Compliance News | July 25, 2022
Most of the retirement reform bill provisions that are referred to as SECURE 2.0 are aimed at DC plans. However, there are several provisions that would affect DB plans.
This insight addresses the limited number of provisions that affect only DB plans (and at that mostly single-employer DB plans).
The VRP is indexed each year by a cost-of-living index. The bills would eliminate further indexing and the VRP would be frozen at its current rate.
Cash-balance plans need to project interest for several purposes. A new rule would allow that projection to be at a reasonable rate (not to exceed 6 percent). Current law requires projections at the prior year’s rate, which overemphasizes the positive or negative return of the prior year.
The current annual funding notice for single-employer DB plans requires several different funding percentages (e.g., with and without smoothing). One of the bills would limit the notice provided by single-employer plans to one set of funding percentages: the non-smoothed funding ratio based on the assets and liabilities used for PBGC’s VRP.
Single-employer DB plans may not pay benefits (under section 415(b) of the Code) exceeding 100 percent of compensation. This limit does not apply to governmental, multiemployer and certain other types of DB plans. One of the bills would remove the limit for non-highly compensated employees for the Rural Electric Cooperatives Plan, a multiple employer plan subject to the single-employer plan rules. This provision, if kept, may be expanded to cover additional single-employer plans.
Under a provision of the tax code that will expire in 2025, transfers of assets from the pension component of a DB plan to the 401(h) account for retiree health of the same plan are allowed only if the plan is substantially overfunded and other conditions are met. Under one of the bills, these rules would be extended until 2032. The bill would also make changes to the overfunding required in certain situations. For example, the percentage funding would be lowered from 125 percent to 110 percent if no more than 1.75 percent of the plan’s pension assets are transferred to the 401(h) account.
Members of Congress are expected to negotiate a bicameral, bipartisan version for passage in the House and Senate. That version could include provisions that are in none of the bills currently and revisions to the existing proposed changes. Enactment is not likely until after the November election.
Because retirement bills rarely are brought up for a vote by themselves, if SECURE 2.0 moves forward, it is likely it will be added to an end-of-year “must-pass” bill. This could be the appropriations bill, a tax bill or some other “must-pass” bill.
The three SECURE 2.0 bills are:
There are numerous provisions in these three bills, some identical, some with minor modifications and some with no parallel.
These provisions continue the work done by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which is why SECURE 2.0 is shorthand that many retirement industry professionals use to describe the provisions. (We discussed the SECURE Act in our March 4, 2020 insight.)
We discuss more SECURE 2.0 provisions in other July 25, 2022 insights: “SECURE 2.0 Retirement Reform: Focus on DC Plan Provisions” and “SECURE 2.0 Would Change the RMD Rules, Corrections and More.”
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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