Cardin, Portman Move to Protect Retirement Security for American Workers
Outdated IRS Rules to Encourage Retirement Saving a Threat to Older Workers
WASHINGTON– U.S. Senators Ben Cardin (D-Md.) and Rob Portman (R-Ohio), both members of the Senate Finance Committee, today introduced the Retirement Security Preservation Act of 2019 (RSPA)—legislation to protect the retirement security of American workers in closed defined benefit plans. The bill amends and modernizes the pension nondiscrimination rules that apply to these single-employer pension plans to protect over 450,000 older, longer-serving workers from having their benefits frozen by the end of the year through no fault of their own.
The bill builds on previous legislation and regulatory work to address this issue, and is included in the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), which passed the House by a 417-3 vote earlier this year. The Senate has not yet acted on this bill. RSPA was also approved unanimously by the Senate Finance Committee as part of a retirement-related legislative package in September 2016.
According to the most recent estimate from the American Benefits Council, at least 450,000 American are at risk of losing future pension benefits this year if a solution is not reached soon. Some plans have already been forced to freeze due to Washington’s inaction.
“Workers who have been saving for retirement for decades should not be penalized for playing by the rules and planning for their futures,” said Senator Cardin. “I am proud to work with Senator Portman to protect workers and encourage greater participation in retirement savings programs. While I maintain my belief that the Senate should pass the SECURE Act now, we have an obligation to act immediately to prevent a further loss of benefits for workers affected by this provision. Congress must act immediately to give workers, especially those closer to retirement, the certainty they need to make decisions and plan their lives – be it passing the SECURE Act or passing this standalone bill.”
“This measure will help safeguard the retirement security of hundreds of thousands of working families who deserve the ability to accrue benefits under their pension plan as they were promised,” Senator Portman said. “Senator Cardin and I are pleased that the legislation is included in the SECURE Act, but we are introducing it as a stand-alone bill as well to send a message about its urgency. Older workers in these affected closed defined plans deserve relief before it’s too late.”
Over the past several years, many companies have transitioned from “traditional” defined benefit (DB) plans to other retirement plan models, such as defined contribution (DC) plans. In doing so, a large number of these companies have elected to grandfather existing employees by closing their traditional DB plans (also known as “soft freezing”); other companies have “hard frozen” their traditional DB plans but assisted existing employees in other ways, such as through enhanced DC plan contributions. When a plan closes, existing participants or a subset of participants continue to earn benefits under the traditional DB plan. When a plan is “hard frozen,” employees earn no new benefits under the plan.
Over time, existing employees in the closed plan typically build seniority and become more highly compensated than younger, newer employees, who are more likely to have greater job turnover. This widens the income gap between the employees in the closed plan and the new employees.
Because the grandfathered group in the closed plan generally becomes more highly compensated, closed plans almost always end up inadvertently violating the IRS nondiscrimination testing rules. This clearly is not the intended effect of the nondiscrimination rules, which were written to strengthen retirement security, rather than to force many older employees into different types of plans that may not provide enough time to accumulate sufficient benefits before retirement.
The RSPA addresses the problem by amending and updating the nondiscrimination rules to protect older workers in plans that have been closed or frozen. The bill also contains anti-abuse rules related to closed and frozen plans. The legislation is based on H.R. 5381 and S. 2855, which were introduced in the 113th Congress. Since the introduction of those bills, Treasury has proposed regulations that partially address these issues, but only for a certain subset of affected plans. The RSPA incorporates elements of the Treasury regulations and provides targeted relief to plans who are not be able to take advantage of the Treasury regulations. Similar standalone legislation was introduced by Cardin and Portman in 2014, 2016, and 2017.
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