Washington Pulse

Washington Pulse: Delivering DOL Disclosures May Get Easier

The Department of Labor (DOL) has issued proposed regulations that provide an additional safe harbor for providing electronic retirement plan disclosures to participants and beneficiaries. The regulations also incorporate the framework used in existing guidance found in FAB 2006-03.

For several years, the retirement industry has been requesting additional guidance and simplified procedures for providing disclosures electronically. Although the current rules were supposed to make it easier for employers and participants to communicate electronically, many employers still find it difficult to meet the current electronic notification requirements. The DOL hopes to remedy this with the release of the proposed regulations.

Note that the proposed regulations apply only to pension benefit plans providing disclosures required under Title I of ERISA; they do not apply to IRS disclosures or to health and welfare plan disclosures.

 

What are the current safe harbor rules?

In 2002, the DOL created safe harbor standards for electronically delivering any plan disclosures required by the Employee Retirement Income Security Act of 1974 (ERISA). Although this is not the only permissible way that an employer may use electronic media, the safe harbor treats the notice or other document sent by email or other electronic means as having been properly delivered.

The DOL later issued limited guidance for participant benefit statements (FAB 2006-03), qualified default investment alternatives (FAB 2008-03), and participant fee disclosures (Technical Release 2011-03R), but has not updated its broader e-delivery safe harbor since 2002.

The 2002 safe harbor applies to two categories of recipients.

  • The first category consists of participants who can effectively access documents provided electronically at their job site and who regularly access the employer’s electronic information system as part of their job duties.
  • The second category consists of participants, beneficiaries, and others (e.g., retirees) who do not fit into the first category but are entitled to ERISA documents.

The safe harbor assumes that individuals in the second category are using electronic information systems that are beyond the control of the plan sponsor. Accordingly, those individuals must affirmatively consent to receive documents electronically.

 

What’s different under the proposed safe harbor rules?

The proposed regulations add a second electronic notification safe harbor to the existing 2002 regulations. Similar to FAB 2006-03, the proposed safe harbor allows employers to post retirement plan disclosures online. Employers that want to use a safe harbor e-delivery method can use both options or choose between the new online option and the e-delivery options provided under the 2002 guidance.

The proposed regulations also allow employers to treat e-delivery as their default delivery method for participants who have provided or been issued an electronic address (e.g., an email address or phone number on a smart phone). Participants who want to receive free paper documents must be allowed to opt out of the e-delivery method for some or all of the covered documents. Those who opt out must receive paper documents until they opt in to receive the covered documents online again. Employers must have reasonable procedures in place to track opt outs and requests for paper copies.

Employers may post more documents online

Unlike FAB 2006-03, which allows employers to post only pension benefit statements online, the proposed regulations allow employers to post all “covered documents” online. The DOL defines a covered document as any ERISA Title I document that an employer must provide to participants and beneficiaries. A covered document does not include a document provided only upon the participant’s written request (e.g., a request for a trust agreement).

Examples of covered documents that employers may post online include

  • a summary plan description,
  • a summary of material modifications,
  • a summary annual report, or
  • an annual funding notice.

Employers must provide an initial paper notification

Employers must provide a paper notice to each individual being defaulted to the e-delivery option. The notice must specify that some or all of the documents will be provided online. The notice must also

  • explain that the participant can request a free paper copy of some or all of the documents,
  • clarify that the participant can opt out of receiving documents online at any time, and
  • describe how the participant can exercise those rights.

Employers must notify participants when documents are posted

When an employer posts a covered document online, the employer must also notify participants that the document is available. The notice, referred to as a “Notice of Internet Availability,” must meet certain form and content requirements. The employer’s system for delivering this notice must alert the employer when there is an inoperable or an invalid electronic address.

The employer generally must provide the Notice of Internet Availability for each covered document, as each document is posted. But the employer can provide one combined notice for certain covered documents that are triggered solely by the passage of time. For example, an employer can provide one combined notice if it posts the summary plan description and summary annual report at the same time. Employers providing a combined notice for multiple covered documents may provide the notice annually, but over a 14-month window for added flexibility.

Websites must meet certain standards

Employers must ensure that employees can easily access any covered documents posted online. For example, an employer could provide a web address that leads directly to the covered document or to a login page that contains a prominent link to the covered document. Employers must also

  • post documents online by their applicable due date;
  • keep documents online until the documents are superseded;
  • present documents in a printable, easy-to-read format that can be searched electronically by numbers, letters, or words;
  • permanently retain each document in an electronic format; and
  • protect each individual’s personal information.

A new rule applies to former employees

If an employee terminates employment (e.g., retires), the employer must take reasonable steps to obtain and maintain an accurate email address for the former employee. This rule is meant to give former employees who are still participating in the plan access to important plan information, while still allowing the employer to post the disclosures electronically.

 

More to come?

The DOL has asked for comments on the proposed regulations and has also issued a Request for Information (RFI). The questions in the RFI generally focus on how the DOL can improve the design and content of ERISA disclosures. Examples of questions asked include the following.

  • What current routine disclosures need improved effectiveness and efficiency?
  • Is any required disclosure obsolete?
  • Is it feasible to condense and streamline information into fewer or less voluminous disclosures?
  • Are there steps the DOL could take to better coordinate disclosures required under ERISA and notices required under the Internal Revenue Code?

Comments on both the proposed regulations and responses to the RFI are due by November 22, 2019. The new guidance is proposed to take effect 60 days after publication as final regulations in the Federal Register. Once published, the regulations will become applicable on the first day of the next calendar year.

 

Next Steps

The proposed regulations seem to represent a “middle-of-the-road” approach by the DOL. While many in the retirement industry have been hoping for this type of guidance, others believe that it will make it harder for certain participants (e.g., retirees) to access important plan information. In addition, the proposed regulations apply only to DOL retirement plan notices, which means employers must still follow separate IRS disclosure requirements when delivering IRS required notices.

Employers interested in using the proposed safe harbor may want to start reviewing the regulations now (knowing that some provisions might change) in order to determine whether to make operational changes, which could include website modifications and revisions to notifications. Those looking for additional information on the proposed regulations may refer to the DOL’s fact sheet and news release. Ascensus will continue to monitor any new developments on the proposed regulations. Visit ascensus.com for the latest information.

Click here for a printable version of this edition of the Washington Pulse.


Washington Pulse: New Guidance Simplifies Affordability Determination for ICHRAs

The IRS has issued proposed regulations that provide additional guidance to employers intending to offer an Individual Coverage HRA (ICHRA) for 2020 and beyond. The guidance confirms and clarifies the safe harbor provisions that were initially outlined in IRS Notice 2018-88. The proposed regulations are meant to 1) help employers determine whether their ICHRA is affordable, and 2) clarify the ICHRA nondiscrimination testing requirements.

 

Affordability

There are several reasons why an ICHRA may appeal to employers. For example, an ICHRA allows an employer to contribute a set amount to employees while reducing the employer’s risk of incurring unknown costs that may arise with traditional group health insurance plans.

A unique feature of the ICHRA is that it is flexible: there are no minimum or maximum contribution limits, so an employer can contribute any amount it chooses. But there are some restrictions. For example, an applicable large employer (ALE) that offers ICHRAs to its full-time employees must ensure that it is offering an “affordable” ICHRA. If the ICHRA is not affordable, then the employer must make a shared responsibility payment under Internal Revenue Code Section (IRC Sec.) 4980H(b). The payment is determined on a month-by-month basis. The monthly penalty amount is 1/12 of $3,860 for each full-time employee who receives a premium tax credit (PTC).

An ALE is defined as an employer who had an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year. If an ALE offers an ICHRA to part-time employees only, the ALE will not be subject to the IRC Sec. 4980H(b) penalty if the ICHRA is not affordable. (The ALE must still offer affordable health coverage to its full-time employees or it could owe a penalty under IRC Sec. 4980H(a) or (b).) If the employer is not classified as an ALE, it will not be subject to the IRC Sec. 4980H(b) penalty, regardless of whether the ICHRA is considered affordable for employees.

An ICHRA is considered affordable for full-time employees if the monthly premium for single coverage under the lowest-cost silver plan offered on the Exchange in their rating area (where the employee lives) minus the monthly allowance is less than 9.78 percent of their household income. (On average, silver plans pay 70 percent of the costs for benefits that the plan covers.)

Determining affordability on this basis is difficult for employers: they may not know an employee’s household income and may not know where the employee currently lives. As a result, the IRS has provided safe harbors to ease the calculation for employers.

 

Safe Harbors

Instead of using individual employee calculations, employers may use the safe harbors when determining ICHRA affordability. Employers are not required to use all of the safe harbors when determining affordability. For example, employers could use the look-back month safe harbor and the affordability safe harbor, but disregard the location safe harbor when calculating affordability. Employers may also use the safe harbors when calculating affordability for all employees, or just when calculating affordability for a reasonable category of employees (as specified in the ICHRA final regulations). Employers must, however, always apply the safe harbors on a uniform and consistent basis for all the employees in a category.

Look-back month safe harbor

Although the ICHRA may appeal to some employers, there are a few drawbacks—including not knowing how much to contribute to an ICHRA. The Exchange generally does not determine premium costs until shortly before open enrollment begins on November 1 of each year. Employers must usually make benefit decisions well before this date. To help employers determine how much they will have to contribute before the beginning of the plan year, the IRS has developed the look-back safe harbor.

To determine the ICHRA’s affordability for the current year, this safe harbor allows a calendar-year ICHRA to use the cost of the lowest-cost silver plan offered on the Exchange in the employee’s rating area during January of the prior year (known as the look-back month). Employers maintaining noncalendar-year ICHRAs may also use this safe harbor, but the look-back month will be January of the current year.

Affordability safe harbor

When determining ICHRA affordability, employers must also take into account the employee’s household income. Prior guidance on affordability calculations has recognized that employers will not have this information—and have permitted an employer to use either a safe harbor based on the employee’s Form W-2 income, the employee’s rate of pay, or the federal poverty line.

When looking at the affordability safe harbors, remember that ICHRAs are funded solely by employer contributions. The term “HRA employee contributions” refers to what employees must pay for their insurance premiums in addition to what the employer must provide as an ICHRA contribution.

Form W-2 wages safe harbor: Under the Form W-2 wages safe harbor, the ICHRA is deemed affordable if the required HRA contribution for the employee does not exceed 9.78 percent (subject to cost-of-living adjustments) of that employee’s W-2 wages for the calendar year. This safe harbor allows an employer to use the employee’s wages entered in Box 1 of Form W-2.

The proposed regulations state that employers should not add back any W-2 reductions under IRC Sec. 36B (e.g., 401(k) or IRC Sec. 125 cafeteria plan contributions). When determining affordability, employers may not use Form W-2 wages from a prior year. They must use the current calendar year Form W-2 wages when determining affordability. This will require the employer to project the W-2 wages for each employee at the beginning of the current calendar year. If this proves to be to administratively difficult for the employer, the employer can use either the rate-of-pay or the poverty-line safe harbor described below.

Rate-of-Pay safe harbor: Under the rate-of-pay safe harbor, the ICHRA is deemed affordable for a calendar month if the required HRA contribution for the employee does not exceed 9.78 percent (subject to cost-of-living adjustments) of an amount equal to 130 hours multiplied by the lesser of 1) the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year), or 2) the employee’s lowest hourly rate of pay during the calendar month.

Example: If an employee earns $15 per hour, the employer should perform the following calculation.

$15 x 130 hours = $1,950

$1,950 x .0978 = $190.71

In this example, for the ICHRA to be deemed affordable, the required HRA contribution for the employee must be less than $190.71.

If the employee is paid on a salary basis, the ICHRA is still deemed affordable if the employee’s required HRA contribution for the calendar month does not exceed 9.78 percent of the employee’s monthly salary.

Federal poverty-line safe harbor: Under the federal poverty-line safe harbor, an applicable large employer member’s offer of ICHRA coverage to an employee is treated as affordable if the employee’s required ICHRA contribution for the calendar month does not exceed 9.78 percent of a monthly amount. This amount equals 1/12 of the federal poverty line for a single individual for the applicable calendar year.

Location safe harbor

When determining an ICHRA’s affordability, an employer must use the lowest-cost silver plan in the employee’s rating area. This requires the employer to know where the individual lives.

The IRS initially proposed a location-based safe harbor in Notice 2018-88, which allowed employers to use the employee’s primary work location for the area of residence. The IRS received numerous suggestions on how to simplify the calculation for employers while ensuring that employees would not be disadvantaged if premium costs varied widely in a small geographical area that was composed of different rating areas.

The proposed regulations conclude that the employer may generally use the primary site of employment where the employee will be reasonably expected to perform services on the first day of the plan year. The proposed regulations also address issues related to employees that change worksites midyear, who regularly work from home or in other remote locations, or who work only remotely.

 

Nondiscrimination Testing

The proposed regulations also provide more information on nondiscrimination testing.

The guidance found under IRC Sec. 105(h) prohibits discrimination in relation to benefits, in both plan design and plan operation.  To be nondiscriminatory in design, employers must provide uniform contributions to all participants, and amounts cannot vary based on age or length of service. If the plan fails this nondiscrimination requirement, the excess reimbursements become taxable to the highly compensated individuals (HCIs).

The ICHRA rules, however, provide certain exceptions to this nondiscrimination requirement. Contributions may increase based on the number of dependents covered and based on the participant’s age—as long as the oldest participants do not receive an amount greater than three times what the youngest participants receive. An ICHRA that follows these exceptions within each class of employees (as specified in the ICHRA final regulations) will not fail to meet the requirement to provide nondiscriminatory benefits as a matter of plan design.

Even if an ICHRA follows these exceptions, it may still be considered discriminatory in operation. If an ICHRA is discriminatory in operation and too many HCIs use the maximum ICHRA benefit, the excess reimbursements will become taxable to the HCIs.

Employers that have a large number of older employees who are HCIs may be concerned about failing nondiscrimination testing in relation to plan operations. Limiting ICHRA reimbursements may be a practical solution to testing concerns. This is because HRAs that reimburse only for premium costs (and are not permitted to reimburse for other 213(d) medical expenses) are excluded from the testing requirements of IRC Sec. 105(h).

 

The Take Away

The proposed regulations are consistent with the President’s goal of expanding HRAs in order to give employers and employees more options when purchasing health insurance. This guidance should simplify determining an ICHRA’s affordability and help employers avoid the shared responsibility payment. In light of the new proposed regulations, it is clear that the IRS is expecting employers of all sizes—including ALEs—to use the new ICHRA.

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

 

Click here for a printable version of this edition of the Washington Pulse.


Washington Pulse: Hardship Distributions Made Easier

On September 19, 2019, the IRS issued final regulations that make retirement plan assets more accessible to those experiencing financial hardship. Released approximately 10 months after the proposed regulations, the final hardship distribution regulations address changes made by the Bipartisan Budget Act of 2018 (BBA) and satisfy a BBA provision directing the IRS to update its hardship regulations in general.

Among other things, the final hardship distribution regulations allow employers to broaden the employee contribution sources (including earnings) available for hardship distributions, and to grant a hardship distribution without first requiring the participant to take a plan loan. In addition, the regulations eliminate the six-month suspension of salary deferral and employee after-tax contributions (employee contributions) following receipt of a hardship distribution.

 

Hardship Distribution Overview

Retirement plan participants generally are prohibited from taking plan distributions unless certain events occur—such as separation from service or attainment of age 59½. But employers are permitted to design plans to allow participants experiencing financial difficulties to take hardship distributions.

Before receiving a hardship distribution, a participant must meet two conditions. First, the participant must have an “immediate and heavy financial need.” Second, the distribution must be necessary to satisfy that financial need.

The final regulations do not change how employers determine whether participants have an immediate and heavy financial need. Employers may still generally choose to use safe harbor rules (some of which changed under the final regulations) or may rely on “facts and circumstances.”

The final regulations do change how employers determine if a distribution is necessary to satisfy the financial need. Instead of relying on facts and circumstances, employers must now follow a general standard when determining if a participant has met this requirement.

The IRS adopted the final regulations with minimal changes from the proposed regulations. The highlights of the final regulations are discussed next.

 

The “Immediate and Heavy Financial Need” Safe Harbor Provisions

The final regulations make the following changes to the “immediate and heavy financial need” safe harbor provisions.

Federal disaster declarations

The final regulations add a safe harbor for “expenses and losses—including loss of income—incurred by the employee” in FEMA-declared disasters. Employers may apply this safe harbor to distributions taken on or after January 1, 2018. According to the IRS, this safe harbor expense differs from its previous disaster relief in three ways.

  • The safe harbor applies only to the participant’s losses and expenses (not to the losses and expenses of the participant’s relatives or dependents.)
  • Participants do not have a specific deadline by which to take a hardship distribution. And although the IRS does not have the authority to relax certain procedural requirements, employers may be more flexible when processing hardship distributions following a disaster.
  • An employer that chooses to wait until a disaster occurs to allow disaster-related distributions must amend its plan by the end of the plan year in which the amendment first applies.

This safe harbor is meant to end any uncertainty about accessing plan assets following a major disaster. As a result, the IRS and Treasury Department do not believe that future disaster-related announcements will be needed.

Repairing damage to 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 unless the losses were part of a federally-declared disaster. As a result, the availability of the safe harbor for repairing damage to a principal residence was severely limited. The final regulations remove the limitation imposed by TCJA for hardship distribution purposes, restoring the broad usefulness of this safe harbor.

Primary beneficiary safe harbor

This change aligns 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.

 

Determining Whether a Distribution is Necessary to Satisfy a Financial Need

The final regulations create a general standard for determining whether a hardship distribution is necessary to satisfy a financial need. Under this new standard, a hardship distribution must not exceed a participant’s need (including amounts to pay penalties and taxes), and the participant must not have any other way of meeting that need. To meet the second requirement,

  • the participant must take all other available distributions from the plan and from all deferred compensation plans of the employer,
  • the participant must represent that she has insufficient funds “reasonably available” to satisfy the financial need, and
  • the plan administrator cannot have actual knowledge that the participant’s representation is false.

The final regulations clarify that a participant can represent that she has insufficient funds even if she does have cash or other assets on hand—as long as she’s planning to use those assets on other future expenses (e.g., rent). The final regulations also clarify that in addition to a written representation, a participant can make a verbal representation through a recorded phone call.

 

Employers May Add Other Conditions, but Can’t Suspend Deferrals

In addition to the general standard described above, an employer may design its plan to require participants to meet additional conditions—such as taking a plan loan—before being eligible for a hardship distribution or requiring a nondiscriminatory minimum hardship distribution amount. Beginning January 1, 2020, however, an employer cannot require participants in a qualified plan, 403(b) plan, or governmental 457(b) plan to suspend employee contributions after receiving a hardship distribution.

While these three types of plans cannot suspend deferrals, the final regulations clarify that nonqualified deferred compensation plans may continue to include a suspension feature.

 

More Contribution Sources Available For Distributions

In addition to earnings on elective deferrals, other contribution sources in a participant’s 401(k) plan account 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 of these amounts.

The new rules relating to hardship distributions also apply to 403(b) plans. However, earnings on 403(b) elective deferrals continue to be ineligible for hardship distribution and QNECs, QMACs, and other employer contributions continue to be unavailable in 403(b)(7) custodial accounts.

 

Other Issues

Using all safe harbor expenses not required

When determining if a participant has an immediate and heavy financial need, the final regulations clarify that employers may make available some but not all of the safe harbor expenses. The regulations also make clear that employers do not need to include all categories of individuals (e.g., primary beneficiaries) when determining who has a safe harbor expense.

Notice Requirements

The final regulations indicate that employers with ADP and/or ACP safe harbor plans must provide safe harbor notices that contain the hardship withdrawal provisions. If an employer’s current notice does not contain the new provisions, then the employer must provide an updated notice to eligible participants and provide participants with an opportunity to change their election.

 

Applicability Dates

The new hardship distribution rules apply to distributions taken on or after January 1, 2020, but employers may choose to apply the rules to distributions taken in plan years beginning after December 31, 2018.

The regulations allow employers to stop suspensions of contributions for hardship distributions taken in plan years after December 31, 2018. Employers may apply this rule as of the first day of the first plan year beginning after December 31, 2018, even if the hardship distribution was taken in the prior plan year (e.g., in October 2018.)

 

Amendment Deadlines

Although the amendment deadlines vary based on the type of plan document used, all amendments must apply to distributions taken no later than January 1, 2020.

At this point, the amendment deadline for pre-approved plan documents is unclear. Ascensus will provide updates as additional information becomes available.

The amendment deadline for individually designed plans (IDDs) depends on when the IRS includes the final regulations in the Required Amendments list. If the IRS includes the final regulations in the 2019 Required Amendments List, then employers must amend their IDDs by December 31, 2021.

For now, the 403(b) plan remedial amendment deadline is March 31, 2020. But the IRS and Treasury Department may issue separate guidance that provides for a later amendment deadline.

 

Next Steps…

Now that the final regulations have been released, service and document providers have begun analyzing the regulations with an eye toward updating their products and services. In the meantime, employers should become familiar with the revised hardship requirements and expect future amendments.

Ascensus will continue to monitor any new guidance as it is released. Visit ascensus.com for the latest information.

 

Click here for a printable version of this edition of the Washington Pulse.

 


IRS Issues Long-Awaited Final Regulations for Retirement Plan Hardship Distributions

Scheduled to be published in Monday’s Federal Register are IRS final regulations for hardship distributions from employer-sponsored retirement plans, including 401(k) and 403(b) plans. These regulations are chiefly a response to statutory changes affecting hardship distributions that were contained in the Bipartisan Budget Act of 2018.

The hardship-related changes in that legislation included the following.

  • Elimination of the (formerly) required 6-month suspension of employee elective deferrals following receipt of a hardship distribution
  • Allowing inclusion of employer-provided qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and their earnings—as well as earnings on employee elective deferrals—in hardship distributions
  • Elimination of the requirement that available retirement plan loans be taken before the granting of a hardship distribution

Additional regulatory guidance on these changes—including required plan amendments—has been awaited since the legislation’s enactment and the IRS’ issuance of proposed regulations in November 2018.

Ascensus will continue to analyze these regulations. Stay tuned for additional information.


Washington Pulse: Final Regulations Expand MEP Options

In 2018, roughly 38 million private-sector employees did not have access to a retirement plan*. This troubling statistic led the Trump Administration to issue an Executive Order, directing the Department of Labor (DOL) and the Treasury Department to issue guidance that would help increase participation levels in employer-sponsored retirement plans.

On July 31, 2019, the DOL fulfilled this directive by releasing final regulations on association retirement plans (ARPs)—also known as multiple employer plans, or MEPs. A MEP typically allows multiple employers to participate in a single retirement plan, which may—among other things—help reduce plan administrative and fiduciary responsibilities for participating employers. The final regulations are substantially similar to the proposed regulations, which were covered in detail in a previous Washington Pulse.

 

Why the Final Regulations are Important

One of the most important outcomes of the final regulations is the expanded interpretation of the term “employer.” The current definition of “employer” under ERISA Section 3(5) is unclear because the term “group or association of employers” is not defined. As a result, many in the retirement industry have relied on various DOL advisory opinions that seemed unnecessarily narrow.

The final regulations clarify that a “bona fide group or association of employers,” and a “bona fide professional employer organization” that satisfy certain criteria are deemed to be able to act in the interest of an employer for MEP purposes. Although the final regulations expand the term “employer,” the guidance does not create “open MEPs,” under which multiple participating employers share no common characteristic, affiliation, or purpose (as has been proposed in pending legislation).

 

Commonality of Interest Requirement Remains

To qualify as a “bona fide group or association of employers,” the group or association of employers must meet seven requirements—one of which is the “commonality of interest” requirement. To meet this requirement, the employers within the group or association must

  • be in the same industry, trade, line-of-business, or profession; or
  • have a business in the same region.

The DOL is taking a “middle-of-the-road” approach toward expanding or restricting the commonality requirement. Responding to the proposed regulations, some commenters asked the DOL to impose a less restrictive test by eliminating the commonality of interest requirement. The elimination of this requirement would essentially allow groups or associations of employers to form open MEPs. The DOL, however, decided to keep the commonality of interest requirement. Although this provision is not required by statute, the DOL believes that keeping this requirement is important for several reasons—one of which is that it aligns the final ARP regulations with the final association health plan (AHP) regulations.

In the preamble to the final ARP regulations, the DOL stated that it would “construe[ ] broadly” what constitutes an industry, trade, line-of-business, or profession. The DOL believes that this broad interpretation will help expand access to MEPs. The DOL also indicated that, in general, it will not challenge

  • any “reasonable and good faith” industry classification or categorization of employers, or
  • the inclusion of businesses that share an economic or representational interest with other members of the group or association.

 

Special Rules for Owner-Employees

The 2018 Executive Order directed the DOL to consider how working owners (e.g., sole proprietors without employees) might be included in MEP arrangements. The final regulations clarify that working owners without common law employees may consider themselves to be both an employer and an employee, and therefore eligible to participate in a MEP. To qualify for MEP participation, an owner-employee must 1) have an ownership interest in the trade or business, 2) have income from providing personal services to the trade or business, and 3) meet minimum work hours or earnings tests.

 

New PEO Requirements
Under the final regulations, a professional employer organization (PEO) must meet four requirements in order to qualify as a “bona fide PEO.” A bona fide PEO may act as an “employer” for purposes of sponsoring a MEP that covers the employees of its client employers. To qualify as a bona fide PEO, a PEO must

  • perform substantial employment functions for its client employers;
  • have substantial control over the MEP’s functions and activities and continue to have employee-benefit-plan obligations to MEP participants after the contract between the PEO and its client employers ends;
  • ensure that each client employer has at least one participant covered under the MEP; and
  • limit MEP participation only to current and former employees of the PEO and the PEO’s client employers, to former client employers, and to beneficiaries.

Whether a PEO performs “substantial employment functions” on behalf of its client employers is generally based on the facts and circumstances. But PEOs needing more regulatory certainty can take advantage of a new safe harbor, which is separate from the facts-and-circumstances test. (The proposed regulations contained a complicated regimen of safe harbors; the final regulations contain a single, simplified safe harbor with four conditions that PEOs must meet.)

 

Miscellaneous Provisions

 

Severability Provision Provides Safety Net
The final ARP regulations include a severability clause. Under this clause, if any provisions are found to be unenforceable, or stayed by court action, the remaining provisions of the regulations would remain operative and enforceable. (The regulations include examples of how this severability provision would be applied.)

The severability clause is similar to the one found in the final AHP regulations, which were released in June 2018. Since then, the final AHP regulations have encountered legal obstacles—including having certain provisions vacated by the U.S. District Court for the District of Columbia. Whether the ARP guidance generates similar concerns remains to be seen.

 

States Can Still Establish MEPs

The DOL received numerous comments questioning how the final regulations would affect other guidance—including DOL Interpretive Bulletin 2015-02, which gives states the authority to establish state-facilitated MEPs. The DOL clarified that, although the final regulations do supersede other preexisting DOL guidance, the regulations do not supersede this interpretive bulletin.

 

Open MEPs Still a Possibility

Although the final regulations don’t allow for open MEPs, the DOL has not ruled out future rulemaking that may permit them. Following the release of the proposed regulations, the DOL received approximately 60 comments; more than half of those comments addressed this issue, and the majority supported the creation of open MEPs or pooled employer plans.

Because of the comments received, the DOL has issued a request for information (RFI) that asks for responses on several questions addressing such issues as 1) the cost and complexity of open MEPs, 2) whether the DOL should allow financial institutions to sponsor open MEPs for unrelated employers, and 3) whether the DOL should expand its regulatory definition of employer to include “corporate MEPs” and affiliated service groups.

Although not officially defined, a corporate MEP typically consists of a plan that covers a group of employers related by some level of common ownership—but not enough ownership to constitute a controlled group or affiliated service group. There were three reasons the DOL included corporate MEP questions in the RFI.

  • To obtain information on the level of common ownership that would indicate enough genuine interests to permit members to act in the interests of other group members for purposes of sponsoring a MEP.
  • To determine whether the DOL should consider other facts and circumstances in addition to the level of common ownership between employers.
  • To determine what criteria two or more tax-exempt organizations or a tax-exempt organization and another organization must meet to be considered an employer under ERISA Section 3(5).

 

No Additional Reporting Requirements

The proposed regulations solicited comments on whether it should modify the current reporting and disclosure requirements. Because of the comments received, the DOL decided not to modify the current reporting and disclosure requirements. It also clarified that the MEP plan administrator is responsible for meeting these requirements.

 

The Pros and Cons of Joining a MEP

Some employers may benefit from joining a MEP—especially smaller employers that may not have the time or money to offer their own retirement plan. For example, participating employers may benefit by delegating plan duties to the MEP plan sponsor, incurring less fiduciary liability and sharing reporting responsibilities. But MEPs may not provide a substantial benefit to all who join. For example, proponents claim that participating employers could file one Form 5500 information return collectively. While this is true, many small employers don’t have to file this form, so this benefit could be minimal at best. Cost savings is another commonly perceived benefit. But because plan administration fees and investment fees have lessened in recent years, employers may not incur substantial cost savings after joining a MEP.

 

More to Come . . .

This year has seen a substantial increase in MEP-related activity. In addition to the DOL’s final regulations, the IRS released proposed regulations eliminating the “one bad apple rule,” which would provide an important improvement for MEPs. And earlier this year the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. If enacted, this proposed legislation would eliminate the current commonality requirement—resulting in open MEPs.

While the final ARP regulations may not go as far as some in the industry would like, the regulations do give employers participating in MEPs more certainty about their status under ERISA. And based on the information contained in the RFI, it appears that the DOL is at least preparing for the possibility of open MEPs sometime in the future.

The final ARP regulations are effective September 30, 2019. Those looking for additional information may refer to the DOL’s fact sheet. And, as always, visit ascensus.com for any new developments.

* “National Compensation Survey: Employee Benefits in the United States”, The U.S. Department of Labor’s Employee Benefits Security Administration, March 2018

 

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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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