July 22, 2015
- Council Files Comments with U.S. Department of Labor on Fiduciary Definition Proposal
- Senate Finance Committee Approves Tax “Extenders” Legislation
- IRS Revises Determination Letter Program for Individually Designed Qualified Plans
Council Files Comments with U.S. Department of Labor on Fiduciary Definition Proposal
The Council submitted comments on July 21 to the U.S. Department of Labor (DOL) on the proposed regulations redefining the term “fiduciary.” In the comments, the Council identified a number of issues of concern to plan sponsors and participants that are raised by the proposal, as well as potential issues that could arise. Our comment letter also provided several recommendations to ensure certainty and reduce liability for employers.
As we have previously reported, the DOL 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 is done by the existing rules. (See the April 14 Benefits Byte for a brief summary of the proposal.)
The rule was first proposed by DOL in October 2010 (see the October 21, 2010, Benefits Byte) but later withdrawn due to concerns raised by the business and financial communities, as well as lawmakers from both parties. The Council identified several key areas of concern for plan sponsors at that time in February 3, 2011, written comments.
The new proposed rule broadly updates the definition of fiduciary investment advice by extending fiduciary status in a wider array of advice relationships than existing rules and covers the following categories of advice: investment recommendations, investment management recommendations, appraisals of investments and recommendations of persons to provide advice for a fee or to manage plan assets.
The Council letter expresses concern that “the proposed new rules, as written, are at odds with the direction that employers are moving and the pressing needs of participants in terms of facilitating employee engagement.” The letter notes that the combination of the breadth of the redefinition of fiduciary advice and limited nature of the exemptions will force employers to significantly pull back tools that provide important benefits to plan participants and that the rules will make many plan operations more difficult and more expensive because they add uncertainty, cost and potential liability for employers at a time when plan sponsors are trying to efficiently use both internal and outside resources to enhance education and encourage more effective consumerism.
The letter urges DOL to ensure that employers, a critical source of innovation, have the flexibility needed to work with participants and service providers to continue meeting the changing needs of the workforce in the most cost-efficient manner. The letter points out that without a clear and workable definition of fiduciary investment advice and set of associated exemptions that are able to achieve the best combination of costs, benefits and risks, “the redefinition could hurt the very people it is intended to protect.”
The letter outlines issues raised by the proposed rules and provides recommendations for the following areas:
- Investment advice and education
- Rollovers and distributions
- Higher costs and risks regarding routine agreements
- Higher costs and risks regarding plan valuations
- Loss of general assistance from financial professionals
- Plans maintained by financial institutions and web-based advice
- Health and welfare plans
- Effective date and transition rules
- Other potential issues
The Council submitted a separate letter on July 10 regarding the proposed regulation’s potential impact on health and welfare plans and asked DOL for formal confirmation that the rules are not intended to apply in the health and welfare arena. The Council’s July 21 letter reasserts that point and urges DOL to exempt health and welfare plans, as well as Health Savings Accounts, from the proposed rule.
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.
For more information on DOL’s fiduciary definition project, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
Senate Finance Committee Approves Tax “Extenders” Legislation
The U.S. Senate Finance Committee approved legislation in a 23-3 vote on July 21 to extend a number of expiring tax breaks, including two provisions that affect employee benefits.
The tax provisions affecting individuals and employers were given a short-term extension in December 2014 with the passage of The Tax Increase Prevention Act. The current legislation would provide for a two-year extension of the provisions.
Expiring tax provisions that affect employee benefits include:
- Mass transit benefit parity: The American Taxpayer Relief Act of 2012 (H.R. 8) provided for an increase in the pre-tax allowance for mass transit expenses, making it equal to the benefit provided for parking ($245 per month). The legislation would extend this parity treatment through the end of 2016.
- Distributions from Individual Retirement Plans for Charitable Purposes: The expiring provision allows taxpayers age 70 ½ and older to make a tax-free distribution from an IRA of up to $100,000 to a 501(c)(3) organization and simultaneously satisfy the minimum required distribution rules. The legislation would extend the provision through the end of 2016.
For more information, contact Diann Howland, vice president, legislative affairs, at (202) 289-6700.
IRS Revises Determination Letter Program for Individually Designed Qualified Plans
On July 21, The Internal Revenue Service (IRS) released Announcement 2015-19, significantly paring back the Employee Plans Determination Letter Program for individually designed defined contribution and defined benefit qualified retirement plans. Effective January 1, 2017, the IRS will eliminate the staggered five-year remedial amendment cycles for these plans because of limited agency resources.
The program will instead focus on submissions of initial plan qualification and qualification upon plan termination. For certain individually designed plans participating in remedial amendments on the current five-year cycle, a transition rule indicates the extension of this period may be moved but will end no later than December 31, 2017. Lastly, the IRS requests comments on specific issues related to the outlined changes that will be due by October 1, 2015.
Of particular note, Announcement 2015-19 states that, with its release, the IRS will no longer accept “off-cycle” determination letter applications except for new plans as defined in Section 14.02(2) of Revenue Procedure 2007-44 and for terminating plans. An “off-cycle” submission of an amendment would be one occurring at any time other than during the 12-month period ending on January 31 of the last year of the plan’s remedial amendment cycle. This loss of flexibility for sponsors to address remedial plan amendments and the resulting increased risk to plan qualification may be addressed in the future by the IRS “providing model amendments, not requiring certain plan provisions or amendments to be adopted if, and for so long as, they are not relevant to a particular plan…or expanding plan sponsors’ options to document qualification requirements through incorporation by reference.”
Other limited circumstances in which the IRS would accept “off-cycle” plan determination letters may be determined going forward. Announcement 2015-19 requests comments on four related issues: (1) other changes that could be made to the remedial amendment period for individually designed plans; (2) additional considerations related to the current interim amendment requirement; (3) suggestions for guidance to plan sponsors converting individually designed plans to pre-approved plans; and (4) suggestions of modifications to other IRS programs in order to facilitate the changes outlined in 2015-19.
This change will shift more burden to sponsors in ensuring plan qualification, particularly when there are plan amendments and it increases compliance challenges for companies. A number of plan sponsors have raised concerns about mergers and acquisitions as well.