By Andy Ives, CFP®, AIF®
There is a 131-page bill currently working its way through the U.S. legislature. The proposal would amend the Internal Revenue Code and encourage retirement savings. While the “Retirement Enhancement and Savings Act of 2018,” or RESA, still needs to make it through Congress – potentially before year end – it has strong tailwinds.
RESA recognizes that small businesses face a mountain of obstacles. Deciding which employee benefit to implement oftentimes comes down to expense and perceived importance. Covering the costs of an employee retirement plan can be a challenge. If a retirement plan is considered, many companies will pass plan fees to the participants, select low-cost/low-service providers, or just decide to delay implementing a plan for another year.
RESA contains some interesting provisions which could address this cost problem.
Multi-employer retirement plans (MEPs) are typically designed for a group of affiliated or related businesses to pool their assets in order to form a single retirement plan. Economies of scale allow this group of smaller companies to enjoy the plan benefits (i.e. pricing) that larger companies offer their employees. However, finding enough related businesses who want to add a plan can be difficult. If passed, RESA might do away with this “commonality” requirement and allow unrelated businesses to band together.
Another way RESA addresses the need for more workers to gain access to a retirement plan is to increase the available tax credit to plan sponsors. Currently, companies opening a new 401(k) plan receive a $500 tax credit. RESA could potentially increase the tax credit to $5,000 over three years. In addition, RESA suggests a unique way for new and existing plans to gain an extra $500 credit over three years…add automatic enrollment.
Regarding IRAs, there is a proposed provision within the RESA bill that would allow IRA contributions for employees still working at age 70½. While an individual with earned income who is over age 70½ can already contribute to a Roth IRA and 401(k), contributing to a traditional IRA after age 70½ has always been against the rules. If adopted, it remains to be seen how allowing contributions to a traditional IRA after age 70½ might affect IRA required minimum distributions.
There are many other retirement-focused provisions within the bill, and there is sure to be debate over the details. Nothing is set in stone. However, while the Retirement Enhancement and Savings Act of 2018 still has some hoops to jump through, RESA appears to be on the right path. Stay tuned!
A summary of the Retirement Enhancement and Savings Act can be found here. https://www.congress.gov/bill/115th-congress/senate-bill/2526