and policies to comply with the Byrd rule.  The timeline for a House vote will likely slip into October as leaders make these adjustments and try to corral the necessary Democratic votes and overcome objections raised by members so far (e.g., overall size of spending and tax measures; drug pricing reforms; providing relief from the TCJA SALT tax limitations).

In addition, the Senate is nearly certain to amend the Legislation on the Senate floor to meet Byrd rule limitations, insert desired policies (including likely additional tax measures aimed at wealthy individuals and corporations) and trim the package’s overall net cost to attract moderate votes. At this time, it appears that the entire reconciliation process could take a couple of months – and possibly until the end of the year – to play out as members of the Democratic caucus from both chambers and sides of the ideological spectrum try to reach consensus on the scope and contents of the legislation.

In the meantime, Congressional lawmakers will need to pass a stop-gap continuing funding resolution to keep the federal government operating after September 30, as well as a suspension of the federal debt limit in the next few weeks.  To that end, on September 20 Speaker Pelosi and Minority Leader Schumer announced that they would link a vote on the suspension of the debt limit through December 2022 with a stop-gap measure to fund the government until the end of this year and provide disaster and Afghanistan resettlement funding.  Senate Minority Leader McConnell has indicated that Senate Republicans will not support a suspension of the debt limit due to concerns over the pending budget reconciliation bill, setting up a possible governmental shutdown and default.

Key Retirement Provisions in Budget Reconciliation Bill

The Ways and Means portion of the Legislation includes numerous retirement provisions, including:

• A requirement that most employers must facilitate employee enrollment in an automatic retirement plan (certain small employers and governments exempted);
  • Existing state auto-enrollment plans, such as CalSavers and Illinois Secure Choice, are grandfathered and automatically meet the new federal requirements;
• A change to make the existing Saver’s Credit refundable and a direct “matching contribution” to retirement accounts;
• A new, aggregate limit of $10 million for defined contribution plans, Roth IRAs, and IRAs for savers with income above $400,000 ($450,000 for married filing joint);
  • The provision includes a requirement for plan sponsors to report participants with plan balances in excess of $2.5 million; and
• Limits on in-plan Roth conversions, back-door Roth IRA conversions and certain investments in IRAs.

More information on the retirement provisions in the Legislation can be found here.

Update on SECURE 2.0/Cardin-Portman

While the budget reconciliation package generally does not affect governmental plans and does not address NAGDCA’s legislative priorities, two major bills pending in Congress include many proposals of interest to governmental plans. “SECURE 2.0” – officially the Securing a Strong Retirement Act (H.R. 2954) introduced by House Ways and Means Committee Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) and approved by the Ways and Means Committee – and the Retirement Security and Savings Act (S. 1770), known simply as “Cardin-Portman” for its two sponsors, Sens. Ben Cardin (D-MD) and Rob Portman (R-OH), are the leading, comprehensive retirement reform bills of the 117th Congress. The two bills are substantially similar in many areas, although as seen below, the bills do differ in some respects.

Priorities in SECURE 2.0 and Cardin-Portman

SECURE 2.0 and Cardin-Portman contain two of NAGDCA’s top priorities: allowing 403(b)s to invest in collective investment trusts (“CITs”) and eliminating the “first day of the month” rule for 457 plans. Regarding the former, the bills would correct a discrepancy that 403(b) plans are not allowed to invest in CITs while their 401(a), 401(k), and 457(b) counterparts are. Regarding the latter, the bills would eliminate the longstanding rule only applicable to 457(b) plans limiting the timing of deferral changes.

Priorities in Cardin-Portman

The Cardin-Portman legislation contains four additional NAGDCA priorities. First, the bill would allow retirement plan participants to make certain charitable distributions directly from their accounts, as IRA account holders are currently permitted to do. Second, the legislation would allow non-spousal beneficiaries of inherited IRA assets to roll over such assets into their employer-based plans. Further, the bill would give Roth contributions to an employer-plan the same treatment as Roth IRA assets by exempting them from the lifetime required minimum distribution rules. Lastly, the bill would allow Roth IRA assets to be rolled into an employer-sponsored plan.

Priorities Not Included in Either Bill

Neither bill addresses NAGDCA’s priority of allowing deemed IRAs to invest in CITs. Two of NAGDCA’s remaining priorities are defensive instead of offensive ones: preventing wholesale Rothification of the retirement system and preventing the elimination of special government plan features. Thankfully for NAGDCA members, neither of those are threats at this time.

Outlook for Passage

Congress is currently completely absorbed with the $3.5 trillion Build Back Better budget reconciliation package, a separate Senate-passed $550 billion, bipartisan infrastructure package, the looming debt ceiling suspension expiration, and providing for government agency funding after the end of the federal fiscal year on September 30. These major priorities mean that passage of SECURE 2.0 and Cardin-Portman will likely not occur until 2022, although some further movement could occur this fall.

2021 NAGDCA AWARD WINNERS

Congratulations to our 2021 Leadership Award and Caple President’s Award winners! NAGDCA’s annual awards program recognizes excellence and innovation in retirement plan design, participant education, technology, and/or effective communication methods in government defined contribution plans.

We encourage you to below to learn more about your peers’ innovative, award-winning projects and campaigns! Registration for the Award Winner showcase will open next month.

LEADERSHIP AWARD WINNERS
PRESIDENT’S AWARD WINNER

EXECUTIVE BOARD FILLS VACANT PAST PRESIDENT SEAT

Earlier this week, the NAGDCA Executive Board appointed Sandy Blair, CalSTRS, as the Board Past President, filling the previously vacant seat as provided for in the NAGDCA Bylaws. This will be her second consecutive term as Past President.

Click here to meet the Executive Board.

PROPOSED AMENDMENTS PASSED

Thanks to all those who voted to approve the proposed amendments to the NAGDCA bylaws. Click here to review the revised Bylaws.