August 27, 2014
- IRS Updates Priority Guidance Plan
- ERISA Advisory Council Holds Second Session on Benefits Issues, Hears Regulatory Update from DOL
- IRS Issues Revenue Ruling on Puerto Rican Retirement Plans in 81-100 Group Trusts
IRS Updates Priority Guidance Plan
The U.S. Treasury Department (Treasury) and Internal Revenue Service (IRS) released its initial 2014-2015 Priority Guidance Plan on August 26, listing those topics that will be the subject of formal guidance during the next year.
The 2014–2015 Priority Guidance Plan contains 317 projects to be considered priorities for the twelve-month period from July 2014 through June 2015 (the plan year), including 42 items addressing retirement benefits (Pages 5-7 of the document) and 23 items addressing executive compensation, health care and other benefits, including items related to implementation of the Patient Protection and Affordable Care Act (PPACA) (Pages 7-9). A number of these items have already been completed, as indicated in the priority plan.
The plan includes a number of long-awaited regulatory projects from prior guidance plans:
- Final hybrid plan regulations [Item A18] (proposed regulations were issued in October 2010)
- Regulations on “closed defined benefit plans and related matters,” most likely the nondiscrimination issue identified by the Council [A5]
- Guidance relating to defined benefit plan funding, including (1) regulations updating the minimum present value requirements for pension plans [A28], (2) a revenue procedure relating to approval for funding method changes [A30]
- Additional projects on Code Section 430 defined benefit plan funding rules, including (1) final regulations on determination of minimum required contributions [A29], (2) updated mortality tables used for pension funding purposes [A32] and (3) regulations on additional issues relating to funding rules for single-employer plans under the Pension Protection Act of 2006 [A31]
- Guidance on multiple employer plans [A40]
- Guidance under Internal Revenue Code (Code) Section 402(c) on retirement plan distributions that are disbursed to multiple destinations and regulations under Code Section 402A on distributions from designated Roth accounts that are disbursed to multiple destinations [A11 and A12] (both related to the controversial language in the model notice under Code Section 402(f) for split distributions involving after-tax contributions)
- Guidance on issues relating to pension equity plans [A20]
- Elements of the "lifetime income" guidance package [A39], along with final regulations under Code Section 417(e) to simplify the treatment of optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form (proposed regulations were published on February 3, 2012) [A27]
- Regulations updating the rules applicable to Employee Stock Ownership Plans (ESOPs) [A1]
- Guidance on safe harbor 401(k) plans regarding certain mid-year changes and certain business transactions [A10]
- Guidance under §404 on deductions for employer contributions to qualified plans [A13]
- Regulations on eligible combined plans under Code Section 414(x), relating to the “DB(k)” form of hybrid plan provided for under the Pension Protection Act of 2006 [A25]
- A revenue procedure providing guidance on the Employee Plans Compliance Resolution System (EPCRS) [A41]
Similarly, the Employee Benefits/Executive Compensation, Health Care and Other Benefits section of the priority guidance plan includes key guidance related to the PPACA:
- A formal notice under Code Section 4980I related to the 40 percent excise tax on high-cost employer-provided coverage [B21]
- Guidance regarding the annual adjustment in the fee imposed to fund the Patient-Centered Outcomes Research Trust Fund [B19]
- Final regulations under Section 162(m)(6), relating to the $500,000 deduction limit on the compensation of some individuals by certain covered health insurance providers (proposed regulations were published in April 2013) [B7]
This section also includes the following miscellaneous benefits guidance items:
- Regulations under Code Section 86 regarding rules for lump-sum elections [B2]
- Regulations on the interaction of Code sections 4980G and 125 with respect to comparable employer contributions to employees’ HSAs [B21]
- Final regulations under Code Section 162(m) on the stock-based compensation aggregate limit rule and associated transition relief (proposed regulations were published in June 2011) [B6]
- Guidance under Code Section 409A relating to executive compensation, including (1) final regulations on the income inclusion (proposed regulations were published in December 8, 2008) [B10] and (2) guidance to update prior correction program guidance [B11]
- A revenue ruling on the definition of “post-retirement medical benefits” [B12]
- Guidance updating the reporting requirements for sick pay benefits [B17]
Other issues addressed elsewhere in the priority guidance plan include consolidated returns; corporations and their shareholders; excise taxes; exempt organizations; financial institutions and products; gifts, estates and trusts; insurance companies and products; international issues; partnerships; subchapter S corporations; tax accounting; tax administration; tax-exempt bonds and other general tax issues. An appendix also lists additional routine guidance that is published each year.
While the IRS is not bound by its priority guidance plan, their publication does provide insight regarding the administration's goals and the amount of activity expected within the next year.
The Council commends Treasury for its continued cooperation and commitment to addressing the regulatory concerns of employer plan sponsors and service providers. We will continue to work with agency officials to reduce regulatory costs and burdens for employer plans.
For more information on regulatory activity as it applies to retirement matters, please contact Jan Jacobson, senior counsel, retirement policy. For more information on regulatory activity as it applies to health care matters, please contact Kathryn Wilber, senior counsel, health policy. Both can be reached at (202) 289-6700.
ERISA Advisory Council Holds Second Session on Benefits Issues, Hears Regulatory Update from DOL
On August 19, 20 and 21, the ERISA Advisory Council (EAC) heard testimony on a number of vital benefits matters, including outsourcing employee plan services, pharmacy benefit manager (PBM) compensation and fee disclosure, and issues and considerations around facilitating lifetime plan participation. (The Council reported in detail on the August 20 PBM discussion in the August 22 Benefits Byte.) This session follows the previous set of 2014 EAC hearings in June (as reported in the June 20 Benefits Byte).
The EAC also received a regulatory update from U.S. Department of Labor (DOL) staff. In addition, there was a brief discussion by the EAC of its possible recommendations to the DOL on the issue of lifetime participation.
The EAC is a group of benefits experts established by the DOL to identify emerging benefits issues and advise the Secretary of Labor on health and retirement policy. The chair of the EAC for the 2014 term is Neal S. Schelberg, senior partner at Proskauer Rose LLP (a Council board member company), representing employers on the panel. The 2014 EAC roster also includes Council members Ralph C. Derbyshire, senior vice president and deputy general counsel for FMR (Fidelity Investments) LLC, representing investment management.; Josh Cohen, head of institutional defined contribution at Russell Investment Group, representing investment counseling; Christina R. Cutlip, managing director and head of plan sponsor services for TIAA-CREF, representing employers; Kevin T. Hanney, director of pension investments for United Technologies Corporation, representing employers; David C. Kaleda, a principal in the Fiduciary Responsibility group at Groom Law Group, Chartered, representing corporate trusts; and Mark Schmidke, shareholder at Ogletree, Deakins, Nash, Smoak & Stewart, representing insurance.
Outsourcing Employee Plan Services
On August 19, the EAC heard testimony regarding the outsourcing of employee benefit plan services. (Allison Klausner, assistant general counsel – benefits for Honeywell International Inc. and a member of the American Benefits Council’s Executive Board, gave testimony on this topic on June 18.) Among the witnesses was Brian Smith, chief operating officer of Segal Select Insurance Services, Inc., a Council member company.
Smith testified regarding the types of insurance plan sponsors should seek or require from their various service providers, including professional liability insurance, which Smith recommended the DOL require for all plan service providers. The EAC’s questions for Smith indicated an interest in insurance requirements for entities that outsource the named fiduciary function and for how small plan sponsors can meet their fiduciary responsibilities in selecting an insurance broker.
Lou Campagna, from the Division of Fiduciary Interpretations at the DOL Employee Benefits Security Administration (EBSA), also testified before the EAC, reviewing and summarizing current law with respect to the outsourcing of fiduciary responsibilities. Campagna’s testimony prompted a discussion of whether the naming of a fiduciary in the plan document itself constitutes a settlor or fiduciary function. Campagna did not cite specific regulatory authority supporting his view that such activity is a fiduciary function.
During the August 20 session, the EAC received a regulatory update from Judy Mares, Deputy Assistant Secretary for EBSA, Joe Canary, Director of the Office of Regulations and Interpretations and Dan Maguire, Director of the Office of Health Plan Standards and Compliance Assistance.
Most notably, Mares noted that the DOL’s most recent regulatory agenda set a target release date of January 2015 for a re-proposed fiduciary definition and conflict-of-interest rule, and only added that the DOL is still working on the new rule. (Also see Canary’s testimony during the lifetime facilitation discussion)
The discussion also covered the following issues:
- Brokerage Windows: Mares previewed the request for information (RFI) regarding brokerage windows subsequently published on August 20. (See the August 21 Benefits Byte.)
- Missing Participants: Mares described the Field Assistance Bulletin 2014-01 (FAB 2014-01) released on August 14 (as reported in the August 15 Benefits Byte).
- The Patient Protection and Affordable Care Act (PPACA): Maguire reported that many of the projects that the Departments of Labor, Health and Human Services, and Treasury have been working on for several years are now being implemented. The departments are examining how well the rules are working and where there may be gaps or the need for additional work.
- Longevity Annuities: In response to a question from the EAC, Canary commented that EBSA is not currently planning to give further input on the use of longevity annuities other than the input it provided to the IRS during its development of the recently released final rules on qualified longevity annuity contracts (QLACs).
Issues and Considerations Around Facilitating Lifetime Participation
On August 21, the EAC heard testimony on facilitating lifetime plan participation and briefly discussed possible recommendations to the DOL on this subject. The following Council member companies testified before the panel:
- Mark Fortier, managing director and head of global defined contribution research and product development for State Street Global Advisors, testified that the solution to facilitating lifetime plan participation is dependent upon a redesign of the current system’s infrastructure and technology. Fortier also called for an industry cooperative to develop open and common technology standards to efficiently and safely move retirement assets within the employer based system.
- Steve Saxon, chairman of Groom Law Group, supported the use of “auto portability” as a means of reducing the rate of terminating employee cash-outs and helping small balance safe harbor IRA holders develop their savings by consolidating their multiple IRA accounts into the defined contribution plan maintained with their new employer.
- Jack Towarnicky, an employee benefits attorney with Willis North America, focused his testimony on repurposing 401(k) plans so they are viewed as lifetime financial instruments that serve workers throughout life for their entire working career.
- Cynthia Mallett, vice president of industry strategies and public policy in corporate benefit funding at MetLife, testified on behalf of the American Council of Life Insurers (ACLI) that the goal of lifetime participation is to prevent leakage from the retirement plan system overall and that rules must retain flexibility and facilitate an informed choice on the part of the participant, not constrain their options.
EBSA’s Canary also testified separately on this subject, answering questions from the EAC on Form 5500, plan sponsor communications at employee termination, rollovers and loan regulations. He asserted that there are no explicit limitations on what plan sponsors can communicate to terminating plan participants, but “issues can arise” when those communications give rise to investment advice. While he added that employers have raised fiduciary concerns with EBSA, he could not provide additional details because such discussions are part of its ongoing fiduciary definition project.
The EAC briefly discussed recommendations for the DOL concerning facilitating lifetime participation, including educating plan sponsors and individuals on the benefits of retaining assets in the employer system, providing best practice guidance for plan features that encourage participants to remain in plans, simplifying forms for plan to plan transfers and development of an updated defined contribution plan annuity safe harbor.
For more information on the EAC’s activities and opportunities to testify, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
IRS Issues Revenue Ruling on Puerto Rican Retirement Plans in 81-100 Group Trusts
On August 21, the Internal Revenue Service (IRS) issued Revenue Ruling 2014-24 which clarifies that plans covering only Puerto Rico residents and only qualified under Puerto Rico law (Puerto Rico only Plans) can invest in group trusts or collective investment trusts under Rev. Rul. 81-100 (81-100 Trusts). This is a favorable resolution to the federal income tax issues which affected the ability of Puerto Rico only plans to invest in the 81-100 Trusts. Plans dual qualified under both U.S. and Puerto Rican laws were already eligible to invest in these trusts. A memorandum describing the issuance in more detail, prepared by Groom Law Group, Chartered, is now available on the Council website.
81-100 group trusts are those that meet the requirements of Rev. Rul. 81-100, which was later modified by Revenue Ruling 2011-1 and Notice 2012-6. Rev. Rul. 2011-01 (as we reported in the December 16, 2010, Benefits Byte) indicated that Puerto Rico only Plans could continue to participate in 81-100 group trusts until the IRS issued further guidance on the topic.
Revenue Ruling 2014-24 states that any pension, profit-sharing or stock bonus plan whose participants are all residents of Puerto Rico is eligible to participate in 81-100 group trusts, since these plans fall under Section 1022(i)(1) of ERISA, which provides that any trust forming part of such a plan is generally tax-exempt under the U.S. tax code if the trust is exempt from Puerto Rico income tax.
The new ruling was issued due to inquiries from plan sponsors (including the American Benefits Council, representing plan sponsors) who wanted to “transfer assets and liabilities to Section 1022(i)(1) plans, while continuing to invest the transferred assets in the group trust in order to take advantage of the group trust's broader diversification opportunities and lower investment costs.” The IRS stated that although Puerto Rico plans are not qualified plans under the U.S. tax code and are not listed as group trust retiree benefit plans under Rev. Rul. 2011-1, they are still eligible as they fulfill the other applicable requirements of Rev. Rul. 2011-1, such as being tax-exempt under Section 501(a).
The ruling also lays out conditions in which a group trust retiree benefit plan may invest in an 81-100 group trust through a separate account maintained by an insurance company without affecting the tax status of the trust or the plans participating in it. These conditions include:
- all of the assets in the separate account must consist only of assets of group trust retiree benefit plans as defined in Rev. Rul. 2011-1 and as modified by this revenue ruling.
- the insurance company managing the separate account must enter into a written arrangement with the trustee of the group trust in accordance with the requirements of Rev. Rul. 2011-1.
- the assets of the separate account must be insulated from the claims of the insurance company's general creditors.
Rev. Rul. 2014-24 also extends transition relief on transfers from qualified retirement plans to Puerto Rico plans that meet the requirements of ERISA Section 1022(i)(1) that occur before January 1, 2016, as provided in Rev. Rul. 2008-40. Rev. Rul. 2008-40 temporarily provided that transfers from a qualified retirement plan to a Section 1022(i)(1) plan can be made without being treated as a distribution, as well as temporary relief from the tax code Section 410(b) minimum coverage rules for qualified retirement plans that make transfers to Puerto Rico plans.
For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.