February 11, 2016
The federal Budget for Fiscal Year 2017 (Budget), which was published on February 9, 2016, includes several proposals that would affect retirement plans and savings.
Defined Contribution Open MEPs
A multiple-employer plan (MEP) is a plan maintained under the “single-employer” rules in which two or more unrelated employers participate. Under current law, the unrelated employers must have a “common bond” in order to qualify as a MEP. The Budget would eliminate the common bond requirement for defined contribution MEPs, and replace it with various safeguards. There have been bi-partisan proposals for these open MEPs over the last several years, but this is the first time that the Obama Administration has supported the concept. The DOL would have authority to issue guidance, including guidance to allow multiple employer plans to spin off the benefits of an employer who violates the applicable laws (thereby addressing the nondiscrimination testing “one-bad-apple” problem).
Pilot Program Funding for State Retirement Savings Initiatives for Private-Sector Employees
In November 2015, the Department of Labor (DOL) issued guidance aimed at state-sponsored auto-IRAs and retirement marketplaces for private-sector employees who do not have access to employment-related retirement savings. This guidance specified ways for states to enact laws consistent with the preemption provisions of the Employee Retirement Income Security Act (ERISA) and allowed for state-sponsored MEPs. In addition, the DOL announced that it would be requesting $6.5 million to assist in the creation of pilot programs for state-based 401(k)-type arrangements and automatic enrollment IRAs. The Budget would provide that $6.5 million.
Mandatory Automatic-Enrollment IRAs
As it has in past years, the Budget would require most employers (those in existence for at least two years and that have more than 10 employees) that do not currently offer a retirement plan to provide an automatic enrollment IRA program. Under the proposal, no employer contributions to the IRAs would be required and employees could opt out of the program. Employers could opt-out only by providing a different type of retirement savings plan.
For the first time in many years, the Budget does not include a proposal to increase single-employer Pension Benefit Guaranty Corporation (PBGC) premiums. The Budget would, however, authorize PBGC to raise $15 billion for the multiemployer program over the next 10 years (the budget window) and assumes this would be done by developing a multiemployer plan variable-rate premium applicable to underfunded plans and an “exit” premium applicable to employers that withdraw from multiemployer plans. The Budget allows PBGC to establish both the basis and the rate for the new premiums. Congress has regularly rejected past suggestions that PBGC be given discretion to set and allocate premiums for the single-employer variable-rate premium.
Other Significant Items
The Budget includes a number of other significant items related to retirement plans and savings:
While the Republican-controlled Congress is not expected to accept these Budget proposals, several of them could show up in amended form as part of bi-partisan legislation later this year or in future years. This is most likely for the open MEP proposal.
Sibson helps our clients navigate the maze of federal, state and local laws and regulations related to benefit plans.Learn more about our compliance services