May 1, 2015
- Council Encourages IRS to Issue Guidance on Substantiation of Hardship Distributions, Loans
- SEC Proposes Rule Requiring New Pay-For-Performance Disclosure
Council Encourages IRS to Issue Guidance on Substantiation of Hardship Distributions, Loans
The Council asked the Internal Revenue Service (IRS) to press forward with guidance on hardship distributions and loans from retirement plans in a comment letter (submitted jointly with the SPARK Institute) on May 1.
The Council’s comments respond to IRS Notice 2015-27, which request public comment on recommendations for items that should be included on the 2015- 2016 Priority Guidance Plan, and addresses a matter raised by the IRS Employee Plans News (EPN) Issue 2015-4 as issued on April 1.
In EPN 2015-4 the IRS explicitly stated that even if a plan sponsor uses a Third Party Administrator (TPA), they must obtain and keep hardship distribution records, saying it is not sufficient for plan participants to keep their own records of hardship distributions and that electronic self-certification is also not sufficient documentation of hardship.
The IRS newsletter also states that plan sponsors should retain records in either paper or electronic format for each plan loan granted to a participant, including documentation verifying that the loan proceeds were used to purchase or construct a primary residence, if applicable. This language has raised concerns that plan sponsors would be required to establish an after-the-fact process to determine if the funds were used to purchase or construct a primary residence.
As the Council’s letter notes, the position articulated in the newsletter is “inconsistent with other information provided by the Service, including statements on the Service’s website and in public forums, with respect to certifying and substantiating hardship distributions.” We are also concerned that this new position was communicated in a newsletter that cannot be relied upon as authoritative by plans and their service providers.
The most recent IRS Priority Guidance Plan includes an entry under Employee Benefits for “guidance regarding substantiation of hardship distributions” (Page 6, No. 8). The Council’s letter asserts that “the need for formal guidance has become more important, not less,” in light of the newsletter.
The letter also:
- Sets forth a number of other suggested methods for documenting “hardship.”
- Suggests the substantiation of primary residence loans be included on the Priority Guidance Plan for 2015-2016.
- Recommends that IRS clarify that electronic loan processing, if consistent with applicable law, is acceptable.
- Asks IRS to clarify its position regarding the maintenance of records of hardship and loan substantiation independent of the plan’s record keeper or third party administrator.
“The substantiation of hardship distributions and the documentation requirements for principal residence loans are critical components to properly administering plans for tens of millions of participants, and as a result, we respectfully request that they be included in the 2015-2016 Priority Guidance Plan,” the letter concludes.
For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
SEC Proposes Rule Requiring New Pay-For-Performance Disclosure
On April 29, the Securities and Exchange Commission (SEC) voted to approve a proposed rule that would require public companies to disclose the relationship between “executive compensation actually paid” and the financial performance of the company for select employees. The proposed rules would implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 and reflect continued efforts to tie executive compensation more closely to actual financial performance of the company.
The proposed rule defines “executive compensation actually paid” as the “total compensation as reported in the Summary Compensation Table, modified to adjust the amounts included for pension benefits and equity awards.” The Summary Compensation Table is a key element of the SEC's required annual disclosure on executive compensation.
The proposed rules would:
- Require companies to measure financial performance using Total Shareholder Return (TSR),a measure of the performance of different companies' stocks and shares over time, and TSR of a registrant peer group.
- Require companies to provide a pay-for-performance table including the “executive compensation actually paid,” total compensation as disclosed in the Summary Compensation Table, TSR and peer group TSR.
- Require the executive compensation disclosure to be presented separately for the principal executive officer and as an average for the remaining proxy-disclosed officers identified in the Summary Compensation Table.
- Require disclosure for the last five fiscal years and for the last three fiscal years for smaller reporting companies. Smaller reporting companies are also not required to provide disclosure of peer group TSR.
- Require companies to tag the disclosure in an interactive data format using eXtensible Business Reporting Language (XBRL). This requirement is phased in for smaller reporting companies.
The SEC proposes phasing in these changes over a three-year period, with companies required to disclose compensation and cumulative TSR performance for a three-year period and increasing the covered disclosure period over each of the next two fiscal years to four years and five years, respectively. The SEC also released a fact sheet on the proposed rule.
For more information, contact Lynn Dudley, senior vice president, global retirement & compensation policy, at (202) 289-6700.