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In this Current outlook we review a number of recent developments: DOL’s new rule providing a 2-month ‘cushion’ for the annual statement deadline; IRS’s extension of its ‘closed plan’ relief to 2016; Congressional questioning about why the SEC is not more involved in the conflicted advice regulation project; the reintroduction of the SEAL Act, providing (among other things) rollover relief for loans distributed on termination of employment; the decision by the ERISA Advisory Council to re-study de-risking in 2015; and the Supreme Court’s invitation to the Solicitor General to submit a brief with respect to RJR’s request for a review of the Fourth Circuit’s decision in Tatum v. R. J. Reynolds Tobacco Company.
The final DOL rules for disclosure of fee and other information to participants in participant-directed individual account plans require that plan- and investment-related information be provided annually. Follow-on guidance clarified that these annual disclosures had to be made “no more than one year exactly” after the prior annual disclosure.
This rule’s inflexibility presented a number of problems for sponsors (and providers), preventing them from consolidating (1) different required disclosures and (2) disclosures for different plans. Indeed, in some situations, the rule provided an incentive to delay disclosures (“to avoid accelerating subsequent compliance deadlines”).
To address these concerns, on March 18, 2015, DOL published a direct final rule modifying this 12-month requirement. Under the new rule, annual disclosures must be made “at least once in any 14-month period, without regard to whether the plan operates on a calendar year or fiscal year basis.” That gives the plan administrator a 2-month cushion, providing flexibility requested by sponsors and providers.
The rule is not being issued under the usual proposal-and-comment process. Instead, the “rule is effective June 17, 2015, without further action or notice, unless significant adverse comment is received by April 20, 2015.” And during the period prior to June 17, 2015, plan administrators may rely on the new rule.
In our article IRS provides temporary relief for ‘closed plan’ nondiscrimination issue we discussed temporary IRS relief (Notice 2014-5) to address the ‘closed plan’ problem. That relief generally applied to 2014 and 2015. In Notice 2015-28, released March 19, 2015, IRS extended that relief to 2016.
Generally, the ‘closed plan’ problem may develop whenever the group of employees covered by a plan (typically a DB plan) is closed to new entrants, while some or all current participants continue to earn benefits. It may also come up where grandfather benefits are provided to a closed group, e.g., in connection with a cash balance plan conversion. The problem arises because even though the closed group is nondiscriminatory at the time of closure, over time the group may become discriminatory. Quoting Notice 2014-5: “This might occur for several reasons, including the tendency of NHCEs [non-highly compensated employees] to have higher rates of turnover than HCEs [highly compensated employees], as well as the potential for some of the NHCEs in the closed plan to become HCEs as they continue employment and their pay increases.”
Where new employees (those frozen out of the DB plan) are covered under an ongoing defined contribution plan, one way to deal with this problem is to apply the Tax Code nondiscrimination test to both the (closed) DB plan and the DC plan on a combined basis. Usually this only works if, for purposes of the test, you ‘convert’ DC contributions to DB benefits (e.g., you project a DC contribution made for a 30 year old to age 65) this is called testing on ‘benefits basis.’
Current rules allow sponsors to do combined testing on a benefits basis only if the plan passes one of three tests – the (1) ‘defined benefit in character,’ (2) ‘broadly available separate plans,’ or (3) ‘minimum aggregate allocation gateway’ tests. While (1) and (2) are generally easier for a frozen DB plan to pass than a standalone test, eventually the same problem emerges. Again quoting Notice 2014-5: “the same demographic forces that drive the increase in the proportion of HCEs in the closed plan might also over time lead to the aggregated plans being neither primarily defined benefit in character nor consisting of broadly available separate plans.” Test (3) – the minimum aggregate allocation gateway – is viewed by many sponsors as a non-viable solution. The minimum allocation is often prohibitively expensive, and (for instance) matching contributions in the DC plan generally cannot be taken into account.
Notice 2014-5 provides, generally, that (i) if the plan was frozen before December 13, 2013, and (ii) if the DB plan is able to pass nondiscrimination testing for 2013 on a standalone basis or on a combined/benefits basis under test (1) or (2) above then (iii) for the 2014 and 2015 plan years the plan may continue to test on a benefits basis even if it does not pass test (1), (2) or (3) for those years. Notice 2015-28 extends that relief for another year, through 2016.
IRS stated that Notice 2015-28 was “provided in anticipation of the issuance of proposed amendments to [Tax Code nondiscrimination] regulations that would be finalized and apply after the relief under Notice 2014-5 and this notice expires.” The possible permanent solutions to this problem that IRS has informally discussed, however, are not viewed as adequate by many sponsors. Bills providing a legislative fix have been introduced in Congress (see our article Congressman Neal reintroduces retirement savings legislation). Notice 2015-28 may delay action on legislation until IRS is able to make a formal proposal.
One of the striking things about the publicity surrounding DOL’s (recently released) conflicted advice proposal is that the arguments made for regulating conflicts could as well apply to, for instance, ordinary brokerage transactions as to plan or IRA investments. On March 17, 2015, Securities and Exchange Commission Chairman Mary Jo White said that the SEC should use its authority under Dodd-Frank to develop ‘uniform fiduciary’ standards for brokers.
On March 18, 2015, the House Education and the Workforce Committee held a hearing at which DOL Secretary Perez testified. During questioning, Congressman David Roe (R-TN) said “I think probably your department [DOL] should work with the SEC if there’s going to be a change in the fiduciary rule and not just unilaterally do it. I think the SEC really is the place that that should be done more than DOL.”
On March 24, 2015, Congressman Kline (R-MN), Chairman of the Education and the Workforce Committee, and Congressman Roe sent a letter to DOL Secretary Perez reiterating their request for detailed information on “how DOL has considered, adopted, or discarded any concerns raised by SEC as it revised its regulatory proposal.”
At the end of January 2015, Senators Michael Enzi (R-WY) and Bill Nelson (D-FL) reintroduced the “Shrinking Emergency Account Losses Act of 2015” (SEAL Act). This legislation would:
Give participants until their tax return due date (for the year of distribution) to rollover the unpaid balance of a loan that has been distributed in connection with termination of employment or plan termination.
Eliminate the 6-month suspension of contributions in connection with taking a hardship withdrawal from a 401(k) plan.
Generally prohibit loans “made through the use of any credit card or any other similar arrangement.”
At a meeting on March 20, 2015, the ERISA Advisory Council announced its 2015 working group topics: de-risking and lifetime plan participation. That announcement is interesting (and a little curious) because the EAC studied both of those topics last year. That the EAC was asked by DOL to re-study de-risking in 2015 is evidence of DOL’s ongoing concern about the issue. That concern may at some point ripen into some sort of regulatory proposal.
As discussed in our article Tatum v. RJR Tobacco: Circuit court reverses district, holds for plaintiffs, the Fourth Circuit found for plaintiff-participants in this reverse stock drop case. The Fourth Circuit split 2-1 in that decision, and there was a vigorous dissenting opinion the fundamental argument of which was that the majority did not properly apply last year’s Supreme Court decision discussed in our article Fifth Third Bancorp et al. v. Dudenhoeffer.
The defendant-sponsor has asked the Supreme Court to review the Fourth Circuit decision, and on March 9, 2015 the Supreme Court invited the Solicitor General to file a brief in connection with the defendant’s petition. That request may indicate that the Supreme Court is prepared to review the Fourth Circuit decision.
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We will continue to follow these issues.