The IRS has released a notice of proposed rulemaking that takes into account changes made by the TCJA related to rollover rules for qualified plan loan offset (QPLO) amounts.
In Announcement 2020-14, the IRS provides advance notice of fee increases for certain determination applications, effective January 4, 2021.
The SEC has announced a proposal to modify and modernize the disclosure framework of mutual funds and exchange-traded funds that is intended to better serve the needs of retail investors.
The IRS has released two Notices with more guidance for certain provisions under the CARES and SECURE Acts.
Rep. Sean Maloney (D-NY) has introduced H.R. 7645, legislation that would extend the time period for taxpayers to withdraw coronavirus-related distributions (CRDs) from retirement savings arrangements and receive the special tax benefits that CRDs provide. Certain withdrawals could be tax-free under the legislation.
CRDs, as defined in the Coronavirus Aid, Relief and Economic Security (CARES) Act, are eligible for the following tax benefits for withdrawn amounts up to $100,000 (currently, only for withdrawals in 2020).
- Three-year taxation on amounts withdrawn
- Exemption from the 10 percent excise tax for early (pre-59½) distributions
- The option to repay such withdrawn amounts within three years
Included in the bill is expected to be a provision that would make CRDs tax-free if the taxpayer qualifies as a first-time home buyer. “Expected,” because neither bill text nor a summary is available at this time. Details of legislative intent are being inferred from the bill’s description at the official congressional web site:
“To extend the time period for making coronavirus-related distributions from retirement plans and to provide an exclusion from gross income of coronavirus-related distributions which are first-time homebuyer distributions.”
H.R. 7645 has been referred to the House Ways and Means Committee.
Few aspects of retirement plan governance have been as controversial as regulating investment advice. Exactly what obligation—if any—does an investment professional have to provide impartial, conflict-free advice to savers and retirees? When do financial professionals step over the boundary that can make them a fiduciary, with the ethical and legal obligations that come with this duty?
The answers have been inconsistent, stretching over many years. Department of Labor (DOL) fiduciary investment advice regulations date back to the 1970s. Those regulations needed revision in order to better align with today’s investment products and participant-directed retirement plans. Changes were proposed in 2010, withdrawn in response to public comments, revised again in 2015, and made final in 2016.
The DOL delayed implementing the 2016 final investment fiduciary regulations and accompanying guidance. These regulations were ultimately struck down in 2018 as “regulatory overreach” by the United States Court of Appeals for the Fifth Circuit.
The DOL later issued Field Assistance Bulletin (FAB) 2018-02, which states that the DOL will not pursue prohibited transaction claims against fiduciaries who make good-faith efforts to comply with the Impartial Conduct Standards (discussed later). FAB 2018-02 remains in effect.
The DOL has again issued investment advice guidance, this time to replace the guidance struck down by the appellate court. This latest guidance package includes a proposed prohibited transaction class exemption entitled Improving Investment Advice for Workers and Retirees, and a technical amendment to DOL Regulations (Regs.) 2509 and 2510 that implements the appellate court’s order by
- reinstating the original version of DOL. Reg. 2510.3-21 (including the five-part test);
- removing prohibited transaction exemptions (PTEs) 2016-01 (the Best Interest Contract Exemption) and 2016-02 (the Class Exemption for Principal Transactions);
- returning PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128 to their original form; and
- reinstating Interpretive Bulletin (IB) 96-1, which is intended to help investment providers, financial institutions, and retirement investors determine the difference between investment education and investment advice. Investment providers and financial institutions may rely on the safe harbors in IB-96-1 in order to avoid providing information that could be construed as investment advice.
The technical amendment became effective on July 7, 2020.
What is the five-part test?
The original version of DOL Reg. 2510.3-21 (which the technical amendment reinstates) contains a five-part test that is used to determine fiduciary status for investment advice purposes. Under the test, an investment provider or a financial institution that receives a fee or other compensation is considered a fiduciary if it meets all of the following standards (i.e., prongs) of the test.
- The provider or institution gives advice on investing in, purchasing, or selling securities, or other property.
- The provider or institution gives investment advice to the retirement investor on a regular basis.
- Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan or its fiduciaries.
- The retirement investor uses the advice as a primary basis for investment decisions.
- The provider or institution provides individualized advice, taking into account the plan’s demographics, needs, goals, etc.
Has the DOL’s opinion changed on rollover recommendations?
In the preamble of the proposed PTE, the DOL clarified that it no longer agrees with the guidance originally provided in Advisory Opinion 2005-23A (better known as the Deseret Letter). In the Deseret Letter, the DOL indicated that a recommendation to distribute and roll over retirement plan assets would not generally constitute investment advice because it would not meet the first prong of the five-part test. But because it is common for the investments, fees, and services to change when the decision to roll over assets is made, the DOL now believes that a recommendation to distribute assets from an IRA or an ERISA-covered plan would be considered investment advice with respect to the first prong of the five-part test.
The DOL acknowledges that advice encouraging an individual to roll over retirement plan assets may be an isolated and independent transaction that would fail to meet the second “regular basis” prong. But determining whether advice to roll over assets meets the “regular basis” prong depends on the facts and circumstances. So the DOL could view a rollover recommendation that begins an ongoing advisory relationship as meeting the “regular basis” prong.
As discussed above, the proposed PTE would allow investment professionals to receive compensation for advising a retirement investor to take a distribution from a retirement plan or to roll over the assets to an IRA. The investment professional could also receive compensation for providing advice on other similar transactions, such as conducting rollovers between different retirement plans, between different IRAs, or between different types of accounts (e.g., from a commission-based account to a fee-based account).
Under the proposed PTE, financial institutions would need to document why the rollover advice was in the retirement investor’s best interest. Documentation would need to
- explain whether there were other alternatives available (e.g., to leave the assets in the plan or IRA and select different investment options);
- describe any applicable fees and expenses;
- indicate whether the employer paid for some or all of the plan’s administrative expenses; and
- show the different levels of services and investments available.
In addition, investment providers or financial institutions that recommend rolling over assets from another IRA or changing account types should consider and document the services that would be provided under the new arrangement.
Who is covered under the proposed PTE?
The proposed PTE would apply to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions), and their employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors. The proposed PTE would also apply to any affiliates or related entitites.
“Retirement investors” include
- IRA and plan fiduciaries (regardless of plan size),
- IRA owners or beneficiaries, and
- plan participants or beneficiaries with authority to direct their accounts or take distributions.
The proposed PTE defines a “plan” as including 401(a) plans (e.g., 401(k) plans), 403(a) plans, 403(b) plans, defined benefit plans, owner-only plans, simplified employee pension (SEP) plans, and savings incentive match plan for employees of small employers (SIMPLE) plans. The proposed PTE would also apply to employee welfare benefit plans that have established a trust (e.g., VEBAs).
The proposed PTE, defines an “IRA” as an individual retirement account, an individual retirement annuity, a health savings account (HSA), an Archer medical savings account (MSA), and a Coverdell education savings account (ESA).
What protection does the proposed PTE offer?
The Internal Revenue Code and ERISA generally prohibit fiduciaries from receiving compensation from third parties and compensation that varies based on investment advice provided to retirement plans and IRAs. Fiduciaries are also prohibited from selling or purchasing their own products to retirement plans and IRAs (known as principal transactions).
Under the proposed PTE, financial institutions and investment professionals providing fiduciary investment advice could receive payments (e.g., commissions, 12b-1 fees, and revenue sharing payments) that would otherwise violate the prohibited transaction rules mentioned above. For example, the exemption would provide relief from prohibited transactions that could occur if a financial institution or investment professional
- advises a client to take a distribution or roll over assets to an IRA or retirement plan;
- provides recommendations to acquire, hold, dispose of, or exchange securities or other investments; or
- recommends using a particular investment manager or investment advice provider.
In addition, the proposed PTE would cover riskless principal transactions (e.g., when a broker-dealer purchases a security for their own account knowing that it will be sold to a retirement investor at a certain price) as well as principal transactions involving certain specific types of investments (e.g., municipal bonds).
The following transactions would not be covered by the PTE.
- Transactions where advice is provided solely through a computer model without any personal interaction (i.e., robo-advice arrangements).
- Transactions in which the investment professional is acting in a fiduciary capacity other than as an investment advice fiduciary under the five-part test, as described below (e.g., a 3(38) investment manager with authority to make discretionary investment decisions).
- Transactions involving investment providers, financial institutions, and their affiliates if they are the employer of employees covered by the plan; or are a named fiduciary, plan administrator, or affiliate who was chosen to provide advice by a fiduciary who is not independent of the investment professional, financial institution, or their affiliates.
Certain individuals and institutions (and all members within the institution’s controlled group) would be ineligible to rely on the exemption—including those who have been convicted of a crime associated with providing investment advice to a retirement investor, or those who have a history of failing to comply with the exemption. The period of ineligibility would generally be 10 years, but a financial institution with a conviction may petition the DOL for continued reliance on the exemption.
What does the proposed PTE require?
To take advantage of the relief provided under the proposed PTE, investment professionals and financial institutions must provide advice in accordance with the Impartial Conduct Standards. The Impartial Conduct Standards contain three components—a reasonable compensation standard, a best interest standard, and a requirement that prohibits investment providers or financial institutions from giving misleading statements about investment transactions or other related matters. The Impartial Conduct Standards also requires financial professionals and financial institutions to provide the best execution possible when completing security transactions (e.g., completing the transaction timely).
Under the best interest standard, investment professionals and financial institutions are not required to identify the best investment for the retirement investor, but any investment advice given must put the retirement investor’s interests ahead of the interests of the investment professional, financial institution, or their affiliates. This is consistent with the SEC’s Regulation Best Interest.
Investment providers and financial institutions cannot waive or disclaim compliance with any of the proposed PTE’s conditions. Likewise, retirement investors cannot agree to waive any of the conditions. In addition, the proposed PTE would require a financial institution to
- provide the retirement investor—before the transaction takes place—with an acknowledgment of the institution’s fiduciary status in writing, and a written description of the service to be provided and any material conflicts of interest;
- adopt and enforce policies and procedures designed to discourage incentives that are not in the retirement investor’s best interests and to ensure compliance with the Impartial Conduct Standards;
- maintain records that prove compliance with the PTE for six years; and
- conduct a review at least annually to determine whether the institution complied with the Impartial Conduct Standards and the policies and procedures created to ensure compliance with the exemption. Although an independent party does not need to conduct the review, the financial institution’s chief executive officer (or the most senior executive) must certify the review.
Note that the proposed PTE would not give retirement investors new legal claims (e.g., through contract or warranty provisions) but rather would affect the DOL’s enforcement approach.
Many investment advisers, broker-dealers, banks, and insurance companies that will be affected by the proposed PTE currently operate under similar standards found in various state laws and in the SEC’s Regulation Best Interest. The DOL’s temporary enforcement policy discussed in FAB 2018-02 also remains in effect, as do other more narrowly tailored PTEs.
Each type of investment provider and financial institution is likely affected differently, whether in steps to comply or costs involved. Financial institutions and investment providers may want to review the proposed PTE and start taking steps to comply with it. This may involve creating and maintaining any policies and procedures they don’t already have in place as a result of state law or the Regulation Best Interest.
In the meantime, a 30-day comment period for the proposed PTE starts on July 7, 2020. Comments may be submitted at www.regulations.gov. The Docket ID number is EBSA-2020-0003.
Visit FuturePlan.com for future updates.
The IRS has issued Notice 2020-52, guidance that provides sponsors of 401(k) and 403(b) safe harbor plans limited relief from certain otherwise-applicable requirements for mid-year suspension or reduction of safe harbor matching or nonelective contributions.
Notice 2020-52’s temporary relief is being granted as a consequence of the widespread economic challenges facing employers as a result of the coronavirus (COVID-19) pandemic.
Requirement for Mid-Year Suspension of Safe Harbor Contributions
In order to suspend safe harbor matching or nonelective contributions mid-year, a sponsoring employer generally must meet one of the following requirements.
- The employer must be operating at an economic loss.
- The employer must have given employees timely notice prior to the start of the plan year that the plan might be amended to suspend safe harbor contributions during the coming plan year, and that such suspension would not apply until 30 days after a mid-year supplemental notice is given.
Temporary Relief for Mid-Year Reduction or Suspension of Safe Harbor Contributions
Employers that adopt or have adopted between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce 401(k) or 403(b) safe harbor matching or nonelective contributions, will not be considered to have violated the economic loss or pre-plan year notice requirements described above.
Temporary Relief for Nonelective Contribution Supplemental Notice
Notice 2020-52 also provides temporary relief for employers that amended or amend their plans for a mid-year reduction or suspension of nonelective contributions, without providing a supplemental notice to employees at least 30 days before the reduction or suspension. This notice requirement will be treated as having been met if the notice is provided to employees by August 31, 2020. This relief is not being extended for a reduction or suspension of safe harbor matching contributions.
Clarification on Reduction or Suspension of Contributions for HCEs
Notice 2020-52 also provides further clarity on mid-year amendments to reduce certain contributions to highly compensated employees (HCEs).
In general, a reduction or suspension of safe harbor contributions only for HCEs is not treated as an impermissible reduction, since contributions on behalf of HCEs are not included in the definition of safe harbor contributions. However, Notice 2020-52 clarifies that a notice to HCEs of the reduction or suspension is still required, and a new deferral election opportunity must be given.
Notice 2020-52’s relief provides a degree of assurance that employers will not be violating safe harbor plan rules that pertain to reductions, suspensions, and notices, if they satisfy its conditions. But the guidance does not provide relief from ADP/ACP nondiscrimination testing for the plan year in which such reductions or suspensions have taken place.
On Tuesday, the United States Senate passed by unanimous consent a bill to extend from June 30, 2020, to August 8, 2020, the deadline for businesses to apply for a Paycheck Protection Program (PPP) loan administered by the federal Small Business Administration.
PPP loans were created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, targeted to businesses with no more than 500 employees. The purpose of the program is to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. More than $130 billion of the $669 billion appropriated for the program had not been applied for as the June 30th deadline approached.
If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60% of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group health care coverage, including payment of insurance premiums.
As this is reported, the House of Representatives had yet to approve the bill, which is required—in addition to signing by President Trump—for the application deadline to be extended.
The retirement industry eagerly received the IRS guidance on applying provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act with the issuance of Notice 2020-50 on June 19. It has provided important details on compliance with this legislation—which offers financial and tax relief to millions of Americans affected by the coronavirus (COVID-19) pandemic.
The CARES Act was signed into law on March, 27, 2020, as the largest emergency relief package in U.S. history. It offers a variety of potential benefits to those who participate in tax-favored retirement savings arrangements. The legislation not only grants special access to the tax-favored accounts of many who may need it, but also provides a pathway to later repayment. For amounts up to $100,000, there is an exemption from the 10 percent penalty tax for early distributions from a retirement plan, three-year ratable taxation of amounts distributed, and a three-year repayment option for those who qualify.
Although there has been comparable legislation for past disaster events—notably, Hurricane Katrina in 2005—still there has been some uncertainty as to how closely CARES Act procedures might ultimately mirror it. Notice 2020-50 now provides greater clarity and is to be followed in applying CARES Act provisions.
Following are some of the more significant highlights of Notice 2020-50.
Qualified Individual Definition Expanded
Notice 2020-50 broadened the definition of who is eligible for a coronavirus-related distribution (CRD)—and therefore eligible for CARES Act tax benefits.
Initial guidance defined a “qualified individual” as
- an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
- an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.
Notice 2020-50 adds new circumstances to the definition of “qualified individual.”
- An individual who has experienced a reduction in pay (or self-employment income) due to COVID-19, or has had a job offer rescinded or a start date for a job delayed due to COVID-19.
- An individual whose spouse or a member of the person’s household has
- been quarantined, furloughed or laid off, or had work hours reduced due to COVID-19;
- been unable to work because of a lack of childcare due to COVID-19,
- had a reduction in pay (or self-employment income) due to COVID-19; or
- had a job offer rescinded or a start date for a job delayed due to COVID-19.
- An individual whose spouse or a member of the person’s household has experienced the closing or a reduction of hours of their business due to COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.
A CRD was defined in the statute as an amount distributed from a retirement account on or after January 1, 2020, and before December 31, 2020. Notice 2020-50 affirmed that a distribution taken on December 31, 2020, would not be a CRD.
Who Can and Cannot Recontribute CRDs
A CRD can be taxed ratably over three years, and generally can be recontributed to an eligible retirement plan within three years. However, Notice 2020-50 makes clear that while beneficiaries of retirement plans and IRAs may be taxed in this manner, only spouse beneficiaries may make recontributions.
Employer May Choose Whether to Allow CRDs, Other CARES Act Options
Employers can choose to allow participants in their retirement plans (other than pension plans) to take CRDs even without otherwise having a distributable event, if they are qualified individuals, up to $100,000 of their vested balance.
Notice 2020-50 makes clear that employers are not required to offer CRDs to participants. If they do, they are not required to implement all elements of CARES Act relief, such as enhanced retirement plan loan amount or available loan suspension options.
Reliance on Employee Certification
Employers that offer retirement plan CRDs are allowed to rely on an employee-participant’s certification that he is a qualified individual, unless the employer has actual knowledge to the contrary. Notice 2020-50 states that an employer is under no obligation to “inquire into whether an individual has satisfied the conditions” of eligibility.
Sample Employee Certification Provided
Notice 2020-50 includes a sample of what the IRS considers “an acceptable certification.”
If an employer has adopted provisions allowing CRDs, they will be reported on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. Notice 2020-50 states that for CRDs made to participants (other than beneficiaries) who are otherwise subject to the 10 percent early distribution penalty tax, Code 2, Early distribution, exception applies, may be used. Alternatively, Code 1, Early distribution, no known exception, may be used. (A qualified individual can claim exemption from the 10 percent penalty tax on his individual income tax return if he qualifies for a CRD, regardless of how Form 1099-R is coded.)
Reliance on Employee Certification for Recontributions
Employers that allow recontributions of CRDs are allowed to rely on an employee-participant’s certification that she is a qualified individual, unless the employer has actual knowledge to the contrary.
A qualified individual will report CRDs as distributions and as repayments—if made—on new Form 8915E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. This is a form in the same series used for certain prior disaster events, such as Hurricane Katrina. A taxpayer can claim CRD status even if distributions were received from a retirement plan whose sponsoring employer did not elect to add CRDs as a distributable event.
Examples of Tax Treatment
Notice 2020-50 provides several examples of tax impacts when both CRDs and repayments occur. These include amending a prior year’s tax return to account for recontributions made later in the three-year ratable taxation period, and choosing to carry forward or carry back—to future or prior years—the tax impact of a repayment that is made during the three-year ratable taxation period.
No Modification of Substantially Equal Periodic Payments
A CRD received by an eligible individual is not to be considered a modification of a series of substantially equal periodic payments as an exemption from the 10 percent early distribution penalty tax.
Deadline to Take Plan Loan Confirmed
Notice 2020-50 confirmed that the final day to take a CARES Act retirement plan loan, including the enhanced loan amount, is September 22, not September 23.
Plan Loan Suspension Safe Harbor
Notice 2020-50 provides a safe harbor for loan repayment when a loan payment suspension is permitted by the employer under CARES Act provisions. Among its conditions: loan payments must resume at the end of the suspension period; the loan’s term may be extended up to one year from the date originally required to be repaid; interest accrued during the suspension period must be added to the remaining loan principal amount; and the loan must be reamortized and repaid in substantially level amounts over the remaining period of the loan.
Notice 2020-50 recognizes that there may be other reasonable interpretations of the CARES Act loan provisions in addition to the Notice’s safe harbor.
Participant Certification as Eligible Individual
Employers that adopt the CARES Act enhanced loan provisions are allowed to rely on an employee-participant’s certification that he is an qualified individual, unless the plan administrator has actual knowledge to the contrary.
The IRS has issued Notice 2020-51, providing additional guidance on the 2020 suspension of RMDs that generally must be taken annually by IRA owners, retirement plan participants, and beneficiaries.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, signed into law by President Trump on March 27, 2020, suspended for the 2020 tax year the general requirement that annual distributions must be taken from tax-favored retirement plans and IRAs when an account owner reaches RMD age, or annually by some account beneficiaries. The timing was problematic for some, who—before the CARES Act enactment—had already in 2020 taken distributions they believed to be required, but under the waiver are not.
Among the details provided in Notice 2020-51 are the following.
- Extends the normal 60-day rollover period to permit repayments through August 31, 2020, of waived 2020 RMD amounts
- Allows repayments without regard to the one-per-12-month rollover limitation
- Permits repayment by nonspouse beneficiaries of waived 2020 required distributions—these repayments will not violate the statutory prohibition on nonspouse indirect (60-day) rollovers
- Provides a sample plan amendment for defined contribution plans
- Includes a 12-item question-and-answer section related to the 2020 RMD waiver