May 19, 2022

Secure Act 2.0, DOL cryptocurrency guidance, and SEC issues, oh my

With springtime fully abloom in Washington, lawmakers returned in late April from the two-week Easter recess facing a crucial stretch. The three months from the beginning of May to the beginning of August are likely the last opportunity to pass major legislation, before attention turns to this fall's midterm elections. 

A key question to be resolved over this period is whether Democrats can find consensus on an economic-focused bill. The "Build Back Better Act," an ambitious package that focused on climate change and social programs, collapsed in the Senate at the end of 2021. Democratic leaders would like to pivot to a slimmed-down bill that helps families struggling with the impact of inflation. Among the ideas in the mix are addressing prescription drug costs, providing assistance for childcare and elder care, and universal pre-K programs. But it remains far from certain that Democrats can unite around a smaller bill. 

Last fall's Build Back Better Act included several notable tax provisions, including an increase in the state and local tax deduction and a new wealth tax. The version of the bill that passed the House in November also included several retirement savings provisions, including new proposals to require distributions once an individual accumulates more than $10 million in retirement savings and a prohibition on "backdoor" Roth conversions. The collapse of the legislation means that those ideas are on the back burner for now and Democrats have been vague about whether a smaller version of the bill will include any tax increases. Voting for a tax hike in a midterm election year can be a tricky political position to take, particularly for Democrats in competitive races. That may mean no significant tax changes are on the table until the very end of the year, after the election. 

House approves SECURE Act 2.0

Retirement savings legislation is one of just a few issues that enjoys broad bipartisan support in today's bitterly divided Washington. That was the clear message in the House of Representatives, which voted 414-5 on March 29 to approve the Securing a Strong Retirement Act, a bill better known as "SECURE Act 2.0." The bill includes notable provisions for individuals, including an increase in the required minimum distribution age from 72 to 73 next year and eventually to 75 by 2033. It also would increase the "catch-up contribution" limit to $10,000 for individuals aged 62 to 64 years old. But the bulk of the bill focuses on expanding coverage and increasing savings through employer-sponsored plans. Key provisions include:

  • Requiring newly established 401(k) and 403(b) plans to automatically enroll participants;
  • Requiring such plans to automatically increase the default contribution rate by one percent each year of employment;
  • Increasing the tax credit for small businesses that adopt a new qualified plan;
  • Allowing small financial incentives, such as a gift card, to encourage employees to enroll in the company's plan;
  • Accelerating the service time requirement for long-term part-time employees to become eligible for the company plan to a minimum of 500 hours of service in two consecutive years; 
  • Allowing employer matching contributions on behalf of employees who make payments on their student loans; and
  • Creating a "lost and found" online database to help employees keep track of their retirement accounts when they change jobs.

Next up is consideration in the Senate, where a similar bill, the Retirement Security and Savings Act, is pending. The two bills have significant overlap, but there are also some differences that will ultimately need to be worked out. Timing for Senate consideration remains uncertain, although there are reports that the bill could be considered in the Senate Finance Committee in June. Like the House bill, the Senate legislation enjoys strong bipartisan support.

Optimism is high that the bill will be passed into law before the end of 2022, though the bill will likely have to be attached to a larger government funding bill or some other must-pass legislation near the end of the year. That's what happened in 2019, when the SECURE Act was passed just before the Christmas holidays as part of a larger bill.

DOL cryptocurrency guidance causes consternation

In March, the Department of Labor (DOL) issued strongly worded guidance that warned 401(k) plan fiduciaries about the risks of including cryptocurrency options among a plan's investment choices. While the guidance did not explicitly ban cryptocurrency-related investment options from plans, it stated that plan fiduciaries should "exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu." The guidance went on to say that DOL "has serious concerns about the prudence of a fiduciary's decision to expose 401(k) plan's participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies," citing significant risk of fraud, theft and/or loss of value. The guidance specifically noted that plans offering open brokerage windows are likely to be questioned by examiners as to "how they can square their actions with their duties of prudence and loyalty."

Industry trade associations have been pushing back on the regulators not over the issue of the appropriateness of retirement plan investments in cryptocurrency, but over the process. A recent joint letter from 11 trade groups questioned whether the DOL’s guidance created a new fiduciary responsibility for plan sponsors for investments made through brokerage windows and raised other concerns. The groups called on the DOL to withdraw the guidance and instead propose new rules through the standard regulatory process, which includes notice and an opportunity for public comment. At this writing, the guidance remains in place pending further decisions from DOL.

The rest of the DOL's 2022 agenda remains in limbo, pending the confirmation of the president’s nominee to be assistant secretary for the Employee Benefits Security Administration (EBSA). Lisa Gomez, an employee benefits attorney in private practice, was nominated last summer for the slot and was approved by the Senate Health, Education, Labor and Pensions Committee in January. A Senate vote is expected to take place in the coming weeks.

SEC issues regulatory proposals at a frantic pace

Last fall, the SEC issued an ambitious regulatory agenda that included more than 50 rulemaking initiatives. So far in 2022, the agency seems focused on getting as many of those issues through the rulemaking process. Rule proposals issued since the beginning of the year have included such high-profile issues like new disclosure requirements for public companies about their contributions to climate change and the risks they face in the future from climate change, another round of money market fund reforms, shortening the securities settlement cycle from two days after a trade to one day, and new rules for short sellers, special purpose acquisition companies and private funds. The financial services industry has been particularly frustrated that most of these proposals, despite their complexity and the controversy surrounding many of them, have had unusually short public comment periods, sometimes as little as 30 days. More than two dozen trade associations wrote a joint letter to the SEC in April noting that the SEC has had more 30-day comment periods in the past year than in the previous seven years. The letter called on the SEC to set comment deadlines that are better tailored to the complexity of the rule proposed – a sentiment echoed in a letter to the SEC from a bipartisan group of 47 lawmakers in April. In response, the SEC announced earlier this month that it would extend the comment periods for three major rule proposals, including the climate risk disclosure rule. Still, the SEC's aggressive timetable could mean that several of these rules are finalized later this year.