For Plan Sponsors,Retirement Savings Plans,Custom

The 117th Congress and the Prospects for Pension Reform

February 2, 2021

As we reported just before the November elections, the House Ways and Means Committee Chair Richard Neal (D - MA) and Ranking Member Kevin Brady (R -TX) introduced the "Secure a Strong Retirement Act of 2020," which has also been called "SECURE 2.0."  This major pension reform bill incorporates numerous pension reform ideas discussed over the past several years. 

In the Senate, Senator Rob Portman (R - OH) and Senator Ben Cardin (D - MD) have worked for years to promote bipartisan pension legislation, most recently in 2019 when they introduced the Retirement Security and Savings Act (RSSA). 

We now have members of both the House and Senate advancing significant bipartisan pension reform.  Given the Senate tradition of comity, particularly for retiring Senators (Senator Portman has announced his retirement at the end of his term in 2022), the prospects of significant pension reform happening are very real.

The House (SECURE 2.0) and Senate (RSSA) pension bills overlap in many areas but each contain provisions absent from the other bill.  Even where the bills overlap, however, there are differences at the detail level.

We've summarized those major provisions of the two proposed pension bills impacting governmental and nonprofit employers and employees below.  While many of the provisions apply only to ERISA plans, governmental plans often adopt ERISA provisions as a best practice.

Common Provisions between SECURE 2.0 and RSSA

  • Modifies Required Minimum Distribution (RMD) rules
    • Increases starting age from 72 to 75
    • Exempts small DC and IRA account balances from RMD requirements
    • Reduces excise tax for RMD failures
    • Removes RMD barriers for certain types of annuities
  • Allows matching contributions in a DC plan for student loan repayments
  • Allows 403(b) plans to invest in Collective Investment Trusts
  • Eliminates the 457(b) "first day of the month" requirement
  • Modifies catch-up contributions rules
    • Increases catch-up contribution limit for individuals who have attained age 60.  
    • Indexes IRA catch-up contribution amounts for inflation
  • Expands Saver’s Credit for lower income participants
  • Reduces service requirement for plan participation for long-term, part-time employees
  • Allows small employer financial incentives for contributing to a DC plan.  
  • Liberalizes rules applicable to deferred annuity beginning at advanced ages (known as Qualified Longevity Annuity Contracts (QLAC))
  • Allows modified performance benchmarks for target date, balanced, and other asset allocation funds
  • Expands IRA qualified charitable distribution to DC plans

RSSA Provisions not contained in SECURE 2.0

  • Allows non-spousal beneficiaries to rollover distributions indirectly to an IRA or directly to a DC plan
  • Clarifies that certain small distributions from a 457 plan prior to 1996 do not preclude future plan participation
  • Allows annuity payments to be used to meet RMD distribution requirements
  • Clarifies when “substantially equal periodic payments” are exempt from the 10% tax for early distributions
  • Allows severance pay and back pay to be deferred in a DC plan
  • Allows for the merger or transfer of assets between a 401(a) and 403(b) plan
  • Harmonizes the hardship distribution rules for 401(k) and 403(b) plans
  • Allows spousal beneficiaries to be treated as the participant/IRA owner for RMDs
  • Allows Roth IRAs to be rolled over to DC plans

SECURE 2.0 Provisions not contained in RSSA

  • Allows for 403(b) multiple employer plans
  • Would require new DC plans (with certain exceptions, such as governmental plans) to include automatic enrollment and auto-escalation features
  • Excludes from federal taxation certain disability-related pension payments for first responders
  • Allows non-profit firefighters and emergency medical service workers to join a state or local retirement system
  • Allows employers additional flexibility when retirement plan overpayments are made
  • Modifies, but does not eliminate, the requirement for paper benefit statements for retirement plans
  • Provides for SECURE Act technical corrections          

The Way Forward

Pension legislation can take the form of a stand-alone bill or be part of a broader legislative package.  Both SECURE 2.0 and RSSA, or some combination of the two, will need to be reintroduced in the current session of Congress for further consideration.

While the prospects for passage of significant pension reform appear high, there are a number of areas that will take legislative priority, so the timing of pension reform legislation remains uncertain.  While we are optimistic about the changes that Congress are considering, we do not expect broad-based pension reform to be part of the Biden administration’s first 100 days legislative agenda given the focus on addressing numerous matters including measures to extend additional COVID relief.

ICMA-RC will continue to closely monitor these bills and will keep you informed of developments.    Please contact your ICMA-RC Representative if you have questions.

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