Continuing our series on this year’s retirement plan regulatory updates, we now shift our focus to legislative updates. If you missed our first blogs, you can read our Internal Revenue Service update and our Department of Labor update.
Key Takeaway for Retirement Plan Sponsors
Several retirement plan proposals continue to gain momentum and could affect plan administration, participant outcomes, and reporting requirements. Industry support is growing for legislation that would allow Collective Investment Trusts (CITs) in 403(b) plans, potentially giving participants access to lower-cost investment options. The proposed Charity Parity Act would permit individuals age 70½ and older to make tax-free charitable donations directly from employer-sponsored retirement plans, simplifying the giving process. Beginning in 2027, the new Saver’s Match would replace the Saver’s Tax Credit, providing eligible workers with a federal matching contribution deposited directly into their retirement account, while giving plan sponsors time to decide whether to accommodate these contributions. In addition, bipartisan legislation would simplify Form 5500 compliance by extending the filing deadline to October 15 and authorizing electronic signatures for required filings.
Full Legislation Update
Industry Support Grows for Allowing CITs in 403(b) Plans
The multi-year push to allow Collective Investment Trusts (CITs) to be used in 403(b) plans continues to receive support from industry groups and retirement companies. Recently, the National Association of Christian Lawmakers called on Congress to pass legislation that would allow the investments. It is joined now by a group of 30 retirement company CEOs calling for the legislation as well.
SECURE 2.0 has a provision allowing 403(b) plans to offer CITs. However, it failed to address securities laws that need to be amended to make the provision effective. There have been repeated attempts to push through the needed changes, which generally receive strong bipartisan support. The challenge has been provisions other than the CIT availability included in the proposed bills, which have prevented passage. The current bill faces a similar obstacle, as Democrats are opposed to provisions that would provide increased access to private market investments for retirement plans.
CITs are not registered with the SEC and are regulated through banking laws. As a result, they typically have lower administrative and regulatory costs than mutual funds, allowing them to be offered at a lower cost. Cost savings from the use of these investments are passed directly to participants.
Charity Parity Act Would Allow Charitable Donations Directly From Employer Plans
The Charity Parity Act would allow individuals over 70½ to make tax-free charitable donations directly from employer retirement plans. Currently, the law allows annual donations of up to $111,000 from IRAs, but not employer-sponsored plans. The bill would remove the cost and administrative burden of moving money from an employer plan to an IRA to make the tax-free donation.
The benefits of making charitable donations directly from retirement savings include avoiding income tax on the donation, lowering your adjusted gross income, and counting the donation toward required minimum distributions. Because the donation is not counted as income, the lower income level can potentially reduce Medicare premiums and the amount of taxes that may be owed on Social Security.
Saver’s Match Available in 2027
SECURE 2.0 introduced a new Saver’s Match for low-to-moderate-income individuals. Beginning in 2027, the new Saver’s Match replaces the current and often overlooked Saver’s Tax Credit. The difference between the two is that the Saver’s Tax Credit is claimed when an individual who has made retirement plan contributions receives a tax credit on their individual tax return, reducing their tax liability in that year. The Saver’s Match is a matching contribution made by the Federal Government directly to the individual’s retirement account. This change should result in greater retirement savings as compared to the tax credit.
The Saver’s Match is a 50% match of the first $2,000 contributed to a traditional IRA (not a Roth IRA), SIMPLE IRA, or employer-sponsored retirement plan. The match is available to single filers earning between $20,500 and $30,750 and married filers earning between $41,000 and $71,000, and phases out at the higher income levels.
Plan sponsors should be aware that this is an optional provision for their plan. Before adding the option, it is important to work with the plan’s recordkeeper to understand whether they can accept and monitor these contributions. There may be added complexity, as contributions are excluded from the maximum contribution limit and discrimination testing, and are not available for hardship distributions. If a plan does not accept these contributions, it does not mean employees cannot still receive the match. The match can be made to an IRA even if the employee contribution was made to an employer-sponsored plan.
While the match is available in 2027, government contributions would likely not be made until 2028, so plan sponsors have time to make a final decision.
Form 5500 Filing Simplification Act
Bipartisan bills have been introduced in the House and Senate focused on improving 5500 reporting requirements. Both versions would extend the deadline for filing from July 31 to October 15, to better align with the timing required to prepare the form. Currently, almost all plan sponsors file IRS Form 5558 to request an extension to October 15 to collect necessary information and prepare the report. The bills will also authorize the use of electronic signatures for the 5500 and related reports.
