BY TED GODBOUT – THE NATIONAL ASSOCIATION OF PLAN ADVISORS (NAPA)
Following weeks of intensive lobbying, the American Retirement Association has gotten a provision pulled from the COVID relief bill that could have undermined retirement savings.
The nearly $2 trillion American Rescue Plan Act of 2021 (H.R. 1319) passed by the House of Representatives Feb. 27 included a provision that would freeze the annual cost-of-living adjustments (COLAs) for overall contributions to defined contribution plans and for the maximum annual benefit under a defined benefit plan, effective for calendar years beginning after 2030—a COLA freeze that, ironically, would not apply to collectively bargained plans. Ironic, in that one of the key retirement plan provisions of the bill would be to provide funding relief to multiemployer plans—many of which are union retirement plans.
The provision also applied to the limit on the annual compensation of an employee that may be taken into account under a qualified plan.
But a substitute amendment offered by Senate Majority Leader Chuck Schumer (D-NY) removes the COLA freeze limit from the underlying bill (H.R. 1319). The amendment still needs to be approved by the full Senate, but because it was offered by the Majority Leader as a substitute to the underlying bill, it appears very likely it will pass.
“This was a tremendous victory for the ARA and the retirement plan system. The government affairs team worked tirelessly to make this happen knowing that it would have been extremely challenging to get this fixed in the future, especially without the support of unions which were exempted from the freeze,” stated Brian Graff, CEO of the American Retirement Association.
Graff also extended “Particular thanks to Senators Cardin (D-MD) and Portman (R-OH) who zealously worked to protect their legacy in EGTRRA which reversed years of misguided retirement policy. Thanks are also due to the relentless work of Capitol Hill staff, including Ron Storhaug, Senior Tax and Economic Policy Advisor for Senator Cardin and Michael Sinacore, Economic Policy Advisor for Senator Portman, and the committee staff starting in the House with Kara Getz, Counselor to the Chair of the Ways and Means Committee and Kevin McDermott, Senior Adviser to the Chair of the Education and Labor Committee, and in the Senate, Drew Crouch, Senior Counsel, Tax and ERISA, for the Finance Committee and Kendra Isaacson, Senior Counsel, Pensions for the Health, Education, Labor, and Pensions Committee. We will no doubt be dealing with similar issues in the future and the support of ARA membership will be critically necessary in our ongoing mission to protect and strengthen our nation’s retirement plan system.”
Decade-long Fight
Congressional budgeters targeting retirement plan limits is something the ARA has been fighting for years. In fact, the ARA fought for more than two decades to have the DC and DB plan savings limits increased and for the equitable treatment of contributions, with regard to reasonable COLAs in those caps. Qualified retirement plan contribution limits were cut by nearly 40% in the early 1980s, and subsequent legislation kept the limits frozen for nearly two decades. Capping those limits discourages new plan formation, as well as the continued commitment to these programs, specifically among small businesses, where most of the current coverage gap remains.
It wasn’t until passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 that balance was restored to those limits, indexing them to inflation, but these initial improvements were set to expire after 10 years until Congress made the changes permanent in the Pension Protection Act (PPA) of 2006.
Should this freeze have been implemented under the House-passed bill, these qualified retirement plan contribution and benefit limits would have decreased significantly because they would have failed to keep up with the increase in the cost of living, directly leading to smaller savings and reduced benefits in retirement. That, of course, is why removing a provision—even one with an apparently distant effective date—is so critical. Once in the law, it can be difficult to restore.
Moreover, this will negatively impact workers beyond those with higher compensation. In fact, 64% of workers who make the maximum allowable employee contribution to a DC plan are aged 45 to 64, and 43% had adjusted gross income of less than $200,000.[1]
Further, as noted above, the freeze also would have reduced the incentive for employers to offer a qualified retirement plan and could cause some employers to terminate their plans. For instance, employers could decide that the tax benefits no longer justify the costs of offering a qualified retirement plan or that employers could better attract employees by instead offering a nonqualified deferred compensation (NQDC) plan or just simply increase cash compensation.
Section 162(m) Limit
The Senate amendment does include a provision that seeks to expand the reach of the deductible limits under IRC Section 162(m) for compensation paid to certain covered employees.
In general, the amendment would broaden the $1 million deductibility cap under Section 162(m) to expand the definition of “covered employee” to pick up the five highest compensated employees, without regards to principal executive officer, principal financial officer or those required to be reported to shareholders under the Securities Exchange Act by reason of such employee being among the three highest compensated officers for the tax year. In other words, the limit would apply to the eight highest paid employees, plus the CEO and CFO. This change would be effective for tax years beginning after Dec. 31, 2026.
The existing provision specifying that a “covered employee” includes those who were covered employees of the taxpayer (or any predecessor) for any preceding taxable year beginning after Dec. 31, 2016, still applies for purposes of the principal executive officer, principal financial officer and the three highest compensated officers (the once-a-covered employee, always a covered-employee rule).
What’s Next
The Senate amendment still includes the “Butch Lewis” multiemployer plan relief provisions to, among other things, create a special financial assistance program for financially troubled multiemployer plans, as well as provide single-employer plan funding relief.
The Senate on March 4 approved a motion to begin debating H.R. 1319, but was delayed for several hours by a call for a reading of the bill. The Senate hopes to approve the legislation perhaps as soon as this weekend. Debate on the reconciliation legislation is limited and cannot be filibustered. Senators have been warned, however, that there will be some late nights over the coming days as the chamber engages in what is dubbed a “vote-a-rama,” and additional amendments are possible.
After presumed Senate passage, the bill will need to go back to the House in order for the chamber to approve the amended Senate version.
