Washington Pulse

Washington Pulse: New Rules Will Govern Retirement Plan Hardship Distributions

The Treasury Department has released proposed rules which—if finalized in present form—will significantly ease access to retirement plan assets for participants who experience financial hardship. The changes are a direct result of the Bipartisan Budget Act of 2018 (BBA), enacted in February of this year.

Treasury also took this opportunity to propose related changes that stem from several other laws previously enacted and related guidance. Like most proposed regulations, these are subject to a public comment period, and the potential for a public hearing. It’s generally hoped that they will be adopted with little—if any—change, since some of the provisions included in the regulations are or will be effective before the close of the 60-day comment period that will end January 14, 2019.

 

The Role of Hardship Distributions

Participants may generally access their retirement assets only after a specified event or events occur (e.g., separation form service, attainment of normal retirement age). Distributions due to hardship are also available in many plans, and are intended to serve as a last resort resource for participants who experience difficult financial circumstances.

 

How is the Need for a Hardship Distribution Now Determined? 

Two conditions must be met. First, there must be “immediate and heavy financial need.”  Second, a distribution from the plan must be considered necessary to satisfy that financial need.

Determining financial need can currently be based on “all relevant facts and circumstances.” An option—one intended to simplify this determination for plan administrators, and actually used by most plans—makes use of six “safe harbor” expense reasons, any one of which will be deemed to meet the condition of “immediate and heavy financial need.”  These currently include medical care, principal residence purchase, education expense, preventing eviction or foreclosure, funeral expense, and repair of damage to a principal residence.

In addition, it must be determined that a hardship distribution is necessary to meet this need. Current rules require that the amount distributed not exceed the actual need, and that there are no alternative financial resources outside of the plan available to satisfy that need. The determination of whether the need can be satisfied with non-plan resources currently can be based on “all relevant facts and circumstances.”  To satisfy this facts-and-circumstances condition, an employer is permitted to rely on an employee’s “representation” that the need cannot be met with other financial resources, unless the employer “has actual knowledge to the contrary.”

There is also a safe harbor for determining the necessity of the hardship distribution. If the employee has taken all available plan distributions and loans, and is required to cease making deferrals and employee contributions to the plan for at least six months, then a hardship distribution can be “deemed necessary to meet immediate and heavy financial need.”

To sum up, if a hardship distribution is sought for one of the six above-described safe harbor reasons, and a need for the distribution is established either by facts-and-circumstances or by safe harbor means, then granting a hardship distribution will generally be considered justified.

 

How are the Rules Changing?

BBA made significant statutory changes relative to hardship distributions, both broadening the employee account types available, and eliminating the requirement that available plan loans be taken before granting a hardship distribution. BBA also directed the Treasury Department to make specific revisions to existing regulations governing these distributions. In general, with some exceptions, they are to be effective beginning in 2019 plan years. Together, BBA and the proposed regulations would yield the following important changes.

  • Balances in an employee’s account in addition to employee deferrals may now be distributed for hardship reasons, including qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), employer ADP safe harbor and QACA safe harbor contributions, and earnings on all these amounts; plans may, but will not be required, to include these amounts in hardship distributions; effective for 2019 plan years.
  • Available plan loans need not be taken before seeking a hardship distribution, but whether to impose the requirement will remain a plan option.
  • There is no longer a requirement to suspend employee deferrals and employee contributions for at least six months; all plans must conform to this change (this will also apply to qualified reservist distributions).

 

Clarifications, Timing of the Proposed Changes

The BBA statutory change and directive to the Treasury Department for regulations revisions raised questions as well as providing answers. Following are some much-awaited clarifications, as well as timing details.

 

Suspension of Employee Deferrals for Hardship Recipients

  • As of the first day of 2019 plan years, a suspension of employee deferrals and employee contributions is not required when granting a hardship distribution; this must take effect for distributions on, or after, 1/1/2020.
  • In transition, participants whose employee deferrals and employee contributions are under a six-month suspension can resume deferring as early as the start of 2019 plan years, even if that results in a shortened suspension period; this will be a plan option, the IRS granting a transition period leading up to the mandatory change January 1, 2020, in recognition of the timing of these regulations’ release.

 

Provisions Related to “Deemed Immediate and Heavy Financial Need” Safe Harbors

To simplify determining whether a participant or beneficiary has an “immediate and heavy financial need,” regulations identify six “safe harbor” expenses that satisfy this condition. These proposed regulations add a seventh qualifying expense, and contain the following clarifications and revisions.

  • Federal disaster declarations: this provision would add a new safe harbor to the existing six safe harbors described previously, for “expenses and losses—including loss of income—incurred by the employee” in FEMA-declared disasters; effective for distributions on, or after, January 1, 2018.
  • Repair of damage of principal residence: the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated an income tax deduction for certain personal casualty losses for tax years 2018 through 2025, except in the case of disasters declared by the Federal Emergency Management Agency (FEMA). One of the six current hardship distribution safe harbors is for repairing damage to a principal residence. Due to its dependence on the TCJA-eliminated tax code provision, this safe harbor would have been unavailable during these years, except in the case of FEMA-declared disasters. These regulations propose to retain the principal residence repair safe harbor reason uninterrupted, declaring the TCJA provision inapplicable in the case of hardship distributions.
  • Primary beneficiary safe harbor: this change would align the regulations with an earlier law change that—plan permitting—includes the hardship of an employee’s primary beneficiary—for medical, educational or funeral expenses—whether or not that is the employee’s spouse; effective for distributions on, or after, August 17, 2006.

 

A Simpler Standard for “Distribution Necessary to Satisfy a Financial Need”

In addition to the requirement that there be an “immediate and heavy financial need,” a hardship distribution must be found “necessary to satisfy…” that financial need. Currently, satisfying this second requirement can be “…based on all the relevant facts and circumstances…”—a potentially challenging determination—or under a safe harbor that requires suspension of employee deferrals and employee contributions, and taking available plan loans.

  • The regulations propose “one general standard” to determine that a hardship distribution is “necessary to satisfy financial need.” To satisfy this standard—which is optional for 2019 plan years, mandated as of January 1, 2020—employers will no longer be required to suspend employee deferrals and employee contributions or have employees take available loans.
  1. Under this single standard, a hardship distribution must not exceed an employee’s need, other available plan distributions must have been taken, and “the employee must represent that he has insufficient cash or other liquid assets to satisfy the financial need.” (Current regulations anticipate a participant potentially being required to liquidate an illiquid asset, such as property).
  2. Currently, a plan administrator may rely solely on such employee representations “unless the plan administrator has actual knowledge to the contrary.” Going forward—effective January 1, 2020—a plan administrator must obtain such representation.
  • In transition, the above-described employee representation is not required for hardship distributions before January 1, 2020 (this delay is described as being due to the timing of these proposed regulations).

Limitations to the Expanded Account Sources Eligible for Hardship Distribution

Before BBA, employee elective deferrals—but not QNECs, QMACs, employer safe harbor 401(k) contributions—or their earnings—were eligible for hardship distribution. (The only exception was for certain pre-1989 amounts.)  While BBA expanded the funds eligible for hardship distribution, not all impacts were initially clear.

  • While hardship distributions may—for 2019 and later plan years—include these account sources, this is proposed as a plan option, not a requirement.
  • Unexpectedly, the broadening of hardship-eligible accounts appears to include the 401(k) safe harbor plan design known as qualified automatic contribution arrangement, or QACA, in which employer contributions may require a vesting period; such unvested amounts—of course—may not be distributed.
  • While earnings in 401(k) plans may be included in hardship distributions, this is not true of 403(b) plans, because BBA did not modify an equivalent 403(b)-governing statute.
  • QNECs and QMACs in annuity-based 403(b) accounts can be distributed due to hardship, while those in 403(b)(7) custodial accounts cannot.

 

Special Relief for Hurricanes Florence and Michael

In addition to the ongoing relief in federally-declared disaster situations already described, these proposed regulations would offer “expedited access to plan funds” for victims of 2018 Hurricanes Florence and Michael. Relief similar to that in IRS Announcement 2017-15—regarding California wildfires—is being provided.

  • A plan may add a hardship distribution feature after the fact (by retroactive amendment), and will have temporary relief from having to follow normal hardship administrative procedures.
  • Plan administrators must, however, make a good-faith effort to comply with administrative procedures, and as soon as practicable’ obtain required documentation.
  • Timing for relief eligibility is determined by the variable, FEMA-specified dates for the areas of the country affected by these identified hurricanes.
  • Procedural relief is provided through March 15, 2019, and plans must be amended for any specially-granted hurricane-related relief no later than the timing to amend for these proposed hardship regulations.

 

Plan Amending

While it is possible—if unlikely—that some provisions or their effective dates could change as a result of public comments, what is known for certain is that all plans offering hardship distributions will have to be amended. Deadlines will differ depending on whether a plan uses a pre-approved document or an individual-designed document (IDD). Pre-approved plan amending will be tied to either the sponsor’s plan year or taxable year—the year the amendment is adopted or effective—and IDDs will amend by a deadline tied to IRS issuance of its Required Amendments list.

 

How Will the Industry Respond?

Perhaps the question could just as readily be “How has the industry responded?  Given the 2019 plan year effective date for BBA’s provisions on hardship distributions, administrative decisions had to be made, even without available guidance. These decisions had potential impacts on system programming, employee communications, and other dimensions of plan administration. For example, would employers be given the option to continue requiring the current six-month suspension of employee deferrals after granting a hardship distribution, or would this be eliminated completely?

This is but one example, added to which is the fact that some elements of the proposed regulations were entirely unanticipated. The inclusion of QACA contributions as an account type eligible for hardship distribution was generally not expected. And there was the question of how 403(b) plans should be handled compared to 401(k) plans.  Most of these and other answers are now known, though perhaps belatedly. Going forward, those who administer the plans affected by these regulations at least have a road map. Hopefully there will not be any significant detours on the road from these proposed regulations to the final guidance.

 

Ascensus will continue to monitor the status of these regulations, and the industry’s response to them. Visit ascensus.com for the latest developments.

 

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Washington Pulse: DOL Opens Door to Wider MEP Availability; But How Much?

Advocates of expanding access to retirement plans through a multiple employer plan (MEP) approach have been hoping for a relaxation of existing rules that govern these cooperative arrangements. Now, the Department of Labor (DOL) has obliged—at least to a degree. But if MEP proponents were looking for a magic bullet to significantly expand worker coverage and saving within employer plans, that outcome—at least as it can be influenced by MEPs—will only be determined with time and employers’ response to the following guidance.

 

DOL Responds to President’s Executive Order

On October 23, 2018, the DOL published in the Federal Register much-anticipated proposed regulations on “association retirement plans,” new terminology for arrangements that have historically been called MEPs. Not only is the terminology new, but the regulations relax somewhat prior DOL guidance that restricted the ability of several employers to join together in a commonly-administered plan. A key objective in such arrangements is to share expense, labor, and responsibility, yet retain the ability of each participating employer to tailor plan features to its own needs.

These proposed regulations are a response to President Trump’s August 2018, Executive Order directing the DOL and Treasury Department to craft and issue guidance intended to increase participation in employer-sponsored retirement plans. Central to this were the Order’s instructions to provide guidance that would ease restrictions on employers wishing to participate in a MEP. Notably, the new guidance applies only to ERISA-governed defined contribution plans. No effective date is proposed, and public comments are being accepted through December 24, 2018.

 

Treasury Guidance is Still Missing

Not yet responding to the Order is the Treasury Department. Current Treasury regulations as they apply to MEPs do not insulate an employer from undesirable consequences—including plan disqualification—for compliance failures by one or more participating employers. This remains a missing piece to the MEP puzzle, much-desired protection against a so-called “bad apple” employer that could threaten an entire plan. But given the prominence of MEPs in Trump administration priorities, predictions of Treasury regulations being issued “in the near future” could mean just that.

 

What’s the Attraction of a MEP?

Why would an employer choose participation in a MEP, rather than having its own plan that covers only its own employees? There are numerous reasons, which may include the following.

  • One plan audit, covering all participating employers
  • Common Form 5500, Annual Return/Report of Employee Benefit Plan, covering all participating employers
  • Delegation of plan administration duties to the plan sponsor
  • Less fiduciary liability for participating employers
  • Potential for reduced investment fees, based on pooling of plan assets to achieve more bargaining power

 

Will High MEP Expectations be Met?

While some expect the new DOL guidance to lead to more employers thinking seriously about establishing and participating in a retirement plan, some expectations may not be fully met. The following examples show why.

  • Investment fees have been declining, even for small plans, for various reasons (e.g., increased scrutiny of fees and sales charges)
  • Recordkeeping has become very automated. The industry’s largest recordkeepers have wrung much—if not all—of the “scalable” efficiencies and savings out of the system.
  • MEPs often allow each participating employer to have different provisions (e.g., eligibility, vesting, entitlement to allocations), there could be more complexity in MEP plan administration.
  • Withdrawal from a MEP arrangement is an administrative process, not a mere declaration. It generally involves spinning-off that employer’s portion to form a stand-alone plan, which is not free of time and expense.

 

Defining “Employer” is Key

The Employee Retirement Income Security Act (ERISA) defines an “employee pension benefit plan” as a “plan …established or maintained by an employer or employee organization…that … provides retirement income…”  ERISA Sec. 3(4) provides examples of an employee organization; e.g., “any labor union.”

But it is not the definition of employee organization—rather, the definition of employer—that has been at the heart of the debate over which groups or associations can sponsor a MEP. ERISA Sec. 3(5) recognizes the ability of “a group or association of employers” to “act[ing] directly as an employer” for plan purposes. If conditions are met, the group or association may sponsor a plan in which certain other employers may choose to participate. If conditions are not met, the de facto result is each employer having to sponsor its own plan.

Previous guidance defining “employer” for MEP purposes has relied heavily on DOL Advisory Opinions*. In these, the agency has considered not only the provisions of ERISA, but also the Internal Revenue Code, and judicial review. These opinions date back to at least 1980, and—as a whole—have generally been considered restrictive.

The most recent and familiar is Advisory Opinion 2012-04A.  It’s instructive for its illustration of past DOL rulings. The arrangement proposed under Advisory Opinion 2012-04A would have allowed unrelated employers to participate in a single 401(k)/profit sharing MEP, their only common links being the investment advisory firm, and a shell corporation formed to sponsor the plan. The DOL found the proposal unacceptable, inasmuch as the applicants met neither the criteria of being an “employee organization,” nor the meaning of “employer” under ERISA. The DOL noted the fact that the participating employers would have no “substantial common ownership, control, or organizational connections” sufficient to treat them as one employer.

 

How the New Regulations Redefine “Employer”

The preamble to the proposed regulations states that their purpose “is to clarify which persons may act as an employer …in sponsoring a multiple employer defined contribution pension plan.”  The regulations describe a “bona fide group or association of employers,” and “bona fide professional employer association” as meeting the ERISA definition of “employer,” and thus—if these regulations are made final—entitled to act as an employer for MEP purposes.

 

What is a Bona Fide Group of Employers?

The elements necessary to be considered a bona fide group or association of employers are as follows (quotations indicate regulations language).

  • “The primary purpose of the group or association may be to offer and provide MEP coverage to its employer members and their employees,” and must have “at least one substantial business purpose…” (as for this purpose, it “is not required to be a for-profit activity,” and the regulations do not require a business purpose in-common among the participating employers).
  • Each participating employer must employ at least one person covered under the plan (see Special Rules for Owner-Employees, below).
  • The group must have an organizational structure, with bylaws or other indications of a formal structure.
  • The plan must be controlled by participating members (not a coordinating organization or service provider).
  • The group must have a “commonality of interest,” which can be satisfied by 1) being in the same trade, industry, line-of-business, or profession; or 2) having “a principal place of business in the same region”. A region may be as large as a single state, or can be a “metropolitan area” that spans state borders. (Region as a definition of commonality is a significant expansion of conditions that can enable creation of a MEP).
  • Only employees, former employees, or their beneficiaries may participate in the plan.
  • The group of employers cannot be “a bank or trust company, insurance issuer, broker-dealer, or other financial services firm (including pension recordkeepers and third-party administrators)…”.

 

What is a Bona Fide Professional Employer Organization?

A professional employer organization—also known as a PEO—generally provides personnel that perform human resource functions for client businesses on a contract basis. A PEO can be considered a “bona fide” PEO for MEP purposes based on facts and circumstances, or by meeting the conditions of a ”Certified PEO” (the latter is a certification granted by the IRS).

Facts-and-circumstances conditions for a “bona fide” PEO are as follows.

  • The PEO organization performs substantial business functions for its member clients (may include a combination of payroll, income tax withholding and reporting, recruiting, hiring and firing, employment policies, human resource functions, regulatory compliance, executing benefit plan obligations, etc…).
  • The PEO has “substantial control over the functions and activities of the MEP.
  • Employer-clients of the PEO must be acting directly as an employer for at least one employee participating in the MEP.
  • Participation must be limited to current and former employees of the PEO and its client-employers, and their beneficiaries.

 

Special Rules for Owner-Employees

A noteworthy element of President Trump’s August Executive Order was its DOL directive to consider how sole proprietors, working owners, and other “entrepreneurial workers with nontraditional employer-employee relationships” might be included in MEP arrangements. These proposed regulations state that “a working owner of a trade or business without common law employees may qualify as both an employer and as an employee …”and thus be eligible to participate in a MEP as defined in these regulations.

Such person must have an ownership interest in the trade or business, have income from providing personal services, and meet minimum work time or earnings tests in order to qualify for MEP participation.  (It is noteworthy that in doing so, an owner-only employer—generally exempt from ERISA—would be opting to participate in an ERISA-governed plan.)

 

Conclusion

Broadening employers’ ability to reap the full benefits of MEP participation has been a galvanizing issue for several years. DOL regulations intended to do just that have now been proposed. It remains to be seen whether this guidance will have the intended effect of extending employer plan benefits to more American workers. These regulations stop well short of permitting “open MEPs”—arrangements with no employer-affiliating criteria other than having a common service provider. Yet they may be a step in the right direction. Ascensus will continue to monitor the status of these regulations, and the industry’s response to them. Visit ascensus.com for the latest developments.

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*Advisory Opinions shaping DOL employer/MEP policy have included 80-42A, 94-07A, 96-25A, 2001-04A, 2003-17A, and 2008-07A.

 


Washington Pulse: Tax Reform 2.0 Continues Lawmakers’ Push for Savings Enhancements

Attracting attention is something that lawmakers in Washington, D.C., are known for, and legislation revealed September 11th by the House Ways and Means Committee does nothing to change that image. The Committee has approved a trio of bills which—taken together—are being referred to as Tax Reform 2.0. The name is a nod to the Tax Cuts and Jobs Act of 2017, tax reform legislation signed into law by President Trump in December 2017. Many lawmakers up for re-election this November are looking for positive talking points—or what they hope will be—in advance of the midterm elections.

In keeping with the Tax Reform 2.0 title, the first bill in the legislative package would make permanent the individual tax cuts in the 2017 legislation; the corporate tax cuts are already permanent. A second bill—perhaps the most likely to receive favorable reviews—proposes many potentially popular changes to tax-advantaged savings arrangements. The third bill is aimed at promoting “business innovation.”

Can Consensus Be Achieved?

Some of the most sweeping tax cuts in more than 30 years were contained in the Tax Cuts and Jobs Act of 2017. They’re applauded by some and panned by others. Regardless, some components of the new legislative package—specifically those found in the second bill, titled The Family Savings Act of 2018 (FSA 2018)—enjoy bipartisan support. FSA 2018 is an eclectic mix of changes that would affect IRAs, employer-sponsored retirement plans, and 529 plans.

Divide and Conquer?

A vote on Tax Reform 2.0 by the full House chamber is expected by the end of September. It should be emphasized, however, that passage in the Senate in identical form is required. Under Senate rules, a simple majority would not suffice, which makes enactment of the total legislative package an uncertain outcome, at best.

The best chance for enactment of changes proposed in FSA 2018 may lie in the possibility that this element of Tax Reform 2.0 could be split off and voted upon independently. It is not impossible to imagine a compromise in which lawmakers of all political persuasions consider the benefits of enacting something popular before the November midterm elections.

Savings Enhancements in FSA 2018

Following are brief descriptions of the savings arrangement enhancements in FSA 2018 (i.e., the second bill), with currently proposed effective dates.

Employer-Sponsored Retirement Plans

  • Multiple employer plans (MEPs) – Also referred to as “pooled employer plans,” the legislation would enhance the ability of employers to jointly participate in a common plan, the purpose being to reduce administrative burden and expense. The provision would apply to “qualified plans” as defined by Internal Revenue Code (IRC) Section (Sec.) 401, and IRA-based plans. Effective for plan years beginning after December 31, 2019.
  • More time to establish a plan – An employer would have until the business’ tax return deadline—including extensions—to establish a plan, rather than the last day of the business’ tax year; this grace period would not apply to adding a 401(k) component to a qualified plan. The provision would apply to profit sharing, stock bonus, defined benefit, and annuity-based plans. Effective for plans adopted for taxable years beginning after December 31, 2018.
  • Extend the period to adopt safe harbor design – Plans wishing to use safe harbor testing designs could elect safe harbor status after the plan year begins if the employer makes nonelective contributions to all eligible employees (versus matching contributions) and satisfies simplified safe harbor notice requirements. Effective for plan years beginning after December 31, 2018.
  • Prohibition on retirement plan credit card loans – Loans from employer plans that are taken under a credit card arrangement would be considered a deemed distribution for tax and other purposes. Effective for loans taken after the date of enactment.
  • Relief for closed defined benefit (DB) plans – Nondiscrimination rules would be modified so that a business could continue to operate a DB pension plan that is closed to new employees; such employers typically offer a defined contribution (DC) plan to new employees instead. Effective generally as of the date of enactment.
  • Armed Forces Ready Reserve contributions – Would allow members of the Armed Forces Ready Reserve to make certain additional elective deferrals—both basic and catch-up (all deferral-type plans)—beyond the limitation in Internal Revenue Code Section 402(g). Effective for plan years beginning after December 31, 2018.
  • Government employer contributions – Would clarify rules for certain “government pick-up” retirement plan contributions for new and existing employees. Effective for plan years beginning after the date of enactment.
  • 403(b) participation by employees of qualifying church controlled organizations (QCCOs) – The legislation would clarify which employees of such organizations are eligible to participate in their employer’s Retirement Income Account plan. Effective (retroactively) for plan years beginning after December 31, 2008.
  • PBGC DB insurance program evaluation – A study of the PBGC’s pension plan insurance program and its premiums would be required; to be completed by an independent organization. The study to begin no later than six months after date of enactment.

IRA, or Employer-Sponsored Retirement Plan/IRA “Crossover”

  • Traditional IRA contributions at any age – Anyone with earned income (or with spouse’s earned income) could make Traditional IRA contributions; no longer limited to those under age 70½. Effective for contributions for tax years beginning after December 31, 2018.
  • Exempt small balances from required minimum distribution (RMD) rules – The annual requirement to receive an RMD would be waived for any year if a taxpayer’s aggregate balance is at, or below, $50,000 (indexed). Would combine balances in IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans. Effective for calendar years beginning more than 120 days after enactment.
  • Grad student IRA eligibility – Graduate student stipend or fellowship payments would qualify as compensation for IRA contribution purposes. Effective for tax years beginning after December 31, 2018.
  • Birth or adoption excise tax exemption – Would exempt from the 10 percent early distribution excise tax (for those plans subject to it) up to $7,500 for expenses related to the birth or adoption of a child. Such amounts withdrawn could be repaid. Effective for distributions made after December 31, 2018.
  • Portability of lifetime income investments – Would allow an employer plan participant to distribute and roll over to an IRA or another employer plan a lifetime income investment—even in the absence of a distribution triggering event—if the investment is no longer available under the plan. Applies to IRC Sec. 401(a) “qualified plans.” Effective for plan years beginning after December 31, 2018.
  • 403(b) custodial accounts to become IRAs with plan termination –  A current obstacle to 403(b) plan termination—liquidating accounts to complete the termination process—would be overcome for certain plans by deeming 403(b) custodial accounts to be IRAs. Effective for plan terminations after December 31, 2018.

Miscellaneous Provisions

  • Universal Savings Accounts – Would create an account similar to a Roth IRA (no tax deduction, tax-free earnings) with the ability to remove any amount at any time for any reason, tax free (no ordering rules or qualified distribution rules as in a Roth IRA); $2,500 per year maximum contribution. Effective for tax years beginning after December 31, 2018.
  • Expansion of 529 Plans – Would amend the definition of qualified expenses to include those related to apprenticeship programs and homeschooling. Would also allow up to $10,000 (total) to be used to repay student loan debt, and would expand the definition of qualified expenses for K-12 education (currently limited to tuition). Effective for distributions made after December 31, 2018.

Conspicuously Absent

FSA 2018 was preceded by the March 2018 introduction of the Retirement Enhancement and Savings Act (RESA), whose chief sponsors in the Senate were Orrin Hatch (R-UT) and Ron Wyden (D-OR). An equivalent RESA bill has been introduced in the House of Representatives by Rep. Mike Kelly (R-PA). Some provisions are shared by RESA and FSA, though RESA was more comprehensive in terms of retirement simplification and provisions intended to encourage retirement plan formation and employee participation. It is not beyond possibility that some of those provisions could resurface if FSA 2018 progresses to the point of passage in the House of Representatives and the Senate takes up the bill. Following are some notable differences between the two bills.

  • Expanded small plan start-up and auto-enrollment tax credit – RESA would have raised the maximum small plan start-up credit from $500 to $5,000 per year, and created a credit for adding automatic enrollment to a plan. FSA 2018 has no such provision.
  • Raise the deferral cap on automatic enrollments – RESA would have lifted the 10 percent cap on deferrals of automatically-enrolled plan participants; FSA 2018 does not.
  • Annuity selection safe harbor – RESA prescribed an annuity selection “safe harbor” for plans that make lifetime income investments available, to encourage the use of lifetime income investments; FSA 2018 does not.
  • Lifetime income projections – To make savers more aware of what their current plan balance could generate throughout retirement, RESA required periodic projections of lifetime income; FSA 2018 does not.
  • Beneficiary lifetime vs. five-year payout – RESA would have required most nonspouse beneficiaries to deplete inherited IRA or employer plan accounts within five years; FSA 2018 has no such requirement.

Conclusion

As noted above, the best chance for enactment of changes proposed in FSA 2018 (i.e., the second bill) may rest on the possibility that this component of Tax Reform 2.0 could be considered separately—on its own merits—by the U.S. Senate and House of Representatives. The provisions described here are likely to have significant bipartisan support. Ascensus will continue to monitor the progress of this legislation. Visit ascensus.com for the latest developments.

 

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Washington Pulse: President Trump Asks Agencies to Review, Revise Retirement Plan Rules

On August 31, President Donald Trump launched the Labor Day holiday weekend by issuing an Executive Order directing the Secretaries of Labor and Treasury—and the agencies they lead—to consider options for changing several important items pertaining to retirement savings plans. The President focused on 1) broadening retirement plan availability by expanded use of multiple employer plans (MEPs) and a simplified plan disclosure process, and 2) enhancing savings preservation by modernizing the determination of required minimum distributions (RMDs) from IRAs and employer plans.

Expand Access through Common Plan Sponsorship and Participation

In an Executive Order signing ceremony in Charlotte, North Carolina, President Trump spoke of a need “to expand access to … retirement plans for American workers.” He cited a Bureau of Labor Statistics finding that 34 percent of full and part-time U.S. workers have no employer-provided retirement plan. A White House Fact Sheet cited a disparity in access to a retirement plan if employed by a large employer (89 percent) versus a small employer (53 percent).

The Trump Administration proposes relaxing the MEP rules to allow the formation of Association Retirement Plans, or ARPs, which—as is the nature of MEPs—would allow employees of different employers to participate in a common plan. The Executive Order directs the DOL and the Treasury Department to take the following actions.

  • Within six months, the Department of Labor (DOL) is to consider whether to propose regulations or other guidance that would clarify which business entities and individuals can join together in a MEP.
  • The DOL must consider sole proprietors, part-time workers, and “entrepreneurial workers with nontraditional employer-employee relationships”—such as gig-economy workers—in this guidance process.
  • Within six months the Treasury Department is to consider proposing guidance—in consultation with the DOL—that would shield a MEP-participating employer from the consequences of compliance failures by other employers.

It is worth noting that there was no indication that the Administration is backing the “open MEP” concept, wherein no common ownership, business purpose, or other linkage would be a condition for MEP participation.

More Efficient, More Effective Plan Disclosure

One of the challenges faced by retirement plan sponsors is disclosing vital, required information to employees. In the Executive Order, President Trump directed the Labor and Treasury Departments to jointly undertake an effort “to make retirement plan disclosures … more understandable and useful for participants and beneficiaries, while also reducing costs and burdens they impose on employers and plan fiduciaries.” The Executive Order also contains the following.

  • Within one year, the Departments of Labor and Treasury are to consider regulatory or other guidance options to reduce the number and complexity of retirement plan disclosures.
  • The Executive Order links the cost and burden of plan disclosures and notices with suppressing the formation of more employer-sponsored retirement plans.
  • The new guidance—if issued—should address not just cost, but “potential liability” associated with the disclosure process.
  • The agencies’ review of guidance options is to “include an exploration of the potential for broader use of electronic delivery as a way to improve the effectiveness of disclosures and to reduce their associated costs and burdens.”

Align Required Distributions with Retirement Realities

The Executive Order points to current regulations as leading to unnecessarily rapid withdrawal of retirement savings, and retirees experiencing a shortfall in financial resources during their lifetime. The President is seeking a reexamination of regulations that dictate the rate of required withdrawal. The Executive Order requires the Treasury Department to take the following actions within six months.

  • Review the mortality tables that now govern the speed of distribution—generally beginning at age 70½—in accounts subject to required minimum distributions (RMDs).
  • Consider the latest data on longevity in determining whether current regulations—and the life expectancy tables within them—should be revised.
  • Consider the appropriateness of more frequent updating of the life expectancy calculation factors in the RMD regulations. The Executive Order suggests this could be as often as annually.

Conclusion

Nothing that the President has asked of the Departments of Labor and Treasury in his Executive Order has the force of law, or makes any immediate changes to retirement savings arrangements. It is a prompt to incrementally change the compliance landscape by regulatory action, in the absence of action by Congress.

The changes President Trump is seeking are not sweeping, but very targeted.  The most noteworthy—addressing the MEP rules and plan disclosures—are clearly meant to diminish employer-perceived obstacles to establishing and maintaining plans. The ball is now in the agencies’ court. Yet to be determined is the extent to which such changes will be made in agency drafting rooms, versus the halls of Congress.

Perhaps noteworthy, the DOL recently issued final regulations on association health plans (AHPs), which offer guidance on the ability of multiple employers to join together under a single health insurance plan. Will these regulations ultimately serve as a model for retirement arrangements?

Ascensus will continue to monitor these agencies and their response to the President’s Executive order. Visit ascensus.com for the latest developments.


Washington Pulse: Finally Final: Court’s Mandate Terminates DOL Fiduciary Guidance

The U.S. Fifth Circuit Court of Appeals has finally made it official: the 2016 Department of Labor (DOL) fiduciary investment advice final regulations and accompanying guidance are repealed. On June 21, 2018, the Fifth Circuit issued the formal mandate that implements its March 2018 ruling “vacating” (i.e., making null and void) this much-contested guidance, whose purpose was to provide retirement savers with greater protection from conflicted and potentially exploitive investment advice. Attempts during the March-to-June interval to appeal the Fifth Circuit’s ruling and save the fiduciary guidance ultimately proved unsuccessful.

It is not completely clear what this outcome will mean for investment advisors and advisory firms in their future relationships with retirement savers. DOL regulations dating back to 1975—intended for replacement by the now-repealed 2016 guidance—may once again provide the standard that determines fiduciary status. 1996 and 2005 DOL sub-regulatory guidance may also shed additional light. It is hoped that the DOL will release formal guidance soon in order to provide greater clarity regarding future investment fiduciary standards.

How the DOL Investment Fiduciary Guidance Was Defeated

Several earlier District Court challenges to the fiduciary guidance ended with multiple lower courts all upholding it. One of these was a Texas District Court decision, which was appealed to the Fifth Circuit Court of Appeals. There the fiduciary guidance suffered its first defeat. Perhaps more important, the Fifth Circuit’s March ruling had sufficient authority to vacate “in toto” the final regulations and several accompanying prohibited transaction exemption (PTE) components. All were eliminated, in all legal jurisdictions nationwide. The Fifth Circuit judge writing for the majority rebuked the DOL for over-stepping its authority in issuing the 2016 guidance.

The Fifth Circuit’s decision was not unanimous. The three-judge Fifth Circuit panel (the full Fifth Circuit Court of Appeals has nine members) that rendered the decision was split 2-1. Had this ruling occurred during the Obama administration, with the same DOL leadership that had issued the guidance, the loss would in all probability have been appealed. With the Trump administration and its new DOL leadership committed to revising or withdrawing the guidance, the Fifth Circuit’s ruling was welcomed by the DOL, rather than challenged. Others—including the states of California, Oregon, and New York, in concert with the American Association of Retired Persons (AARP)—sought standing to appeal, but were denied. The ultimate deadline of June 13, 2018, for a DOL appeal to the Supreme Court passed as expected, and eight days later came the Fifth Circuit mandate that sealed the fiduciary guidance’s fate.

What Happens Next?

Over the slightly more than two years since the DOL investment fiduciary final regulations and exemptions were issued in April 2016, many financial organizations and investment advisors have made changes to their business models, compensation practices, and investment lineups to comply with new rules. Some even acknowledged fiduciary status as part of the new compliance regime. Will these changes be modified or reversed?  Can a firm or advisor disclaim a fiduciary role after having embraced it?  Does any DOL guidance issued from 2016 to the present have continued purpose or bearing on investment advising relationships?

Other DOL Investment Fiduciary Guidance; More is Needed 

Financial organizations, investment advisors, and service providers who serve them are wondering what past guidance can—or should—be relied on now that the 2016 final regulations and accompanying PTEs have become invalid. Possibilities include the following.

  • The DOL 1975 regulations specified a five-part test to determine if investment advice is fiduciary in nature, but generally apply only to advising that is associated with employer-sponsored retirement plans, not IRAs.
  • Interpretive Bulletin (IB) 96-1 clarified what constitutes investment information versus investment advice. IB 96-1 describes safe harbors to help employers guard against unintentionally providing information that could be construed as investment advice.
  • DOL Advisory Opinion 2005-23A addressed limited circumstances in which a person who is already a fiduciary to an employer-sponsored retirement plan could become an investment fiduciary when plan assets are rolled over from the plan to an IRA. According to this 2005 guidance, an individual who is not already a plan fiduciary may provide IRA rollover advice without becoming an investment fiduciary.
  • DOL Field Assistance Bulletin (FAB) 2018-02 was written after the Fifth Circuit’s March ruling vacating the final investment fiduciary regulations and exemptions. Anticipating this guidance to be eliminated, FAB 2018-02 provided for a transition period during which relaxed impartial conduct standards are to apply, accompanied by lenient enforcement. The impartial conduct standards require that those who provide investment advice for a fee
  • make no misleading statements,
  • receive only reasonable compensation, and
  • act in a client’s best interest.

FAB 2018-02 states that these standards are to apply “until after regulations or exemptions or other administrative guidance has been issued.”

The DOL has remained silent following the Fifth Circuit’s June 21, 2018, mandate officially invalidating the investment fiduciary guidance. Within the investment advisory and retirement industries it is widely hoped that the DOL will soon release more definitive guidance, providing greater clarity and assurance regarding the agency’s investment fiduciary standards and compliance expectations.

Proposed SEC Fiduciary Guidance

As the fate of the DOL investment fiduciary guidance was being determined in the judicial system, the Securities and Exchange Commission (SEC) in April issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. The agency did so eight years after the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the agency a directive to consider issuing standards of conduct for investment recommendations.

The proposed rules generally do not apply to banks or credit unions unless they are (or own) a broker-dealer or a registered investment advisor. The rules do appear to cover individual plan participants receiving direct investment recommendations, but exclude employer plans per se as a business exception. The guidance is also believed to cover investors in individual tax-advantaged accounts, such as IRAs, health savings accounts, and education savings accounts, but only for securities investments, which greatly limits the reach of this SEC guidance. The proposed SEC package contains three items.

  1. A “Regulation Best Interest” for broker-dealers
  2. A rule requiring disclosure of the nature of the advising relationship (fiduciary or not), and restraints on use of the term “advisor”
  3. Clarifications on fiduciary standards applicable to investment advisors

Although the full impact of the SEC proposed guidance is undetermined at this time, the SEC has indicated that the final guidance will generally include advice given to retirement savers who are invested in securities and are receiving investment advice from broker-dealers or registered investment advisors. The SEC is accepting public comments for a 90-day period, which began on May 9, 2018.

Still unknown at this time is the extent to which there will be coordination—and hopefully commonality—between the SEC and DOL guidance that will ultimately govern investment advising relationships.

NOTE: See SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance, for more information on the proposed SEC guidance or visit www.ascensus.com for the latest developments.


Washington Pulse: Bill Would Create Commission to Advise Congress on Retirement Issues

Senators Todd Young (R-IN) and Cory Booker (D-NJ) have introduced the Commission on Retirement Security Act of 2018. The bill’s purpose is to create a commission that would study Americans’ retirement security, including private retirement programs, and make recommendations to Congress on how to improve it. The Commission would be expected to complete a review and report to Congress not later than two years after the Commission is established. Public input through hearings and testimony could be sought by the Commission during this period.

While many bills are never enacted and little legislation is expected to pass before November’s mid-term election, this bill may eventually have a greater chance of advancing because it has bipartisan support and comes on the heels of a 12-year period of increased legislative activity aimed at enhancing retirement security. Further, following a 40-year transition from traditional pensions (defined benefit plans) to defined contribution plans, U.S. citizens are expected to prudently plan for their own retirement security through personal savings, retirement savings programs like IRAs and 401(k) plans, and Social Security.

Commission Goals

The bill would require a comprehensive review of private retirement plans and would not include Social Security. The Commission would be tasked with a comprehensive review of the following.

  • Existing U.S. retirement savings vehicles
  • Private retirement coverage, investment trends, retirement account balances, costs and net returns, retirement savings retention, and distribution activities
  • Social trends, such as wage and economic growth, health care costs, and increasing life expectancy that could lead to less retirement security
  • Retirement programs in other countries

If a three-quarter majority vote of the Commission is received, the Commission would be required to submit a report to the President and Congress of its findings along with its recommendations for legislative or administrative actions regarding how to improve or replace existing private retirement programs.

Commission Appointees

The bill, if enacted, would establish the Commission on Retirement Security, which would be made up of 15 members.

  • The Secretaries of Labor, Treasury, and Commerce
  • 12 appointed individuals who generally have expertise in such matters as retirement security, economics, aging, benefits, pension plan design, finance, the workforce, and labor unions.

Retirement Savings Challenges

As announced in a press release, Senators Young and Booker believe that America’s private retirement system faces major challenges and too many households are unprepared for retirement. A noted challenge is that the economy is undergoing a shift towards a “gig economy,” which may make it harder for individuals to save for retirement. In a gig economy, temporary and flexible jobs are more commonplace, and companies tend to hire more independent contractors and freelancers.

Senator Young states, “With many individuals reaching retirement with little to no savings of their own, we must take a serious look at our current retirement programs and make the changes necessary to help secure the futures of so many hardworking Americans. Our bill would enact a commission to better understand how we can strengthen private benefit programs and ensure our current and future generations have the tools necessary to plan for retirement.”

No schedule for committee consideration of the legislation has been announced. Visit www.ascensus.com and subscribe to the Industry and Regulatory news feed for the latest developments.

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Washington Pulse: SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance

Eight years after receiving a directive from Congress to consider standards of conduct for investment recommendations, the Securities and Exchange Commission (SEC) has issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. Unlike the DOL fiduciary regulations, the guidance applies only to securities; not to traditional bank, credit union, and insurance investment products. Many had hoped for a uniform standard for brokers and registered investment advisors (RIAs), however this guidance does not take that approach.

 

Who will regulate investment advising behavior?

This SEC guidance comes at a time of uncertainty for oversight of investment advising relationships. After the U.S. Department of Labor (DOL) issued final regulations on fiduciary investment advice for retirement savers, a court case recently resulted in a finding that the DOL exceeded its authority. Unless the DOL or another party successfully appeals, the DOL’s guidance will be nullified. This would leave the SEC regulations—if finalized—as the standard for broker-dealers who make investment recommendations.

 

What is in the guidance package?

The SEC has issued two proposed regulations and a proposed interpretation.

 

SEC Best Interest Standard ≠ DOL Best Interest Contract

The SEC’s proposed “regulation best interest” is not the same as the legally-enforceable “best interest contract” (BIC) in the DOL fiduciary investment advice regulations. Instead, the SEC’s best interest standard would be enforceable under its current arbitration framework. To satisfy the proposed SEC guidance, a broker-dealer must “act in the best interest of the retail customer” when a recommendation is made, and not put his own financial or other interest ahead of the customer. Broker-dealers can accomplish this by meeting the following conditions.

 

Disclosure Obligation

  • Disclose the nature of the broker-dealer/client relationship (which for brokers is not a fiduciary relationship, as it is for RIAs), and any material conflicts-of-interest—including financial incentives that might cause a broker-dealer to put his interests ahead of the customer’s.

 

Care Obligation

Exercising reasonable diligence, care, skill and prudence to:

-Understand the investment product recommended to a customer
-Determine that this recommendation could be in the interest of some customer
-Determine that a recommendation is in a particular customer’s best interest based on her investment profile
-Determine that a proposed series of transactions is also in that customer’s best interest based on her investment profile

 

Conflict of Interest: Disclosure, Mitigation, and Elimination

Establish, maintain, and enforce written policies and procedures to identify material conflicts-of-interest due to financial incentives tied to investments and either disclose and mitigate such conflicts, or eliminate them.

 

Contents of the Customer Relationship Summary

While the SEC guidance is primarily directed to broker-dealers and the securities recommendations they make, a new disclosure requirement applies to both broker-dealers and RIAs. These regulations would require both to make clear their roles in a brief “customer relationship summary” (CRS) form that includes

  • an introduction highlighting the types of investment services and accounts offered to retail investors
  • a description of the relationships and services a firm offers to retail investors, including the legal standards of conduct to be expected (e.g., RIAs are fiduciaries, broker dealers are not)
  • a description of the fees and costs a retail investor would pay the firm
  • a comparison of brokerage and RIA services (for firms that are one or the other, but not both)
  • a description of the conflicts-of-interest that may exist, including compensation that differs based on investments chosen.
  • how a customer can get additional information, including legal and disciplinary actions involving the firm or representative.
  • key questions a retail investor may want to ask for greater detail about services, specific fees, etc.

In general, the SEC advises representatives to be direct and clear about their status as a broker-dealer or RIA—or dual status—and to refrain from using language or terms formally or informally that may mislead a customer. Form CRS must be filed electronically with the SEC.

 

Fiduciary standard clarifications

While the fiduciary standard is not new for registered investment advisors, the SEC has never before formally included “best interest” obligations as part of their interpretation of the fiduciary obligations for RIAs. They define the prongs of the fiduciary standard of conduct to include:

  • Duty of Care
    • Duty to provide advice that is in the client’s best interest
    • Duty to seek best execution
    • Duty to provide services and to provide advice and monitoring over the course of the relationship
  • Duty of Loyalty
    • Duty to put its client’s interests first and not favor one client over another
    • Duty to make full and fair disclosure of all material facts relating to its relationship with its client
    • Duty to seek to avoid conflicts of interest and, at a minimum, disclose all material conflicts

 


Who is covered by the SEC guidance?

Unlike the DOL’s fiduciary investment advice regulations, the SEC broadens the pool of investors captured by its new investor protection rules. The SEC’s proposed regulations are not specific to retirement savers but instead cover the general retail investor.

The SEC guidance, however, also narrows the pool of investment recommendation providers covered by the guidance as its new rules only apply to broker-dealers and registered investment advisors. The guidance does not generally apply to personnel of banking or insurance organizations.

 

Which activities fall under the SEC guidance?

The three components address activities with respect to securities investments, such as stocks, bonds, and mutual funds, for retail clients. This includes the purchase, sale, or holding of such investments. By comparison, the DOL fiduciary rules apply to a broader class of investments than just securities. The DOL rule includes investments in certificates of deposit and certain insurance products that are not governed by the SEC framework.

While the SEC guidance is somewhat ambiguous, it appears to cover retirement plan participants receiving direct investment recommendations but exclude employer plans as a business exception. The guidance also appears to cover investors in individual tax-advantaged accounts such as IRAs, health savings accounts, and education savings accounts.

Clarifications on these and certain other issues are being sought.

 

More to come

The SEC requests comments from the public on this guidance, during a 90-day period. Based on public comments made by SEC commissioners, these SEC proposed regulations and disclosure guidelines could be just the first elements of more comprehensive guidance from the agency on investment advising relationships.  If true, more guidance may be forthcoming. Visit ascensus.com and subscribe to our Industry and Regulatory news feed for the latest developments.

 

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Washington Pulse: RESA’s Return May be Departing Senator’s Gift to Retirement Readiness

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).

IRA provisions

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).

Miscellaneous Provisions

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).

Conclusion

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.


Bill Seeks to Help Individuals Find Unclaimed Retirement Benefits & Provide Relief to Employers with Benefits Due Missing Participants

Senators Elizabeth Warren (D-MA) and Steve Daines (R-MT) have introduced the Retirement Savings Lost and Found Act of 2018 (the Act). The Act would create the Office of Retirement Savings Lost and Found, which would rely on new tools and build on existing reporting and disclosure rules to achieve two overall objectives: 1) assist participants and beneficiaries in finding and obtaining unclaimed retirement benefits in plans subject to ERISA’s vesting rules, and 2) provide plan administrators with a new option for balances of missing or lost participants. The bill would generally become effective the second year after it is enacted.

 

Retirement Savings Lost and Found Database

The Act would require the Commissioner of Social Security and the Secretary of the Treasury to create an online database called the Retirement Savings Lost and Found (RSLF). The objective of the database would be to allow individuals—with assistance from the RSLF Director, if needed—to locate the plan administrator of plans in which they have benefits.

The database would be populated with information gathered from IRS Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. This form would be modified to include information such as

  • the name and taxpayer identification number of participants or former participants whose benefits were either paid out, automatically rolled over to an IRA , or distributed in the form of a deferred annuity contract;
  • the name and address of the IRA trustee that received an automatic rollover of a cash-out amount; and
  • the account or contract number into which the assets were placed.

When participants separate from service, plan administrators would be required to provide them with information about the availability of the RSLF.

Plan administrators who automatically roll over a cash-out amount to an IRA would also be required to notify the receiving IRA trustee that the rollover is a mandatory distribution.

The statute suggests that changes could be made to IRS Forms Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and IRS Form 5498, IRA Contribution Information to satisfy the Act’s reporting requirements for the year such amounts are rolled over.

The reports would be required to state that such rollovers are mandatory and would be required to be filed with the RSLF Director.

 

Additional Relief Regarding Small Balances and Benefits of Missing Participants

In addition to creating the online RSLF database for those seeking unclaimed retirement benefits, the Act provides new options for plans to dispose of small balances and provides a compliance cushion when certain requirements can’t be met because a participant or beneficiary is lost or missing.

 

Small Balance Disposition

In addition to creating an online information bank to assist in claiming benefits, the Act would also make the following changes for small, unclaimed balances.

  • The involuntary cash-out limit for former participants would increase from $5,000 to $6,000.
  • After notifying former participants, plan administrators would be required to roll over balances of $1,000 or less to either an IRA established by the Secretary of Treasury or to the RSLF if the participant fails to claim the assets within six months. For tax purposes, a rollover to the RSLF would be treated as a rollover to an IRA and subsequent distributions would be treated as from an IRA.
  • For purposes of fiduciary relief under ERISA Sec. 404(c), the Act would expand the circumstances under which individuals are deemed to exercise control of accounts that are automatically rolled over to include rollovers made to
  • target date or life cycle funds held under the IRA,
  • the RSLF Director,
  • an IRA established by the Secretary of the Treasury, or
  • any other option provided by Secretary of Labor.

 

Relief Regarding Missing Participants

The Act would generally provide relief for plan fiduciaries by specifying that

  • a plan administrator or other plan fiduciary would generally not fail to comply with any requirements under the Internal Revenue Code (IRC) or ERISA—including the requirement to pay required minimum distributions or to provide documents, information, etc., to missing individuals;
  • when an individual is no longer considered missing, there would be a 180-day grace period for satisfying requirements under the IRC or ERISA, after which any temporarily suspended requirements must be met; and
  • the PBGC’s missing participant program, which now includes defined contribution plans in addition to defined benefit plans, will remain an option—and an alternative to the RSLF—for retirement plans that cash-out small balances.

 

Definition of Missing Participant

For purposes of the Act, the term “lost or missing participant” generally means a participant, former participant, or beneficiary of a participant, who cannot be located despite a plan administrator or other responsible party (e. g., a plan service provider or an IRA trustee) having

  • satisfied its Form 8955-SSA reporting obligation;
  • made at least one attempt to contact the participant at the most recent address on file with the plan; and
  • taken one or more additional measures to locate the participant, including checking with the administrator of a related plan, attempting to contact the participant’s beneficiary, conducting a search using a free electronic search tool, and using a commercial locator service.

 

Conclusion

The issue of unclaimed benefits—and the difficulty plans face meeting the requirements to dispose of them—are becoming more and more visible. Equally visible are the shortcomings of many workers in their preparedness for a financially secure retirement. Together, these factors may motivate Congress to act to at least ensure that existing retirement benefits find their rightful owners.

Given the bipartisan sponsorship and support for this bill’s concepts, it is possible that some or all of its provisions—on their own, or attached to other legislation—could find their way to enactment. Visit www.Ascensus.com for the latest developments.