Defined contribution plan

Washington Pulse: SEC Approves Regulation Best Interest Guidance

On June 5, 2019, the Securities and Exchange Commission (SEC) released a guidance package for broker-dealers and investment advisers who provide investment recommendations and investment advisory services to clients.  By releasing this guidance package, the SEC is enhancing the broker-dealer standard to meet retail customers’ expectations, and also confirming and clarifying the standard of conduct for investment advisers.

The SEC first proposed this guidance in April 2018, almost nine years after a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the SEC to do so. The SEC’s rulemaking and interpretation guidance package contains the following items.

  • The Regulation Best Interest (Reg. BI), which establishes a new standard of conduct under the Securities and Exchange Act of 1934 for broker-dealers when making recommendations to retail customers.
  • A final rule requiring investment advisers and broker-dealers to provide a client relationship summary (known as Form CRS) to retail investors.
  • An interpretation of the standard of conduct for investment advisers.
  • An interpretation of the “solely incidental” prong—under the Investment Advisers Act of 1940—which excludes certain broker-dealers from the definition of “investment adviser.”

 

How Did Reg. BI Change From the Proposed Guidance?

Before releasing the final guidance package, the SEC modified some of the proposed Reg. BI provisions.

  • BI now defines “account recommendations” to include recommendations to move assets between different types of accounts or to roll over an employer plan distribution to an IRA.
  • Broker-dealers must disclose whether they will provide account-monitoring services—and the scope of those services. Hold recommendations, whether explicit or implicit, are subject to Reg. BI. For example, an implicit hold recommendation occurs when a broker-dealer reviews a customer’s account under an account monitoring agreement and does not communicate any recommendations.
  • Broker-dealers must adopt policies and procedures designed to “eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.”
  • Investment cost considerations are now explicitly required both in a broker-dealer’s Care Obligation and in the Disclosure Obligation.
  • Broker-dealers must create and enforce policies and procedures that are designed to achieve compliance with all of Reg. BI.

 

What Is the Standard of Conduct for Broker-Dealers?

Reg. BI establishes a standard of conduct for broker-dealers when they make a recommendation to a retail customer regarding any securities transaction or any investment strategy involving securities.

Specifically, Reg. BI requires broker-dealer action.

  • Broker-dealers must act in the retail customer’s best interest at the time the recommendation is made, without placing the broker-dealer’s financial or other interest ahead of the retail customer’s interests. (This “General Obligation” requirement is discussed in more detail below.).
  • Broker-dealers must address conflicts of interest by establishing and enforcing policies that are designed to identify and fully disclose facts about conflicts of interest. In instances where the SEC has determined that the disclosure is insufficient to reasonably address the conflict, broker dealers must mitigate or eliminate the conflict.

The SEC rule does not expressly define “best interest,” nor does it establish a “safe harbor” for complying with the best interest standard. Rather, the specific obligations under Reg. BI are mandatory, and compliance with the letter and spirit of these obligations will be determined by considering all of the facts and circumstances.

The SEC’s Reg. BI is not the same as the Department of Labor’s (DOL’s) Best Interest Contract, which was part of the now vacated fiduciary investment advice final rule. Unlike the DOL’s guidance, the SEC’s guidance applies only to securities transactions; it does not apply to traditional bank and credit union products (e.g., certificates of deposit).

Compared with the DOL’s fiduciary investment advice regulations, the SEC’s final investor protection rules cover a larger pool of investors. Reg. BI is not specific to retirement savers, but instead covers general retail investors. In this final version of Reg. BI, the SEC modifies the definition of a “retail investor” to include any natural person—including an individual retirement plan participant—who receives a recommendation from the broker-dealer. This would apply to any recommendations for the natural person’s own account—but not for an account of a business that she works for (for example, where an individual is seeking investment services for a small business).

Reg. BI also narrows the pool of investment-recommendation providers covered by the guidance, as the SEC final rules apply only to broker-dealers and “associated persons” of a broker-dealer. The guidance does not typically apply to personnel of banking or insurance organizations.

 

General Obligation

The General Obligation requires that broker-dealers act in the retail customer’s best interest—without placing their own interests ahead of the customer’s interests. The General Obligation is satisfied only if the broker-dealer complies with four specific component obligations.

 

Disclosure Obligation

The Disclosure Obligation requires broker-dealers to disclose, in writing, all material facts about their relationship with a customer. The broker-dealer must disclose any conflicts of interest associated with the recommendation (e.g., conflicts associated with proprietary products or payments from third parties).

 

Care Obligation

The Care Obligation requires a broker-dealer to exercise reasonable diligence, care, and skill when making a securities-related recommendation. The broker-dealer must also understand the recommendation’s potential risks, rewards, and costs and consider those factors in light of the customer’s investment profile. The broker-dealer must reasonably believe that the recommendation is in the customer’s best interest.

 

Conflict of Interest Obligation

Under the Conflict of Interest Obligation, broker-dealers must create and enforce written policies and procedures addressing conflicts of interest associated with their securities-related recommendations to retail customers. When broker-dealers place limitations on recommendations that they make to retail customers (e.g., offering only proprietary funds or another narrow range of products), the policies and procedures must be designed to disclose any limitations and associated conflicts and to prevent the broker-dealer from placing his interests ahead of the customer’s interests.

The broker-dealer’s policies and procedures “must be reasonably designed to identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities” within a limited time period.

 

Compliance Obligation

The Compliance Obligation requires a broker-dealer to create and enforce written policies and procedures designed to achieve compliance with all of Reg. BI. At the time a recommendation is made, key elements of Reg. BI will be similar to key elements of the fiduciary standard for investment advisers.

 

Which Activities Fall Under the SEC Reg. BI guidance?

The SEC guidance package addresses activities with respect to securities investments—such as stocks, bonds, and mutual funds—for retail clients. This includes the purchase, sale, exchange, or holding of such investments. A recommendation that triggers application of Reg. BI is based upon the facts and circumstances of the particular situation. Factors include whether the communication “reasonably could be viewed as a ‘call to action’” and “reasonably would influence an investor to trade a particular security or group of securities.”  The more individually tailored the communication to a specific customer or a targeted group of customers, the greater likelihood it would be viewed as a “recommendation.”

Account recommendations generally include recommendations involving securities, recommendations to roll over or transfer assets from one type of account to another (e.g., employer plan to IRA), and recommendations involving employer plan loans.

The following broker-dealer communications are not considered “recommendations.”

  • General financial and investment information
  • Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan
  • Asset allocation models and related interactive investment materials
  • Requirement to take an RMD, as long as there is no discussion of which assets to liquidate
  • Communications on making or increasing retirement plan contributions, as long as there is no discussion of how the assets should be invested or allocated

The SEC guidance covers retirement plan participants receiving direct investment recommendations for their own account, but excludes employer plans as a business-purpose exception. The guidance also covers investors in individual tax-advantaged accounts such as IRAs, health savings accounts, Archer medical savings accounts, 529 plans, and Coverdell education savings accounts.

 

How does Form CRS Affect Broker-Dealers and Investment Advisors?

While the SEC guidance is primarily directed to broker-dealers and the securities recommendations they make, the client relationship summary (known as Form CRS) disclosure requirement applies both to broker-dealers and to investment advisers. Broker-dealers and investment advisers must provide Form CRS, in a standardized Q & A format, to retail clients at the beginning of their relationship. (For existing clients or customers, certain disclosures still have to occur when recommendations are made.)

Some of the information Form CRS should contain includes

  • information about services, fees, and costs; conflicts of interest; standards of conduct; and whether there has been any disciplinary history with the financial professional or firm;
  • a link or information on how to access the SEC’s gov website; and
  • key questions a retail investor may want to ask (for example, Form CRS should provide greater detail about services provided or specific fees).

The SEC’s intent of multiple disclosures (including Form CRS and Disclosure Obligation communications) is to layer disclosures to customers so that they have appropriate information either before or at the time a recommendation is made. In general, the SEC advises representatives to be direct and clear about their status as a broker-dealer or investment adviser—or dual status—and to refrain from using language or terms formally or informally that may mislead a customer. Form CRS is subject to SEC filing and recordkeeping requirements.

 

What is the Standard of Conduct for Investment Advisers?

While the fiduciary standard is not new for investment advisers, the SEC has never before adopted a formal interpretation of its fiduciary obligations. The SEC has now defined the fiduciary standards of conduct for investment advisers, which include the following duties.

Duty of Care

  • Duty to provide advice that is in the customer’s best interest
  • Duty to seek best execution
  • Duty to provide advice and monitoring over the course of the relationship

Duty of Loyalty

  • Duty not to subordinate the clients’ interests to their own
  • Duty to make full and fair disclosure of all material facts relating to the investment adviser’s relationship with the client
  • Duty to eliminate (or at least expose, through full and fair disclosure) all conflicts of interest

 

What is the SEC’s New Interpretation of “Solely Incidental”?

Broker-dealer advisory services are excluded from the scope of the Investment Advisers Act of 1940 and the definition of “Investment Adviser” (the “broker-dealer exclusion”) only if the following requirements are met.

  • The services must be solely incidental to the broker-dealer’s regular business as a broker-dealer (the “solely incidental” prong).
  • The broker-dealer cannot receive special compensation for those advisory services.

In response to comments, as part of its final guidance package, the SEC has published an interpretation to confirm and clarify its position with respect to the solely incidental prong of the broker-dealer exclusion.

Specifically, the SEC interprets the language to mean that a broker-dealer who provides advice is acting “consistent with the solely incidental prong if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.”

Whether the solely incidental prong is satisfied is based on the facts and circumstances of the broker-dealer’s business, the services offered by the broker-dealer, and the broker-dealer’s relationship with the customer.

 

Other Items of Interest

  • Broker-dealers must maintain a record of all information pertinent to, and provided by, a customer that shows compliance with Reg. BI for six years. The records must also include the identity of all individuals associated with the broker-dealer who are responsible for the account. Broker-dealers must retain originals of all communications received from a customer and copies of all communications sent to the customer for three years; these communications must be retained “in an easily accessible place” for two years.
  • Some states have adopted their own rules governing the relationship between regulated entities and their customers. Whether Reg. BI preempts such state laws would be determined in future judicial proceedings, based on the specific language and effect of that state law.
  • The SEC does not believe Reg. BI creates any new private right of action or right of rescission, nor does the SEC intend such a result.

 

Effective Dates

Reg. BI and the Form CRS requirements will become effective 60 days after they are published in the Federal Register, and include a transition period until June 30, 2020, in order to give firms sufficient time to come into compliance. The “standard of conduct” interpretation and the “solely incidental” interpretation become effective upon publication in the Federal Register. More guidance is expected—the DOL has indicated its intent to release a new proposed fiduciary rule by the end of this year. Stay tuned to ascensus.com for the latest developments.

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SEC Approves Long-Awaited Investment Advising Regulation and Accompanying Guidance

The Securities and Exchange Commission (SEC) today approved by a 3-1 vote its guidance package for broker-dealers and investment advisers who provide investment advisory services to retail clients. This guidance was first proposed in April 2018, the impetus being a directive contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In the interim following Dodd-Frank’s enactment, the Department of Labor (DOL) proposed and finalized guidance on investment advice standards that were to apply to retirement investors, but this guidance was later overturned by a federal court.

The Commission’s vote today adopts the full package of its investment fiduciary advice guidance.

Included in Guidance Package

  • Regulation Best Interest, which establishes a standard of conduct for broker-dealers when making recommendations to retail customers
  • A requirement for investment advisers and broker-dealers to provide a client relationship summary (Form CRS) to retail investors
  • An interpretation of the standard of conduct for investment advisers
  • An interpretation of the “solely incidental” prong of the Investment Advisers Act of 1940

Notable Changes

  • The scope of Regulation Best Interest is modified to include account recommendations, including rollovers or transfers from workplace retirement plan accounts to IRAs and recommendations to take a plan distribution.
  • Regulation Best Interest would require broker-dealers to disclose whether monitoring will be provided and the scope of that service.
  • Regulation Best Interest would specifically require broker-dealers to adopt policies and procedures designed to eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.
  • The consideration of cost is explicitly required as part of a broker-dealer’s care obligation.
  • More flexibility in describing a firm’s offerings on Form CRS will be allowed.
  • Broker-dealers must establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.

Effective Date

  • Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register, and include a transition period until June 30, 2020, to give firms sufficient time to come into compliance.
  • The interpretations under the Advisers Act become effective upon publication in the Federal Register.

GAO Warns That Caregivers Face Special Challenges in Retirement Readiness

The U.S. Government Accountability Office (GAO) has released a report that focuses on difficulties many caregivers face in achieving a financially secure retirement. The GAO notes that, on average, about 10 percent of the U.S. population was engaged in providing care services to a family member or someone outside of their family during the 2011 to 2017 survey period.

Of the 49,000-plus providing such care services, 51 percent were doing so for an elderly parent and 7 percent were caring for a spouse. About one quarter each of the total were providing care services for another family member or for a nonrelative (some provided care to more than one recipient).

The following were among the possible consequences of being a caregiver.

  • More interference with work and career, and, therefore, lower income
  • Smaller retirement accumulations
  • Less Social Security benefits because of employment interruptions

Policymakers’ suggestions to reduce such adverse consequences included the following.

  • Consider providing an enhanced Social Security benefit to those whose income and future retirement security may be compromised by their service as caregivers.
  • Better educate potential caregivers of the financial—and, ultimately, security—impacts of reducing their employment or leaving the workforce to provide such care.

The GAO released both a Fast Facts summary and highlights of its findings.

 

 

 


House Passes the SECURE Act

In a 417-3 vote, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which would significantly overhaul current legislation governing retirement plans. The bill, which is sponsored by Rep. Richard Neal (D-MA), was approved with broad bipartisan support. It must be passed by the Senate and signed by the President before it becomes law.

The legislation went through a few changes shortly before passage. The final bill removed certain provisions that had been included in previous versions which were intended to expand 529 plans to cover the cost of home schooling and attendance at private elementary, secondary, and religious schools. Additionally, the final version included language unrelated to retirement savings, which is intended to fix the 2017 Tax Cuts and Jobs Act provisions that affected military survivor benefits.

The SECURE Act includes the following provisions.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Increase the 401(k) automatic enrollment safe harbor deferral cap from 10 percent to 15 percent
  • Simplify 401(k) safe harbor rules
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for including automatic enrollment in new 401(k) and SIMPLE IRA plans
  • Treat taxable nontuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) plan participants to retain individual custodial 403(b) accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Allow long-term part-time workers to participate in 401(k) plans
  • Allow penalty-free retirement arrangement withdrawals in the event of the birth or adoption of a child
  • Increase the age to begin required minimum distributions from 70½ to age 72
  • Provide pension funding relief to certain community newspapers that sponsor defined benefit pension plans
  • Treat tax-free “difficulty of care” payments received by home healthcare workers as compensation for retirement plan contribution purposes
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined IRS Form 5500 reports for certain similar plans
  • Require benefit statements to defined contribution plan participants to include an annual lifetime income disclosure based on participant balance.
  • Provide a fiduciary safe harbor to employers for selection of a lifetime income provider
  • Protect older, longer service employees in closed defined benefit plans
  • Lower Pension Benefit Guaranty Corporation (PBGC) premiums for pension plans of cooperatives and charities
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Expand 529 plan distribution options to cover the costs of apprenticeships and allow for repayment up to $10,000 of student loan repayments for a student or his or her siblings
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 10 years of the account owner’s death
  • Increase penalties for failure to file certain information returns and IRS Form 5500
  • Allow the IRS to share certain returns and return information with other governmental agencies for tax administration purposes
  • Modify rules relating to the taxation of unearned income of certain children

A nearly identical bill, the Retirement Enhancement and Savings Act (RESA) has been introduced in the U.S. Senate by Sen. Charles Grassley (R-IA) and Sen. Ron Wyden (D-OR). The Senate held hearings on the issue as recently as last week but has not yet scheduled a date to vote on its version of the legislation.

With apparent bipartisan support in both the House and Senate, there seems to be growing momentum that could result in 2019 being the year that significant retirement legislation is passed. Ascensus will continue to monitor the progress of RESA and its counterpart legislation in the House, the SECURE Act.

 

 


Bill for a Commission to Advise Congress on Retirement Issues Is Re-Introduced

Senators Todd Young (R-IN) and Cory Booker (D-NJ) have introduced the Commission on Retirement Security Act of 2019, legislation virtually identical to the 2018 bill these senators introduced. Its purpose is to create a commission that would advise Congress on issues pertaining to retirement security in the United States. The commission would be charged with reviewing existing private retirement benefit programs and drafting a report to Congress that could be useful to lawmakers in improving retirement security.

The following would be among the areas of focus for this commission.

  • Comprehensively review existing U.S. retirement savings vehicles, including the long-term transition from defined benefit pension plans to defined contribution plans
  • Take into consideration social and economic changes that have occurred in the U.S.
  • Examine alternative retirement programs in other countries that could have value or application in the U.S.

A schedule for consideration of the legislation has not been announced.

 

 


Legacy IRA Act Would Increase Tax-Free IRA Qualified Charitable Distributions (QCDs)

Senator Kevin Cramer (R-SD) has introduced the Legacy IRA Act (S. 1257), a bill that would significantly increase the maximum IRA qualified charitable distribution (QCD) now available to certain federal taxpayers. Under current law, taxpayers age 70½ or older can withdraw from an IRA and contribute tax-free up to $100,000 per year if such amounts are given directly to certain qualified charitable entities. The donor cannot retain authority or control over the disposition or use of the donated assets. A qualified charity is generally an entity that a taxpayer of any age can make tax-deductible contributions to. The difference is that an IRA QCD is 100% excludable from taxable income, rather than partially deductible, as are charitable donations in general.

Senator Cramer’s bill would do the following.

  • Raise the taxpayer QCD limit for any tax year from $100,000 to $400,000
  • Limit the qualifying QCD amount paid to any single recipient to $100,000 per year
  • Treat IRA amounts donated to charitable remainder trusts, unitrusts, and charitable gift annuities (collectively called split-interest entities) as QCD-eligible
  • Grant QCD eligibility for split-interest donations at age 65, rather than age 70½

This bill has been referred to the Senate Finance Committee for consideration; no action has yet been taken by that committee.


Senators Portman, Cardin Add Their Bill to the Retirement Legislation Mix

If there were any doubts that enhancing retirement saving opportunity is a high congressional priority, one need not look beyond immediate events for evidence. In a week when the Senate Finance Committee held a hearing on retirement security, and the House of Representatives is preparing to begin consideration of comprehensive retirement legislation, two familiar senators are re-introducing their own bill with similar purpose.

Senators Rob Portman (R-OH) and Ben Cardin (D-MD) have renewed a legislative partnership that began more than two decades ago as congressmen in the U.S. House of Representatives, before both were elected to the U.S. Senate. The Retirement Security and Savings Act of 2019 is a re-introduction of legislation the senators introduced in December 2018, during the final days of the 115th Congress. Limited changes have been made to that legislation, whose provisions include the following.

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans, with higher contribution levels
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide a small employer tax credit for implementing automatic enrollment
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the Saver’s credit for contributions to employer plans and IRAs, and make it refundable and payable to a retirement account
  • Require that certain long-term, less-than-fulltime employees be allowed to participate in deferral-type retirement plans, but apply nondiscrimination benefits testing and top-heavy testing separately to such employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to beneficiary IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) in IRAs or defined contribution plans from required minimum distributions (RMDs); the 2019 version does not apply to beneficiaries
  • Increase the RMD age in stages to age 75
  • Reduce the excise tax for RMD failures from 50% to 25%
  • Reduce—under certain circumstances—the excise tax for IRA excess contributions from 6% to 3%

Student Loan Repayment Bill Is Re-Introduced

Senator Ron Wyden (D-OR) has re-introduced the Retirement Parity for Student Loans Act, a bill intended to allow employers to make contributions to 401(k), 403(b), and SIMPLE IRA plans in amounts that have a matching relationship to an employee’s student loan debt repayments.

The legislation was previously introduced in December 2018, in the last days of the 115th Congress. Though the conditions are not identical, the legislation may in part be a response to a 2018 IRS private letter ruling on an employer request to make retirement plan contributions based on employees having made student loan debt repayments.

Some of the bill’s key provisions are as follows.

  • Only employees’ higher education loan repayments (not loans for private secondary or elementary expenses) would qualify for such employer contributions.
  • Employer contributions matched to employee student loan debt repayments could not exceed the annual deferral limit appropriate to the employer’s plan (e.g., 401(k) vs. SIMPLE IRA plan deferral limit), reduced by such employee’s elective deferrals into the retirement plan; all amounts together must not exceed the employee’s compensation.
  • Only employees eligible to defer into the employer’s retirement plan may receive student loan matching contributions.
  • All employees who are eligible to receive retirement plan matching contributions must be eligible to receive student loan matching contributions.
  • For purposes of satisfying nondiscrimination requirements in providing retirement plan benefits, rights, and features, those who have no student loan debt—and, therefore, would not receive student loan matching contributions—would not be considered as having been denied a benefit, right, or feature.
  • The Secretary of the Treasury would be directed to issue regulations governing such arrangements.
  • As proposed, the legislation would be effective for 2020 and later years (plan year was not specified).

 

 


Retirement Spotlight: IRS Provides Welcome Relief From High VCP Fees

The retirement industry received a gift on April 19, 2019: Revenue Procedure (Rev. Proc.) 2019-19. This revenue procedure updates the Employee Plans Compliance Resolution System (EPCRS) by expanding the availability of self-correction options for more kinds of plan failures. The IRS anticipates that this expanded guidance will increase plan compliance and reduce some costs for employers.

 

A Step in the Right Direction

Expanding the options available through the IRS’s Self-Correction Program (SCP) will benefit employers that face increased fees if they correct plan failures under the Voluntary Correction Program (VCP). Under the VCP, an employer submits an application for correction to the IRS, and—if approved—has assurance that the failure will not result in greater sanctions or plan disqualification.

In January 2018, the IRS announced a new VCP fee structure based on plan assets, rather than on the number of plan participants. This fee structure eliminated several exceptions—including amendment or loan failures—that used to carry a fixed or reduced general fee. As a result, many employers face significantly higher fees to correct operational failures under the VCP. But the IRS also allows more employers to fix plan failures through self-correction, perhaps as a result of the vigorous criticism about higher fees.

 

New Plan Failures Available for Self-Correction

The SCP process requires that employers follow specific IRS correction steps. If properly completed and documented, the SCP gives employers assurance of plan compliance. But with the SCP, the IRS neither reviews the employer’s actions nor issues a “compliance statement,” which documents the IRS’s approval.  Rev. Proc. 2019-19 expands self-correction in three primary areas: plan document failures, operational failures, and loan failures.

 

Plan Document Failures
The revised procedure allows employers to self-correct many plan document failures—other than the initial failure to adopt a qualified plan or 403(b) plan document timely—as long as the plan has a favorable letter at the time of correction. The EPCRS generally considers plan document failures as “significant” failures. So to qualify for self-correction, an employer needs to correct the failure by the end of the second plan year following the year the failure occurred.

 

Operational Failures
The EPCRS now allows employers to retroactively amend their plans when they have failed to follow the terms of their plan documents. Through this process, an employer can conform the terms of the plan document to the way the employer actually ran the plan. Employers can retroactively amend these operational failures if they meet the following three conditions.

  • The plan amendment would result in an increase of a benefit, right, or feature.
  • The increase in the benefit, right, or feature applies to all eligible employees.
  • The increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the EPCRS general correction principles.

As with plan document failures, employers must amend their plans for significant operational failures by the end of the second plan year following the year that the failure occurred.

 

Loan Failures
Employers may now self-correct a defaulted loan by 1) requiring the participant to make a corrective payment, 2) re-amortizing the outstanding balance of the loan, or 3) dictating some combination of these two options. Previously, employers could use these options only when filing through the VCP. The revised revenue procedure also allows an employer to

  • report a deemed loan distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in the year of the SCP correction (instead of for the year in which the failure occurred);
  • obtain after-the-fact spousal consent if the employer failed to obtain spousal consent at the time of the plan loan; and
  • retroactively amend the plan for exceeding the number of outstanding loans specified in the document.

Although the EPCRS has greatly expanded the availability of self-correction for loan failures, some restrictions do apply. According to Rev. Proc. 2019-19, the Department of Labor (DOL) will provide a no-action letter only to those employers who correct loan default failures through the VCP. Employers concerned about receiving the DOL’s no-action letter may wish to spend the additional time and money required to correct the failure under the VCP.

Another restriction applies to failures arising from loans that violate the statutory loan provisions. This includes loans that exceed the maximum loan limit, loans that exceed the maximum repayment period, and loans that were not subject to level amortization. These types of loan failures do not qualify for self-correction.

 

More Guidance to Come?

While Rev. Proc. 2019-19 provides employers with additional self-correction options, more clarification is needed. The IRS has indicated that it may provide additional examples of insignificant operational failures in the Correcting Plan Errors section of its website. Ascensus will continue to monitor the IRS’s website for new guidance. Watch Ascensus.com News for any significant developments that may emerge.

 

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