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In this current outlook we discuss (1) reports that House Republicans are considering “Rothification” of 401(k) contributions over $2,400, (2) the possibility of a solution to regulatory obstacles to Open MEPs based on President Trump’s Healthcare Executive Order, (3) legislation approved by the House Financial Services Committee repealing the Department of Labor’s fiduciary rule, (4) the ERISA Industry Committee’s suit against the state of Oregon claiming that Oregon’s state retirement program is in some respects preempted by ERISA and (5) President Trump’s naming of a new head of the Department of Labor Employee Benefit Security Administration.
There are widespread reports that, as part of its tax reform effort, the Republican leadership (at least in the House) is considering a requirement that salary deferrals into a 401(k) plan in excess of $2,400 will be deemed as “Roth” contributions (i.e., on a post-tax basis). We discuss the implications of Rothification for retirement plans, plan participants, plan sponsors and the capital markets in our article Roth only?
There has been immediate pushback from the financial services community, which is likely to be hardest hit by the proposal, under which part of the money that would otherwise contributed to a 401(k) plan and invested would instead be immediately withheld and transferred to the U.S. Treasury. Sponsors have also expressed concern about participant dissatisfaction with the elimination of the ability to make pre-tax 401(k) contributions.
Democrats are pushing back against the proposal, with Senate Minority Leader Schumer saying:
Republicans are so determined to cut taxes on the wealthy that they’re willing to tax the retirement accounts of millions of middle class Americans. The GOP’s total devotion to millionaires and billionaires comes at the expense of every family using a 401k to save for a decent retirement.
There may also be opposition from Senate Republicans – the Wall Street Journal quoted Senator Portman (R-OH) as saying “I’m deeply concerned about it [the Rothification proposal] …. I don’t think you want to disincentivize retirement savings in any way right now.”
Reports are, however, that “full” Rothification would raise somewhere between $550 and $680 billion over 10 years. And, given the pressure on Republicans to restore deductibility of state and local taxes to their tax reform proposal, revenue to offset losses from reductions in corporate and individual income tax rates will have to come from somewhere.
However, earlier today, President Trump tweeted: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”
The political fight over this issue will continue.
Some view multiple employer plans (MEPs) – non-union plans for employees of unrelated employers – as a way to provide lower cost plan administration and investment services, particularly to small employers. There are, currently, two obstacles to the widespread use of MEPs: IRS’s “one bad apple” rule, which generally provides that a qualification violation that applies to only one employer may disqualify the entire plan. And the Department of Labor’s position that “a group of employers can collectively act as the ‘employer’ in sponsoring a multiple employer plan only if the employers group was formed for purposes other than the provision of benefits, the employers have a basic level of commonality (such as the participating employers all being in the same industry), and the employers participating in the plan in fact act as the ‘employer’ by controlling the plan).” (Quoting DOL’s 2016 Interpretive Bulletin Relating to State Savings Programs, emphasis added.)
Advocates of a “MEP solution” to the problem of providing lower-cost retirement plan services to smaller employers/participants have urged a relaxation of, among other things, the DOL rule, thereby allowing what are called “Open MEPs” – multiple employer plans for employers with little or no “basic level of commonality.”
A similar commonality requirement applies with respect to multiple employer welfare plans, including “Association Health Plans” (aka AHPs).
President Trump, in his October 12, 2017, “Executive Order Promoting Healthcare Choice and Competition Across the United States,” instructed the Secretary of Labor, within 60 days, to:
[C]onsider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs. To the extent permitted by law and supported by sound policy, the Secretary should consider expanding the conditions that satisfy the commonality-of-interest requirements under current Department of Labor advisory opinions interpreting the definition of an “employer” under section 3(5) of the Employee Retirement Income Security Act of 1974. (Emphasis added.)
ERISA section 3(5) defines “employer” for purposes of both welfare and retirement plans, and presumably any “expanding [of] the conditions that satisfy the commonality-of-interest requirements” of section 3(5) for AHPs would also apply to multiple employer retirement plans.
This possibility (that the Trump DOL may relax both AHP and MEP commonality requirements via regulation), however, raises a political issue. There is bipartisan support for retirement plan Open MEPs (with, perhaps, some restrictions). Expansion of AHPs is caught up in the (very contentious) politics of what to do about the Affordable Care Act.
Thus the Trump Executive Order cuts both ways. It suggests the possibility that DOL may solve (via regulation or other guidance and within 60 days) the “commonality problem” that is blocking the use of retirement plan Open MEPs. But it also raises the possibility that some policymakers may object to retirement plan Open MEPs simply because of their issues with AHPs.
On October 12, 2017, the House Financial Services Committee approved the Protecting Advice for Small Savers Act of 2017 (PASS Act of 2017) on a straight 34-26 (Republican-Democrat) party-line vote. This legislation would, among other things, repeal DOL’s fiduciary rule. In the current situation – with Senate Democrats able to block (non-budget) legislation – it is unlikely that this bill will be adopted by Congress. But the “current situation” could change – either via DOL revisions to the current rule or a court decision striking down the rule (the Fifth Circuit is currently considering one challenge to the rule).
In such a changed context, the PASS Act may present one way forward for regulation of, e.g., broker advice to plan participants.
Summarizing, in addition to repealing the fiduciary rule, the PASS Act would:
Apply “best interests” and disclosure standards to recommendations by a broker, dealer or registered representative to a retail customer (which could include, e.g., a retirement plan participant).
Prohibit DOL from promulgating any regulation under ERISA or the Tax Code “that would impose any obligation on a broker or dealer (or its registered representative) … that is in addition to, duplicative of, or inconsistent with, the [standard of conduct enacted by the PASS Act].”
Provide that “[t]he fact that a person may owe, or may in fact comply with, [the PASS Act’s best interests and disclosure standards] shall not mean or create any presumption that such person is a ‘fiduciary’ under [ERISA].”
Preempt state laws relating to a broker, dealer or registered representative.
On October 12, 2017, the ERISA Industry Committee (ERIC) filed a suit in the United States District Court for the District of Oregon, asking the court (among other things) to declare that Oregon’s Retirement Savings Plan – a state-sponsored IRA program applicable to private employers – is preempted under ERISA to the extent that it requires “ERISA plan sponsors operating in Oregon to file certificates of exemption to avoid having to register to administer the Oregon Retirement Savings Plan.” ERIC’s argument (as sketched out in the complaint) is that, because it requires ERISA plans to register, the Oregon statute and related regulations “relate to” those ERISA plans within the meaning of ERISA’s preemption provision.
This litigation may put before the courts the question of whether states are prohibited by ERISA’s preemption provision from mandating coverage under IRAs for employers that do not maintain ERISA retirement plans for their employees.
On October 12, 2017, President Trump nominated Preston Rutledge to be the new head of DOL’s Employee Benefit Security Administration (EBSA). Mr. Rutledge is currently Senior Tax & Benefits Counsel to the Senate Finance Committee under Chairman Hatch (R-UT). Given the Senate connection, approval would normally be fairly easy, although current partisan divisions may slow that process down.
Currently, EBSA is being run by Timothy Hauser, Deputy Assistant Secretary for Program Operations, Employee Benefits Security Administration – part of DOL’s permanent staff (joining DOL in 1991). Deputy Assistant Secretary Hauser was behind DOL’s regulation delaying for only 60 days the application of its fiduciary rule, a decision to which 124 House Republicans objected strenuously (calling it, among other things, “significantly flawed”).
There is certainly a possibility (but by no means a certainty) that, if and when Mr. Rutledge takes over at EBSA, policy in a number of areas (including with respect to the fiduciary rule) may change.
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We will continue to follow these issues.