The IRS has issued Notice 2019-49, guidance that extends existing nondiscrimination testing relief available to certain defined benefit (DB) pension plans that are closed to new participants. The guidance is intended to aid sponsoring employers that are maintaining a DB plan for certain current employees, but commonly offer only a defined contribution (DC) plan—such as a profit sharing-401(k) plan—to new employees. In the absence of such relief, these DB plans could fail nondiscrimination testing because of the limitations on participation. Notice 2019-49 extends the current relief to cover plan years that begin before 2021. (Permanent relief has been proposed in retirement enhancement legislation that has not yet been enacted.)
Several corrections to IRS proposed regulations on multiple employer plans (MEPs) were published in the Federal Register. Originally published on July 3, 2019, this proposed guidance would revise 1979 IRS final regulations on MEPs—arrangements under which several employers elect to participate in a common plan.
A key revision being proposed in these regulations addresses the so-called “bad apple” rule, under which an entire MEP could fail to meet qualification requirements because of a compliance failure by one employer. This is known formally as the “unified plan rule.” These regulations propose an exception to the unified plan rule and—if certain requirements are met—compliance failures by individual participating employers need not jeopardize the entire MEP.
Most of the corrections published in the Federal Register are of a grammatical or punctuation nature, or a minor omission, such as failing to precede an Internal Revenue Code citation with the word “Section.” However, one substantive change corrects an omission in the preamble (page 31788) to these proposed regulations. Added by the correction is the parenthetical reference “(and their beneficiaries”) to a proposed notification requirement.
Specifically—in the event of a compliance failure by a participating MEP employer—a notification must be sent by the MEP plan administrator to participants if that participating employer has proven unresponsive. The proposed regulation states that such notices must be provided to beneficiaries, as well. However, the preamble as published did not include a reference to beneficiaries. The correction now being made aligns the preamble with the regulation itself.
The IRS has issued Revenue Ruling 2019-19, which addresses the responsibilities of retirement plan administrators when a distribution check that represents a taxable amount is issued to a plan participant, but remains uncashed. The facts and circumstances described in the guidance define the distribution as not including designated Roth account (e.g., Roth 401(k)) amounts—which are potentially tax-exempt—or other amounts not subject to normal taxation.
The guidance notes the following.
- The check amount is taxable in the year received by the recipient, whether cashed or not.
- Plan administrator obligations for withholding—and remitting of withholding—are not altered by whether the check is cashed.
- The recipient’s failure to cash the check does not alter the plan administrator’s requirement to report the distribution on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (reporting is required for distributions of $10 or more).
The IRS has issued Notice 2019-45, in which it identifies certain chronic health conditions whose treatments will be considered “preventive.” As a result, such treatments can be covered by a health insurance plan without first meeting the minimum deductibles generally required of high deductible health plans (HDHPs) for health savings account (HSA) contribution eligibility purposes. This guidance is effective July 17, 2019.
This guidance, which is effective July 17, 2019, notes that it is a response to an Executive Order issued by President Trump on June 24, 2019. The President charged the Secretary of the Treasury with the task of issuing guidance that would “expand the ability of patients to select HDHPs that can be used alongside an HSA, and that cover low-cost preventive care before the deductible, that helps maintain health status for individuals with chronic conditions.”
In general, “preventive” care does not include treatment for existing illnesses or conditions. Under current HDHP/HSA rules, treatments of a nonpreventive nature that are covered or reimbursed by a health plan without first satisfying HDHP conditions would generally disqualify a covered individual from HSA contribution eligibility.
Notice 2019-45 identifies the following conditions whose ongoing treatment may now be considered preventive, and, therefore, may be covered by a health plan without first satisfying an HSA-qualifying deductible.
- Congestive heart failure
- Coronary artery disease
- Hypertension (high blood pressure)
- Liver disease
- Bleeding disorders
- Heart disease
The treatments listed for the above conditions include certain inhibitors, therapies, monitors, medications, screenings, tests, and statins, which will be considered preventive expenses for HDHP purposes. Items not listed in Notice 2019-45 will not be considered preventive for HDHP purposes.
Today’s edition of the Federal Register contains the official version of new IRS proposed regulations on multiple employer plans (MEPs). Under such arrangements several employers elect to participate in a common plan. Objectives of these arrangements can include sharing of administrative burden and cost, and centralizing certain plan operation functions.
The new proposed guidance would revise 1979 IRS final regulations on MEPs. One key revision being proposed would address the so-called “bad apple” rule, under which an entire MEP could fail to meet qualification requirements because of a compliance failure by one employer. This is known as the “unified plan rule.” These regulations propose an exception to the unified plan rule, and—if certain requirements are met—compliance failures by individual participating employers need not jeopardize the entire MEP.
Public comments may be submitted for a 90-day period that will end October 1, 2019.
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.
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.
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).
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.
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.
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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Scheduled for publication in tomorrow’s Federal Register are proposed IRS regulations on circumstances when income tax withholding must be applied to certain payments from retirement arrangements and commercial annuities.
Specifically, these regulations address required withholding for payments made to destinations outside the United States, or made to a U.S. financial institution by a person with no U.S. address. The proposed regulations are intended to replace IRS Notice 87-7, the primary guidance currently governing such withholding.
The proposed regulations are not intended to replace rules that apply to an eligible rollover distribution (ERD) from an employer-sponsored retirement plan; a mandatory 20 percent withholding rate generally applies to such payments (other than distributions from IRA-based employer plans). Also, these regulations do not alter the general rule that withholding may be waived for employer plan payments that are not ERDs (e.g., required minimum distributions); the regulations—in general—apply to IRA distributions.
Key provisions of these proposed regulations include the following.
- As with Notice 87-7, the guidance would apply to both periodic—annuity, or similar—payments and nonperiodic payments.
- In general, the proposed regulations would not apply to foreign nationals (those who are not U.S. citizens); other rules apply to these persons.
- As before, a recipient who furnishes a payor with a U.S. residence address could generally waive the standard 10 percent withholding rate if the payment is not subject to mandatory withholding (e.g., an ERD).
- A recipient who furnishes a U.S. residence address but requests that a payment be directed outside the U.S would not be permitted to waive withholding (this is a major change from Notice 87-7).
- A recipient with a foreign address who requests that a payment be made to a financial institution within the U.S. also would not be permitted to waive withholding; the IRS cited “the ease with which funds deposited with a financial institution within the United States can be withdrawn by a person outside the United States” as the reason for this regulatory position.
- Consistent with Notice 87-7, a recipient with a non-U.S. address only, or who does not furnish the payor with a residence address, may not waive withholding.
- Recipients who furnish a military or diplomatic post office address (APO, FPO, or DPO) would be treated as having a U.S. residence address. A payment to such an address would be treated as being delivered to a U.S. address; therefore, the recipient could waive withholding on such payment if the payment was not subject to mandatory withholding (e.g., an ERD).
These proposed regulations would officially apply upon their approval in final form; until such time the guidance in Notice 87-7 would continue to apply. However, the regulations’ proposed recognition of military and diplomatic post office addresses as U.S. addresses may be relied upon in the interim.
Public comments must be received within 90 days of publication in the Federal Register; a public hearing will be held if requested in such public comments.
A pre-publication version of the proposed regulations can be found here.
The IRS has issued Notice 2019-35, guidance on factors used in certain defined benefit (DB) pension plan minimum funding and present value calculations. Updates include the corporate bond monthly yield curve, spot segment rates used under Internal Revenue Code Section (IRC Sec.) 417(e)(3), and the 24-month average segment rates under IRC Sec. 430(h)(2).
In addition, the notice provides interest rate guidance pertaining to 30-year Treasury securities under IRC Sec. 417(e)(3)(A)(ii)(II), as well as the 30-year Treasury weighted average rate under IRC Sec. 431(c)(6)(E)(ii)(I).
IRC Sec. 417 contains definitions and special rules for minimum survivor annuity requirements in DB plans. IRC Sec. 430 addresses minimum funding standards for single-employer defined benefit plans. IRC Sec. 431 addresses minimum funding standards for multiemployer plans.
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.
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.
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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The IRS has informally revealed that it intends to enable owner-only retirement plans to file Form 5500-EZ electronically through the web-based EFAST2 Electronic Filing System. Form 5500-EZ, Annual Return/Report of One-Participant Retirement Plan or a Foreign Plan (form title revised to reflect foreign plans) is a simplified plan return that can be filed by sole proprietors and spouses or partners and spouses that have no common law employees.
At present, however, Form 5500-EZ can only be filed with the IRS in hard copy form. Employers that wish to file electronically must submit their plan information on Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. This form is longer than Form 5500-EZ.
In a May 7 Federal Register posting requesting continued authority to gather information on Form 5500 series forms, the IRS noted that it “…plans to make the Form 5500-EZ available on the EFAST2 system for direct electronic filing instead of using Form 5500-SF.” The IRS further indicates that paper filing of Form 5500-EZ still will be possible after the electronic filing option is in place. No proposed timing for the electronic filing option was revealed.