Representatives Pat Tiberi (R-OH) and Richard E. Neal (D-MA), both members of the House Ways & Means Committee, and Senators Rob Portman (R-OH) and Ben Cardin (D-MD), both members of the Senate Finance Committee, introduced updated legislation Wednesday designed to protect the retirement security of many American workers. The Retirement Security Preservation Act of 2017 (RSPA) amends the nondiscrimination rules that apply to qualified retirement plans to protect older, longer-service participants whose defined benefit plans have been closed or frozen. The bill builds on previous legislation and regulatory work to address this issue, and was approved unanimously by the Senate Finance Committee as part of a retirement-related legislative package in September 2016.
“The Retirement Security Preservation Act will give certainty to longer-serving employees who have worked hard to plan and save for their retirement years,” said Congressman Tiberi. “This is a necessary fix that will prevent them from unfairly losing their pension benefits due to the IRS’s nondiscrimination rules.”
“Americans work hard to prepare for retirement, so it is absolutely critical that their nest eggs are protected,” said Congressman Neal. “This bipartisan bill would play an important role in strengthening retirement security for many Americans, and I look forward to working with my Congressional colleagues – on both sides of the aisle – to swiftly pass this measure.”
“This important bill will help protect the retirement security of hundreds of thousands of dedicated working families who are counting on their pension benefits in their retirement,” Senator Portman said. “There is strong bipartisan support for the Retirement Security Preservation Act in both the House and Senate, and I would urge both chambers to pass it quickly so it can be signed into law.”
“Older workers who have been saving for their retirement should not be penalized playing by the rules and planning ahead,” said Senator Cardin. “We need to get back to the original intent of the regulations, which was to encourage greater participation in retirement savings programs. The number of workers whose savings are put in jeopardy by inaction on this issue grows each day. The House and the Senate should consider this bill as quickly as possible to ensure the retirement security of these workers.”
A summary of the bill can be found here. Bill text can be downloaded here.
Over the past several years, many companies have transitioned from “traditional” defined benefit (DB) plans to other retirement plan models, such as defined contribution (DC) plans. In doing so, a large number of these companies have elected to grandfather existing employees by closing their traditional DB plans (also known as “soft freezing”); other companies have “hard frozen” their traditional DB plans but assisted existing employees in other ways, such as through enhanced DC plan contributions. When a plan closes, existing participants or a subset of participants continue to earn benefits under the traditional DB plan. When a plan is “hard frozen,” employees earn no new benefits under the plan.
Over time, existing employees in the closed plan typically build seniority and become more highly compensated than younger, newer employees, who are more likely to have greater job turnover. This widens the income gap between the employees in the closed plan and the new employees.
Because the grandfathered group in the closed plan generally becomes more highly compensated, closed plans almost always end up inadvertently violating the IRS nondiscrimination testing rules. This clearly is not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into different types of plans that may not provide enough time to accumulate sufficient benefits before retirement.
The RSPA addresses the problem by amending the nondiscrimination rules to protect older workers in plans that have been closed or frozen. The bill also contains anti-abuse rules related to closed and frozen plans. The legislation is based on H.R. 5381 and S. 2855, which were introduced in the 113th Congress. Since the introduction of those bills, Treasury has proposed regulations that partially address these issues, but only for a certain subset of affected plans. The RSPA incorporates elements of the Treasury regulations and provides targeted relief to plans who are not be able to take advantage of the Treasury regulations.