March 18, 2015
- DOL Issues New Regulations for Timing of Defined Contribution Plan Annual Disclosure
- House Ways and Means Subcommittee Hears Testimony on Evidence-Based Policymaking
- IRS Issues New Guidance on FATCA; Senate Committee Examines International Taxation
DOL Issues New Regulations for Timing of Defined Contribution Plan Annual Disclosure
The U.S. Department of Labor (DOL) Employee Benefit Security Administration (EBSA) issued new regulations on March 18 setting forth the timing requirements for annual disclosures under participant-directed individual account plans. The new rule effectively gives plan sponsors and administrators additional flexibility by replacing the prior 12-month window for annual disclosure with a 14-month window.
The regulations take the form of a proposed rule and an identical direct final rule. The final rule, which contains the actual text of the regulation, will automatically take effect if no “significant adverse comment” is received with regard to the proposed regulations. The deadline for comments on the proposed rule is Monday, April 20.
Under October 2010 final regulations governing fee disclosure for participant-directed individual account plans (including defined contribution arrangements like 401(k) plans), plan administrators must annually disclose detailed investment-related information to plan participants and beneficiaries about the plans’ designated investment alternatives in the form of a comparative chart. Those regulations required that the disclosure must be provided at least once in any 12-month period for both calendar- or fiscal-year plans.
After the Council and other groups asserted that the 12-month period was both confusing and problematic, partially because the original disclosure was due August 30, 2012, EBSA provided temporary enforcement relief from defined contribution plan fee disclosure requirements by allowing plan sponsors a one-time “reset” of the timing of this annual disclosure to align the comparative chart with other participant disclosures. EBSA also asked if it should consider allowing a 30-day or 45-day window in connection with the due date for disclosing subsequent annual comparative charts.
In October 2014, the Council joined a coalition of ten groups in sending a letter to DOL and EBSA in support of a minimum 45 day window. While EBSA’s revised regulations does not institute a window, as it had earlier suggested, changing the 12-month period to a 14-month period essentially allows the same flexibility if the notice is provided every year (by providing an additional two months to comply).
In extending this disclosure period, EBSA acknowledged that “the overall objective of the “participant-level fee disclosure” regulation is to make sure participants and beneficiaries in participant-directed individual account plans are furnished the information they need, on a regular and periodic basis, to make informed decisions about the management of their individual accounts and the investment of their retirement savings. While deadlines are needed to avoid irregular and non-periodic disclosures, flexible deadlines alone do not undermine the overall objective of the regulation.”
Although the direct final rule is not effective until June 17 (90 days after publication in the Federal Register), the Department is adopting an enforcement policy, effective immediately, under which plan administrators may rely on the new definition in paragraph (h)(1) prior to the effective date of the amendment.
The 14-month window applies only to the annual disclosure requirements and does not address the quarterly disclosure notice on benefit statements required elsewhere in the fee disclosure rules (for which a 45-day window is already provided). EBSA is soliciting comments on whether a similar adjustment is needed for the quarterly statements.
For more information or to provide feedback for a possible Council comment letter, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement & compensation, at (202) 289-6700.
House Ways and Means Subcommittee Hears Testimony on Evidence-Based Policymaking
On March 17, the U.S. House of Representatives Ways and Means Subcommittee on Human Resources held a hearing to discuss how to use empirical data to evaluate government program effectiveness. The hearing, Expanding Opportunity by Funding What Works: Using Evidence to Help Low-Income Individuals and Families Get Ahead, is the second in a series on “Moving America’s Families Forward;” the first hearing occurred in early February. While this hearing did not focus on benefit plans specifically, there was brief discussion about the “skewed” nature of current tax expenditures and whether they disproportionately benefit higher income workers.
In convening the hearing, Chairman Charles Boustany (R-LA) stated that “while we all want to know about whether [federal social] programs are working or not, what we actually know is quite limited,” noting that there is little data available to evaluate the effectiveness of many government programs. He emphasized the need to ensure that resources are being invested in effective programs.
The subcommittee heard testimony from the following witnesses:
- Joan Entmacher, vice president for Family Economic Security at the National Women’s Law Center, testified on the importance of safety net work and social programs, but stressed that budget cuts, sequestration and other program extensions make it difficult to properly evaluate programs’ effectiveness, but cited examples of certain programs that have proved effective and should be expanded, such as the Earned Income Tax Credit.
She suggested finding additional resources to invest in such programs by looking at the largest federal tax expenditures, stating that “the benefits of tax expenditures are distributed unevenly across the income scale.” Tax expenditures constitute foregone revenue the government estimates it does not collect. The tax incentives for retirement savings – which the Council has argued provide a strong and effective incentive for individuals across all income levels to save for a secure retirement – have recently been cited by reports from the White House’s Office of Management and Budget (OMB) and the Joint Committee on Taxation (JCT) as the second largest projected federal “tax expenditure” over the next five years, with the exclusion of employer contributions for employee health care as the largest (see the August 7, 2014, Benefits Byte).
The Council has consistently advocated that such estimates (1) undervalue the tax revenue realized from retirement assets when benefits are paid and (2) ignore the reduced government spending attributable to lesser reliance on government retirement systems and other social safety net programs (see the December 1, 2014, Benefits Byte).
- John Bridgeland, senior advisor to Results for America (a non-profit organization seeking to use evidence and data to create policy to improve quality and results), noted the lack of program evaluations and gave recommendations to build evidence for what works, use evidence to invest in what works, and redirect funding away from what does not. He also commended the Social Impact Partnership Act (H.R. 1336) introduced by representatives Todd Young (R-IN) and John Delaney (D-MD) to encourage and support partnerships between the public and private sectors “to improve our nation’s social programs,” as well as the proposed Evidence-Based Policy Commission Act, introduced by Rep. Paul Ryan (R-WI) and Senator Patty Murray (D-WA) in the last Congress.
- David Muhlhausen, research fellow at the Heritage Foundation, testified that “the effectiveness of federal programs is often unknown,” and demonstrated how many programs operate without evaluations for decades. He reviewed recent program evaluations and concluded that with the exception of some “welfare-to-work” programs, many federal social programs are found to be consistently ineffective.
- Grover Whitehurst, director of the Brown Center on Education Policy at The Brookings Institution, also testified on the need for evidence and research in guiding policy. He suggested that Congress focus on creating incentives for incorporating findings from the best research into programs, allowing for more flexibility between states, rather than direct how states and local government should use findings from research.
The Council’s latest public policy strategic plan, A 2020 Vision, provided several recommendations that would satisfy many of the objectives discussed in the hearing and would be particularly helpful for lower-income individuals, including:
- Excluding current retirement plan assets and future retirement plan benefits from eligibility calculations for state or federal housing and food subsidies. Effective retirement saving can facilitate income mobility and improve overall health and financial well-being. Individuals and their families should not be penalized for preparing for retirement. Accounting of income eligibility for subsidized food or housing should exclude retirement assets.
- Establish financial education as a secondary school graduation requirement. Curricula should include saving, investment and income management principles, as well as concepts such as “longevity risk” (the financial implications of longer lifespans) and the value of ensuring adequate income throughout one’s life. This requirement could particularly benefit children and families with low income, who may have had no prior financial education.
- Expand and improve the Saver’s Credit. Encourage savings by younger employees by increasing the Saver’s Credit by 50 percent for workers under age 35, creating a targeted incentive for primarily young, low- and moderate-income workers to contribute at a time when they can maximize the tax deferral and thereby significantly increase their ultimate retirement savings. The Saver’s Credit could also be directly deposited into an existing retirement account to enhance the retirement security of eligible temporary, part-time or seasonal workers and low- and moderate-income individuals.
IRS Issues New Guidance on FATCA; Senate Committee Examines International Taxation
The Internal Revenue Service (IRS) has updated its instructions for Form 8938, the official form used by individual U.S. taxpayers to report ownership of foreign deferred compensation over certain threshold amounts under the Foreign Account Tax Compliance Act (FATCA). These revised instructions clarify the reporting rules and provide relief for failure to report certain foreign retirement plans and accounts for 2014 and earlier years.
FATCA was enacted in 2010 as part of comprehensive efforts by the U.S. government to crack down on concealed financial accounts owned by individual U.S. taxpayers outside the United States. Under FATCA, Foreign Financial Institutions (FFIs) are subject to U.S. reporting requirements and are subject to the imposition of a 30 percent tax withholding on most types of investment income for failure to comply. In January 2013, the IRS published final regulations relating to information reporting by FFIs and withholding on certain payments to FFIs and other foreign entities under FATCA. The principal issue for non-U.S. retirement plans has been that the definition of FFI includes “any non-U.S. entity that holds financial assets for the account of others as a substantial portion of its business” – a definition the United States interprets to include retirement plans.
A summary of the new Form 8938 instructions is now available on the Council website (provided courtesy of Groom Law Group).
In related news, the Senate Finance Committee continued its series of hearings on tax reform with a March 17 session on Building a Competitive U.S. International Tax System.
In his opening statement, Committee Chairman Orrin Hatch (R-UT) said that reforming the international tax system is “a critical step” in comprehensive tax reform. He added that the U.S. needs to lower its corporate tax rate and “should also shift significantly in the direction of a territorial tax system.”
The committee’s ranking Democrat, Senator Ron Wyden (D-OR), said in his opening statement that “The dealmakers will always get around piecemeal policy changes. Nothing short of comprehensive tax reform will end the cycle.” He joined Hatch in calling for a reduction in the U.S. corporate tax rate.
Witnesses at the hearing discussed international taxation trends in other countries, the advantages of a “territorial” system versus a “worldwide” system and the institution of a minimum tax on foreign income.
During the question-and-answer period, lawmakers also debated the merits of comprehensive tax reform as opposed to piecemeal reform, with Wyden urging a comprehensive approach and Senator Tom Carper (D-DE) suggesting that Congress should do what they can now, in case comprehensive reform becomes bogged down.
This latest hearing is the fifth in the Senate Finance Committee’s series of hearings on tax reform. The committee’s previous hearings have discussed:
- The process leading to the Tax Reform Act of 1986.
- Ways to promote growth in wages, jobs and the economy.
- Fairness in the tax code.
- Simplification in tax reform.