Washington Pulse

Washington Pulse: Proposed Treasury Regulations on MEPs a Good Start

The U.S. Treasury Department has released proposed regulations that relax the “unified plan rule” for multiple employer plans (MEPs). Published on July 3, 2019, this guidance was prompted by a 2018 Executive Order that directed the Treasury Department to consider proposing guidance that would expand workplace retirement plans for American workers. This Order specifically noted that providing greater access to MEPs would help achieve this goal. The new rules would provide relief for defined contribution MEPs that include a participating employer that jeopardizes the plan through failure to comply with certain qualified plan rules. Under the existing rules, one noncompliant employer within a MEP can disqualify the entire plan, creating significant problems for the other participating employers. If these proposed regulations become final, they will remove an important compliance hurdle for employers considering—or already in—a MEP.

Why are MEPs Important?

Multiple employer plans generally allow two or more employers to participate in a single retirement plan, which may result in simpler plan administration and reduced costs. These businesses may, for example, have some common ownership that allows—but does not require—the companies to share a single plan. Recognizing the potential benefits of MEPs, the Department of Labor (DOL) and federal legislators have also proposed expanding access to these plans.

 

The MEP concept is simple: some employers may benefit from combining their retirement resources into one plan. Instead of each employer establishing, maintaining, and paying for a separate qualified plan, many employers can participate in a single plan. This means that each participating employer could save time and money by avoiding individual annual plan audits, IRS Form 5500 returns, and ERISA bonds. Additionally, MEP participants may be able to enjoy some savings on plan investments once the plan reaches a certain size. Each participating employer still owes certain fiduciary duties to plan participants, but MEPs typically streamline administration by using a single plan administrator, who assumes overall responsibility for plan compliance and for day-to-day operations.

How Would the Proposed Regulations Help Employers with MEPs?

For the past 40 years, Treasury Regulations have dictated that “the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all employers maintaining the plan.” This unified plan rule, sometimes called the “one bad apple rule,” may well have discouraged individual employers from participating in a MEP. The proposed regulations provide an important exception to the unified plan rule. But this relief, if made final, will require the MEP plan administrator to follow a rigorous notification process and extensive follow-up.

Requirements for the Unified Plan Rule Exception

The proposed regulations cite four conditions that the MEP must satisfy in order to avoid plan disqualification on account of a participating employer’s failure. These conditions, listed below, will be described in more detail throughout this Washington Pulse.

  • The MEP must satisfy the general eligibility requirements:
  • The MEP plan administrator must have processes and procedures that are designed to promote overall plan compliance.
  • The MEP plan document must describe the steps that the MEP plan administrator would take to address a participating employer’s compliance failure.
  • The MEP must not be “under examination” by the IRS.
  • The MEP plan administrator must provide detailed notices to the “unresponsive participating employer”—and if no action is taken, to plan participants (and their beneficiaries) and to the DOL’s Employee Benefits Security Administration (Office of Enforcement)—describing the failure and possible remedies.
  • If the participating employer does not remedy the failure or spin off the assets held on behalf of its participants to a single employer plan, then the MEP plan administrator must spin off of those assets into a single employer plan and terminate such plan.
  • The MEP plan administrator must comply with any IRS information request in connection with the spun-off plan assets.

Important MEP Compliance Provisions

The Treasury Department crafted these regulations to promote compliance and to increase coverage of employees by workplace retirement plans. To do so, it has proposed an exception to the unified plan rule, as discussed above, to ensure overall qualification of a MEP plan in spite of the action or inaction of one or more individual participating employers. To achieve its objective, Treasury’s proposed regulations—created in cooperation with the DOL—include many detailed requirements.

 

The MEP plan administrator must create a compliance process—and must include procedures in plan documents. The proposed regulations state that the MEP plan administrator must establish procedures that are designed to promote compliance with federal rules. The proposed regulations also require that the MEP defined contribution plan document itself contain the procedures that the MEP plan administrator will use to address participating employer failures, including failures to take appropriate remedial action. Fortunately, once final regulations are issued, the IRS intends to release a model plan amendment, which will provide clear direction about exactly how much procedural detail must be placed in the plan document.

The MEP plan administrator must provide certain notices. A participating employer becomes an “unresponsive participating employer” when it fails to comply with reasonable MEP plan administrator requests for compliance information—or when it fails to correct a compliance deficiency. At this point, the MEP plan administrator must provide a first notice to this employer, describing

  • the participating employer failure;
  • the remedial actions needed to fix the failure;
  • the employer’s option to initiate a spinoff of the assets and account balances of its participants; and
  • the consequences of failing to remedy the failure, including an involuntary spinoff of the assets and account balances of the employer’s participants, followed by a termination of that spun-off plan.

The MEP plan administrator must provide a second notice if the unresponsive participating employer fails to take remedial action within 90 days of the first notice. This second notice must be provided within 30 days after the first 90-day period ends. The second notice must include all of the information contained in the first notice. But it must also specify that the employer must remedy the failure (or spin off the assets) within 90 days, or the MEP plan administrator will send a notice to the DOL and to the unresponsive participating employer’s plan participants (and their beneficiaries), telling them of the participating employer’s failure and of the consequences of not correcting that failure.

The proposed regulations require a third notice if the employer takes no remedial action within 90 days of the second notice. The MEP plan administrator must provide this notice within 30 days after the second 90-day period ends. The MEP plan administrator must, however, also provide the notice to the unresponsive participating employer’s plan participants (and their beneficiaries) and to the DOL. This notice must include the information required to be in the first notice, plus

  • the deadline for employer action,
  • an explanation of any adverse consequences that a spinoff/termination could create for participants, and
  • a statement that the MEP plan administrator is sending the notice to the unresponsive employer’s participants (and beneficiaries) and to the DOL.

Additional requirements.

  • Spin off and termination. If the unresponsive participating employer doesn’t fix the compliance failure or spin off its participants’ assets, the MEP plan administrator must
  • notify the affected participants (and their beneficiaries) about the spin off-termination details,
  • notify the IRS (further guidance is expected),
  • stop accepting contributions,
  • implement a spinoff of the affected participants’ assets to a separate single-employer plan, and
  • terminate the spun-off plan.
  • Qualification of spun-off plan. The unified plan rule exception in the proposed regulations does not protect the unresponsive participating employer’s plan. Even though the MEP plan may have remained qualified at the time of the spinoff, the spun-off plan’s failure while still part of the MEP will be considered a qualification failure once it has been spun off. Further, the IRS may pursue adverse action against the owner of the participating employer or against any other responsible parties.
  • Favorable tax treatment of participants’ assets upon termination. Generally, assets that are distributed because of the participating employer’s failure will still be treated as eligible rollover distributions.

The Treasury Department is Seeking Comments

With these proposed regulations, the Treasury Department has tried to balance the need for efficient plan administration with the ultimate aim of protecting plan participants and their beneficiaries. Accordingly, it is seeking comments from the public until October 1, 2019, particularly on whether

  • the exception to the unified plan rule should be extended to defined benefit plans,
  • the regulations should include additional requirements for MEPs to be eligible for the exception,
  • the notice requirements should be simplified or the notice period shortened, and
  • there are steps that the DOL should take to help implement the regulations.

The Proposed Regulations and Future MEP Developments

As written today, the proposed regulations provide an important improvement for MEPs. They will protect other participating employers from plan disqualification arising from one “bad apple.” But they cannot be relied on until they are made final. In addition, the regulations do not broaden the base of employers that are eligible to adopt a multiple employer plan.

Pending legislation and proposed DOL guidance could soon alter the MEP landscape. The final DOL “Association Retirement Plan” regulations are expected to be released soon. Like the proposed regulations, the final regulations are expected to provide much needed clarity and would allow a somewhat broader segment of employers to adopt MEPs. The U.S. House of Representative’s Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019—which enjoys bipartisan support—would eliminate the current commonality requirement, thereby creating “open MEPs.” If it becomes law, employers may find it easier to become part of a MEP. So while the Treasury’s proposed regulations may not significantly increase MEP usage on their own, as part of a larger movement toward greater MEP accessibility, they certainly could prove helpful to employers.

Ascensus will closely monitor any new developments regarding this guidance. Visit ascensus.com  for future updates.


Washington Pulse: Joint Effort Leads to New Health Reimbursement Arrangement Guidance

The U.S. Departments of Health and Human Services, Treasury, and Labor have jointly issued final regulations that create two new types of HRAs—the Individual Coverage HRA (ICHRA) and the Excepted Benefit HRA (EBHRA). The final regulations, which are applicable to plan years on or after January 1, 2020, are meant to give employers and employees more options when purchasing health insurance and covering out-of-pocket expenses. This guidance was issued in response to the President’s Executive Order, released in October 2017.

 

Certain HRA Definitions and Rules Apply

HRAs are defined as employer-funded accounts used by employees to help pay for out-of-pocket medical expenses. HRAs can cover employees as well as their spouses and dependents. Employees cannot simply take an HRA distribution on their own. They must substantiate their claims and submit the claims to their employer. The employer must then determine if the substantiation is sufficient for reimbursement.

HRAs are generally subject to COBRA and ERISA—including the plan document, summary plan description, and Form 5500 reporting requirements.

 

General ICHRA Requirements

The ICHRA is unique because the Affordable Care Act (ACA) previously prevented integrating HRAs with individual health insurance. The regulations now permit this integration—allowing employees to purchase individual health insurance on their own and to receive ICHRA reimbursements to help pay for the premiums (including Medicare and Medicare supplemental premiums) and any other qualified medical expenses under IRC Sec. 213(d).

While the ICHRA may be subject to ERISA, the regulations provide a safe harbor that exempts individual health insurance from the complex ERISA rules applicable to employer-sponsored plans—as long as the employer takes certain administrative steps. The regulations specify the employer cannot force the purchase of any individual health insurance, endorse a particular insurance carrier or plan, or receive any compensation in connection with an employee’s selection.  The employer must also provide an annual notice to employees that the individual health insurance is not subject to ERISA.

Here is a brief summary of the most significant ICHRA requirements:

  • Before receiving an ICHRA reimbursement, employees must provide proof of enrollment in an individually purchased health insurance plan (whether purchased on the Exchange or not). The final regulations identify Medicare and student health insurance as eligible individual health insurance.
  • The employer generally cannot offer a traditional group health plan and an ICHRA to the same class of employees. Classes that employees can be divided into are limited, but include full-time, part-time, seasonal, or geographic locations. Certain minimum class-size requirements may apply, with minimums ranging from 10-20 employees depending on employer size.
  • The employer must offer the same ICHRA terms to all employees in a class; but the employer may vary the amounts it contributes to employees within each class based on the employee’s age, the number of dependents who will be covered, or because of late enrollment during the plan year.
  • The employer will not violate the “same terms” requirement by offering an HSA-compatible ICHRA or a traditional ICHRA to the same class of employees.
  • The employer may determine the plan design. This includes the contribution amount, the maximum reimbursement per month, and the eligible expenses. The employer may choose to reimburse premiums only, IRC Sec. 213(d) expenses only, or both.
  • Employees must be allowed to opt out of the ICHRA before each plan year and also upon termination from employment (if remaining amounts are not forfeited).
  • The ICHRA will be subject to COBRA if the loss of ICHRA coverage is due to a qualifying event. An employee’s failure to maintain individual health insurance is not a qualifying event.

 

Factors to Consider Before Offering an ICHRA

Employers should consider a number of factors—some of the biggest takeaways are described below.

 

ICHRA Affordability Requirement

Employers that are subject to the ACA mandate (employers with 50 or more full-time employees) must provide minimum essential coverage (MEC) that is available to at least 95 percent of their employees and is affordable. Employers offering an ICHRA do not need to be concerned with the MEC requirements: employees must certify that the individual health insurance they purchase meets those requirements.

Employers offering an ICHRA do need to consider whether the ICHRA is affordable. An employer that is subject to ACA and sponsors an ICHRA that is not deemed affordable for enough employees could be subject to penalties. Determining affordability for individual employees could be burdensome to an employer because it would require a calculation based on each employee’s household income compared to the lowest cost silver plan in the employee’s rating area.

The IRS issued proposed safe harbors in Notice 2018-88 in order to provide guidelines applicable to ICHRA affordability determinations. The final regulations also specify that more guidance will be provided, which should make the affordability determination even more straightforward for employers.

 

ICHRA Notice and Substantiation Requirements

Because of the ICHRA individual coverage requirement, employers and employees are subject to the following notice and coverage substantiation requirements. These notice requirements do not apply to other HRAs.

  • Employees must annually verify that they have coverage under individual health insurance at the time of open enrollment. Employees can meet this requirement by completing a “model attestation” provided by the Department of Labor (DOL).
  • Employers must require coverage substantiation from the employee with each request for reimbursement. To meet this requirement, employees can complete a second model attestation provided by the DOL.
  • Employers generally must provide a notice to eligible employees 90 days before the beginning of the plan year (generally by October 2 of each year). Among other things, the notice must
    • include information on the ICHRA,
    • explain that the employee’s individual health insurance is not subject to ERISA, and
    • explain the interaction between the ICHRA and the premium tax credit (PTC).

This notice is important for employees because they will use the information to help determine if they should 1) enroll in the ICHRA, or 2) decline to participate in the ICHRA in order to take advantage of the PTC. (Employees who enroll in the ICHRA are not eligible for the PTC.)

Employers may use the DOL’s model notice to meet this requirement.

 

When an ICHRA Might Make Sense

Adopting ICHRAs may make sense both for large employers looking for more affordable healthcare options and for small employers who normally couldn’t afford to provide healthcare coverage. Two examples are described below.

Large Employer Example: ABC Company operations concentrate in State X, but it also maintains smaller operations in State Y and State Z. ABC Company provides group health plan coverage to its employees living in State X. ABC Company’s small number of employees in State Y and State Z makes it difficult to obtain group insurance coverage in those regions. ABC Company decides to maintain the group health plan for its State X-based employees, and to offer a new ICHRA to its employees in State Y and State Z, which have a different rating area than State X. As a result, the newly created ICHRA benefits the employees in State Y and State Z and allows ABC Company to extend health coverage to all its employees regardless of location.

Small Employer Example: XYZ Company has determined that it cannot afford to provide a group health plan to its 10 employees. Instead, XYZ has decided to offer an ICHRA to all employees. This will help each employee defray some of the cost of purchasing individual health insurance obtained from an Exchange.

 

General EBHRA Requirements

The new “Excepted Benefit HRA (EBHRA)” needs some clarification because of its name. Created by the regulations, the EBHRA is different from HRAs that reimburse only for excepted benefits. Employees may use the new EBHRA to pay for all medical expenses, even ones that are not excepted benefits—including amounts owed as a result of the cost sharing provisions of individual health insurance or group health insurance. EBHRAs must comply with these main requirements.

  • The employer must offer group health insurance, but an employee does not have to enroll in the group plan. The employer must have a waiver of coverage on file for each employee that is enrolled in the EBHRA.
  • The EBHRA is subject to an annual contribution limit ($1,800 for plan year 2020). For plan years beginning after December 31, 2020, the annual contribution limit may be indexed for cost-of-living adjustments. Employees may carry over unused EBHRA amounts to the following plan year: these amounts will not count toward the annual contribution limit.
  • EBHRAs generally cannot reimburse premiums for health insurance (an exception applies for COBRA or other coverage continuation premiums). Employees may receive EBHRA reimbursements for all other IRC Sec. 213(d) medical expenses—including premiums for excepted benefits like vision or dental insurance and short-term limited duration insurance.
  • Employers must offer an EBHRA on the same basis to all “similarly situated individuals”; the employer can treat separate groups of employees differently, but they must be grouped based on bona fide employment-based classifications and not on factors like medical history or health status.
  • An EBHRA is subject to COBRA if it provides an annual benefit of more than $500.

 

Next Steps

Employers that decide to offer an ICHRA or EBHRA should ensure that their human resources departments (and other affected associates) are trained on the new HRA requirements—including requirements for providing ICHRA notices and obtaining additional substantiation. They should also be prepared to answer employee questions.

Those seeking additional information on the final regulations may review a DOL news release and a set of FAQs. Ascensus will closely monitor any new developments regarding this guidance. Visit ascensus.com for future updates.

 

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Washington Pulse: SEC Approves Regulation Best Interest Guidance

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

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

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

 

How Did Reg. BI Change From the Proposed Guidance?

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

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

 

What Is the Standard of Conduct for Broker-Dealers?

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

Specifically, Reg. BI requires broker-dealer action.

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

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

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

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

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

 

General Obligation

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

 

Disclosure Obligation

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

 

Care Obligation

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

 

Conflict of Interest Obligation

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

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

 

Compliance Obligation

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

 

Which Activities Fall Under the SEC Reg. BI guidance?

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

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

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

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

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

 

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

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

Some of the information Form CRS should contain includes

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

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

 

What is the Standard of Conduct for Investment Advisers?

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

Duty of Care

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

Duty of Loyalty

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

 

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

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

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

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

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

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

 

Other Items of Interest

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

 

Effective Dates

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

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Washington Pulse: Will RESA Succeed This Time?

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

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

Simplify, Create Incentives for New Plan Creation

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

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

Promote Greater Saving in Employer Plans

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

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

General Provisions Affecting Employer Plans

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

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

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

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

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

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

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

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

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

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

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

Changes Affecting Employer Plans and IRAs

These RESA 2019 provisions would affect employer plans and IRAs.

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

Exceptions include the following.

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

Enhance IRA Contributions

RESA 2019 would significantly expand Traditional IRA contribution eligibility.

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

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

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

Will RESA 2019 Become a Reality?

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

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Washington Pulse: After Near Misses, Congress Zeroes in on Major Retirement Reforms

Lawmakers in the U.S. House of Representatives and Senate have not given up on enacting major retirement savings enhancements. Their multiple attempts in 2017 and 2018 yielded incremental changes within tax reform and budget bills, but more comprehensive changes eluded them. Such legislation has become a priority and has bipartisan support. This support is apparent among Republicans and Democrats in both the House and Senate, including the top leadership levels of both parties.

Under consideration is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, co-sponsored by Representatives Richard Neal (D-MA), Kevin Brady (R-TX), Ron Kind (D-WI), and Mike Kelly (R-PA). During bill mark-up, provisions from another bill were added that would enhance the formation of multiple employer plans (MEPs). Approved by the House Ways and Means Committee, the SECURE Act of 2019 has now been reported to the full House for debate and a vote. (Similar legislation has been introduced in the Senate, and is being analyzed.)

New Incentives to Establish or Enhance Employer Plans

The following SECURE Act provisions would create new incentives and modify existing incentives for employers to establish retirement plans. They would also broaden the time window within which employers may establish plans.

  • Multiple employer plans: Enhance an employer’s ability to participate in a MEP and add a new variant to be known as a “pooled employer plan,” or PEP. Both have basic features in common; the latter to be administered by a pooled plan provider (effective for 2021 and later plan years).
    • Multiple participating businesses with a common interest would generally be part of a MEP.
    • Multiple participating businesses with no common interest other than plan sponsorship would generally be part of a PEP.
    • Smaller MEPs/PEPs could, as permitted by the IRS, file a simplified short Form 5500-SF plan tax return.
    • Noncompliance by one participating employer would not disqualify the entire MEP/PEP arrangement (eliminates the “bad apple” rule).
  • Deadline to establish a plan: Allow an employer to establish a qualified plan—such as a profit sharing or pension plan—as late as its business tax filing deadline, including extensions. Under current rules, employers must establish a qualified plan by the last day of their business year. The extension would not apply to certain plan provisions, such as elective deferrals (effective for 2020 and later taxable years).
  • Small employer plan start-up credit: Increase the small employer retirement plan start-up tax credit from $500 to a maximum of $5,000 per year, available for three years (effective for 2020 and later taxable years).
  • Automatic enrollment credit: Provide a new automatic enrollment tax credit, available to employers with new or existing small 401(k) plans (100 or fewer employees) or SIMPLE IRA plans that include automatic enrollment; maximum tax credit $500 per year, for up to three years (effective for 2020 and later taxable years).
  • Election of 401(k) nonelective safe harbor design: Eliminate the safe harbor notice requirement for employers that make nonelective safe harbor plan contributions and grant employers more time to amend their plans to implement a nonelective 401(k) safe harbor plan feature. Amendments may be made up to 30 days before the end of a plan year. However, amendments may be made up to the deadline for removing excess contributions for a plan year (generally, by the close of the following plan year) if the plan is also amended to require a four percent nonelective safe harbor contribution (effective for 2020 and later plan years).
  • Annuity selection safe harbor: Create a new safe harbor for a plan fiduciary to meet ERISA’s “prudent man rule” when selecting an insurer and an annuity contract to offer lifetime income options under a plan (no specified effective date).

New Ways to Save More in Employer Plans

The next set of provisions would allow employers more freedom to automatically increase employees’ deferral contributions, require employers to share with each participant a projection of future retirement benefits, and promote plan entry for certain part-time employees.

  • Higher cap on deferrals in safe harbor 401(k) plans: Increase from 10 percent to 15 percent the maximum deferral rate that can apply in a 401(k) plan as a result of automatic enrollment and automatic deferral increases in a qualified automatic contribution arrangement (QACA) (effective for 2020 and later plan years).
  • Lifetime income disclosure: Require defined contribution plans to provide, at least annually, a projected lifetime income stream that a participant’s accrued benefit could generate; employers would not be liable for amounts projected (effective for benefit statements provided more than 12 months after the DOL issues guidance, interest assumptions to be used, and a model disclosure. The bill prescribes that all three be completed within one year of the date of enactment).
  • Participation by less than fulltime employees: Generally allow employees who have three consecutive 12-month periods of 500 hours of service and satisfy the plan’s minimum age requirement to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive eligibility rules could continue to be applied, however, to other contribution sources (e.g., matching contributions) and to ADP/ACP safe harbor plans. Employers would also be permitted to exclude such employees from coverage, nondiscrimination, and top-heavy test rules (effective for 2021 and later plan years, but no 12-month period that begins before January 1, 2021, shall be taken into account).

More Targeted Provisions Affecting Employer Plans

The SECURE Act contains a number of additional, more targeted provisions that apply to employer plans.

  • Custodial accounts of terminating 403(b) plans: Allow the plan administrator or custodian of a 403(b) custodial account to distribute the account in kind to a participant or beneficiary when the employer is terminating the 403(b) plan (retroactive; effective for 2009 and later taxable years).
  • Lifetime income portability: Allow plan participants in a qualified plan, 403(b) plan, or governmental 457(b) plan to roll over lifetime income investments to an IRA or another retirement plan without a traditional distribution event if their plan no longer permits such investments (effective for 2020 and later plan years).
  • Higher penalties for plan reporting failures: Retirement plan information reporting failures would lead to the following increased penalties (effective for filings and notices required January 1, 2020, and thereafter).
    • Form 5500, $105 per day, up to a maximum of $50,000
    • Form 8955-SSA (deferred benefit reporting), $2 per day, up to a maximum of $10,000 for failing to file, $2 per day, up to a maximum of $5,000 for failing to file a notification of change
    • Withholding notices, $100 per day, up to a maximum of $50,000
  • Credit card loan prohibition: Treat retirement plan loans enabled through credit card or similar programs as distributed from the plan and subject to taxation (applies to loans made after the date of enactment).
  • Shared Form 5500 filing: Allow employers sponsoring defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options, to file a common Form 5500 (effective for 2022 and later plan years).
  • Nondiscrimination relief for closed pension plans: Provide nondiscrimination testing relief for defined benefit pension plans closed to new participants; such employers generally offer a defined contribution plan as an alternative for new employees (effective upon enactment, or—if elected—for 2014 and later plan years).
  • Community newspaper pension funding relief: Allow sponsors of certain plans maintained for community newspapers to calculate defined benefit plan contributions with interest rates and amortization periods that reduce funding requirements (effective for plan years ending after December 31, 2017).
  • Church retirement plan rules: Clarify which employees may participate in retirement plans sponsored by church-controlled organizations (effective for past, present, and future plans years).
  • Pension plans of cooperatives and charities: Reduce Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans of certain cooperatives and charities to $19-per-participant for fixed-rate premiums, and $9-per-$1,000 of unfunded vested benefits for variable-rate premiums (effective on date of enactment).

New Provisions Affecting Employer Plans and IRAs

The following SECURE Act provisions could affect both employer plans and IRAs, or further connect these types of plans.

  • More rapid payouts to beneficiaries: Most nonspouse beneficiaries of IRA, qualified defined contribution, 403(b), and governmental 457(b) plan balances would generally be required to distribute inherited amounts within 10 years (effective for participant/IRA owner deaths in 2020 or later years; 2022 or later years for governmental plans; special delay to accommodate contracts of certain collectively bargained plans). Exceptions include those who, at the time of the account owner’s death, are
    • spouses,
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries whose age is within 10 years of the decedent’s age,
    • minors (they would begin a 10-year payout period upon reaching the age of majority), and
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.
  • Delayed age for beginning RMDs: The age when required minimum distributions (RMDs) from Traditional IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans must generally begin would be increased from age 70½ to age 72 (effective for distributions required in 2020 and later years, for those who reach age 70½ in 2020 or a later year).
  • Birth/adoption excise tax exception: The birth of a child or adoption of a child or individual who requires support would qualify as a distribution event and an exemption from the 10 percent excise tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs and defined contribution qualified plans, 403(b) plans, and governmental 457(b) plans; amounts could be repaid (effective for distributions in 2020 and later years).
  • Difficulty of care” as eligible retirement income: Increase the contribution limit to qualified plans, 403(b) plans, and IRAs to include “difficulty-of-care” payments (effective upon enactment for IRAs, and for 2016 and later plans years for employer plans).

More Flexibility for IRA Contributions

The following provisions would specifically affect IRAs.

  • Traditional IRA contributions at any age: Taxpayers with earned income could make Traditional IRA contributions at any age, not just for years before reaching age 70½, as under current law (effective for 2020 and later taxable years).
  • Graduate student IRA contributions: Certain stipend, fellowship, and similar payments to graduate and postdoctoral students would be treated as earned income for IRA contribution purposes (effective for 2020 and later taxable years).

New Eligible Expenses for 529 Plans

The SECURE Act also broadens the definition of eligible expenses for qualified tuition or “529” plans.

  • Eligible expense categories: 529 plan distributions taken for certain expenses related to the following items would be considered qualified, and therefore not subject to taxation (effective for distributions in 2019 and later years).
    • Registered apprenticeships
    • Home schooling
    • Repayment of student loans of a 529 plan beneficiary—or sibling—up to $10,000 (total, not annual)
    • Expenses in addition to tuition for attendance at an elementary or secondary public, private, or religious school

Will This Time be Different?

Significant bipartisan support has been present for retirement and education savings reform for the past several years, yet efforts to enact legislation have fallen short. Now, in the 116th Congress, momentum seems to be building. Whether the outcome this time will be different remains to be seen.  Ascensus will closely monitor the progress of the SECURE Act and comparable Senate legislation. Visit Ascensus.com for the latest developments.

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Washington Pulse: Familiar Retirement Reforms Already in Play in New Congress

The new 116th Congress begins with a blank slate as bills introduced in the 115th Congress have sunset with the transition. But lawmakers and Hill watchers may justifiably have a sense of déjà vu, as familiar retirement legislation has been introduced in the brief period since the new Congress convened in January. Despite the U.S. House of Representatives flipping to Democratic control in November’s midterm elections, retirement reform remains an issue where significant bipartisan support is evident, and clearly growing.

The Retirement Enhancement and Savings Act of 2019 (RESA 2019) is the latest version of a bill that has been introduced in Congress multiple times since 2016. But, despite bipartisan support the legislation has failed to advance.

RESA 2019, whose primary sponsors are Rep. Ron Kind (D-WI) and Mike Kelly (R-PA), would make many changes to the retirement saving landscape that are primarily intended to achieve three objectives: encourage more employers to offer retirement plans, and encourage greater accumulation and preservation of savings in retirement plans and IRAs

Several significant items included in the bill and intended to address the bill’s objectives are described below.

Allow Pooled Employer Plans to Encourage Offering Workplace Saving Options

More than one-third of Americans have no access to an employer-sponsored retirement plan. Often-cited obstacles for employers considering establishing a plan —especially among small to mid-size employers—are the cost, administrative responsibility, and potential fiduciary liability. One proposed remedy in RESA 2019 is enhancement of the multiple employer plan (MEP) option. MEP arrangements allow many employers to participate in a commonly-administered plan, with the flexibility to tailor provisions to their respective needs. Proponents hope this will yield economies of scale that lead to reduced cost, greater sharing of administrative burden and reduced fiduciary liability for participating employers

Past regulatory restrictions have required MEP-participating employers to have a commonality among them (e.g., common ownership, business purpose, etc.). This has greatly limited use of the MEP concept. Among other MEP enhancements, RESA would permit “open MEPs” by creating “pooled employer plans” (PEPs). PEPs would be exempt from the commonality requirement and would be required to specify a “pooled plan provider” that is the plan’s named fiduciary and plan administrator. The result could be more employers offering a retirement plan to their employees.

Lifetime Income Investments – a Solution to Outliving Retirement Savings?

In addition to the issue of workers having no workplace retirement plan, there is great concern that the savings of many will not be enough to support them through their retirement years. An often-proposed solution is greater use of so-called “lifetime income investments,” which can be used to transform accumulated savings into an income stream throughout retirees lives. Such investments, whose payout in retirement can resemble a payment stream from a defined benefit pension plan, have seen limited use in the past. A major obstacle to their use has been the concern of retirement plan sponsors over potential fiduciary liability for the soundness of the lifetime income provider.

RESA 2019’s sponsors hope to address employers’ fear of fiduciary liability. The bill would require an annual statement that projects potential lifetime income payments—using a participant’s actual accumulation—in the hope of stimulating increased saving and increased use of lifetime income products to provide a secure retirement. The legislation also offers a new fiduciary safe harbor to encourage more employers to offer these investments in their plans.

Will Tax Incentives Motivate Employers and Savers?

RESA 2019 contains several tax incentives for establishing retirement plans and for workers to save more. The maximum tax credit for small employers establishing a plan would be 10 times greater. A new credit for implementing automatic enrollment of employees would be created. All workers—or those whose spouse has earned income—would be eligible to make Traditional IRA contributions beyond age 70½.

Proposal to Eliminate Life Expectancy Payments to Nonspouse Beneficiaries Remains

While RESA’s provisions generally have been welcomed, one that is particularly complex would require most nonspouse beneficiaries of IRA and employer plan accounts to distribute them and pay any taxes owed within five years, for aggregate balances that exceed $450,000. Lesser amounts could be distributed and taxed over a beneficiary’s lifetime. This provision is included in RESA 2019—as it has been in other legislation—to raise tax revenue in order to offset various incentives and enhancements the bill contains.

And More …

RESA 2019 contains many more provisions that address a host of retirement saving issues. Some would offer greater latitude in when employer plans can be established and plan design changes made. Others would address the insolvency of the insurance program for defined benefit pension plans, limit pre-retirement leakage from plans, and make it easier to successfully terminate 403(b) plans.

For a more complete description of RESA 2019 provisions—which mirror those contained in RESA 2018—see the March, 2018, Ascensus Washington Pulse and watch Ascensus.com News for the latest developments.

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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.