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 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.

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%

GAO Issues Report on IRA and Retirement Plan Early Withdrawals

The United States Government Accountability Office (GAO) has released a March 2019 report, titled Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals, describing events that lead IRA owners and employer-sponsored retirement plan participants to make early withdrawals. These are distributions withdrawn generally before age 59½, and often expose the individuals to a 10 percent excise tax.

Limited statutory exceptions allow some early distribution recipients to escape this excise tax; these exceptions differ somewhat between IRAs and retirement plans. But early distributions likely reduce amounts available for expenses later in retirement.

The GAO used data from the IRS, U.S. Census Bureau, and Department of Labor, as well as interviews with taxpayers, plan sponsors and administrators, and retirement subject matter experts to generate this report.

Reasons for Early Withdrawals

These items are among the GAO’s findings.

  • Pressing financial needs—for such things as out-of-pocket medical expenses—were a common reason for early distributions.
  • Unpaid/offset plan loans, hardship distributions, and lump sums taken at separation from employment—versus execution of a rollover—led to many early distribution events.
  • Perceived complexity in transferring balances from one employer’s plan to another discourages some plan-to-plan rollovers.

Suggested Steps to Reduce Early Distributions

Survey interviewees offered suggestions on steps that could be taken to limit early retirement plan distributions.

  • Allow continued repayment of outstanding plan loans after separation from employment (beyond the extended time period created by the Tax Cuts and Jobs Act of 2017, which lengthened the eligible rollover period to an individual’s tax return due date for the year of loan offset, including tax filing extensions).
  • Restrict early access to employer-made retirement plan contributions.
  • Encourage partial distributions (rather than lump sums) when an employee separates from service with an employer.
  • Build emergency savings features into employer-sponsored retirement plans, with access criteria that differ from amounts earmarked for retirement.

Among its suggestions for continued monitoring of early withdrawals, GAO recommends that employer-sponsored retirement plans be required to report the incidence and the amounts of unpaid plan loans.

Disaster Tax Relief Act of 2019 Introduced in House

Tom Rice (R) of South Carolina introduced the Disaster Tax Relief Act of 2019 (H.R. 2145) in the United States House of Representatives. The purpose of this proposed legislation is to provide tax-related relief to victims of presidentially declared disasters that occurred after January 1, 2018 and before the enactment date this Act.

Tax relief specific to retirement savings arrangements include the following and applies to distributions taken from IRAs and tax-qualified employer-sponsored retirement plans.

  • Qualified disaster distributions would include amounts not to exceed the excess (if any) of $100,000, over the aggregate of any qualified disaster distributions received by the individual in all prior taxable years, received by an individual whose principal residence was located in a qualified disaster area and who suffered economic loss as a result.
  • Qualified distributions would include those taken on or after the date the qualified disaster incident began and on or before December 31 of the year after the year in which the qualified disaster incident began.
  • The 10 percent excise tax for early distributions would not apply to qualified disaster distributions.
  • Such distributions could be repaid over a three-year period, beginning on the day after the distribution was received.
  • Qualified disaster distributions from employer plans would not be subject to mandatory 20 percent withholding.
  • Inclusion in income of qualified disaster distributions would be done ratably over a three-year period, unless a taxpayer chose otherwise.
  • Certain retirement plan distributions taken for purchase of a principal residence, but not used due to disaster events, could be recontributed.
  • Loan amounts up to $100,000 could be taken from an eligible employer retirement plan.
  • Plan loan repayments following disaster events could be delayed up to a year; this delay would not alter loan amortization (in effect, lengthening a five-year amortization period).
  • A plan amendment necessary to comply with these provisions could be made up to and including the last day of the 2020 plan year, or a later date if prescribed by the Secretary of the Treasury (governmental plans two years later).

The bill was referred to the House Committee on Ways and Means following its introduction. The prospect of enactment is unclear at this time. Watch the news at for progress of this legislation, as warranted.

Washington Pulse: Will RESA Succeed This Time?

No other legislation in recent memory is more deserving of the label “survivor” than the Retirement Enhancement and Savings Act (RESA). Since 2016, multiple versions of RESA have been championed by high-profile lawmakers (both past and present). This legislation has offered many innovative ideas to expand retirement savings opportunities and has served as a model for other retirement reform bills.

RESA 2019 has now been introduced by Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). Its introduction came just one day before the House Ways and Means Committee gave unanimous approval to nearly identical legislation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (for more information on the SECURE Act of 2019, see Ascensus’ prior Washington Pulse). With this apparent unanimity in the Senate and House, hopes are high that 2019 may be a year for major retirement savings enhancement. The RESA 2019 provisions are described below.

Simplify, Create Incentives for New Plan Creation

The following RESA 2019 provisions are intended to reduce the complexity of establishing and enhancing retirement plans and offer tax incentives to do so.

  • Reform multiple employer plans (MEPs): Relax current rules for employer participation in a MEP and create a new variation to be known as a “pooled employer plan,” or PEP. Both allow consolidation of administrative responsibility and expense (effective for 2023 and later plan years).
    • Multiple participating businesses with a common interest would generally be administered as MEPs
    • Multiple participating businesses without a common interest would generally be considered to be part of a PEP
    • Simplified Form 5500-SF plan reporting would be allowed for smaller MEPs or PEPs
    • Compliance failures by one or more participating employers would not jeopardize the qualified status of the entire MEP or PEP (ends the “one bad apple” rule)
  • Allow more time to establish a plan: Permit qualified plans (e.g., profit sharing or pension plans) to be established as late as the sponsoring employer’s tax return deadline, including extensions. Certain plan options—like employee deferrals—would not be eligible for the extension (effective for 2020 and later taxable years).
  • Increase plan start-up credit for small employers: Increase the small employer retirement plan start-up credit from $500 to a maximum of $5,000 per year, available for three years beginning with the year the plan is established (effective for 2020 and later taxable years).
  • Create automatic enrollment credit: Provide a tax credit of up to $500 per year for small employers (100 or fewer employees) that implement automatic enrollment in existing or new 401(k) or SIMPLE IRA plans. The credit would be available for three years beginning with the year that automatic enrollment is allowed   (effective for 2020 and later taxable years).
  • Extend period for electing safe harbor 401(k) design: 401(k) plans could elect testing safe harbor designs without prior notice if an employer nonelective (vs. employer match) contribution is made; the deadline would be at least 31 days before the end of the plan year with a three percent contribution, or up to the deadline for removing excess contributions for a plan year—the close of the following plan year—if a four percent contribution is made (effective for 2020 and later plan years).
  • Create annuity selection safe harbor: Provide a new safe harbor for a plan fiduciary’s selection of an annuity provider—deemed to satisfy the “prudent expert” standard—when offering lifetime income plan investments (no specified effective date).

Promote Greater Saving in Employer Plans

RESA 2019 would encourage broader employee participation, greater employee saving, and clearer participant understanding of retirement savings adequacy.

  • Remove the cap on deferrals in safe harbor 401(k) plans: Eliminate the 10 percent maximum deferral rate in a 401(k) plan that employs automatic enrollment and automatic deferral increases in a qualified automatic contribution arrangement (QACA) after the initial period (effective for 2020 and later plan years).
  • Require new lifetime income disclosure: Defined contribution plan sponsors would be required to provide, at least annually, a projection of a lifetime income stream that could be generated by a participant’s accrued benefit; employers would not be held liable for the projection (Effective for benefit statements provided more than 12 months after the DOL issues 1) interim guidance, 2) the interest assumptions to be used, and 3) a model disclosure).

General Provisions Affecting Employer Plans

RESA 2019 would make targeted changes to employer plans in order to encourage asset preservation, simplify plan administration, and enhance compliance.

Provide lifetime income portability: Allow participants in a qualified plan, 403(b), or governmental 457(b) plan to roll over lifetime income investments to an IRA or another retirement plan without an otherwise available distribution event if the employer’s plan no longer offers such investments (effective for 2020 and later plan years).

Allow distributions of terminating 403(b) plans: Allow the plan administrator or custodian of a 403(b) plan to distribute such accounts in-kind to a participant or beneficiary when the 403(b) plan is being terminated (enabling guidance to be issued within six months of enactment).

Prohibit credit card loans: Treat as distributed and subject to taxation a retirement plan loan enabled through a credit card or similar program. Existing loans provided through credit card systems in place as of September 21, 2016 are considered “grandfathered” unless one of the following conditions apply (effective for 2020 and late plan years).

  • The loan is for $1,000 or less.
  • The loan is used for gambling or for the purchase of certain items such as liquor.

Permit shared Form 5500 filing: Allow employers that sponsor defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options to file a common Form 5500 (effective for 2022 and later plan years).

Allow nondiscrimination relief for closed defined benefit plans: Provide nondiscrimination testing relief for defined benefit pension plans that are closed to new participants; such employers generally offer a defined contribution plan to new employees (effective generally upon enactment, or—if elected—for 2014 and later plan years).

Increase penalties for plan reporting failures: Retirement plan information reporting failures would result in the following penalties (effective for returns, statements, and notices required January 1, 2020, and thereafter).

  • Form 5500, $100 per day, up to a maximum of $50,000
  • Form 8955-SSA (deferred benefit reporting), $2 per participant per day, up to a maximum of $10,000 for failing to file, $2 per day, up to a maximum of $5,000 for failing to file of notification of change
  • Withholding notice, $100 per failure, up to a maximum of $50,000

Clarify church retirement plan rules: Clarify which employees are eligible to participate in retirement plans sponsored by church-controlled organizations (effective for all years (i.e., years beginning before, on, or after the date of enactment).

Lower premiums for pension plans of cooperatives and charities: Reduce Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans of certain cooperatives and charities to $19 per participant for fixed-rate premiums, and $9-per-$1,000 of under-funded vested benefits for variable rate premiums (effective for 2019 and later plan years).

Changes Affecting Employer Plans and IRAs

These RESA 2019 provisions would affect employer plans and IRAs.

Require quicker payout to beneficiaries: With limited exceptions, most nonspouse beneficiaries of IRAs, qualified defined contribution, 403(b), and governmental 457(b) plans would be required to distribute inherited amounts within five years. New reporting requirements to ensure compliance would apply (effective for plan participant/IRA owner deaths occurring in 2020 or later, and to beneficiary reporting beginning with the 2021 calendar year).

Exceptions include the following.

  • Aggregate inherited IRA and employer plan balances that do not exceed $400,000
  • The disabled
  • The chronically ill
  • Beneficiaries not more than 10 years younger than the deceased participant or IRA owner
  • Minors (a 5-year payout period would begin upon reaching the age of majority)

Enhance IRA Contributions

RESA 2019 would significantly expand Traditional IRA contribution eligibility.

Permit Traditional IRA contributions at any age: Similar to Roth IRA owners, Traditional IRA owners with earned income could make IRA contributions at any age, not just before age 70½ (effective for 2020 and later taxable years).

Allow graduate student IRA contributions: Certain fellowship, stipend, and similar payments to graduate students and postdoctoral students would be treated as earned income for IRA contribution purposes (effective for 2020 and later taxable years).

Permit IRAs and S Corporation bank shares: IRAs would be permitted to hold shares of S Corporation banking entities (effective January 1, 2020).

Will RESA 2019 Become a Reality?

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

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Several Retirement and IRA Topics on IRS’ Priority Guidance Plan List

The Department of the Treasury and IRS have released a second quarter update to the 2018-2019 fiscal year Priority Guidance Plan (PGP). The PGP lists items of regulatory guidance that the IRS is—or hopes to be—working on during the fiscal year. A high priority item highlighted in the update is the release of guidance to implement provisions of the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December of 2017. Some items of guidance have remained on the PGP over several fiscal years.

Following are the pending guidance items related to employee benefits.

  • Regulations under Internal Revenue Code Section (IRC Sec.) 401(a)(9) updating life expectancy and distribution period tables for purposes of the required minimum distribution (RMD) rules
  • Guidance on hardship distributions from employer-sponsored retirement plans (in response to the Balanced Budget Act of 2018 provisions)
  • Guidance on missing retirement plan participants
  • Final regulations on minimum present value requirements for defined benefit (DB) pension plans
  • Guidance updating regulations on service credit and vesting
  • Hybrid DB pension plan interest credit and annuity conversion factor guidance
  • Multiple employer plan guidance
  • Church plan guidance
  • Guidance on Traditional and Roth IRAs, Including contributions and excise taxes
  • Affiliated service group guidance
  • Additional guidance on lifetime income payments from employer plans and IRAs
  • Regulations on deferred vested benefit reporting requirements
  • Final regulations on various issues for nonqualified plans subject to IRC Sec. 409A
  • Final regulations on “ineligible” nonqualifed plans under IRC Sec. 457(f)
  • Regulations for qualified ABLE programs (proposed regulations issued in 2015)
  • Updated guidance on use of truncated taxpayer identification numbers (SSNs); proposed regulations issued in 2017

Newly Introduced Retirement Reform Bill Has Better Chance of Progressing

Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) have announced the introduction of the Retirement Enhancement and Savings Act (RESA) of 2019.

This legislation is a version of similar legislation introduced several times dating back to 2016. This year, however, the prospect of enacting major retirement enhancement legislation seems especially promising, given indications of bipartisan support in both the House and Senate.

RESA 2019 includes these retirement changes and enhancements.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Remove the 401(k) automatic enrollment safe harbor deferral cap entirely (now 10 percent)
  • Simplify 401(k) safe harbor rules and give employers more flexibility in electing to implement a safe harbor design
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for implementing automatic enrollment in 401(k) and SIMPLE IRA plans
  • Treat taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Permit IRAs to hold shares of S Corporation banking entities
  • Generally prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) participants to retain individual tax-favored custodial accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined 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 defined benefit plans by providing nondiscrimination relief to plans that are closed to new participants
  • Modify the Pension Benefit Guaranty Corporation premiums for single-employer, multi-employer, and cooperative and small employer charity (CSEC) plans
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 5 years of the death of the account owner; would not apply to the first $400,000 of inherited balances
  • 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