American Benefits Council
Benefits Byte


June 18, 2015

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

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House Committee Hearing on DOL Fiduciary Definition Proposed Rule

The U.S. House of Representatives Education and the Workforce Subcommittee on Health, Employment, Labor and Pensions discussed the recent U.S. Department of Labor (DOL) fiduciary rule re-proposal in a June 17 hearing. Secretary of Labor Thomas Perez testified before the subcommittee, in addition to a separate panel representing members of the business community and consumer protection interests.

As we have previously reported, the DOL’s Employee Benefits Security Administration (EBSA) issued proposed regulations on April 14 that broadly update the definition of “investment advice” by extending fiduciary status to a wider array of advice relationships than the existing rules do. (See the April 14 Benefits Byte for a brief summary of the proposal.) This regulatory project is a continuation of a similar effort from 2010 that was ultimately withdrawn in response to scrutiny from outside groups, including the Council, as well as members of Congress.

In convening the hearing, Chairman Phil Roe (R-TN) expressed concerns that the fiduciary proposal will hurt Americans’ access to financial advice, stating “we cannot – in any way – make it harder for workers, retirees and small business owners to receive the financial advice they may need.” He urged the DOL to “withdraw this proposal and work with this committee on a responsible, bipartisan approach that will strengthen protections for investors and preserve robust access to financial advice.”

Ranking Democratic member Jared Polis (D-CO) stated the need for a standard to improve transparency in the financial industry and to prevent bad actors from taking advantage of individuals, but also noted that the majority of financial advisers act in their clients’ best interests and that the proposal should not impose a burden on them.

Perez expressed concerns in his testimony that Americans are facing a retirement crisis and that while a majority of advisers already act to serve their clients’ best interests, “others operate under no such commitment, and there’s nothing stopping them from getting backdoor payments at their client’s expense. The corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings.”

He also outlined the proposed rule and stated the three main principles DOL used in drafting it: “(1) it updates our regulation to protect retirement savings in the much-changed retirement landscape; (2) it allows flexibility so the industry can use its knowledge and expertise to find the best way to serve its clients and continue to innovate; and (3) it meaningfully responds to the input we received in the extensive outreach that we have conducted.”

During the question-and-answer of Perez’s testimony, several subcommittee members asked about the DOL’s collaboration with the Securities and Exchange Commission (SEC). Perez responded that the DOL had continuous and extensive dialogue with the SEC.

Polis asked about the exemptions for investment education and how the rule clarifies the different treatment of investment advice versus education. Perez responded that the rule has very broad parameters for investment education, including allowing for asset allocation information and trade-offs between risk tolerance and reward. He suggested that “technology” could also be a source of advice.  Perez also emphasized that employers are better positioned to give advice to participants because there is no fee involved. 

Representative Virginia Foxx (R-NC) asked about the requirement to sign a contract before having a conversation with a financial adviser and whether that would discourage new investors; Perez stated that this is a concern they continue to hear, and that is an issue that the Department is looking at.

Rep. Tim Walberg (R-MI) expressed concerns about an increase in the number of fiduciary lawsuits filed. Perez responded that while DOL recognizes that it is a concern, there is no evidence to date that fiduciary status leads to increased litigation risk.

In response to another question, the Secretary said that DOL has a “robust” docket of enforcement cases and that it would continue to pursue them. 

A separate panel of witnesses also testified before the subcommittee, including:

  • Jack Haley, executive vice president of Fidelity Investments, stated that while Fidelity supports a best interest fiduciary standard, they “fear the DOL’s proposed regulation will severely restrict our ability to continue providing this assistance to small businesses and workers in 401(k) plans.” He stated that the rule is “unworkable as drafted” and will effectively prohibit affordable financial advice, hurting low- to mid-income investors and small businesses most.
  • Dean Harman, managing director of Harman Wealth Management, also testified that the proposed rule was “unworkable, complex and costly.” He stated that the rule’s best interest contract exemption would force financial advisers to estimate investment costs for a ten-year period, which he stated is in direct conflict with SEC and Financial Industry Regulatory Authority (FINRA) rules. He also stated that the proposal would discourage people from saving by making access to advice more expensive.
  • Dennis Kelleher, president and chief executive officer of Better Markets, testified that the proposed rule closed loopholes that are “archaic and unjustifiable.” He stated that industry arguments against the rule are “not valid” and disagreed that the rule would deprive small businesses or investors of accessible investment advice or education. He also stated that there is no basis for the SEC to update the fiduciary standard under ERISA, as “only the DOL has that authority, and only the DOL can adopt a rule that protects all types of retirement assets, not just securities.”
  • Kent Mason, partner at Davis & Harman LLP, testified that the re-proposed rule is “far less workable than the 2010 proposal,” noting that small businesses will lose critically needed help in setting up retirement plans, small accounts will lose all access to professional investment advice and that the proposal would eliminate “any meaningful assistance for employees terminating employment regarding their distribution and rollover options.” He stated that bipartisan legislation establishing a best interest standard was the solution, with workable rules that maintain access to investment assistance for low- and middle-income individuals and small businesses.
  • Brian Reid, chief economist at Investment Company Institute, stated that if the proposed rule is enacted, “the result will be a regulatory hodgepodge” where individuals’ best interests are harmed rather than protected. He stated that the DOL’s Regulatory Impact Analysis is fundamentally flawed, as is the proposed rule. He suggested that a better approach would be to balance the need for enhanced investor protections with minimized market disruptions and preserved investor choice through a joint DOL and SEC effort.

During the question-and-answer portion of the second panel, Foxx noted that Perez often mentioned that it is a “structurally flawed system” but he did not clarify where the flaw in the system is, and she asked for the panelists thoughts on that subject.  Mason responded that there is not a structural flaw because many of the “horror stories” regarding bad actors are already illegal under current law. Harman responded that advisers are already highly regulated and that the current structure allows advisers the flexibility to help low as well as high net-worth clients.

Rep. Robert Scott (D-VA) asked if Haley felt confident that he could write a best interest standard rule without the administrative issues and burdens in the DOL proposed rule. Haley stated he could.

Rep. Rick Allen (R-GA) referenced the panelists’ concerns about the adverse effect of the rule on the brokerage model, and asked what portion of IRAs are held under the brokerage model. Mason replied that 98 percent of IRAs under $25,000 are held in broker accounts, demonstrating how the rule could hurt small investors.

DOL announced on June 16 that a series of public hearings on the proposal will be held August 10, 11 and 12 and possibly continuing on August 13. DOL also announced a modest second extension to the comment period deadline to July 21. The Council is already undertaking a thorough review of the proposal itself, as well as the prohibited transaction exemptions and the economic analysis being used to support the issuance of new rules. The Council requests members’ input.  The Council held a Benefits Briefing webinar to discuss the proposal on June 11; click here to request a recording.

In related news, the House Appropriations Committee released a draft fiscal year 2016 funding bill for the DOL and other federal agencies on June 16, significantly lowering the funding appropriated to the DOL. In the section titled “Reducing Harmful Red Tape,” the committee stated its intent to stimulate the U.S. economy by “reducing or eliminating overly burdensome government regulations,” including a provision “prohibiting regulatory changes to the definition of the term ‘Fiduciary.’”

The Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies held a markup of the draft on June 17 and approved it without changes, rejecting a number of amendments, including one to restore funding for the DOL fiduciary rule. The full committee is expected to consider the bill next week.

For more information on DOL’s fiduciary definition project, or to provide input for the Council’s comment letter, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.


Council Comments to Agencies Regarding “Embedded” Maximum Out-of-Pocket Rules under PPACA

The Council expressed serious concerns about recent guidance requiring “embedded” individual out-of-pocket maximums for insured large group and self-funded group health plans for 2016 policy and plan years in June 17 written comments to the U.S. Departments of Labor, Treasury and Health and Human Services.

The U.S. Department of Health and Human Services (HHS) released question-and-answer guidance on May 8, addressing certain issues stemming from the 2016 Notice of Benefit and Payment Parameters published on February 27 (see the May 8 Benefits Byte). The 2016 annual limitation on cost sharing under PPACA for self-only coverage is $6,850. For non-self-only coverage, the maximum out-of-pocket (MOOP) limit will be $13,700. The preamble to the 2016 notice stated that HHS was finalizing prior language stating that “the annual limitation on cost sharing for self-only coverage applies to all individuals regardless of whether the individual is covered by a self-only plan or is covered by a plan that is other than self-only.” The departments of Labor, Treasury and Health and Human Services issued Frequently Asked Questions (FAQs) about Affordable Care Act Implementation (Part XXVII), indicating that the new MOOP rule applies to all  non-grandfathered plans for plan or policy years in or after 2016.

The Council’s letter notes that the departments’ interpretation of MOOP limits is inconsistent with the plain language of the statute and congressional intent, and that the process used to impose the new requirement lacked prior and clear notice of the departments’ intent to apply the embedded MOOP interpretation to large group insured and self-funded plans. The letter underscores that the problematic timing of this requirement, as most large plan sponsors have already finalized their 2016 plan designs. The cost impact of an embedded MOOP requirement is particularly concerning, given that employers are facing the looming 40 percent tax on employee benefits effective 2018. 

The comments urge the departments to rescind the May 8 guidance and that further implementation of cost sharing limits should follow notice and comment rulemaking. The comments urge that as a first step, the departments issue immediate clarification that the May 8 guidance will not apply to 2016 plan or policy years.

For more information, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.


IRS Releases Draft 2015 Employer Reporting Forms

The Internal Revenue Service (IRS) released draft forms for 2015 employer reporting requirements regarding health care coverage and “minimum essential coverage” under Internal Revenue Code Sections 6055 and 6056, as added by the Patient Protection and Affordable Care Act (PPACA).

The forms will be used to fulfill the requirements specified in final regulations implementing the reporting of minimum essential coverage (MEC) under Code Section 6055 and the reporting of health insurance coverage under Code Section 6056.

The draft forms, released on June 16, include:

  • 2015 Draft IRS Form 1095-C: Employer-Provided Health Insurance Offer and Coverage: This form is used to fulfill the requirement under Code Section 6055 that every applicable large employer (generally, an employer that employed on average at least 50 full-time employees or equivalents) file a return with the IRS that reports the terms and conditions of the health care coverage provided to the employer's full-time employees during the year.

The draft 2015 1095-C form is generally unchanged from the 2014 Form 1095?C, except for the addition of a new field, “Plan Start Month,” which is optional for 2015, but will be required in 2016 and beyond. The draft also includes a continuation sheet that filers use if they need to report coverage for more than six individuals. The indicator codes in Part II, line 14, “Offer of Coverage” will remain unchanged in 2015 from those in 2014.  For 2016 and beyond, filers will need to include two additional codes, if applicable. These new indicator codes will indicate to the IRS and to full?time employees that the employer’s offer to the spouse is a conditional offer.

  • 2015 Draft IRS Form 1095-B: Health Coverage: This form is used to fulfill the requirement under Code Section 6056 that every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and other entities that provide minimum essential coverage to file annual returns reporting certain information for each individual for whom minimum essential coverage is provided and to provide a copy of the return to the individual.

As previously reported, the IRS recently revised the Questions and Answers on Reporting of Offers of Health Insurance Coverage by Employers (Section 6056), which provides guidance with respect to the reporting of health care coverage, and an entirely new guidance document, Questions and Answers about Employer Information Reporting on Form 1094-C and Form 1095-C, with more specific guidance on how to complete the required forms (see the May 20 Benefits Byte).

For more information on PPACA reporting issues, contact Katy Spangler, senior vice president, health policy, or Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.

PBGC Issues Rules for Multiemployer Pension Plan Partitions

The Pension Benefit Guaranty Corporation (PBGC) began its implementation of multiemployer pension reform on June 17 with the release of an Interim Final Rule clarifying the agency’s authority to “partition” certain multiemployer plans, under which a plan can apply to PBGC for financial assistance to fund a portion of their benefit liabilities in order to remain solvent.

Many multiemployer plans struggled with underfunding prior to the enactment of the Multiemployer Pension Reform Act of 2014 (MPRA). MPRA was enacted as a part of the Consolidated and Further Continuing Appropriations Act (see the December 15, 2014, Benefits Byte). Before enactment of these reforms, PBGC’s partition authority was limited to situations involving bankruptcy by some of a plan’s contributing employers. Partitions required benefits to be reduced to PBGC guarantee levels. A recent Benefits Blueprint summary, prepared for the Council by Venable LLP, outlines many of the key provisions of MPRA.

Under the new rule, plans that are projected to run out of money within 20 years may be able to ask PBGC to approve a partition. Using the new authority, PBGC can relieve plans of some of their financial obligations so they can preserve benefits for participants at levels above the PBGC-guaranteed amounts and continue to pay retirement benefits over the long term. 

Congressional lawmakers have already begun to discuss the “next phase” of multiemployer plan reform which could include additional premium increases for the multiemployer system. The Council will continue to monitor these discussions.  In addition, the Council is continuing its advocacy for no additional premium increases for the single employer system. For more information, contact Diann Howland, vice president, legislative affairs or Lynn Dudley, senior vice president, global retirement and compensation policy, at (202) 289-6700.

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.

Notice: the information contained herein is general in nature. It is not, and should not be construed as, accounting, consulting, legal or tax advice or opinion provided by the American Benefits Council or any of its employees. As required by the IRS, we inform you that any information contained herein was not intended or written to be used or referred to, and cannot be used or referred to (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party any transaction or matter addressed herein (and any attachment).