Legislative and regulatory brief

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FINANCIAL LIFE BENEFITS®

Legislative and regulatory brief

3Q 2021

For Plan Sponsor and Consultant use only. Distribution to any other audience is prohibited.

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For Plan Sponsor and Consultant use only. Distribution to any other audience is prohibited. 2

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Policy topics

• Legislative Activity ……….. 4

• Regulatory Updates ……… 8 – Department of Labor Guidance and Projects

– IRS/Treasury Guidance and Projects

• Appendix: Additional legislative proposals of interest ……… 12

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Legislative Activity

• “SECURE Act 2.0”

• Fall Reconciliation Bill

• Additional Congressional Activity

For Plan Sponsor and Consultant use only. Distribution to any other audience is prohibited. | 3Q 2021 Legislative and regulatory brief 4

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Legislative Activity

“SECURE Act 2.0”

STATUS: While the various proposals still enjoy bi-partisan support in both the House and Senate, the next major retirement-related legislation may be pushed into 2022 due to congressional priorities on budget reconciliation and infrastructure.

Status in Washington

House status

Securing a Strong Retirement Act of 2021 (SSRA), H.R. 2954 still in process; a full floor vote is not expected soon.

Ways & Means Committee (W&M). In the first week in May, the House W&M approved by unanimous consent the Securing a Strong Retirement Act of 2021 (SSRA), H.R. 2954. Since then, W&M continues to meet on possible additions or amendments to the bill.

Labor Committee. Expected to mark up the House SSRA bill soon, but it is not yet clear if the mark-up will be along party lines or bi-partisan, and whether this could slow the progress of the legislation.

Senate status

No committee votes have taken place yet on the Senate version of Retirement Security and Savings Act S. 1431.

Finance Committee. Next step would be for Finance to mark up the Senate bill. It appears they will do so after the reconciliation bill is resolved in the fall, which could be as late as November or December. Finance is very focused on certain topics, which may result in additional provisions in the bill addressing emergency savings and auto portability. The Senate will also have to think about how to offset some of these provisions—which are costly—with other revenue sources.

HELP Committee. The HELP (Health, Education, Labor and Pensions) committee will also put their mark on the proposal. Key issues HELP is concerned with include: e-delivery with a paper benefit statement requirement, spousal consent expansion to defined contribution plans (we saw this as part of the previously introduced Women’s Retirement Protection Act), cybersecurity, ESG investments, and missing participants.

Highlights of elements common to both proposals:

• Additional $5,000 catch-up contribution at age 60.

• Expand charitable distributions at age 70½ to employer plans.

• Increased required beginning age for required minimum distributions (RMD) to age 75.

• Permit “matching contributions” based on student loan payments.

• Enhance Saver’s Credit and make it refundable.

• Provide long-term, part-time employees access to elective deferrals after two years.

Our Point of View

• Most elements of the proposals enjoy bi-partisan support. The involvement of the House Labor committee and the Senate HELP committee could see the addition of more partisan elements to the legislation, which may create a more difficult path forward.

• Both proposals provide for simplification of administration of employer plans, which is positive for plan sponsors.

• Senate Democrats strongly support making the Enhanced Saver’s Credit refundable as it expands access to retirement savings to more low and moderate income individuals. However, it is an expensive provision and it remains to be seen how it will be paid for. This could be added to the fall reconciliation bill, where the Senate would only need 51 votes to pass in the Senate, thereby removing a partisan issue from debate and retaining bi-partisan support for the passage of a Secure 2.0 package in 2022.

• There remain provisions that are good for the participant or taxpayer but will provide administrative challenges for providers and plan sponsors if they come to fruition, including:

– An RMD exemption for individuals with $100,000 or less in aggregate retirement savings presents a challenge for plan sponsors’ compliance with RMD rules as there is no way to know what assets individuals may hold outside of their plan account.

– Shortening the years-of-service requirement for access to elective deferrals for long-term, part-time employees (recently created under the SECURE Act).

– Requirement of an annual hard copy benefit statement, particularly on the heels of expanded electronic delivery safe harbors, feels like a step backward and may impact plan sponsor use of the new safe harbor.

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Legislative Activity

Fall Reconciliation Bill

STATUS: As we head into the fall of 2021 and Congress returns from their August recess, they will first focus on passing a budget bill by the end of September to keep the government open, as well as a reconciliation bill they have been working on all summer.

Status in Washington

Second reconciliation bill of this Congress

Reconciliation bills only need a simple majority to pass, and the Democrats can leverage this to advance their legislative priorities in the fall, even with a slim majority. The Senate passed a bi-partisan infrastructure bill on August 10 before their August recess. Next it will go to the House for a vote.

Retirement and benefits provisions that may be part of the reconciliation bill

• Refundable Saver’s Credit. Increase the amount of the existing Saver’s Credit and make it refundable and payable only to an IRA or employer plan on behalf of the taxpayer.

• Automatic plan features and Auto IRA Mandate. Newly established DC plans would be required to include automatic enrollment and automatic increase in their plan design. Certain employers who do not have a workplace retirement savings plan would have to default employees into a federally run automatic IRA program, effectively restarting the myRA program from the Obama administration, newly named the R-Bond Program (Retirement Bond).

• Roth IRA Account Balance Cap. Limit accumulations in all of an individual’s Roth IRAs to $5 million with a grandfather provision for Roth IRAs that already exceed that amount.

• Child Savings Accounts. Establish accounts at birth funded by the government.

• End to Roth Conversions. No conversions would be permitted going forward.

Possible “pay-for” provisions

• Executive Compensation. Expand the changes to the 162(m) provision that denies deduction for

compensation over $1 million for the top 10 employees at public companies, accelerate the effective date to 2022 rather than 2027, expand beyond top 10, and include private companies.

• Non Qualified Deferred Compensation. Make taxable when vested.

• DB Pension Changes. Increase PBGC premiums and extend “smoothing.”

Our Point of View

• This bill is more partisan as it is slated to include additional and costly infrastructure elements, as well as some retirement provisions.

• Democrats want to advance their policy agenda, but, with a limited majority, a reconciliation package is one of their only tools to advance such items without noticeable GOP support.

• Using a reconciliation bill still has its limitations, as certain types of legislation, such as tax provisions, may not be included in a reconciliation bill.

• There will likely be opposition to the mandated auto IRA savings, as well as to the plan design requirement that automatic enrollment and automatic increase be included for newly established plans.

• The Roth balance cap proposal is not surprising as many in Congress have expressed the concern that tax advantaged retirement savings accounts were never intended to be tax shelters or generational wealth transfer mechanisms. We could see discussion of the cap expand to include traditional IRAs as well.

However, the data collected on this by the Joint Committee on Taxation shows that there are just about 25,000 Americans with combined IRAs and Roth IRAs in excess of $5 million.

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Legislative Activity

Additional Congressional Activity

STATUS: Committee hearings in both the House and Senate reflect continued congressional focus on retirement savings and employee benefits as a topic of importance to policy makers in Washington. See the Appendix for additional legislative proposals of interest.

Status in Washington

Senate Health, Education, Labor and Pensions (HELP) Committee

• Hearing on Retirement Security: Building a Better Future was held on May 13, 2021.

• This was the first HELP Committee hearing on retirement security since 2013.

• Witnesses included: Shai Akabas, director of Economic Policy at the Bipartisan Policy Center; Lori Lucas, president and CEO of Employee Benefit Research Institute (EBRI); Deva Kyle, counsel at Bredhoff & Kaiser PLLC; Dave Gray, head of Workplace Retirement Products at Fidelity Investments.

• Discussion focused on: Retirement savings for part-time workers; closing racial and gender gaps in retirement savings; the importance of portability and auto features in DC plans; encouraging emergency savings; cybersecurity.

House Education and Labor Subcommittee

§ On June 23, the committee held a hearing entitled “Examining Pathways to Build a Stronger, More Inclusive Retirement System.”

§ Witnesses included: Teresa Ghilarducci, professor at the New School for Social Research; Dr. Nari Rhee, director of the Retirement Security Program at University of California Berkley; Dr. Andrew Biggs, resident scholar at the American Enterprise Institute; and David Certner, legislative counsel and director of Legislative Policy for AARP.

§ Discussion focused on: A proposal for a universal thrift savings program to help Americans meet their retirement savings needs; three crucial inequalities in private sector retirement programs: income, race and gender; portability of retirement assets; the benefits of auto enrollment in DC plans; the potential for auto IRAs.

Chairs of ERISA Committees Request GAO study of Target Date Funds

Senator Patty Murray (D-WA), Chair of Senate HELP, and Rep. Bobby Scott (D-VA), Chair of House Education and Labor, have requested the GAO review and report on the usage of target date funds in plans. The GAO was instructed to look into impact of market fluctuations ,asset allocation and fees, marketing and advertising of target date funds (TDFs), and use of alternative assets in TDFs.

Our Point of View

• The HELP committee is definitely focused on the “P” for pensions in their responsibilities. As Sen. Murray said, it’s been several years since the Committee had a hearing on retirement security.

• It is not surprising that there is overlap in the topics covered by the House Education and Labor committee as well.

• This is consistent with the focus the Biden administration has expressed to improve retirement savings across income ranges and ensure that tax incentives are beneficial to all and are inclusive of low and moderate income workers.

• With this continued focus in both the House and Senate from legislative proposals to various committee hearings, retirement savings and security remain a high level bi-partisan priority.

• We will closely follow the GAO study on the use of TDFs in plans and report back when they issue their findings.

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Regulatory Updates

• Department of Labor

• IRS Treasury/IRS

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Regulatory Updates

Department of Labor (DOL) Updates

STATUS: With Secretary of Labor Marty Walsh confirmed, the Senate will now consider the nomination of Lisa Gomez for Assistant Secretary of the Employee Benefits Security Administration (EBSA). Until Ms. Gomez is confirmed, likely later this year, Acting Assistant Secretary Ali Khawar continues to advance a very busy EBSA agenda.

Status in Washington Our Point of View

DOL releases semi-annual regulatory agenda

Each year, the various regulatory agencies identify their project priorities for the year. This is the first DOL agenda update from the Biden administration since taking office. Priorities for this year include:

• Proposed regulations on ESG factors in investments and proxy voting.

• Proposal of a new fiduciary investment advice definition.

• Final regulations on SECURE Act requirement to provide lifetime income illustrations on participant

statements once per year (Interim Final Rules were issued in 2020) . In August, the DOL released temporary implementation guidelines as well.

• Guidance on consolidated Form 5500 reporting for certain similarly situated defined contribution plans, which could also apply to the new Pooled Employer Plans (PEPs) established by the SECURE Act.

DOL releases cybersecurity tips and best practices April 14, 2021 The best practice guidance published by the DOL:

• States plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risk

• Provided best practice guidelines for plan participants, plan sponsors, and plan service providers

• Provided tips for plan sponsor and service provider contract terms.

ERISA Advisory Committee (EAC) selects topics for 2021 study

Earlier this year, the DOL EAC selected the topics they plan to study that are important to the administration. In 2021, the EAC will focus on issues related to the disparities in retirement savings among different genders, races and ethnicities, as well as plans that offer brokerage windows and potential best practice recommendations, and possibly conduct follow up work on the committee’s earlier work on diminished capacity. In June, the committee held a hearing to hear from expert witnesses on brokerage windows and racial, ethnic and gender disparities in retirement savings.

• The release of the semi-annual agenda is a good way to get a sense of what the DOL plans to work on and how they are prioritizing their projects.

• While the dates aligned with each project are not guaranteed, they provide a good sense of how the DOL is prioritizing their guidance for the year.

• Final guidance on the lifetime income illustration on participant statements will provide further clarity and possibly some changes from the Interim Final Rule the DOL issued last fall. The temporary implementation guidance they provided in August this year clarified that the first benefit statement that a lifetime income illustration will be required on is Q2 2022. Recordkeepers may provide this sooner, but they cannot provide it any later.

• DOL cybersecurity guidance is timely. According to the Government Accountability Office (GAO), as of

“…2018, about 106 million people participated in employer-sponsored defined contribution retirement plans, such as 401(k) plans. Assets in these plans were worth about $6.3 trillion.” Providing guidance to ensure these assets are protected against cyber attacks is essential to a secure retirement for many Americans. The guidance provided by the DOL is not in the form of a regulation, but rather best practices for providers, participants and plan fiduciaries.

• The ERISA Advisory Committee focus on open brokerage windows is not the first time brokerage windows have been of interest. They will likely find there are limited numbers of plans that utilize brokerage windows and small numbers of plan participants that make use of them.

• We will continue to watch these projects and provide updates periodically.

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Regulatory Updates

IRS and Treasury Activity

STATUS: Treasury and IRS released their semi-annual regulatory agenda—each year, the various regulatory agencies identify their project priorities for the year.

Status in Washington

IRS/Treasury Priority Guidance Plan

Published in June, the priorities for this year include:

• Additional guidance on SECURE Act provisions such as changes to RMDs after the death of a participant or IRA account owner; guidance on long-term, part-time employees’ access to elective deferrals; and relief from the “one bad apple” rule that is needed for Pooled Employer Plans (PEPs).

• Other items on the guidance agenda include finalized regulation on disclosure and reporting regarding missing participants, and proposed regulations on the 10% premature distribution penalty made before age 59 ½.

Other recently released guidance:

IRS Revenue Procedure 2021-25 provides new HSA limits for 2022

• HSA contribution limit for an individual with self-only coverage under a high-deductible health plan (HDHP) will be $3,650 for 2022, an increase of $50 from 2021.

• Contribution limit for someone with HDHP family coverage in 2022 will be $7,300, an increase of $100 from 2021.

• Minimum HDHP annual deductible in 2022 will be $1,400 for self-only coverage and $2,800 for family coverage.

• Maximum out-of-pocket limit for HDHPs in 2022 will be $7,050 for self-only coverage and $14,100 for family coverage.

Our Point of View

• Priority Guidance Plan has approximate time frames when they intend to release certain guidance, but it is not guaranteed.

• The Priority Guidance Plan is intended to indicate what Treasury and IRS are working on.

• HSA limit extensions adjusted for inflation as required by regulation.

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Regulatory Updates

IRS and Treasury Activity

STATUS: Treasury and IRS released their semi-annual regulatory agenda—each year, the various regulatory agencies identify their project priorities for the year.

Status in Washington

Other recently released guidance (continued) IRS issues guidance on partial terminations

Widespread layoffs during the pandemic led to many questions about how plans had to apply the partial termination guidelines and potentially fully vest terminated employees. The IRS issued relief and guidance in the form of Q&A in April and stated:

• In determining who is an “active participant covered by the plan,” any reasonable, good-faith interpretation is acceptable if it is consistently applied.

• The relief is available for both the 2020 and 2021 plan years.

• The 80% test does not require that the same individuals be counted. Thus, even if an employer hired different employees by March 31, 2021, the test can be met.

• The relief is not conditioned on COVID-19 being the reason for the original reduction in active participants in the plan.

IRS extends relief for remote notarization

• During the pandemic, it was difficult, if not impossible, for plan transactions that required in-person notarization or the witness of a plan representative. The IRS issued guidance to permit remote notarization that was set to expire at the end of June 2021.

• On June 24, 2021, the IRS issued Notice 2021-40, which provides a 12-month extension, through June 30, 2022, of the temporary relief provided in previous Notices 2020-42 and 2021-03 for remote notarization for spousal consent (as well as similar relief for remote witnessing by a plan representative) using interactive audio/visual technology.

Our Point of View

• This IRS guidance is well received. Many plans were concerned about whether the partial termination guidelines applied to them and whether they then had to 100% vest terminated employees. The IRS guidance is very helpful to plans, particularly where they experienced fluctuation in the number of employees due to the pandemic.

• While the guidance was requested due to the pandemic, the IRS has indicated it can be applied without being conditioned on COVID-19 related reductions.

• Remote notarization relief was one more way the IRS worked to assist plans that found certain administrative requirements difficult due to the pandemic.

• This guidance was extremely well received by plan administrators and participants alike.

• Notice 2021-40 also requests input as to whether the IRS should consider making the remote notarization permanent going forward.

• We will continue to watch for developments and provide updates.

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Appendix: Additional legislative proposals

Various legislative proposals that address the following subjects:

• Student loan debt

• Enhancements to SIMPLE retirement plans

• Limitations on excessive retirement savings

• Emergency distributions

• Family savings

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Legislative Activity

Additional legislative proposals of interest

STATUS: While it is not likely all of these proposals will move forward on their own, elements of these proposals could be added to other legislation.

Proposal Sponsor Provisions

Retirement Parity for Student Loans Act

SIMPLE Plan Modernization Act

Retirement Improvements and Savings Enhancements (RISE) Act

Enhancing Emergency and Retirement Savings Act of 2021

Protecting Worker Paychecks and Family Choice Act

Senator Ron Wyden (D-OR)

Senators Susan Collins (R-ME) and Mark Warner (D-VA)

Senator Ron Wyden (D-OR)

Senators James Lankford (R-OK) and Michael Bennet (D-CO)

Rep. Kevin Brady (R-TX) and Rep. Jackie Walorski (R-IN)

• Employer would be permitted to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to qualified student loan payments.

• Plans would be permitted to test separately employees who receive student loan “matching” contributions for purposes of nondiscrimination testing and safe harbor rules.

• Optional plan design.

• For employers with up to 25 employees, the limit on employee contributions would be increased from $13,500 to $16,500, and the catch-up limit would be increased from $3,000 to $4,750.

• SIMPLE IRA would be permitted to be terminated mid-year if a safe harbor 401(k) plan is adopted in its place.

• Corresponding changes would be made to the SIMPLE 401(k) rules.

• First introduced in 2016, the legislation would cap IRA at $5MM, but this could change to a higher threshold.

• Eliminate Roth IRA conversions.

• Extend RMDs to Roth IRAs.

• Prohibit any investment in an IRA that was acquired for less than fair market value and require a qualified appraisal for assets without a recognized market.

• Prohibit IRA owners from investing in their own business.

• Make transactions between IRAs and their owners prohibited transactions.

• Creates a new penalty-free distribution from plans and IRAs for “emergency personal expense distributions” (EPED).

• Limited to one EPED per calendar year.

• Maximum amount that may be treated as an EPED by any individual in any calendar year is the lesser of (i) $1,000 and (ii) the amount of the individual’s nonforfeitable accrued benefit that exceeds $1,000.

• May be repaid within three years.

• New tax-advantaged account designed to be a flexible savings vehicle for families to use to pay for school expenses, child care and elder care, and to provide for wage replacement during periods of parental or medical leave.

• Federal funding would provide a one-to-one match for every dollar up to $1,000 for individuals with an adjusted gross income of $50,000 or less.

• Employers could contribute to support their employees as a supplement to existing employee benefit plans.

• States could contribute to eligible accounts and count state contributions as Temporary Assistance for Needy Families maintenance of effort.

• Non-profits and other community-based organizations serving low-income families could contribute as a supportive service.