Financial services were not expected to celebrate many Beltway wins with Democrats in control of the executive and legislative branches of government.
However, two recent developments were big victories nonetheless.
The biggest news came when the House of Representatives passed the Securing a Strong Retirement Act of 2022 with overwhelming bipartisan support, 414-5. A follow-up to the Securing a Strong Retirement Act of 2020, industry trade associations lobbied hard for what became known as “SECURE 2.0.”
“The bipartisan legislation will deliver measurable benefits to America’s workers and retirees who have anxiety over whether they will have sufficient retirement income that lasts throughout their golden years,” said Wayne Chopus, president and CEO of the Insured Retirement Institute.
Among other things, the bill features provisions to loosen restrictions on annuities in retirement plans in a section called Preservation of Income. It would change required minimum distribution rules to allow annuity options and raise the limits on qualified longevity annuity contracts.
A second big win came when the Eastern District of Texas reinstated the Department of Labor’s independent contractor rule.
The court ruling came in a lawsuit brought by the Financial Services Institute that claimed the Department of Labor’s Trump-era rule was not correctly removed by the Biden administration in violation of the Administrative Procedures Act. The rule is effective as of its original effective date of March 8, 2021.
As a result, independent agents and financial advisors are most assuredly independent contractors again.
SECURE Act Details
Repeated surveys show Americans feeling pessimistic about their preparedness for retirement. Just 40% of those ages 45-59 and only 48% of those ages 60 and over felt prepared, according to Federal Reserve System data. Sixty-two percent of Americans ages 18–29 have retirement savings, but only 28% believe they are on track with their savings.
Financial professionals say loosening restrictions on access and use of financial products will greatly help address the retirement crisis. Lawmakers responded, and SECURE 2.0 includes several key provisions endorsed by industry trade associations:
» Raises the age to start required minimum distributions. Plan participants are required to begin taking distributions from their retirement plans at age 72. The bill would raise the age to 73 this year and increase it to 74 on Jan. 1, 2029, and 75 in 2032.
» Expands automatic enrollment in retirement plans in employer-sponsored retirement plans, while reducing the service requirements for part-time employees to participate in an employer plan. It requires 401(k) and 403(b) plans to automatically enroll participants, with an employee opt-out provision. The initial automatic enrollment amount is at least 3% and no more than 10%, but the amount would be increased by a percentage point each year until the total reaches 10%. It also allows employers to treat student loan payments made by their employees as elective deferrals for purposes of determining retirement plan matching contributions.
» Increases the catch-up contribution level to retirement accounts for people nearing retirement. Under current law, the limit on IRA contributions is increased by $1,000 for individuals who have reached age 50, but the bill would index such limits starting in 2023. It would also increase the limits on catch-up contributions for employees. The limit on catch-up contributions for 2021 is $6,500, except in the case of SIMPLE plans, for which the limit is $3,000; the bill would increase those limits to $10,000 and $5,000, respectively, to apply at ages 62, 63 and 64.
» Reduces administrative burdens for plan sponsors by modifying retirement plan design rules, and changes regulations on pooled employer plans and multiple employer 403(b) plans. Small businesses with 10 or fewer employees, new businesses (those that have been operating for less than three years), church plans and governmental plans are excluded from automatic opt-in requirements.
» Expands “Rothification” by requiring a Section 401(a) qualified plan, Section 403(b) plan or governmental Section 457(b) plan that permits an eligible participant to make catch-up contributions to treat those contributions as after-tax Roth contributions, according to a Deloitte report. The bill would also allow plan participants to designate employer matching contributions as Roth contributions and permit SEPs and SIMPLE IRAs to be designated as Roth IRAs.
As of press deadline, SECURE 2.0 was in the Senate, where backers hope for swift approval.
Progressives have been pushing to redefine employee classifications as more companies are hiring contract workers. Use of contract workers allows employers to get around pay benefits, including taxes and Social Security.
The reinstated rule clarifies a long-standing “economic reality test” to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. The rule also:
» Identifies two core factors that determine whether a worker is economically dependent on someone else’s business or is in business for him- or herself: The nature and degree of control over the work, and the worker’s opportunity for profit or loss based on initiative or investment.
» Cites three other factors that may also serve in the analysis, particularly when the two core factors do not point to the same classification. The factors are the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production.
» Clarifies that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
» Provides six fact-specific examples applying the factors.
Dale Brown, FSI president and CEO, said the ruling restored important clarity to the financial services industry.
“The court appropriately ruled that the DOL’s independent contractor withdrawal did not follow administrative procedure,” Brown said. “Restoring the DOL’s independent contractor rule provides clarity and certainty for independent financial advisors and independent financial services firms. Our members can now operate their businesses and serve their Main Street clients confidently, knowing that their choice to be independent is secure under FLSA.”
Financial and insurance industry advocates said that without the rule, individual agents and brokers were subject to a patchwork of state and federal regulations. When the DOL pulled the rule last year, the National Association of Insurance and Financial Advisors said the department was incorrect in saying that the rule was inconsistent with established principles.
“In fact, this new [DOL] perspective would be a departure from established legal precedents and DOL opinions and would more closely resemble the strict ABC test for determining employee or contractor status,” NAIFA said in a statement last year. “Unlike the economic realities test or any other worker classification test, the ABC test completely shifts the burden of proof by creating the presumption that a worker is an employee rather than an independent contractor.”
NAIFA indicated that the DOL was working on a new version of the rule, but there are no indications of its status. The Biden administration apparently would want more workers to fall under the employee definition. Employers would be responsible for complying with laws relating to FICA, health care, retirement plans and federal regulations that protect employees.