IRS Notice 2020-68 provides guidance on the SECURE Act, and on the Bipartisan American Miners Act, which is also part of FCAA.
The DOL has issued a proposed rule on registration for pooled plan providers (PPPs), who may begin offering pooled employer plans (PEPs) on January 1, 2021.
As part of the TCJA Congress provided more time to roll over certain types of plan loan offsets. The IRS has released proposed regulations to align the IRS’s guidance with the statutory rules.
The SECURE Act requires ERISA-covered plans to disclose an estimated monthly payment that participants could receive in a lifetime income stream.
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 Changes were proposed in 2010, withdrawn in response to public comments, revised again in 2015, and made final in 2016.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.
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.
Nearly seven months after releasing proposed regulations, the Department of Labor (DOL) has released final regulations on default electronic delivery of retirement plan disclosures.
During the last few months, the Department of Labor (DOL), Treasury Department, and Department of Health and Human Services (DHHS) have jointly issued multiple pieces of guidance intended to provide much needed relief to those suffering economic hardships from the coronavirus (COVID-19) pandemic. In this article, we’ll explain how the most recent relief affects employee welfare benefit plans.
For the past three years, Congress has attempted to pass major retirement reform legislation. It has finally succeeded with the year-end passage of two spending packages meant to avert a government shutdown. One of the packages, the Further Consolidated Appropriations Act, 2020 (FCAA), includes multiple bills—including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which contains several major retirement-related provisions. These provisions are nearly identical to those included in an earlier version of the SECURE Act that was passed by the U.S. House of Representatives in May 2019. At the time of this publication, the President had not yet signed these bills into law. But it is widely anticipated that he will.
The SECURE Act provides the most comprehensive retirement reform package in over a decade. The primary goals of the SECURE Act are to expand retirement savings, improve plan administration, simplify existing rules, and preserve retirement income. The provisions summarized below will certainly give rise to questions in the coming days. Our aim is to provide an easy reference to the important retirement plan changes, while understanding that more federal guidance will be needed to resolve certain matters.
The FCAA also includes bills that provide disaster relief (discussed later) and new health and welfare provisions. The most significant health and welfare measure repeals the controversial “Cadillac Tax.” The Affordable Care Act had created a 40 percent excise tax on the most expensive employer-sponsored health insurance plans when benefits exceeded a certain threshold. This tax was supposed to become effective in 2018, but was previously delayed until 2022.
New Incentives to Establish or Enhance Employer Plans
The following SECURE Act provisions create new incentives and modify existing incentives for employers to establish retirement plans. They also broaden the time frame for employers to establish plans.
- Multiple employer plans (MEPs). Employers can more easily participate in a MEP or a new variant, a “pooled employer plan,” or PEP. Both have basic features in common, the latter to be administered by a pooled plan provider. (Effective for 2021 and later plan years.)
- Multiple participating businesses with a common interest would generally be part of a MEP.
- Multiple participating businesses with no common interest other than plan sponsorship would generally be part of a PEP.
- Smaller MEPs and PEPs may be able to file a simplified short Form 5500-SF tax return for the plan.
- Noncompliance by one participating employer will not disqualify the entire MEP/PEP arrangement, thus eliminating the “one bad apple” rule.
- Deadline to establish a plan. Employers may establish a qualified plan—such as a profit sharing or pension plan—as late as their business tax filing deadline, including extensions. (Under previous rules, employers had until the last day of their business year.) This extension will not apply to certain plan provisions, such as elective deferrals. (Effective for 2020 and later taxable years.)
- Small employer plan startup credit. The small employer retirement plan startup tax credit increases from $500 to a maximum of $5,000 per year, available to cover startup costs for the first three years that the plan is in effect. (Effective for 2020 and later taxable years.)
- Automatic enrollment credit. The SECURE Act provides a new tax credit to employers that include an automatic enrollment feature in their new or existing small 401(k) plans (100 or fewer employees) or SIMPLE IRA plans. The maximum annual tax credit is $500 for each of the first three years that the plan is maintained. (Effective for 2020 and later taxable years.)
- Election of 401(k) nonelective safe harbor design. Employers that make nonelective safe harbor plan contributions (versus a matching contribution) get two benefits: 1) they now escape the notice requirement, and 2) they have more time to amend their plans to implement this nonelective 401(k) safe harbor plan feature. Specifically, they may amend up to 30 days before the end of a plan year if they make a three percent contribution. But they may generally amend by the close of the following plan year if the plan is also amended to require a four percent nonelective safe harbor contribution. (Effective for 2020 and later plan years.)
- Annuity selection safe harbor. The SECURE Act creates a new safe harbor for a plan fiduciary to meet ERISA’s “prudent man rule” when selecting an insurer and an annuity contract in order to offer lifetime income options under a plan. (Effective on date of enactment.)
New Ways to Save More in Employer Plans
The next set of provisions lets employers automatically increase employees’ deferral contributions to a higher percentage, requires employers to give participants a future benefits projection, and promotes plan entry for certain part-time employees.
- Higher cap on deferrals in safe harbor 401(k) plans. Some 401(k) plans meet nondiscrimination requirements through automatic enrollment and automatic deferral increases. These qualified automatic contribution arrangements (QACAs) will now have a maximum 15 percent deferral rate instead of 10 percent. (Effective for 2020 and later plan years.)
- Lifetime income disclosure. Defined contribution plans must provide, at least annually, a projected lifetime income stream that a participant’s accrued benefit could generate. This disclosure does not create employer liability for the amounts projected. (Effective for benefit statements provided more than 12 months after the DOL issues guidance, including the interest assumptions to be used and a model disclosure. The bill prescribes that this guidance be completed within one year of the date of enactment.)
- Participation by less than full-time employees. Employees who have three consecutive 12-month periods of 500 hours of service and who satisfy the plan’s minimum age requirement must be allowed to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive, eligibility rules could continue to be applied to other contribution sources (e.g., matching contributions) and to ADP/ACP safe harbor plans. Employers may also exclude such part-time employees from coverage, nondiscrimination, and top-heavy test rules. (Effective for 2021 and later plan years, but no 12-month period that begins before January 1, 2021, shall be taken into account.)
More Targeted Provisions Affecting Employer Plans
The SECURE Act contains a number of additional, more targeted provisions that apply to employer plans.
- Custodial accounts of terminating 403(b) plans. Plan administrators or custodians of a 403(b) custodial account may distribute the account “in kind” to a participant or beneficiary when the employer is terminating the 403(b) plan. (Retroactive; effective for 2009 and later taxable years.)
- Lifetime income portability. Participants in a qualified plan, 403(b) plan, or governmental 457(b) plan may roll over lifetime income investments to an IRA or another retirement plan without a traditional distribution triggering event if their plan no longer permits such investments. (Effective for 2020 and later plan years.)
- Higher penalties for plan reporting failures. Retirement plan information reporting failures will result in the following increased penalties. (Effective for filings and notices required January 1, 2020, and thereafter.)
- Form 5500, $250 per day, up to a maximum of $150,000
- Form 8955-SSA (deferred benefit reporting), $10 per day, up to a maximum of $50,000 for failing to file, $10 per day, up to a maximum of $10,000 for failing to file a notification of change
- Withholding notices, $100 per failure, up to a maximum of $50,000 for all such failures during any calendar year
- Credit card loan prohibition. Retirement plan loans enabled through a credit card (or a similar program) will be treated as distributed from the plan and subject to taxation. (Applies to loans made after the date of enactment.)
- Shared Form 5500 filing. Employers sponsoring defined contribution plans that have the same trustee, administrator, fiduciaries, plan year, and investment options may file a common Form 5500. (Effective for 2022 and later plan years.)
- Nondiscrimination relief for closed pension plans. Defined benefit pension plans that are closed to new participants will get nondiscrimination relief that protects benefits for older, longer serving participants. (Effective upon enactment, or—if elected—for 2014 and later plan years).
- Community newspaper pension funding relief. Sponsors of certain plans maintained for community newspapers may calculate defined benefit plan contributions with interest rates and amortization periods that reduce funding requirements. (Effective for plan years ending after December 31, 2017.)
- Church retirement plan rules. New rules clarify which employees may participate in retirement plans sponsored by church-controlled organizations. (Effective for past, present, and future plan years.)
- Pension plans of cooperatives and charities. Certain cooperatives and charities may reduce their Pension Benefit Guaranty Corporation (PBGC) insurance premiums for defined benefit plans. (Effective for 2019 and later plan years).
- Lower minimum age for in-service distributions. This provision is not part of the SECURE Act, but is found in Division M—the Bipartisan American Miners Act, which is part of FCAA. This provision allows in-service distributions at age 59½ (instead of age 62 under current law) to participants in governmental 457(b) plans and certain pension plans. (Effective for 2020 and later plan years.)
New Provisions Affecting Employer Plans and IRAs
The following SECURE Act provisions affect both employer plans and IRAs.
- More rapid payouts to nonspouse (and other) beneficiaries. Most nonspouse beneficiaries of IRAs, qualified defined contribution plans, 403(b) plans, and governmental 457(b) plans will generally be required to distribute inherited amounts within 10 years. (Effective for plan participant/IRA owner deaths in 2020 or later years; 2022 or later years for governmental plans; special delay to accommodate contracts of certain collectively bargained plans.) Exceptions include those who, at the time of the account owner’s death, are
- disabled individuals,
- certain chronically ill individuals,
- beneficiaries whose age is within 10 years of the decedent’s age,
- minors (they would begin a 10-year payout period upon reaching the age of majority), and
- recipients of certain annuitized payments begun before enactment of the SECURE Act.
- Delayed age for beginning RMDs. The age when required minimum distributions (RMDs) from Traditional IRAs, qualified plans, 403(b) plans, and governmental 457(b) plans must generally begin is increased from age 70½ to age 72. (Effective for distributions required in 2020 and later years, for those who reach age 70½ in 2020 or a later year.)
- Birth/adoption excise tax exception. The birth of a child or adoption of a child (or individual who is incapable of self-support) qualifies both as a plan distribution event and as an amount that is exempt from the 10 percent early distribution penalty tax (if applicable) for distributions of up to $5,000 in aggregate from IRAs and defined contribution qualified plans, 403(b) plans, and governmental 457(b) plans. These amounts may be repaid. (Effective for distributions in 2020 and later years.)
- “Difficulty of care” payments treated as eligible compensation for retirement plan funding. Because many home healthcare workers receive payment that is not taxable income, they haven’t been able to contribute to a retirement plan. Now such “difficulty of care” payments will qualify as eligible compensation for IRA and other plan contributions. (Effective upon enactment for IRAs, and for 2016 and later plans years for employer plans.)
More Flexibility for IRA Contributions
The following provisions specifically affect IRAs.
- Traditional IRA contributions at any age. Taxpayers with earned income can make Traditional IRA contributions at any age, not just for years before reaching age 70½, as under current law. (Effective for 2020 and later taxable years.)
- Graduate student IRA contributions. Certain stipend, fellowship, and similar payments to graduate and postdoctoral students will be treated as earned income for IRA contribution purposes. (Effective for 2020 and later taxable years.)
New Eligible Expenses for 529 Plans
The SECURE Act also broadens the definition of eligible expenses for qualified tuition or “529” plans. Individuals may now take a qualified, tax-free 529 plan distribution to pay for registered apprenticeships. They may also distribute up to $10,000 in order to make repayments of student loans for a 529 plan beneficiary—or a beneficiary’s sibling. (Effective for distributions in 2019 and later years.)
Disaster Relief Provisions
To provide relief for certain natural disasters that occurred during the last couple of years, the FCAA contains a bill entitled the Taxpayer Certainty and Disaster Tax Relief Act of 2019. Among other things, this bill provides disaster relief to individuals in presidentially declared disaster areas who have taken IRA and retirement plan distributions between January 1, 2018, and 180 days after enactment of this legislation. (Applicable to plans that are amended on or before the last day of the first plan year beginning on or after January 1, 2020, or later, if the IRS allows.)
- Qualified disaster distributions. Qualifying distributions of up to $100,000 from employer-sponsored retirement plans and IRAs are exempt from the 10 percent early distribution penalty tax and the normal withholding requirements. Individuals affected by more than one disaster may distribute up to $100,000 per disaster.
- Repayment options. Individuals may repay qualifying distributions within a three-year period. Distributions not repaid generally will be taxed ratably over a three-year period, unless individuals elect otherwise. Individuals may also repay distributions taken for cancelled home purchases.
- Relaxed loan requirements. Employers may allow participants to request a plan loan of up to $100,000. Participants may delay loan repayments for up to one year.
Effective Dates and Amendment Deadlines
Some effective dates are mere days away—January 1, 2020. These dates were retained from the May 2019 version of the legislation. But the final version of FCAA contains delayed amendment deadlines for employer-sponsored retirement plans. This will allow employers to implement changes immediately, while generally having until the end of their 2022 plan year (2024 for governmental and collectively-bargained plans) to amend for the changes.
As with any major piece of legislation, questions will arise as provisions are analyzed. We expect the IRS and Department of Labor to address these concerns in the coming months. Ascensus will continue to assess the effect of this legislation and any related guidance. Visit Ascensus.com for future updates.
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