February 23, 2015
- IRS Requests Comment on Possible Approaches to Rules for 40 Percent Excise Tax
- President Obama Announces DOL Re-Proposal of Rule Updating Definition of "Fiduciary"
IRS Requests Comment on Possible Approaches to Rules for 40 Percent Excise Tax
On February 23, the Internal Revenue Service (IRS) published Notice 2015-16, requesting comment on possible approaches for regulations implementing the 40 percent excise tax to be imposed on high-cost health coverage under the Patient Protection and Affordable Care Act (PPACA). Comments are being accepted through May 15.
The excise tax, scheduled to be implemented in 2018, is a nondeductible 40 percent excise tax created under Internal Revenue Code (IRC) Section 4980I, as added by PPACA. The tax applies to “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only, $27,500 for family). The tax was implemented as a “revenue raiser” to pay for other aspects of the PPACA, including federal subsidies for coverage for low-income individuals, and also to address perceived over-consumption of health care coverage.
A Benefits Blueprint reviewing the statutory requirements of the 40 percent excise tax, as well as a companion document, with answers to certain “Frequently Asked Questions” regarding the excise tax, are available on the Council website (see the September 18, 2014, Benefits Byte).
Notice 2015-16 asks the public to comment on:
- The definition of applicable coverage.
- The determination of the cost of applicable coverage.
- The application of the annual statutory dollar limit to the cost of applicable coverage.
- Any other issues under Internal Revenue Code Section 4980I.
Notice 2015-16 also states the Treasury and IRS’ intention to issue another notice inviting comments on additional issues not addressed in Notice 2015-16 and that they expect to use those comments “to inform proposed regulations that will be issued in the future for further public notice and comment.”
Working with the Administration and Congress to lessen the impact of the excise tax on employers remains a top priority for the Council and we are working on the issue on several fronts. The Council will be submitting comments to the RFI by the May 15 due date. For more information, contact Katy Spangler, senior vice president, health policy, or Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.
President Obama Announces DOL Re-Proposal of Rule Updating Definition of "Fiduciary"
On February 23, the U.S. Department of Labor (DOL) submitted to the Office of Management and Budget (OMB), a revised version of the “conflict of interest” rule expanding the definition of the term “fiduciary”. OMB will have up to 90 days to review the rule, after which it will be published in proposed form, with a formal comment period, before it is finalized. The text of the proposal will not be made public until it is published.
In describing the rule at an AARP event today, President Obama emphasized the need for “uniform rules of the road that require advisers to act in the best interests of their clients.” It is fairly unusual for the President to specifically give a speech regarding a proposed regulation. That suggests the importance the Administration is placing on this initiative. The fact that the President is publicly speaking about the need for the rule on the very date it has been submitted to OMB underscores the extent to which the issue has largely been vetted within the White House and also suggests that OMB will not likely use the full 90 days to approve the proposed regulation for publication.
ERISA currently imposes stringent requirements on individuals who act as plan fiduciaries, supplemented by certain “prohibited” transactions. Fiduciaries are personally liable for losses sustained by a plan that result from a violation of these rules. Section 3(21)(A)(ii) of ERISA sets out a simple two-part test for determining fiduciary status: a person renders investment advice with respect to any money or other property of a plan, or has any authority or responsibility to do so; and the person receives a fee or other compensation, direct or indirect, for doing so.
The re-proposed rule is expected to expand significantly the definition of the term “fiduciary” with respect to investment advice provided in conjunction with defined benefit pension plans, defined contribution retirement savings plans and individual retirement accounts (IRAs). Generally, the proposal is intended to protect participants from conflicts of interest and self-dealing. For example, the proposed rule would define certain advisers as fiduciaries even if they do not provide advice on a “regular basis.”
The rule was first proposed by the Department of Labor’s Employee Benefits Security Administration (EBSA) in October 2010 (see the October 21, 2010, Benefits Byte) but was later withdrawn due to concerns raised by the business and financial communities, as well as lawmakers from both parties. In February 3, 2011, written comments, the Council identified several key areas of concern for plan sponsors:
- The potentially significant increase in the number of employees who fall within the definition of fiduciary. This presents a question of how to ensure employees are qualified to act as fiduciaries and the difficulty of monitoring these employees and obtaining liability insurance for them.
- Concern about the inadvertent status of fiduciary resulting from benign actions by an employee.
- Impact on agreements (such as investment management agreements, trust agreements, and swap agreements) and valuation of assets routinely held, whereby employees and service providers working on any of these projects could become fiduciaries, raising the issues noted above.
- Impact on investment menu selection, monitoring and call center services, with the likelihood that these services would be significantly affected.
At the February 23 announcement, President Obama emphasized the need to “modernize” an almost 40-year-old fiduciary regulation to build on consumer protections and ensure that Americans who are responsibly saving for their future retirement security are receiving a fair share of their return on investments. The White House also released a fact sheet as well as a new report from the Council of Economic Advisors, outlining the effects of conflicted investment advice on retirement savings. The fact sheet stated that the new proposal would:
- Require retirement advisers to “put their client’s best interest first” by expanding the types of retirement investment advice subject to ERISA.
- Continue to allow access to investment advice by providing an exemption from the limits on payments that create conflicts of interest under the new definition.
- Allow advisers to continue to provide general education on retirement saving across employer-sponsored plans and IRAs without triggering fiduciary duties.
In a February 22 conference call with reporters, DOL Secretary Tom Perez said that the new proposal will include economic analysis as well as a list of proposed exemptions, neither of which were included in the first rule.