News

The IRS grants extensions for completion of certain tax-related acts to victims of severe storms in Michigan and an earthquake and after-shocks in Utah.

Pension Benefit Guaranty Corporation (PBGC) (FAQ) compliance guidance for Defined Benefit (DB) plan sponsors dealing with the coronavirus (COVID-19) pandemic.

Rep. Sean Maloney (D-NY) has introduced H.R. 7645, legislation that would extend the time period for taxpayers to withdraw coronavirus-related distributions (CRDs) from retirement savings arrangements and receive the special tax benefits that CRDs provide. Certain withdrawals could be tax-free under the legislation.

CRDs, as defined in the Coronavirus Aid, Relief and Economic Security (CARES) Act, are eligible for the following tax benefits for withdrawn amounts up to $100,000 (currently, only for withdrawals in 2020).

• Three-year taxation on amounts withdrawn
• Exemption from the 10 percent excise tax for early (pre-59½) distributions
• The option to repay such withdrawn amounts within three years

Included in the bill is expected to be a provision that would make CRDs tax-free if the taxpayer qualifies as a first-time home buyer. “Expected,” because neither bill text nor a summary is available at this time. Details of legislative intent are being inferred from the bill’s description at the official congressional web site:

“To extend the time period for making coronavirus-related distributions from retirement plans and to provide an exclusion from gross income of coronavirus-related distributions which are first-time homebuyer distributions.” 

H.R. 7645 has been referred to the House Ways and Means Committee.

Few aspects of retirement plan governance have been as controversial as regulating investment advice. Exactly what obligation—if any—does an investment professional have to provide impartial, conflict-free advice to savers and retirees?  When do financial professionals step over the boundary that can make them a fiduciary, with the ethical and legal obligations that come with this duty?

The answers have been inconsistent, stretching over many years. Department of Labor (DOL) fiduciary investment advice regulations date back to the 1970s. Those regulations needed revision in order to better align with today’s investment products and participant-directed retirement plans. Changes were proposed in 2010, withdrawn in response to public comments, revised again in 2015, and made final in 2016.

The DOL delayed implementing the 2016 final investment fiduciary regulations and accompanying guidance. These regulations were ultimately struck down in 2018 as “regulatory overreach” by the United States Court of Appeals for the Fifth Circuit.

The DOL later issued Field Assistance Bulletin (FAB) 2018-02, which states that the DOL will not pursue prohibited transaction claims against fiduciaries who make good-faith efforts to comply with the Impartial Conduct Standards (discussed later). FAB 2018-02 remains in effect. 

The DOL has again issued investment advice guidance, this time to replace the guidance struck down by the appellate court. This latest guidance package includes a proposed prohibited transaction class exemption entitled Improving Investment Advice for Workers and Retirees, and a technical amendment to DOL Regulations (Regs.) 2509 and 2510 that implements the appellate court’s order by

• reinstating the original version of DOL. Reg. 2510.3-21 (including the five-part test);
• removing prohibited transaction exemptions (PTEs) 2016-01 (the Best Interest Contract Exemption) and 2016-02 (the Class Exemption for Principal Transactions);
• returning PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128 to their original form; and
• reinstating Interpretive Bulletin (IB) 96-1, which is intended to help investment providers, financial institutions, and retirement investors determine the difference between investment education and investment advice. Investment providers and financial institutions may rely on the safe harbors in IB-96-1 in order to avoid providing information that could be construed as investment advice.

The technical amendment became effective on July 7, 2020.

What is the five-part test?

The original version of DOL Reg. 2510.3-21 (which the technical amendment reinstates) contains a five-part test that is used to determine fiduciary status for investment advice purposes. Under the test, an investment provider or a financial institution that receives a fee or other compensation is considered a fiduciary if it meets all of the following standards (i.e., prongs) of the test. 

• The provider or institution gives advice on investing in, purchasing, or selling securities, or other property.
• The provider or institution gives investment advice to the retirement investor on a regular basis.
• Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan or its fiduciaries.
• The retirement investor uses the advice as a primary basis for investment decisions.
• The provider or institution provides individualized advice, taking into account the plan’s demographics, needs, goals, etc.

Has the DOL’s opinion changed on rollover recommendations?

In the preamble of the proposed PTE, the DOL clarified that it no longer agrees with the guidance originally provided in Advisory Opinion 2005-23A (better known as the Deseret Letter). In the Deseret Letter, the DOL indicated that a recommendation to distribute and roll over retirement plan assets would not generally constitute investment advice because it would not meet the first prong of the five-part test. But because it is common for the investments, fees, and services to change when the decision to roll over assets is made, the DOL now believes that a recommendation to distribute assets from an IRA or an ERISA-covered plan would be considered investment advice with respect to the first prong of the five-part test.

The DOL acknowledges that advice encouraging an individual to roll over retirement plan assets may be an isolated and independent transaction that would fail to meet the second “regular basis” prong. But determining whether advice to roll over assets meets the “regular basis” prong depends on the facts and circumstances.  So the DOL could view a rollover recommendation that begins an ongoing advisory relationship as meeting the “regular basis” prong.

As discussed above, the proposed PTE would allow investment professionals to receive compensation for advising a retirement investor to take a distribution from a retirement plan or to roll over the assets to an IRA. The investment professional could also receive compensation for providing advice on other similar transactions, such as conducting rollovers between different retirement plans, between different IRAs, or between different types of accounts (e.g., from a commission-based account to a fee-based account).

Under the proposed PTE, financial institutions would need to document why the rollover advice was in the retirement investor’s best interest. Documentation would need to 

• explain whether there were other alternatives available (e.g., to leave the assets in the plan or IRA and select different investment options);
• describe any applicable fees and expenses;
• indicate whether the employer paid for some or all of the plan’s administrative expenses; and
• show the different levels of services and investments available.

In addition, investment providers or financial institutions that recommend rolling over assets from another IRA or changing account types should consider and document the services that would be provided under the new arrangement.

Who is covered under the proposed PTE?

The proposed PTE would apply to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions), and their employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors. The proposed PTE would also apply to any affiliates or related entitites.

“Retirement investors” include

• IRA and plan fiduciaries (regardless of plan size),
• IRA owners or beneficiaries, and
• plan participants or beneficiaries with authority to direct their accounts or take distributions.

The proposed PTE defines a “plan” as including 401(a) plans (e.g., 401(k) plans), 403(a) plans, 403(b) plans, defined benefit plans, owner-only plans, simplified employee pension (SEP) plans, and savings incentive match plan for employees of small employers (SIMPLE) plans. The proposed PTE would also apply to employee welfare benefit plans that have established a trust (e.g., VEBAs). 

The proposed PTE, defines an “IRA” as an individual retirement account, an individual retirement annuity, a health savings account (HSA), an Archer medical savings account (MSA), and a Coverdell education savings account (ESA).

What protection does the proposed PTE offer?

The Internal Revenue Code and ERISA generally prohibit fiduciaries from receiving compensation from third parties and compensation that varies based on investment advice provided to retirement plans and IRAs. Fiduciaries are also prohibited from selling or purchasing their own products to retirement plans and IRAs (known as principal transactions).

Under the proposed PTE, financial institutions and investment professionals providing fiduciary investment advice could receive payments (e.g., commissions, 12b-1 fees, and revenue sharing payments) that would otherwise violate the prohibited transaction rules mentioned above. For example, the exemption would provide relief from prohibited transactions that could occur if a financial institution or investment professional

• advises a client to take a distribution or roll over assets to an IRA or retirement plan;
• provides recommendations to acquire, hold, dispose of, or exchange securities or other investments; or
• recommends using a particular investment manager or investment advice provider.

In addition, the proposed PTE would cover riskless principal transactions  (e.g., when a broker-dealer purchases a security for their own account knowing that it will be sold to a retirement investor at a certain price) as well as principal transactions involving certain specific types of investments (e.g., municipal bonds).

The following transactions would not be covered by the PTE.

• Transactions where advice is provided solely through a computer model without any personal interaction (i.e., robo-advice arrangements).
• Transactions in which the investment professional is acting in a fiduciary capacity other than as an investment advice fiduciary under the five-part test, as described below (e.g., a 3(38) investment manager with authority to make discretionary investment decisions).
• Transactions involving investment providers, financial institutions, and their affiliates if they are the employer of employees covered by the plan; or are a named fiduciary, plan administrator, or affiliate who was chosen to provide advice by a fiduciary who is not independent of the investment professional, financial institution, or their affiliates.

Certain individuals and institutions (and all members within the institution’s controlled group) would be ineligible to rely on the exemption—including those who have been convicted of a crime associated with providing investment advice to a retirement investor, or those who have a history of failing to comply with the exemption. The period of ineligibility would generally be 10 years, but a financial institution with a conviction may petition the DOL for continued reliance on the exemption.

What does the proposed PTE require?

To take advantage of the relief provided under the proposed PTE, investment professionals and financial institutions must provide advice in accordance with the Impartial Conduct Standards. The Impartial Conduct Standards contain three components—a reasonable compensation standard, a best interest standard, and a requirement that prohibits investment providers or financial institutions from giving misleading statements about investment transactions or other related matters.  The Impartial Conduct Standards also requires financial professionals and financial institutions to provide the best execution possible when completing security transactions (e.g., completing the transaction timely).

Under the best interest standard, investment professionals and financial institutions are not required to identify the best investment for the retirement investor, but any investment advice given must put the retirement investor’s interests ahead of the interests of the investment professional, financial institution, or their affiliates. This is consistent with the SEC’s Regulation Best Interest.

Investment providers and financial institutions cannot waive or disclaim compliance with any of the proposed PTE’s conditions. Likewise, retirement investors cannot agree to waive any of the conditions. In addition, the proposed PTE would require a financial institution to 

• provide the retirement investor—before the transaction takes place—with an acknowledgment of the institution’s fiduciary status in writing, and a written description of the service to be provided and any material conflicts of interest;
• adopt and enforce policies and procedures designed to discourage incentives that are not in the retirement investor’s best interests and to ensure compliance with the Impartial Conduct Standards;
• maintain records that prove compliance with the PTE for six years; and
• conduct a review at least annually to determine whether the institution complied with the Impartial Conduct Standards and the policies and procedures created to ensure compliance with the exemption. Although an independent party does not need to conduct the review, the financial institution’s chief executive officer (or the most senior executive) must certify the review.

Note that the proposed PTE would not give retirement investors new legal claims (e.g., through contract or warranty provisions) but rather would affect the DOL’s enforcement approach.

Next Steps

Many investment advisers, broker-dealers, banks, and insurance companies that will be affected by the proposed PTE currently operate under similar standards found in various state laws and in the SEC’s Regulation Best Interest.  The DOL’s temporary enforcement policy discussed in FAB 2018-02 also remains in effect, as do other more narrowly tailored PTEs.

Each type of investment provider and financial institution is likely affected differently, whether in steps to comply or costs involved. Financial institutions and investment providers may want to review the proposed PTE and start taking steps to comply with it. This may involve creating and maintaining any policies and procedures they don’t already have in place as a result of state law or the Regulation Best Interest.

In the meantime, a 30-day comment period for the proposed PTE starts on July 7, 2020. Comments may be submitted at www.regulations.gov. The Docket ID number is EBSA-2020-0003.

Visit FuturePlan.com for future updates.

3(16) fiduciary services are one of the fastest growing sectors of the retirement plan industry today, but why do these plan administrators exist? We cover that in this post.

Today’s Federal Register contains the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) proposed guidance announced by the agency on June 29, 2020, entitled Improving Investment Advice for Workers and Retirees Exemption.

This guidance is meant to replace the DOL’s 2016 final regulations and accompanying exemptions regarding fiduciary investment advice, which—after several implementation delays—were vacated (struck down) as “regulatory overreach” by the U.S. Fifth Circuit Court of Appeals in 2018. Written comments or requests for a public hearing on this new EBSA guidance must be submitted by August 6, 2020.

Accompanying this EBSA proposed exemption is a second “vacatur” document that officially implements the Court’s vacating of the 2016 EBSA guidance, and reinstates earlier guidance that had been superseded by it.

The IRS has issued Notice 2020-52, guidance that provides sponsors of 401(k) and 403(b) safe harbor plans limited relief from certain otherwise-applicable requirements for mid-year suspension or reduction of safe harbor matching or nonelective contributions.

Notice 2020-52’s temporary relief is being granted as a consequence of the widespread economic challenges facing employers as a result of the coronavirus (COVID-19) pandemic.

Requirement for Mid-Year Suspension of Safe Harbor Contributions

In order to suspend safe harbor matching or nonelective contributions mid-year, a sponsoring employer generally must meet one of the following requirements. 

• The employer must be operating at an economic loss.
• The employer must have given employees timely notice prior to the start of the plan year that the plan might be amended to suspend safe harbor contributions during the coming plan year, and that such suspension would not apply until 30 days after a mid-year supplemental notice is given.

Temporary Relief for Mid-Year Reduction or Suspension of Safe Harbor Contributions

Employers that adopt or have adopted between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce 401(k) or 403(b) safe harbor matching or nonelective contributions, will not be considered to have violated the economic loss or pre-plan year notice requirements described above.

Temporary Relief for Nonelective Contribution Supplemental Notice

Notice 2020-52 also provides temporary relief for employers that amended or amend their plans for a mid-year reduction or suspension of nonelective contributions, without providing a supplemental notice to employees at least 30 days before the reduction or suspension. This notice requirement will be treated as having been met if the notice is provided to employees by August 31, 2020. This relief is not being extended for a reduction or suspension of safe harbor matching contributions.

Clarification on Reduction or Suspension of Contributions for HCEs

Notice 2020-52 also provides further clarity on mid-year amendments to reduce certain contributions to highly compensated employees (HCEs).

In general, a reduction or suspension of safe harbor contributions only for HCEs is not treated as an impermissible reduction, since contributions on behalf of HCEs are not included in the definition of safe harbor contributions. However, Notice 2020-52 clarifies that a notice to HCEs of the reduction or suspension is still required, and a new deferral election opportunity must be given.

Notice 2020-52’s relief provides a degree of assurance that employers will not be violating safe harbor plan rules that pertain to reductions, suspensions, and notices, if they satisfy its conditions. But the guidance does not provide relief from ADP/ACP nondiscrimination testing for the plan year in which such reductions or suspensions have taken place.

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) has released a guidance package entitled Improving Investment Advice for Workers and Retirees Exemption. The guidance package includes a News Release, Fact Sheet, Proposed Class Exemption, and a Technical Amendment.

This guidance, to a greater or lesser degree, is meant to replace the DOL’s 2016 final regulations and accompanying exemptions on fiduciary investment advice. After several implementation delays, that 2016 guidance was struck down as “regulatory overreach” by the U.S. Fifth Circuit Court of Appeals in 2018.

On Tuesday, the United States Senate passed by unanimous consent a bill to extend from June 30, 2020, to August 8, 2020, the deadline for businesses to apply for a Paycheck Protection Program (PPP) loan administered by the federal Small Business Administration.

PPP loans were created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, targeted to businesses with no more than 500 employees. The purpose of the program is to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. More than $130 billion of the $669 billion appropriated for the program had not been applied for as the June 30th deadline approached.

If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60% of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group health care coverage, including payment of insurance premiums.

As this is reported, the House of Representatives had yet to approve the bill, which is required—in addition to signing by President Trump—for the application deadline to be extended.

In issuing Notice 2020-51 on June 23, 2020, the IRS provided much-needed additional guidance—and some welcome relief—pertaining to the 2020 suspension of required minimum distributions (RMDs). The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, signed into law by President Trump on March 27, 2020, suspended for the 2020 tax year the requirement that these distributions be taken from employer-sponsored defined contribution retirement plans and IRAs.

Notice 2020-51 notes the similarity to a previous RMD waiver granted in 2009 by the Worker, Retiree, and Employer Recovery Act (WRERA), and the subsequent guidance and transition relief provided then in IRS Notice 2009-82. This was in response to the economic downturn at the onset of the Great Recession.

RMDs generally must be taken each year beginning when plan participants or IRA owners reach age 72 (formerly age 70½) or—for some plan participants who work beyond age 72—retire. In general, IRA and retirement plan beneficiaries are also subject to RMDs.

The timing of the 2020 RMD waiver was problematic for those who had already taken distributions in 2020 that they believed were required; especially multiple periodic distributions, or beneficiary distributions. In several tangible ways, Notice 2020-51 has come to their rescue.

Notice 2020-51 details are summarized below.

Direct Rollover, Notice, and Withholding Relief

Plan administrators who treated a 2020 distribution as an RMD that was not eligible for rollover—and thus did not permit a direct rollover, provide a 402(f) notice, or withhold at a 20% rate—will not be considered to have failed to meet these requirements.

RMD Amounts Eligible for Rollover

Eligible for rollover under this guidance are amounts that—but for the waiver—would have been 2020 RMDs (including an amount to be taken by an April 1, 2021, required beginning date (RBD)), and amounts that are part of a series of periodic payments made at least annually over life expectancy, or over a period of 10 or more years. 

Retirement Plan Rollover Deadline Extended to August 31, 2020

Notice 2020-51 permits the rollover of waived retirement plan RMDs—amounts withdrawn or distributed in 2020 in the belief they were required—through August 31, 2020, without regard to the normal 60-day limitation. The rollover is limited to the amount of the waived 2020 RMD. 

IRA Repayment Deadline Extended to August 31, 2020

Notice 2020-51 permits the repayment of waived IRA RMDs—amounts previously withdrawn or distributed in 2020 in the belief they were required—through August 31, 2020. This can be done without regard to the normal 60-day limitation for IRA-to-rollovers. “Repayments” that are made by August 31, 2020, will not be considered to violate the one-rollover-per-12-months limitation or the restriction on rollovers for nonspouse beneficiaries. It is not well-defined at this time what reporting distinctions there may be between the reporting of rollovers vs repayments. It appears that “repayments” (vs rollovers) must be to the distributing IRA. Distributions less than 60 days before August 31, 2020, would be eligible for rollover if all rollover requirements were met.

Defined Contribution Plan Sample Amendment

Notice 2020-51 provides a sample defined contribution plan amendment that provides plan participants and beneficiaries the choice of receiving or not receiving amounts that represent waived RMDs, with no impact on other distribution provisions. The amendment follows the design of pre-approved document plans that use a basic plan document and an adoption agreement.

IRA Document Amending

IRA documents are not required to be amended for the CARES Act 2020 RMD waiver. But to ensure clients receive up-to-date information, IRA disclosure statements may need to be revised to reflect the waiver.

QRP Beneficiary Payout Option Amending

For qualified retirement plans that permit beneficiaries to choose between life expectancy payments and a 5-year payout (when a participant’s death occurs before the RBD), the election deadline for a 2019 death would be December 31, 2020. This election deadline can be extended to December 31, 2021, by a plan amendment. (Most nonspouse beneficiaries may not elect life expectancy payments if a participant dies in 2020 or a later year.)

Nonspouse QRP Beneficiary Rollover to Elect Life Expectancy Payments

In general, a nonspouse beneficiary must directly roll over an inherited qualified retirement plan balance to an IRA by the end of the year following the year of death to be eligible to elect life expectancy payments if a plan mandates a 5-year payout. For a participant who died in 2019, this deadline is now 2021, not 2020. (Most nonspouse beneficiaries may not elect life expectancy payments if a participant dies in 2020 or a later year.)

RMD Suspension and the Required Beginning Date

The RBD for an individual to begin withdrawing RMDs is generally April 1 of the year following the year she reaches age 72 (formerly 70 ½), or—if delayed beyond this age by continuing employment—the year of retirement. The 2020 RMD waiver does not affect an individual’s RBD.

2020 Initial RMD With April 1, 2021, RBD, is Waived

A retirement plan participant whose first RMD year is 2020 (the participant reached age 70½ in 2019 or earlier, participates in a plan that allows a delayed RBD, and retires in 2020) has an RBD of April 1, 2021, but is not required to withdraw this amount in 2021. The 2021 RMD, however, must be withdrawn by December 31, 2021. Amounts that are withdrawn in 2021 will be applied to satisfy this 2021 RMD, and any amount in excess of this 2021 RMD will be eligible for rollover.

No Other Deadline Extensions or Rollover Modifications

No deadlines are extended other than the deadlines to 1) complete certain rollovers or repayments (August 31, 2020), 2) elect life expectancy payments or the 5-year rule if a participant died in 2019 (December 31, 2021, if a retirement plan offers both options), and 3) allow a nonspouse beneficiary of a participant who died in 2019 to complete a direct rollover to an IRA and elect life expectancy payments (December 31, 2021).

Spousal Consent and Suspension of 2020 RMDs

If an individual is receiving certain annuity payments (e.g., qualified joint and survivor annuity) from a qualified plan, the suspension for 2020 and resumption in 2021 would not require spousal consent unless the plan provides that there is a new annuity start date.

Rollover to Distributing Plan

Amounts withdrawn from a retirement plan that are eligible for rollover by virtue of the RMD waiver may be rolled back into the same plan if that plan permits rollovers and if other rollover conditions are met.

RMD Waiver and Withholding

Payors do not have the option to treat a 2020 RMD amount paid from a retirement plan as subject to 20% withholding. But if an amount exceeding the calculated 2020 RMD is distributed, and would otherwise be eligible for rollover, it is subject to 20% withholding.

If the individual is receiving monthly distributions that exceed RMD amounts, as part of a series of payments made over a period of 10 or more years, the entire amount of each distribution is subject to the periodic payment optional withholding rules (IRC Sec. 3405(a).

Substantially Equal Periodic Payments and the RMD Waiver 

Substantially equal periodic payments—exempt from the 10% early distribution penalty tax—are not affected by the RMD waiver. Required payments under such a schedule—even if based on the RMD calculation method—must be made if required in 2020, or all prior payments received under this schedule are subject to the 10% early distribution penalty tax.

Financial Organizations Must Notify IRA Owners

Financial organizations must notify their IRA clients that no RMD is due for 2020. One method of notification is to provide IRA owners with a copy of the 2019 Form 5498, IRA Contribution Information, that was filed with the IRS, indicating that there is no RMD required for 2020 (the extended IRS filing deadline for the 2019 Form 5498 is August 31, 2020).

Defined Benefit Plans and the 2020 RMD Waiver

The waiver of 2020 RMDs does not apply to defined benefit pension plans, even if such plans use a formula that calculates the RMD as if it is a distribution from an individual account plan.