The U.S. Fifth Circuit Court of Appeals has released its official mandate document vacating (repealing) the Department of Labor’s (DOL’s) 2016 fiduciary investment advice final regulations and accompanying prohibited transaction exemptions. This action officially seals the repeal of this guidance, which has been the subject of intense debate and opposition for the last several years. Multiple attempts had been made by the DOL during the Obama administration to arrive at guidance that would provide greater protection for retirement investors, while considering the challenges faced by the investment advising industry.
The Fifth Circuit Court’s mandate has been expected since the deadline for a possible appeal passed earlier this month. The original Fifth Circuit Court ruling striking down the DOL fiduciary guidance was issued in March. When the DOL failed to appeal the Court’s decision and attempt to save the guidance, several states joined the American Association of Retired Persons (AARP) in seeking standing to appeal, but were denied.
Multiple delays in full implementation and enforcement of the 2016 fiduciary guidance had followed the transition from the Obama administration-led DOL to the present administration and its DOL leadership, which advocated the guidance’s reexamination or rollback. A temporary relaxed enforcement policy was announced in May, to be in effect until full implementation and enforcement, which officially were scheduled for July 1, 2019. Some industry watchers, however, doubted that the 2016 fiduciary guidance was likely to take full effect in its current form.
No statement on today’s Fifth Circuit Court mandate vacating the guidance has yet been issued by the DOL.
Under an agreement announced today (April 12) by the Treasury Department and the White House Office of Management and Budget (OMB), many future Treasury regulations are likely to receive more extensive review before release. The agreement reflects an April 2017 executive order of President Trump to review a policy that since 1983 had allowed for expedited issuance of certain Treasury regulations.
Under the new policy announced today, most Treasury regulations will be subject to a 45-day review by OMB’s Office of Information and Regulatory Affairs (OIRA) before publication in the Federal Register. (An exception is to be made for Treasury regulations that pertain to the Tax Cuts and Jobs Act, tax reform legislation enacted in December of 2017, as such regulations would instead be subject to a 10-day expedited review process.)
According to the agreement, OMB’s 45-day review is to take the following questions into consideration.
- Will the proposed Treasury regulation create an inconsistency with regulations planned by another federal agency?
- Could the regulation “raise novel legal or policy issues?”
- Is the regulation expected to have an impact on the economy of $100 million or more?
In a recent article published by The Wall Street Journal, SVP Peg Creonte discusses new 529 plan tax legislation and the potential consequences associated. New federal tax rules state that up to $10,000 tax-free from a 529 account can be spent on K-12 schooling expenses. However, some states have not yet updated the legislative language used, resulting potential tax consequences of withdrawal. Creonte states that, “You should make sure that your state has a clear policy on how withdrawals for private K-12 will be treated from a tax perspective.”
An amendment to New York’s state finance law has established an IRA-based retirement savings program for the state’s private sector employers and their employees. Full establishment of the program is envisioned within 24 months.
The New York State Secure Choice Savings Program is to be a Roth IRA-based program that complies with Internal Revenue Code requirements for Roth IRAs. The program is to cover employees age 18 or older who have compensation from an employer (either for-profit or nonprofit) engaged in an enterprise in the state of New York, an employer that has not offered a “qualified retirement plan” within the two prior years. “Plan” is to include such traditional qualified plans as profit sharing/401(k), money purchase, target benefit, and defined benefit plans, as well as 403(b), SEP, and SIMPLE IRA plans, and governmental 457(b) plans.
Employees will be offered an opportunity to contribute or to decline participation. If no election is made, employees would be automatically enrolled and contributions withheld from their compensation at a rate of three percent. Employees can opt out of participation at any time or may change their rate of contribution. Other provisions of the program as identified in the state’s finance law amendment include the following.
- A governing Board is to choose available investments, with an initial default investment proposed to be a life-cycle or target date fund; future options to potentially include principal protection, growth, and “secure return” investment options.
- Investments are to be pooled to take advantage of cost savings “through efficiencies and economies of scale.”
- The Board would set minimum and maximum contributions consistent with Roth IRA rules, as well as determine withdrawal provisions.
- Employers participating in the program will “begin employee enrollment at most nine months after the Board opens the program for enrollment.”
- A website is to be established to provide information and enable participant transactions.
- Communications with employees will be provided in eight specified languages, and others as “the state comptroller deems necessary.”
- Deposits of amounts withheld from employee pay are to occur no later than the last day of the month following the month of withholding, and consistent also with an employer’s deposit requirements for income tax and unemployment insurance withholding.
- There would be no New York state funding obligation or liability.
- Employers would not be liable for employee participation decisions or governing board decisions.
The program’s governing board may delay implementation beyond the anticipated 24-month period if adequate funds to administer the program are not obtained. Funds for such administration can come from state, federal, or local government sources, as well as any individual, firm, partnership, or corporation.
After passage by the House and Senate, President Trump today signed the omnibus federal budget appropriations bill after an initial veto threat. The legislation that was needed to avert a federal agency shutdown and to assign funds to spending priorities through the rest of the fiscal year.
Conspicuously absent from the legislation was a package of retirement savings provisions contained in the bipartisan-sponsored Retirement Enhancement and Savings Act (RESA) of 2018, which some anticipated might be attached to the appropriations bill. The RESA package had wide bipartisan support, and was co-sponsored by Senate Finance Committee Chairman Orrin Hatch (R-UT), who has announced his retirement at the end of his current Senate term.
Despite its absence from the appropriations bill, many feel that RESA has favorable prospects for being attached to other must-pass legislation in 2018 or advancing to consideration and possible enactment on its own. See the Ascensus summary of the RESA.
The IRS has released the detailed Instructions for Form 8915B, Qualified 2017 Disaster Retirement Plan Distributions and Repayments. The Form 8915B itself was released earlier in March. This is a taxpayer form used to report taxation and/or repayment of certain amounts withdrawn from IRAs and employer-sponsored retirement plans by victims of specified 2017 natural disaster events for which special tax relief has been provided.
The IRS previously released Form 8915A for taxpayers to report similar transactions resulting from 2016 disaster events.
Qualified distributions identified on this form are eligible for exemption from the 10 percent additional tax on early distributions, for proportional taxation of such amounts over three years, and have a three-year window for repayment of the withdrawn amounts.
Members of the House of Representatives have introduced their body’s companion version of the Retirement Enhancement and Savings Act (RESA) of 2018, which is a bill that was introduced in the Senate on March 9. The House bill’s lead sponsors are Representatives Mike Kelly (R-PA) and Ron Kind (D-WI), with more than a dozen co-sponsors from both political parties.
Among its many proposed changes, the legislation would open the door for employers to participate more freely in multiple-employer plans, liberalize numerous IRA and employer plan provisions, and expand employer tax credits for plan startup and automatic enrollment. (See Ascensus’ Washington Pulse summary of the Senate version bill.)
There is speculation that the RESA legislation could be added to an omnibus federal agency appropriations package many expect to be voted on this week. Progress of both House and Senate bills will be monitored closely.
The IRS has released Revenue Procedure 2018-21, modifying existing rules used by pre-approved defined benefit plans to calculate interest credits. The updated rules now allow for pre-approved defined benefit plans containing a cash balance formula to provide for the actual rate of return on plan assets as the rate used to determine said interest credits. This method was previously not allowed for pre-approved cash balance plans, for which IRS will issue approval letters this month.
Bipartisan legislation proposing many changes to IRAs and employer-sponsored retirement plans has been introduced by Senate Finance Committee Chairman Orrin Hatch (R-UT) and Committee Ranking Member Ron Wyden (D-OR). The Retirement Enhancement and Savings Act (RESA) of 2018 is very similar to a bill approved unanimously by the Senate Finance Committee in 2016, but not considered by the full Senate. With Senator Hatch leaving Congress, there may be an urgency to enact some form of this legislation. A companion bill was also recently introduced in the House of Representatives and is being reviewed to determine if there are any differences between the two. A general summary of the Senate bill is provided below.
Incentives to Establish or Enhance Employer Plans
Many of RESA’s provisions are intended to make it less complicated and less expensive to establish a plan and to reduce fiduciary exposure for employers establishing a retirement plan. To accomplish these objectives, RESA would
- enhance an employer’s ability to participate in a multiple employer plan, or MEP (the new but equivalent term “pooled employer plan” is coined by RESA). This would allow sharing of administrative responsibility, expense, and liability. RESA would eliminate the current requirement that participating employers have common purpose or ownership (effective for 2022 and later years);
- allow an employer to establish a plan (e.g., a pension plan or profit sharing plan) by its business tax filing deadline, including extensions. Current rules require employers to establish a plan by the last day of their business year. The extension would not apply to certain plan provisions, such as elective deferrals (effective for taxable years beginning after 12/31/2018);
- increase the maximum small employer retirement plan start-up tax credit from $500 to up to $5,000 per year, available for three years (effective for taxable years beginning after 12/31/2018);
- provide a $500 per year tax credit for up to three years, beginning with the first year a 401(k) plan or SIMPLE IRA plan includes an automatic enrollment feature (effective for taxable years beginning after 12/31/2018);
- allow employers up to 30 days before the end of a plan year to elect a 401(k) safe harbor plan provision without providing a pre-plan year notice if they make a three percent nonelective safe harbor contribution. Employers making a four percent nonelective safe harbor contribution would have until the deadline for removing excess contributions for such year to elect a safe harbor provision (effective for plan years beginning after 12/31/2018);
- specify a fiduciary safe harbor for plans offering lifetime income investment options in order to offer employers greater protection from fiduciary liability for investment provider selection (effective date is not specified in the bill text); and
- provide nondiscrimination testing relief for defined benefit pension plans that are closed to new participants; generally such employers offer a defined contribution plan as an alternative for new employees (effective for plan years beginning after 12/31/2013, if the plan sponsor elects).
Enabling Participants to Save More
RESA includes provisions intended to lead to greater saving by retirement plan participants. To accomplish this objective, RESA would
- eliminate the current 10 percent deferral limitation for plans with qualified automatic contribution arrangements (effective for plan years beginning after 12/31/2018), and
- require defined contribution plan benefit statements to include a lifetime income estimate at least once every 12 months (effective for statements provided more than 12 months after issuance of guidance by the Secretary of the Treasury).
Provisions Affecting IRAs and Employer Plans
Some provisions would affect participants or beneficiaries of both employer plans and IRAs, or would in some manner connect an employer plan and an IRA. These include provisions that would
- require nonspouse beneficiaries of IRAs and employer plans to withdraw amounts that together exceed $450,000 within five years. Exceptions to this rule—allowing certain beneficiaries to distribute and be taxed over their life expectancy—would include the disabled, the chronically ill, and a beneficiary who is no more than 10 years younger than the participant. Minors would begin their required five-year distribution period upon reaching the age of majority (generally effective for payouts as a consequence of deaths after 12/31/2018);
- treat custodial accounts of terminated 403(b) plans as IRAs, as of the termination date (effective for terminations after 12/31/2018); and
- allow plan participants invested in lifetime income investments to roll over the investments to an IRA or to another retirement plan if a plan is no longer authorized to hold such investments (effective for plan years beginning after 12/31/2018).
A limited number of RESA’s provisions would affect only IRAs, and would enhance either contribution or investment options. These provisions would
- eliminate the end of Traditional IRA contribution eligibility at age 70½ (applies to contributions for taxable years beginning after 12/31/2018);
- remove restrictions and allow any IRA owners to invest in S-Corporation bank securities (effective 1/1/2018); and
- treat graduate student or doctoral candidate stipend, fellowship, and similar payments as “earned income” for IRA contribution eligibility purposes (effective for taxable years beginning after 12/31/2018).
RESA contains several provisions less high-profile in nature, provisions that chiefly deal with employer plans. Such provisions would
- treat most retirement plan loans enabled through credit card programs as distributed from the plan (effective for plan years beginning after 12/31/2018);
- increase the following retirement plan reporting failure penalties
- Form 5500: $100 per day to a maximum of $50,000,
- Form 8955-SSA (reporting deferred vested benefits): $2 per participant per day to a maximum of $10,000,
- Withholding notices: $100 per failure to a maximum of $50,000 (effective for returns, statements, or notifications required to be filed after 12/31/2018);
- accelerate PBGC defined benefit (DB) pension plan insurance premiums to improve the agency’s solvency (application date to be determined);
- clarify PBGC insurance premiums for DB plans of cooperative and small employer charities (effective for plan years beginning after 12/31/2017); and
- clarify that employees of church-controlled organizations may be covered by a 403(b) plan that consists of a retirement income account (effective for all plan years, including before RESA enactment).
RESA’s prospects for enactment appear enhanced by the fact that it is known to be a high priority of Sen. Hatch, who will retire after his current Senate term. Furthermore, there could be an opportunity to attach its provisions to congressional appropriations legislation that must be approved by March 23, 2018, in order to avoid another government shutdown. The legislation could also certainly move forward as a stand-alone bill. Visit www.Ascensus.com for the latest developments.
By a 2-1 vote, the U.S. Court of Appeals for the 5th Circuit has reversed a district court’s 2016 ruling in favor of the Department of Labor (DOL). The Court’s opinion states that the DOL exceeded its statutory authority in issuing its fiduciary regulations, particularly as it relates to the best-interest-contract exemption (BICE). The ruling went on to state that DOL’s actions were not valid, as they were not authorized by ERISA Titles I and II, and were “far afield” from ERISA’s original intent.
This marks the first defeat the DOL has suffered in a court case related to its fiduciary regulations since the issuance of the regulations in 2016.
This ruling comes on the heels of a DOL victory in the 10th Circuit Court earlier this week, and so has created a split in rulings at the District Court level. Whether any cases related to the fiduciary regulations will be seen by the Supreme Court remains unknown, but a split at the District Court level often creates a need for the Supreme Court to end the split by issuing their own ruling.
It is also unclear if the DOL, under the Trump administration, deems the further pursuit of a court victory necessary, as the fiduciary regulations were issued under the Obama administration.