Thought Leadership

Insights and announcements from our subject matter experts and Ascensus leadership team

Washington Pulse: Senate Passes Tax Reform; Savings Arrangements Impacted

The race to enact comprehensive tax reform in 2017 is closer to the finish line with the December 1, 2017, Senate passage of the Tax Cuts and Jobs Act. It remains to be seen whether there is enough momentum for tax reform to be finished this year. The changes to savings arrangements that are included in the bill would affect forms, documents, and operations if the provisions become law. The major savings related changes included in the bill are described below.

Changes to IRAs, Education Savings, and ABLE Arrangements

IRA Recharacterizations Eliminated

Under current law, a Roth IRA contribution can generally be recharacterized as a Traditional IRA contribution for the same tax year if done by the following October 15 (six months following the April 15 tax filing deadline). The reverse—recharacterizing a Traditional IRA contribution to a Roth IRA—can also be done. Furthermore, those who convert Traditional or SIMPLE IRA assets or roll over pretax employer plan assets to a Roth IRA can recharacterize their conversions or rollovers.

A recharacterization is commonly done to align IRA contributions with taxpayer eligibility, as well as personal tax objectives. Under the Senate bill, the ability to change the nature of a Traditional or Roth IRA contribution, or to undo a Roth IRA conversion or employer plan rollover, would be eliminated.

The stated purpose of this provision is to prevent “gaming the system” by timing a conversion to coincide with a drop in account value, thereby reducing the tax obligation for such conversion. This provision is also contained in the House version of the tax reform bill. (Effective beginning with 2018 tax years.)                                                                                                                                                                              

Slower Cost-of-Living Adjustments for IRAs, HSAs, Archer MSAs, and the Saver Credit

Many of the annual dollar limitations that apply to IRAs—such as the maximum contribution amount—are adjusted periodically for inflation. The same is true for a taxpayer’s income-based eligibility to receive the “saver credit” for contributions to IRAs or deferrals to employer retirement plans.

The Senate bill would change the method for calculating annual adjustments so that they would occur less frequently than under the current formula. Annual limitations associated with employer retirement plans would generally not be affected, but IRA, HSA, Archer MSA, and saver credit-related adjustments would be. (Effective beginning with 2018 tax years.)                                         

529 Plans and ABLE Accounts

  • 529 plan assets could be rolled over to Achieving Better Life Experience (ABLE) accounts for special-needs individuals, in amounts up to the annual ABLE contribution limit (e.g., $14,000 for 2017); such rollovers would offset other contributions to that ABLE account for the year. (Effective for 529 distributions after the date of enactment, and before 2026 tax years.)
  • 529 plan assets could be used for elementary and secondary school tuition expenses and expenses for homeschooling, in addition to those qualified post-secondary education expenses allowed under current law.
  • An ABLE account beneficiary (the special-needs individual) could contribute his earned income even if his contribution, when added to contributions made by others, resulted in overall contributions above the annual ABLE contribution limit. The ABLE account beneficiary’s contribution amount would be limited to the lesser of his income or the federal single-person poverty limit. The ABLE account beneficiary, or a person acting on his behalf, would be responsible for ensuring compliance with the additional contribution limit.

The additional contribution would be unavailable if the ABLE account beneficiary made deferral contributions to a 401(k), 403(b), or governmental 457(b) plan. (Effective for taxable years after the date of enactment, and before 2026 tax years.) 

  • ABLE account contributions made by the ABLE account beneficiary would be eligible for the saver credit. (Effective for contributions after the date of enactment, and before 2026 tax years.)

Provisions Applying to Employer-Sponsored Retirement Plans
The following provisions in the Senate bill apply to employer-sponsored retirement plans.  

Rollover of Offset Retirement Plan Loans

If a retirement plan loan has not been fully repaid when a participant leaves employment, or a plan is terminated, the outstanding balance is typically “offset” against the participant’s account balance, and becomes taxable. The outstanding loan can be rolled over within 60 days.

The Senate bill would extend that 60-day period to the tax filing deadline, including extensions, for the tax year in which the offset/distribution takes place. This provision is also contained in the House version of the bill. (Applies to loan offsets in 2018 and later tax years.) 

Hardship Distributions Expanded

The following changes to the hardship distribution rules are contained in the Senate bill. (Effective beginning with 2018 plan years.)

  • Hardship distributions could include not only employee deferral contributions (current law), but also an employer’s qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs)—and earnings on all three contribution types.
  • Available plan loans would not have to be taken before a hardship distribution is granted.

Taxation of Pass-Through Income

The Senate bill addresses the taxation of businesses structured in a manner that generates pass-through income, such as S-corporations, by proposing an income tax deduction of an amount that may be as high as 23 percent of taxable income reduced by capital gain. Generous pass-through income taxation could potentially create a disincentive for some employers to establish or maintain retirement plans, though it is not clear that the Senate bill would lead to that result.

Tax-Advantaged Savings Arrangements in General

Special Relief for 2016 Disaster Areas

This provision would grant retirement plan related relief to eligible victims for any 2016 presidentially-declared disaster event. This relief is of a magnitude normally associated with special federal legislation, such as that recently enacted in 2017 for victims of Hurricanes Harvey, Irma, and Maria. The relief would extend well beyond the frequently-granted ability to complete certain time-sensitive tax-related acts on a delayed basis in disaster circumstances. The relief granted to2016 federally-declared disaster area victims would include the following.

  • Qualifying distributions of up to $100,000 from employer plans and IRAs before age 59½ would not be subject to the 10 percent additional penalty tax.
  • Qualifying distributions from employer plans without enabling plan provisions if plans are amended to add such provisions by the end of the first plan year beginning on or after January 1, 2018.
  • Repayment of qualifying distributions from employer-sponsored retirement plans and IRAs within three years.
  • Ratable taxation over a three-year period for distributions not repaid.
  • Waiver of mandatory withholding from qualifying distributions.

(Effective on date of enactment and applicable to distributions on or after January 1, 2016, and before January 1, 2018.)

Items Removed From Original Senate Bill 

The following items were included in the proposed Senate bill but subsequently removed and excluded from the Senate-passed tax reform bill.

  • Alignment of annual and catch-up deferral contributions to 401(k), 403(b), and governmental 457(b) plans.
  • Alignment of the age 59½ eligibility requirement for employer plan in-service distributions.
  • Assessment of a 10 percent penalty tax for early distributions from 457(b) plans.
  • Safe harbor formula for employers to determine “independent contractor” vs. “employee” status.
  • Simplified tax return form for taxpayers age 65 and older.

Next Steps

The next step in the tax reform process will be a conference committee process by which alignment of Senate and House bills must take place. Before a bill can be signed into law by President Trump, the House and Senate must agree on identical bill text. While much progress has been made, there is clearly a lot more work to do before tax reform becomes a reality. Ascensus will continue to closely monitor the process and provide additional details as they become available. Visit www.Ascensus.com for the latest developments.


Washington Pulse: Tax Reform Proposal Would Impact Savings Arrangements

On November 2, 2017, the House Ways and Means Committee’s GOP leadership introduced the Tax Cuts and Jobs Act. The proposed legislation is generally intended to reduce individual and corporate tax rates and simplify income tax filings. It also makes changes that would affect the forms, documents, and operations of employer-sponsored retirement plans, IRAs, HSAs, education savings accounts, and other savings arrangements.

The Ways and Means Committee continues to make changes to the bill before the House of Representatives votes on it. The vote was expected to occur during the week of November 13, 2017, but may occur earlier. Meanwhile, the Senate is working on a tax reform bill of its own.

Although the legislative process is still ongoing, the following is a summary of the more significant provisions from the initial proposal that could become law and affect tax-favored savings arrangements. More subtle provisions (e.g., potential changes to the definition of compensation for certain plan purposes) continue to be analyzed.

 

Distribution and Loan Provisions in Employer-Sponsored Retirement Plans

In-Service Distributions

Retirement plans generally have a minimum age requirement that participants must meet in order to withdraw plan assets while still employed. The minimum age requirement for these types of distributions (known as in-service distributions) varies between retirement plans, but age 59½ tends to be the most common. Pension plans and governmental 457(b) plans, however, are required to use higher age requirements (e.g., age 62). To encourage employees participating in those plans to continue working rather than retiring to access their retirement savings, the Ways and Means bill would reduce the minimum age requirement for those plans to age 59½.

This change would apply for plan years beginning after 2017.

Hardship Distributions

The current rules applicable to hardship distributions are complex and may complicate matters for participants experiencing financial difficulty. The Ways and Means bill would relax these rules for qualified retirement plans and 403(b) plans by

  • expanding hardship distributions to include qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs)—and earnings on all contribution types removed,
  • not requiring participants to take plan loans before granting certain hardship distributions, and
  • not requiring elective deferral contributions to be suspended for six months after receiving certain hardship distributions.

These changes would apply for plan years beginning after 2017.

In addition to the changes noted above, the Ways and Means bill may affect a participant’s ability to qualify for a hardship distribution through a casualty loss. To determine whether a casualty loss and, therefore, a hardship exists, current regulations rely on a section of law that would be eliminated by the Ways and Means bill. It is unclear whether, in the absence of revised regulations, a participant would meet the conditions necessary to qualify for a hardship distribution based on a casualty loss.

This change would apply for tax years after 2017.

Rollover Period for Offset Plan Loans

Currently, if a loan from a qualified plan, 403(b) or governmental plan has not been fully repaid when a participant leaves employment, or a plan is terminated, the outstanding balance is “offset” against the participant’s account balance, and becomes taxable if not rolled over within 60 days. The Ways and Means bill would extend the 60-day period to a participant’s tax filing deadline (including extensions) for the tax year in which the offset occurs.

The change would apply for tax years after 2017.

 

Miscellaneous Provisions in Employer-Sponsored Retirement Plans

Nondiscrimination Testing for Closed Defined Benefit Plans

Defined benefit (DB) plans that are closed to new participants may, eventually, chiefly benefit highly paid employees and lead to compliance testing failures. The Ways and Means bill would extend relief to certain plans by expanding the cross-testing of contributions to a defined contribution plan maintained in addition to a defined benefit plan. The objective of this provision is to allow closed DB plans to avoid having to be frozen or terminated.

This change would apply on the date of enactment.

Unrelated Business Taxable Income

In general, if an IRA or employer-sponsored retirement plan holds assets that generate income unrelated to the plan, those revenues (known as unrelated business taxable income (UBTI)) will be subject to current-year taxation. Historically, it has been clear that IRAs and retirement plans of nongovernmental entities are subject to such annual taxation. The Ways and Means bill clarifies that retirement plans of governmental entities will also be subject to the UBTI rules.

This change would apply for tax years after 2017.

Pass-Through Income Rate

Under the Ways and Means bill, businesses structured in a manner that generates pass-through income (e.g., S-corporations) would be taxed at a 25 percent rate for “business income,” rather than the proposed maximum 20 percent corporate tax rate. Owner-employees would be taxed at individual income tax rates for “compensation.” In general, no more than 30 percent of revenues could be treated as business income and taxed at the favorable 25 percent rate, and at least 70 percent would be treated as compensation and taxed at the individual income tax rates.

Unduly generous pass-through taxation could potentially create a disincentive for employers to establish or maintain retirement plans for themselves and their employees. But the requirement to treat much of a business’ revenue as compensation—taxed at individual income tax rates—seems to limit this concern.

This provision would apply for tax years after 2017.

Taxation of Nonqualified Deferred Compensation  

Under current rules, nonqualified deferred compensation generally remains subject to creditor claims and business risk, and, when paid, is treated as compensation. The Ways and Means bill would tax such amounts when they are no longer subject to a substantial risk of forfeiture rather than when actually paid.

This provision generally would apply to tax years beginning after 2017, but is subject to certain transition rules.

 

Changes to IRAs, Health Savings Arrangements, and Education Savings Arrangements

Recharacterizations Eliminated

Under current law, a Traditional IRA contribution can be recharacterized as a Roth IRA contribution for the same tax year if done by the following October 15  (six-months following the IRA owner’s April 15 tax filing deadline). The reverse—recharacterizing a Roth IRA contribution to Traditional IRA—can also be done. In addition, IRA owners can recharacterize the conversion of Traditional IRA assets to a Roth IRA. Under the Ways and Means bill, the ability to change the nature of a Traditional or Roth IRA contribution, or to undo a Roth IRA conversion, would be eliminated. The elimination of recharacterizations is intended to prevent “gaming the system” to reduce a tax obligation.

This provision applies for tax years after 2017.

Coverdell Education Savings Account, 529 Plan Changes

Under current law, a distribution from a Coverdell education savings account (ESA) that is “contributed” to a 529 plan is considered a tax-free event for the ESA, but subject to the 529 plan’s maximum accumulation amount. Under the Ways and Means bill, contributions could no longer be made to ESAs. ESAs could remain open, however, with rollovers permitted between ESAs or from an ESA to a 529 plan. The bill would treat the ESA-to-529 plan asset movement as a rollover, not a 529 plan contribution.

In addition, up to $10,000 of 529 plan assets—currently usable only for post-secondary academic or vocational education—could be used annually for elementary or secondary (high school) tuition, or for costs associated with participation in a qualified apprenticeship program. A 529 plan could also be set up during pregnancy on behalf of an unborn child.

These provisions would apply to distributions and contributions after 2017.

HSA, MSA Changes

Under current law, individuals may deduct Archer medical savings account (MSA) contributions. Under the Ways and Means bill, taxpayers would no longer be eligible to deduct MSA contributions, nor would an employer contribution to an employee’s MSA be excluded from the employee’s taxable compensation. The bill merely simplifies the rules by consolidating two similar tax-favored accounts into a single account with more taxpayer-friendly rules.

In addition, the bill would clarify certain HSA comparable contribution and reporting requirements and would replace certain laws for health flexible spending accounts (FSAs), health reimbursement account (HRAs), and MSAs that had been relied upon to govern HSAs.

These provisions apply to tax years beginning after 2017.

 

Conclusion

The details in this Washington Pulse are based on the initial proposal from the Chairman of the House Ways and Means Committee. That proposal is already being debated by the Ways and Means Committee and may change. In addition, the Senate is soon expected to introduce its tax reform proposal, leading to a conference committee process if the House and Senate bills differ. All of this, before the possibility of being signed into law. If Congress can get this done, it is expected that savings arrangements will be affected one way or another. Clearly, there is much more to come. Ascensus will continue to closely monitor this fast paced legislative process and provide additional details as they become available. Visit www.Ascensus.com for the latest developments.

 

 


Retirement Spotlight: 2017 Hurricane Disaster Relief Guidance for Employers with Retirement Plans

The Internal Revenue Service (IRS), Department of Labor (DOL), and Pension Benefit Guaranty Corporation (PBGC), have extended many tax-related deadlines for hurricane victims in the wake of Hurricanes Harvey, Irma, and Maria. Congress then passed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 to provide additional relief. What this means to you, your plan, and your participants will vary, so you’ll want to be aware of a few key takeaways.

 

Qualified Hurricane Distributions

The legislation passed by Congress permits a special distribution type: “qualified hurricane distribution.” Individuals whose principal residence is within a presidentially declared disaster area affected by Hurricane Harvey, Irma, or Maria—and who have sustained an economic loss as a result—are eligible to request qualified hurricane distributions from their IRA or employer-sponsored retirement plan (plan permitting).

Qualified hurricane distributions are distributions taken during a specified time period, described below.

HurricaneRelief AreaDistribution taken afterDistribution taken before
HarveyTexas8/23/20171/1/2019
IrmaFlorida, Georgia, U.S. Virgin Islands, and Puerto Rico9/4/20171/1/2019
MariaU.S. Virgin Islands, Puerto Rico, and Seminole Tribe of Florida9/16/20171/1/2019

Your plan is not required to allow qualified hurricane distributions. If you decide that your plan will allow qualified hurricane distributions, however, you should consult with your plan document provider to determine what action you must take. If you need to amend your plan document to allow qualified hurricane distributions, you must amend by the last day of the 2019 plan year.

 

Qualified Hurricane Distribution Relief Granted to Individuals

Designating a withdrawal request as a qualified hurricane distribution allows the individual to

  • withdraw amounts up to $100,000, aggregated across all IRAs and employer plans;
  • avoid mandatory 20 percent withholding on distributions from qualified plans, 403(b) plans, and governmental 457(b) plans;
  • pay taxes on the distribution ratably (equally) over three years, beginning in the tax year of the distribution, or elect to pay all taxes in current year;
  • avoid the 10 percent early distribution penalty tax;
  • repay the qualified hurricane distribution (as a rollover) into any eligible retirement vehicle within a three-year window starting on the day after the distribution is received; and
  • repay hardship distributions for the purchase or construction of a principal residence taken after August 23, 2017, if the purchase was cancelled due to hurricane events. Repayment must be completed by February 28, 2018, and can be made to any eligible retirement plan.

 

Hardship Distribution Relief

If you decide not to permit qualified hurricane distributions in your plan, you may still allow for other relief. Broader relief applies to individuals who live in, or have a business within, a presidentially declared disaster area. For instance, participants can now use disaster relief as a safe harbor hardship reason.

  • Even if your plan does not currently offer hardship distributions, you can permit hardship distributions for disaster relief immediately—if you amend your plan by the end of the 2018 plan year to allow for these distributions.
  • You do not need supporting documentation (e.g., spousal consent) before approving a hardship distribution, as long as you reasonably believe that you can obtain it. Then you must collect it as soon as practicable.
  • No six-month suspension of deferral contributions applies to disaster relief hardships.

 

Loan Relief Provided

For your plan participants who live in, or have a business within, one of the declared disaster areas, certain features of permissible loan programs have been relaxed.

  • Even if your plan does not currently offer loans, you can permit loans to provide disaster relief immediately and then amend your plan to allow for loans by the end of your 2018 plan year.
  • As with hardships, you can process loans without obtaining all of the supporting documentation first. But you must collect this information as soon as practicable.
  • The maximum loan amount for disaster-relief loans is raised to $100,000 (from $50,000), and participants can take loans in excess of 50 percent of their vested balance.
  • The borrower can delay loan repayments for one year, and does not need to include this period in the payment schedule. For example, a five-year loan repayment schedule could begin after the initial one-year delay.

 

Tax Deadline Extensions Granted

If you or your plan participants live in (or have a business within) one of the disaster areas, they may be eligible for extensions on deadlines that fall on or after the dates listed below. Click through the relief area name to see the full list of affected counties from www.fema.gov/disasters.

Hurricane  Relief Area Tax deadline
on or after
Deadline is
extended to
Harvey Texas   8/23/2017   1/31/2018
Irma Florida and Seminole Tribe of Florida   9/4/2017   1/31/2018
Irma U.S. Virgin Islands and Puerto Rico   9/5/2017   1/31/2018
Irma Georgia   9/7/2017   1/31/2018
Maria U.S. Virgin Islands   9/16/2017   1/31/2018
Maria Puerto Rico   9/17/2017   1/31/2018

Employer-Sponsored Retirement Plan Deadlines Extended

  • Employer contributions
  • Employer tax deduction
  • Employee contribution deposit timing (deferrals and loan payments), but must be deposited as soon as practicable
  • Form 5500 filing (IRS and DOL)
  • Loan repayments
  • Required beginning date and required minimum distributions
  • Removal of excess deferrals
  • Removal of ADP excess (no employer penalty applies)
  • Removal of ACP excess (no employer penalty applies)
  • Beneficiary disclaimer timing
  • End of 60-day rollover window
  • Blackout notices not given timely
  • Beneficiary disclaimer timing
  • IRS Employee Plan Compliance Resolution System two-year period for self-correcting significant failures

 

Additional PBGC Deadlines Extended for Defined Benefit Plans

  • Payment of PBGC insurance premiums
  • Filing termination notices
  • Completing the distribution of plan assets
  • Filing Form 501, Form 601, and reportable events notices
  • Filing of actuarial information for plans with funding waivers, missed contributions, or underfunding


IRA, HSA, and ESA Deadlines Extended

  • Regular contributions
  • Tax deduction
  • Recharacterizations
  • Forms 1099 and 5498 delivery
  • Required beginning date and required minimum distributions
  • 60-day rollover
  • SIMPLE IRA deposit timing, but must be deposited as soon as practicable
  • Timely removal of excess (with NIA)
  • Beneficiary disclaimer timing

 

Next Steps

The hurricane relief outlined above should help you and your affected participants in the wake of these recent disasters. But it is up to you whether you take full advantage of the available relief. Plans are not required to operate under the more generous hurricane provisions. But if your plan does, you should thoroughly document any changes to your plan in accordance with the existing rules and the requirements laid out in the relief itself.

Check back at Ascensus.com for updates on this and all retirement-related topics.

                                                   What is the right distribution type to use?

 

 Qualified
Hurricane
Distribution
Hardship
Distribution –
hurricane
reasons
Hardship
Distributions –
normal reasons
Distribution allowed if you live within
the disaster area and if you suffered an economic loss
            X          X  
Distribution allowed if your relative or lineal descendant lives within the
disaster area
           X  
Distribution allowed if your business
was within the disaster area
           X  
The limit on how much you can take for this distribution reason      $100,000 amounts eligible
for hardship
amounts eligible
for hardship
Distribution permitted without a regular (e.g., age 59½, hardship, normal retirement age) distribution trigger             X    
Distribution is considered eligible for rollover             X    
Distribution can be paid back into the plan or another plan             X Only if used to purchase a residence in the disaster area from 2/28/2017
to 9/21/2017
Only if used to purchase a residence in the disaster area from 2/28/2017
to 9/21/2017
Six-month deferral suspension applies                     X
Taxation on the distribution can be spread over three years instead of just in year of distribution             X    
Distribution subject to 10 percent early distribution penalty tax             X                X
Deadline for taking hurricane-related distributions        1/1/2019          1/31/2018              N/A

 


Washington Pulse: Hurricane Legislation Grants Retirement Plan Relief

Similar to its hurricane disaster response more than a decade ago, Congress has acted to give relief to victims of Hurricanes Harvey, Irma, and Maria. Initial responses by the Internal Revenue Service (IRS), Department of Labor (DOL), and Pension Benefit Guaranty Corporation (PBGC), extended many tax-related deadlines for hurricane victims. These actions are now followed by enactment of the Disaster Tax Relief and Airport and Airway Extension Act of 2017.

 

How Legislation Affects IRAs and Employer Plans

Under the provisions of the new law, “qualified hurricane distributions” from IRAs, qualified retirement plans, 403(b) plans, and governmental 457(b) plans are entitled to special tax treatment, as well as repayment options if the recipient so chooses. There are also provisions that apply specifically to loans from employer plans.

Employer plans are not required to offer qualified hurricane distributions or the relaxed loan parameters, but can elect to offer them.

 

Qualified Hurricane Distributions

Individuals with a principal residence within a presidentially-declared disaster area affected by Hurricanes Harvey, Irma, or Maria may request qualified hurricane distributions from their IRAs or from their employer plans (plan permitting). Qualified hurricane distributions are those distributions taken during a specified time period, described below.

Hurricane Relief Area Distribution taken after Distribution taken before
Harvey Texas 8/23/2017 1/1/19
Irma Florida, Georgia, U.S. Virgin Islands, Puerto Rico, and Seminole Tribe of Florida 9/4/2017 1/1/19
Maria U.S. Virgin Islands and  Puerto Rico 9/16/2017 1/1/19 


Qualified Hurricane Distribution Relief Granted to Individuals

Designating a withdrawal request as a qualified hurricane distribution allows an individual to

  • withdraw amounts up to $100,000, aggregated across all IRAs and employer plans;
  • avoid mandatory 20 percent withholding on distributions from qualified plans, 403(b) plans, and governmental 457(b) plans;
  • pay taxes on the distribution “ratably” (equally) over three years, beginning in the tax year of distribution, or elect to pay all taxes in the current year;
  • avoid the 10 percent early distribution penalty;
  • roll over the qualified hurricane distribution into any eligible IRA or employer plan, within a 3-year window, starting on the day after the distribution is received; and
  • repay hardship distributions for purchase or construction of a principal residence taken after August 23, 2017, if the purchase or building was cancelled because of hurricane events. Repayment must be completed by February 28, 2018, and can be made to any eligible IRA or employer plan.

Loan Relief

The new law also allows employer plans to relax the loan limitation for participants with a principal residence in the hurricane areas. If permitted, affected participants can request a loan from their 401(k) plan or other employer plan up to a maximum request of $100,000 instead of the standard $50,000 and the 50 percent-of-vested-account-balance limitation will not apply.

Plan loan payments for qualified individuals may be delayed up to one year, and the maximum five-year loan amortization period for nonmortgaged loans is similarly extended by one year.

What is Required

Plan sponsors must determine if they will permit qualified hurricane distributions and if they will allow the expanded loan provisions. They may need to prepare a document amendment. If an amendment is required, plans may retroactively amend for these features by the last day of the 2019 plan year. Plan sponsors must inform participants of their options under the hurricane relief provisions.

IRA and employer plan service providers should evaluate forms, systems, and workflow processes to support qualified hurricane distributions, loan exceptions, and potential repayment and rollovers. For example, the legislation states that the notice given to recipients of eligible rollover distributions need not be provided with a hurricane-related distribution but other distribution consent and notice requirements still apply.

Additional Guidance

Following enactment of the Katrina Emergency Tax Relief of 2005, subsequent IRS guidance provided details for interpreting that legislation. In the coming days or weeks, we expect similar agency guidance to further interpret the new law. Ascensus will monitor and provide additional details on Ascensus.com as new information is released.

 


Washington Pulse: To No One’s Surprise, DOL Proposes Further Delay in Fiduciary Rule Compliance

On August 31, 2017, the Department of Labor (DOL) published in the Federal Register a proposal for an additional 18-month delay for full compliance with the agency’s fiduciary investment advice (i.e., conflict-of-interest) rule and several accompanying prohibited transaction exemptions. This proposal would further delay major compliance requirements until July 1, 2019. Public comments are being solicited during a 15-day period that ends September 15, 2017.

The proposed delay would extend the current transition period until July 1, 2019. Previous DOL guidance clarified that during the transition period, financial professionals and firms that give fiduciary investment advice to retirement savers are not required to meet most of the disclosure and contractual requirements found in the final rule and exemptions—including the Best Interest Contract (BIC) exemption. Instead, investment fiduciaries need only meet the Impartial Conduct Standards. These standards require that investment fiduciaries

  • receive only reasonable compensation,
  • make no misleading statements, and
  • act in their clients’ best interest.

 

Why the Delay?

The DOL states that the purpose of the proposed additional 18-month delay is “to give the Department of Labor the time necessary to consider possible changes and alternatives . . .” to the guidance previously issued. Major stakeholders hold radically different positions on the final rule and exemptions. At the risk of oversimplification, consumer advocates generally support tighter rules for those who give investment advice, while many in the investment provider community are content with the status quo. Registered Investment Advisers, who by definition are fiduciaries to their clients, have generally supported requiring higher standards for those giving investment advice.

 

Presidential Influence

Regulatory agencies generally must implement administration policy. President Trump’s campaign platform included a strong anti-regulatory plank. “Job-killing regulations” was an often-heard phrase during the run-up to the election. Shortly after taking office, President Trump directed the DOL “to examine the fiduciary rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”  With the newly proposed delay, many believe that the fiduciary guidance issued under the Obama administration will not take full effect in its current form.

 

 

A Key Provision Stricken

In addition to the proposed 18-month delay, the DOL issued Field Assistance Bulletin (FAB) 2017-03. This FAB describes a nonenforcement policy that targets a key provision of the BIC exemption and another exemption known as the Principal Transactions exemption.

The BIC exemption requires investment fiduciaries to adhere to DOL guidance and to act in their clients’ best interest. It is expected to be widely used in advisor relationships with IRA investors, who generally do not have the same fiduciary safeguards that exist for participants in ERISA-governed employer plans.

The BIC exemption prohibits certain arbitration provisions in contracts between financial professionals and investors. Specifically, these contracts cannot force arbitration by requiring clients to waive their right to participate in class-action lawsuits arising from alleged fiduciary breaches. Obama-era DOL leaders considered this provision a vital safeguard because it gave clients full legal recourse for financial harm that might result from inappropriate investment advice. The Principal Transactions exemption, more limited in its scope, also contains this class-action/arbitration clause.

FAB 2017-03 clearly states that the DOL will not enforce the prohibition on advising agreements that waive class-action rights. The agency states that this provision in the BIC and Principal Transactions exemption violates the Federal Arbitration Act and conflicts with other court precedent. As a result, it appears that investment providers will be free to draft advising agreements that require clients to waive their right to participate in legal class actions brought against providers for inappropriate fiduciary investment advice.

 

Where to Now?

The twisted path of fiduciary guidance has included multiple delays, requests for comment, and reset timetables. What lies ahead for the financial industry and retirement investors remains unclear, but it seems reasonable to expect more changes. As always, Ascensus will be monitoring and analyzing such future developments.


Washington Pulse: DOL Issues FAQ Addressing Key Concerns Over Fiduciary Rule

On August 3, 2017, the Department of Labor (DOL) issued additional guidance regarding its final fiduciary regulations and related prohibited transaction exemptions (PTEs)—together referred to as the “fiduciary rules.” This latest guidance is in a frequently-asked question (FAQ) format and provides help with two areas of concern—the interaction of the fiduciary regulations and service provider fee disclosure requirements under ERISA Sec. 408(b)(2), and the confusion over whether recommendations designed to increase participation in retirement plans constitute investment advice.

 

Background

After years in the making, the investment advice fiduciary rules generally became effective on June 9, 2017. Some of the PTE requirements, however, are delayed to January 1, 2018. The period from June 9, 2017, to January 1, 2018, is the “transition period”, after which all fiduciary rule requirements are scheduled to become effective.

Separate from the fiduciary rules, the DOL requires service providers who provide “covered services” to ERISA retirement plans to disclose to those plans the services they provide and the fees they expect to receive in return. The purpose of the disclosure is to make sure that plan fiduciaries have the information needed to carefully select and monitor service providers.

The effect of the fiduciary rules on service provider disclosures raised questions and may have resulted in the failure of some service providers to timely amend their disclosures without additional DOL guidance.

In two previous FAQs, the DOL sought to clarify many items involving the fiduciary rules, including the circumstances under which communications intended to increase plan participation would or would not rise to the level of recommendations and result in investment advice fiduciary status. Because of lingering confusion, and without additional DOL clarification, participation rates and contribution levels may have suffered.

This latest set of FAQs provides much needed relief for those issues described above, especially in light of the DOL’s recent request for comments on the fiduciary rules and the potential for further changes.

 

Service Provider Disclosures and the Fiduciary Rules

The DOL requires service providers to disclose whether they intend to provide fiduciary services to plans. To help service providers comply with the disclosure requirements in light of the investment advice fiduciary rules, the DOL has provided the following guidelines.

  • Service providers that are not investment advice fiduciaries and do not reasonably and in good faith expect to become investment advice fiduciaries need not update their service provider disclosures, assuming they otherwise comply with the service provider disclosure rules. This guideline applies even if an agent, representative, or employee of the service provider individually provides “unauthorized and irregular” services that would otherwise result in investment advice under the fiduciary rules.
  • Service providers that will, or expect to, become investment advice fiduciaries may provide service provider disclosures to plans without using the word “fiduciary” in their disclosures during the transition period as long as their services are accurately and completely described. If the services are not accurately and completely described, the disclosures must be amended.
  • Service providers that are, or expect to become, investment advice fiduciaries, but whose service provider disclosures currently state that they are not fiduciaries, must amend their disclosures to accurately and completely describe the services they provide.

The DOL generally requires service providers to disclose a change in their fiduciary status as soon as is practical and no more than 60 days after the service provider is “informed” of such change. An exception exists for circumstances beyond the service provider’s control. The exception requires service providers to provide updated disclosures as soon as it is practicable, without imposing the 60-day rule.

To assist service providers who must update their disclosures to satisfy the fiduciary requirement, the DOL has clarified that it does not consider service providers to have been informed of a change in fiduciary status on June 9, 2017, the date the fiduciary rules became applicable. In addition, the DOL recognizes the uncertainty caused by its past decisions to delay the fiduciary rules and considers the current circumstances to be beyond the control of service providers. Therefore, service providers who must update their disclosures for the fiduciary element of the service provider disclosure must simply do so as soon as it is practicable. In addition, the DOL FAQ reminds service providers that such amendments may be provided to plans electronicall

A chart summarizing these disclosure rules is provided below:

 

Recommendations to Contribute to a Plan or IRA

Previous DOL FAQs attempted to clarify whether recommendations to contribute to a plan or IRA would result in fiduciary investment advice. The previous FAQs were unclear, however, and resulted in confusion. In its latest FAQ, the DOL has clearly stated that communications about the benefits of participating in or increasing contributions to, a plan or IRA do not result in fiduciary investment advice, provided they do not include investment recommendations.

In addition, the DOL has clarified that it would not be fiduciary investment advice to provide plan administrators or plan fiduciaries with suggestions of ways to increase employees’ participation in or contributions to ERISA plans. This may be helpful, for example, with plan design considerations.

 

Stay Tuned

The outcome of the ongoing fiduciary rule debate is far from over but the latest DOL FAQs provide meaningful clarification to retirement plan product and service providers.  As always, Ascensus will keep you informed of further developments.


Washington Pulse: IRS Makes Major Changes to Qualified Pre-approved Plan Program

On June 30, 2017, the IRS released Revenue Procedure (Rev. Proc.) 2017-41, describing its revamped pre-approved qualified retirement plan program. In addition, Rev. Proc. 2017-41 provides the deadline for practitioners and financial organizations currently using pre-approved defined contribution documents to submit applications to the IRS for new opinion letters. The IRS has significantly simplified and liberalized its program in an ongoing effort to expand the use of pre-approved plans.

At the same time, the IRS issued Notice 2017-37, listing the retirement plan rule changes that may be included in the next restatement’s pre-approved defined contribution plan documents.

 

Background

Federal tax law requires that qualified retirement plans operate under written arrangements (i.e., plan documents). To create a routine and efficient approach to writing, reviewing, and approving pre-approved plan documents, the IRS previously moved from an ad hoc system to a system of six-year cycles. The system was created in 2005 and is currently described in Rev. Proc. 2016-37. During the six-year cycles, the plan documents are rewritten for retirement plan rule changes, are reviewed and approved by the IRS for use by practitioners and financial organizations, and are restated and signed by employers.

The restatement procedures provide for specific tasks to be completed during different time periods.

  • During year one of the cycle, document drafters (e.g., Ascensus) update their plans to reflect changes to the retirement plan rules and changes to the IRS’ pre-approved program. IRS applications for opinion letters are also prepared on behalf of providers (practitioners and financial organizations that make the documents available to employers).
  • During years two and three, the IRS reviews and approves the updated plan documents.
  • During years four and five, employers complete and sign new documents.
  • In year six, the IRS prepares and issues guidance for the next restatement.

To date there have been two pre-approved plan six-year restatement cycles. The latest restatement is best known as the PPA restatement, named for the Pension Protection Act of 2006, which created the majority of the changes that needed to be made during the second six-year cycle.

 

Third Six-Year Cycle Begins

Although it seems like the PPA defined contribution restatement just ended, the third six-year defined contribution cycle began on February 1, 2017, and is scheduled to end on January 31, 2023.

Based upon the general six-year restatement cycle, document drafters would need to update their plan documents and providers would need to have opinion letter applications prepared and submitted to the IRS by January 31, 2018. However, the IRS has extended the deadline to October 1, 2018, to provide ample time for document drafters, practitioners, and financial organizations to react to the program changes.

 

Significant Changes to the Program

Rev. Proc. 2017-41 makes significant changes to the IRS’ pre-approved program beginning with the current (defined contribution) six-year cycle that opened earlier this year. The most notable changes, made in large part as a result of public comments, follow.

  • The Master and Prototype (M&P) and Volume Submitter (VS) pre-approved programs have been combined, resulting in a single Opinion Letter program that retains the best features of both of the former programs. The Opinion Letter program contains two types of plans: standardized and nonstandardized.
  • Nonstandardized plans may be customized, within IRS limits, without becoming individually designed plans. Allowing customization preserves one of the primary benefits of the VS program. Standardized plans that are customized generally will become individually designed plans.
  • Money purchase pension plans (other than target benefit plans) and profit sharing/401(k) plans (except those that include an ESOP feature) may be established using the same adoption agreement. Combining money purchase plans and profit sharing/401(k) plans in a single adoption agreement is allowed primarily to reduce the cost involved with submitting and sponsoring separate adoption agreements, considering the declining number of money purchase plans.
  • A nonstandardized plan that contains an ESOP may now also include a 401(k) feature.
  • A nonstandardized cash balance plan may now permit the interest crediting rate to be based on the plan’s actual rate of return.
  • The program now includes nonelecting church plans.
  • A nonstandardized plan may allow hardship distributions of elective deferrals for non-safe harbor reasons.
  • The IRS will no longer review and approve a plan’s trust or custodial agreement and will require that the trust agreement or custodial account agreement be in a document separate from the plan. This change greatly simplifies the ability for service providers to use the trust or custodial agreement of their choice without having to spend time determining if such agreement has been approved for use with a specific document.

 

Next Steps

Rev. Proc. 2017-41 is effective October 2, 2017, and provides welcome simplification and expansion to everyone involved with pre-approved plans. The delayed effective date provides document drafters (e.g., Ascensus) time to analyze the new program and consider document design decisions. Once those decisions have been made, providers must work with their document drafters to prepare for the October 1, 2018, deadline. In short, it’s time for providers to begin the planning and budgeting process for the next defined contribution restatement.

The IRS has stated future enhancements to the program will be made and has requested comments from the public. Ascensus will provide additional details on the revised pre-approved plan program, including additional changes made by the IRS. In the meantime, contact your client service representative or visit www.Ascensus.com with questions.


Washington Pulse: New FAQs Add Some Clarity to Fiduciary Rule Transition Period Compliance

On May 23, 2017, the Department of Labor (DOL) issued a new set of frequently-asked-questions (FAQs) addressing compliance with the final fiduciary regulations and related prohibited transaction exemptions (PTEs). These FAQs were issued with Field Assistance Bulletin (FAB) 2017-02 to describe the DOL’s decision not to further delay the June 9, 2017, applicability date of the fiduciary guidance. The FAQs also communicate a “kinder and gentler” enforcement stance during the transition period from June 9, 2017, to January 1, 2018, when compliance with all of the rules is required.

While the fiduciary rules generally become effective June 9, 2017, some of the more challenging requirements of the PTEs (e.g., contract and disclosure requirements) will not apply during the transition period. During this period, however, financial professionals dealing with retirement savers generally must adhere to the PTE impartial conduct standards. These standards require that those providing investment recommendations

  • make no misleading statements,
  • receive only reasonable compensation, and
  • make only recommendations in the client’s best interest.

Just how aggressively the DOL will enforce these standards is open to interpretation. FAB 2017-02 states that during the transition period the agency will not punish fiduciaries who are working diligently and in good faith to comply with the fiduciary regulations and PTEs, or treat those fiduciaries as being in violation of the requirements.

 

Further Delay, Revision Still Possible

Future changes to the fiduciary guidance cannot be ruled out. Secretary of Labor Alexander Acosta has stated that while there is no legal basis for delaying the June 9, 2017, applicability date, his agency needs more public input on the fiduciary rule in light of the Trump administration’s deregulatory goals. The new set of FAQs also state that additional changes could be proposed.

For now, those who are paid to provide investment advice to retirement savers must prepare for the June 9, 2017, applicability date, and barring further guidance, for eventual compliance with all provisions.

 

New Set of FAQs is Fourth in Series on Fiduciary Guidance

The new set of FAQs follows two previous sets of FAQs issued in October, 2016, and January, 2017.  The FAQs are meant to enhance industry compliance with the fiduciary guidance. A third set of FAQs, also issued in January, was specifically directed to consumers and has since been removed from the DOL’s website. Some issues in this latest FAQ document (e.g., the DOL’s retention of the June 9, 2017, applicability date) are described above. Other FAQ items merit special discussion, and are described below.

 

Conducting Business During the Transition Period

PTE 84-24

The new set of FAQs wastes no time addressing controversial elements of the fiduciary guidance, one of which was at the heart of failed attempts in the courts to put the guidance on hold. Question 2 (Q2) addresses compliance with PTE 84-24, an exemption pertaining to sales of certain annuity products for employer-sponsored retirement plans and IRAs.

The final fiduciary guidance amended PTE 84-24 to remove variable and fixed-indexed annuities from the relief provided by PTE 84-24. When full compliance is required after the transition period, the sale of these annuity products to retirement investors must be conducted under the new exemption known as the best interest contract (BIC) exemption. FAB 2017-02 delays the effective date of the PTE 84-24 amendment to January 1, 2018. Until then, those who market fixed-indexed and variable annuities may offer them to retirement savers, relying on the existing PTE provisions and the impartial conduct standards previously described.

Q2 also makes clear that the extended applicability date applies to typical payments made in connection with the sale of such annuities to retirement savers (e.g., commissions and dealer payments to an independent marketing organization).

New Compensation Structures in Development

The new set of FAQs addresses potential new compensation models being developed by financial organizations—models intended to reduce or eliminate conflicts of interest relating to investment recommendations. Some models may be structured to provide uniform commission levels or to be free of third-party payments (e.g., 12-b1 fees). Q6 notes that during the transition period (June 9, 2017, through January 1, 2018), a time when such new and potentially conflict-free models may not be perfected and in place, organizations may still rely on the BIC exemption’s relief. And, as FAB 2017-02 describes, the BIC’s conditions are considered satisfied during the transition period if the impartial conduct standards are followed. During this period, certain notice, documentation, and warranty requirements will not be required to qualify for the BIC exemption. Q6 states that during this period “…financial institutions retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards.”

Nonconflicted recommendations

Some interactions between financial professionals and retirement investors are considered unlikely, or less likely, to present an opportunity for conflicted investment advice. Q7 describes relief for individuals or firms that are compensated on a level-fee basis, or whose advice is generated by a computer model that uses objective criteria and whose fee does not change based on investments chosen. Providers of advice who meet these conditions are subject to the BIC exemption’s general conditions, but—among other distinctions—are not required to enter into a written contract with retirement investors. During the transition period both robo-advisors and other level-fee providers of investment advice will be considered to meet the applicable BIC requirements if they satisfy the impartial conduct standards, even though they may not meet certain full-compliance disclosure requirements for level-fee providers, such as acknowledging their fiduciary status, or documenting the advisability of a rollover.

 

Grandfathering of Investment Recommendations

The BIC exemption contains a grandfather rule for compensation relating to

  • investments that were purchased before the applicability date, and
  • recommendations to continue with a systematic purchase program established before the applicability date.

Q8 confirms that if the systematic purchase of investments based on pre-June 9, 2017, recommendations continue, they are not subject to the terms of the final regulations and exemptions. New recommendations, of course, will be.

 

Recommendation or Education? 

One of the ways financial professionals can avoid becoming investment advice fiduciaries is to restrict their communications to “investment education.” The latest set of FAQs offers several examples.

Q12 provides examples of communications in which plan participants are encouraged to increase contributions.  The January 2017 set of FAQs appeared to sharply distinguish between such messages delivered by a plan fiduciary (e.g., employer) and a service provider (e.g., a call center employee).

The new set of FAQs compares communication with participants by email, by interactive computer tool, and with call center employees. If specific investment recommendations are avoided and communication is limited to factual information about plan features—including how to receive the maximum employer contribution, the benefits of saving more, generalized analysis of the participant’s retirement preparedness, etc., then the DOL will view carefully structured communications from these or similar sources as education, not recommendations.

Q12 may be read to suggest that the DOL has relaxed or reversed its concern over who provides information designed to encourage participants to increase contributions. Or, it may be that the DOL’s intent is unclear considering, for example, that it doesn’t specify whether it makes a difference who (e.g., the employer or a call center employee) sends certain messages to participants, as the January FAQs did. Further clarification from the DOL would be helpful.

 

Good News About the Independent Fiduciary Exception

Transactions between a financial professional and an independent fiduciary are exempt from the fiduciary guidance if certain disclosures are made. “Independent fiduciary” is defined as a bank, broker-dealer, insurance carrier, or an investment advisor or other independent fiduciary who manages or controls at least $50 million in investment assets. The presumption is that such fiduciaries have adequate experience and knowledge to evaluate the appropriateness of investments, and thus the regulations’ protections from conflicted investment advice are unnecessary. The relief granted is available if the party offering a recommendation reasonably believes such individual meets the definition of independent fiduciary.

Q13 makes clear that the “reasonable belief requirements” that apply to the independent fiduciary exception may be satisfied by negative consent. For example, in the course of written communications with a plan fiduciary, a financial professional may indicate that—absent notification to the contrary— it will presume that the fiduciary has at least $50 million in assets under management or control, and is not otherwise disqualified from being considered an independent fiduciary.

 

Portfolio Model Developers and Investment Advice

Q14 addresses model portfolios created by independent developers and used by financial professionals serving retirement clients. An independent developer who creates and receives payment for a model portfolio tool to generate investment recommendations, will generally not be considered to be providing investment advice recommendations to a plan or investor if certain conditions are met. A model developer is not an investment advice fiduciary if the

  • portfolio model is not individualized to a specific investor or plan;
  • developer does not contract with, execute trades for, or accept the role of fiduciary for the plan or investor; and
  • developer does not control how a financial professional using the model is paid by his clients.

 

What’s Next?

As financial professionals comply with the guidance found in these FAQs and benefit from the compliance relief promised in FAB 2017-02, the DOL will continue to consider public and industry feedback to assist it in complying with President Trump’s directive for a comprehensive review of the guidance. While it is unclear what lies ahead, it is reasonable to conclude that some change may be coming. As always, Ascensus will monitor and provide additional information as events unfold.


Washington Pulse: DOL Fiduciary Rule not Delayed, but Relaxed Enforcement Expected

Retirement investment providers—and the retirement industry in general—have been anxiously awaiting June 9, 2017, the date for compliance with Department of Labor (DOL) investment advice fiduciary regulations and accompanying prohibited transaction exemptions (PTEs). On May 23, 2017, the DOL addressed questions about the deadline, though perhaps not in the manner many expected or hoped. In an Op Ed article written by Secretary of Labor Alexander Acosta and in Field Assistance Bulletin 2017-02, the DOL described both its decision not to delay compliance requirements and its relaxed enforcement stance during the transition period, June 9, 2017, through January 1, 2018. The DOL also issued a 15-item frequently-asked-question (FAQ) document, providing additional clarification about the regulation and related PTEs.

Before this latest DOL action, retirement investment advisors and the retirement industry were already operating under a 60-day extension. That reprieve was granted April 4, 2017, just six days before an impending April 10, 2017, “applicability” date. The 60-day extension delayed the applicability date to June 9, 2017. During this period—and even before—many interested parties commented and lobbied for another, lengthier delay, or even outright suspension of the new fiduciary guidance. These expectations were not met with the Op Ed article, FAB 2017-02, or the new DOL FAQs. FAB 2017-02 does, however, leave the door ajar concerning the possibility of additional, future relief by stating that if circumstances require it, the DOL will consider taking additional steps as needed.

 

New Labor Secretary Weighs In

Secretary of Labor Alexander Acosta provided insight into the decision to maintain the compliance schedule. In his article he stated that the DOL will seek additional public input on the entire fiduciary rule in light of the Trump administration’s deregulatory goals, but found no legal basis to change the June 9 applicability date while additional input is sought. As a result, the legal process, complicated as it is, must be followed and will take time. In the end, however, it seems possible that the DOL may find that an additional extension to the phased implementation approach is necessary and changes to the regulation and/or PTEs is warranted.

 

DOL Enforcement Intentions; IRS Alignment

During the transition period of June 9, 2017, through January 1, 2018, the DOL will not enforce the most complex requirements of the PTEs (e.g., contract and disclosure requirements) for those who provide conflicted advice under the final regulations. Instead, those who provide compensated investment advice need only comply with the “impartial conduct standards.” These standards require that those providing investment advice

  • make no misleading statements,
  • receive only reasonable compensation, and
  • give advice in the client’s best interest.

But without explicitly saying so, FAB 2017-02 intimates that the DOL will be generous in applying even these compliance standards during the period, stating that the agency will not punish fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary rule and exemptions.

In addition, the DOL stated it has worked with the Treasury Department and that the IRS, similarly, will not assess excise taxes for prohibited transactions under the final DOL regulations and exemptions in cases where the DOL’s temporary enforcement policy applies.

 

Highlights of the FAQs

Accompanying FAB 2017-02 was DOL guidance entitled Conflict of Interest FAQs (Transition Period), intended to provide the industry with additional clarification of the rules during the transition period from June 9, 2017, through January 1, 2018. The FAQs include several items of importance, including

  • clarification that compliance with the regulations and impartial conduct standards is required by the end of the day (11:59 p.m.), local time, June 9, 2017,rather than the beginning of the day;
  • acknowledgement by the DOL that it will issue a request-for-information to assist it in analyzing the regulation and accompanying PTEs in light of President Trump’s previous deregulatory directive;
  • clarification of what constitutes education vs. a recommendation; and
  • confirmation that a negative consent procedure is acceptable for those using the independent fiduciary exception to providing recommendations.

Ascensus will provide additional details regarding the FAQs in a future edition of the Washington Pulse.

 

Sound Familiar?

Except for the FAQs, if this all sounds familiar, you haven’t missed anything. With its latest guidance, the DOL has, in large part, merely confirmed what it said in its April 4, 2017 guidance: the regulations and the impartial conduct standards of the PTEs apply from June 9, 2017, to January 1, 2018, while the government provides compliance assistance. On January 1, 2018, absent new DOL guidance, full compliance with the PTEs will be required.

In the meantime, the DOL will continue to consider feedback to assist it in complying with President Trump’s directive. After that, it’s anyone’s guess what will happen, but it seems reasonable to conclude that additional changes will be coming. Stay tuned—Ascensus will provide additional information as it becomes available.

 

 


Washington Pulse: House Version of Repeal-and-Replace Health Bill Would Make Significant Changes to HSAs

On May 4, 2017, the House of Representatives passed—by a margin of 217 to 213—the American Health Care Act of 2017 (AHCA). Its purpose is to repeal and replace the Affordable Care Act (ACA), often referred to as Obamacare. This was the second attempt by House Republican leadership to pass repeal-and-replace legislation, the first bill having been abandoned when it became clear that there was not enough support for it to be passed.

Among the many AHCA provisions, some of which would affect taxes, coverage requirements, employer and individual mandates, etc., are provisions that would alter health savings accounts (HSAs). Americans are increasingly using these individual savings accounts, coupled with certain high-deductible health plans (HDHPs), to pay for health care expenses. In fact, the trend in American health care—both employer-sponsored and individually purchased—is toward these “defined contribution” savings arrangements and away from what have been informally referred to as low-deductible/comprehensive health plans.

The AHCA would significantly relax contribution and certain other HSA requirements. Most notably, the AHCA would

  • increase annual HSA contribution limits to equal the maximum HDHP out-of-pocket payment amounts (currently $6,550 for single and $13,100 for family coverage);
  • treat an HSA as having been established on the date HDHP coverage begins if the HSA is established within 60 days of such date. This change would permit medical expenses incurred on the date insurance coverage begins to be considered qualified expenses;
  • restore the 10 percent additional penalty tax on HSA distributions that are not used for qualified medical expenses (the ACA increased the additional penalty tax to 20 percent);
  • allow spouses that are both eligible to make catch-up contributions to choose which of their HSAs will receive the additional contributions; and
  • allow over-the-counter (i.e., nonprescription) medications to be considered HSA-eligible expenses.

Another health-related, but non-HSA, provision would affect IRAs and employer-sponsored retirement plans. It would restore the 7.5 percent of adjusted gross income (AGI) threshold for the federal medical expense deduction (the ACA increased this threshold to 10 percent). This would, in turn, reduce the threshold from 10 percent to 7.5 percent of AGI for the unreimbursed medical expense exception to the 10 percent early distribution penalty tax.

The AHCA is expected to face challenges in the Senate. The HSA provisions are not considered controversial, but other provisions in the House bill—including those dealing with coverage of pre-existing health conditions, rolling back state expansions of Medicaid, etc.—are expected to be among provisions that many senators, including some in the Republican majority, may not support. If the Senate passes a health care bill different from the House bill, a conference committee process will be needed to reach a single uniform bill, followed by a new vote by both House and Senate, the outcome of which is uncertain at this time.

The HSA and early distribution provisions described above would generally become effective in 2018 if the AHCA were enacted as currently written.

Ascensus will continue to monitor this rapidly developing process and provide additional information as it becomes available.