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2 Thank You to Our Sponsors!

3 Session 1: Washington Update and Late-Breaking Regulatory Developments Brian Graff, CEO Craig Hoffman, General Counsel American Retirement Association

4 What We Will Cover 2017 Form 5500 Tax Reform Fiduciary Regulation Update Nevada Fiduciary Regulation SBA Comment Letter (if time permits)

5 Form 5500 Update

6 Form 5500-SUP IRS published proposed Form 5500 changes to be effective for the 2015 plan year in the December 23, 2014, Federal Register IRS released a new Form 5500-SUP that was to be effective for 2015 plan years After extensive lobbying by ASPPA, the IRS directed that the questions be skipped for 2015 plan years

7 Form 5500-SUP IRS proposed changes for 2015 included: Trust information (EIN, name of trust, name of trustee, and trustee phone number) will be made mandatory Plan document questions related to whether timely amendment for law changes, date of most recent amendment, date of determination letter, or M&P/VS opinion or advisory letter information Unrelated Business Taxable Income (UBTI) question added Tax deductible ESOP dividend question added 401(k) non-discrimination question added Coverage and non-discrimination question added Paid preparer information made mandatory!! After extensive lobbying by ASPPA, the IRS directed that the questions be skipped for 2015 plan years

8 2016 Plan Years On March 31, 2016, the IRS announced the compliance questions from 2015 had been revised and would be mandatory for the 2016 plan year. The revised questions were much improved from what was published on the 2015 forms: Trust information (EIN, name of trust, name of trustee, and trustee phone number) remains mandatory Plan document questions simplified, simply ask for date of the most recent (IDP) determination letter or M&P/VS opinion or advisory letter Unrelated Business Taxable Income (UBTI) question was DELETED

9 2016 revisions continued: 2016 Plan Years Tax deductible ESOP dividend question appears to have been deleted 401(k) non-discrimination question improved and simplified Coverage and non-discrimination question simplified Paid preparer information made mandatory!!

10 2016 Plan Years On June 30 th, the 2016 revised questions were submitted to OMB for review and approval under the paperwork reduction ACT ASPPA GAC filed a comment letter on August 1, 2016, reiterating that the new questions were unduly burdensome and the information could be collected more efficiently if the changes were made at the same time as the DOL proposed changes to modernize the EFAST system and Form 5500 Noteworthy is that OMB filing indicated that the IRS was contemplating that the paid preparer information requirement for 2016 may be satisfied by providing a firm name rather than an individual s name

11 2016 Plan Years On October 12, 2016, the 5500 Corner page on the Employee Plans Division website was updated to provide that the compliance questions on the 2016 forms should once again be skipped The November 1, 2016 release of the 2016 draft forms confirmed the web page

12 2017 Plan Years On November 20, 2017, the IRS/DOL/PBGC released the 2017 draft forms The draft revealed the compliance questions have been entirely removed INCLUDING THE PAID PREPARER LINE!!! Uncertain if they will come back at some time in the future but for now, this is a big win!!! Thanks to the ASPPA GAC Reporting and Disclosure Subcommittee, chaired by Kizzy Gaul, as well as Janice Wegesin and Peter Gould, for their tireless efforts on this issue

13 Tax Reform

14 The Republican/Trump Plan On September 27 th, the Republicans unveiled their framework for comprehensive tax reform On November 16 th, the Tax Cuts and Jobs Act ( TCJA ) was passed by the House of Representatives by a vote of On December 1 st, the Senate passed its version of TCJA by a vote of Leaders from both Houses of Congress will now conference to work out a compromise

15 The House Plan Included in the House version of TCJA: Lower individual marginal tax rates with brackets of 10, 25, 35, and a maximum 39.6 percent rate Lower corporate tax rate to 20 percent and special passthrough corporate rate of 25 percent Elimination of most personal deductions and cut back on deductions for home mortgage interest (see next slide) Increases the standard deduction to $24,400 Elimination of the AMT Estate tax exemption increased in 2018 for single individuals from $5.6m to $11.2m and for married couples from $11.2m to $22.4m, repealed in 2023

16 The House Plan Deductions cut back or repealed: Property taxes limited to $10k, no other deduction for SALT Home mortgage limited to $500k acquisition debt Repeal of deduction for tax preparation expenses Repeal of deduction for medical expenses Repeal of deduction for alimony payments and corresponding inclusion in gross income Repeal of deduction for moving expenses Repeal of deduction for personal casualty and theft losses New limitation on deduction of wagering losses

17 The Senate Plan Seven tax brackets ranging from ten to 38.5 percent Deductions cut back or repealed: Property tax deduction up to $10k, otherwise repeal of the SALT deduction Full home mortgage deduction maintained Modified deduction for medical expenses maintained Maintains AMT Reduces ACA individual penalty to $0 Doubles estate tax exemption but does not repeal Deduction equal to 23 percent of pass-through income, resulting in an effective pass-through rate of percent at the highest marginal rate

18 Budget Reconciliation Explained Created by the 1974 Congressional Budget Act Only process that avoids Senate filibuster Has been used for major legislation such as COBRA, EGTRRA, and welfare reform Byrd Rule applies to provisions that do not affect revenue or lose revenue outside the ten-year budget window The bill must be revenue neutral outside the budget to avoid a ten-year expiration date

19 What to Expect There is a desire to have a bill on the President s desk by the end of the year A conference committee will likely be appointed to resolve differences and the conference bill will be presented to both Houses for a vote Also possible is ping-ponging of bills back and forth between the House and Senate

20 The Pass-Through Problem

21 Through Way? The Republican plan also includes a new lower tax rate for businesses that are organized as pass-through entities such as Sub-S corporations, partnerships, LLCs taxed as partnerships, and sole proprietors Under the House bill, the pass-through rate would only apply to the business income portion of the pass-through entity s total income with the compensation portion being taxed at ordinary income rates Under the House bill, the big question is how to allocate the entity s total income between these two categories

22 Through Way? The approach taken in the House version of TCJA is an somewhat arbitrary allocation under which 30 percent of a passthrough entity s income is considered business income eligible for the lower pass-through rate. The remainder is compensation income taxed at ordinary income rates. The business income percentage is zero percent for certain specified business activities defined in IRC 1202(e)(3)(A) as follows: any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees

23 Through Way? The business income percentage however, can electively be increased based on the percentage of the pass-through entity s income that can be attributed to capital assets (rather than services) The calculation is somewhat complicated, but essentially comes up with a deemed rate of return on the pass-through entity s capital assets and divides that by the total income (with some adjustments) to determine a capital percentage, which is the percentage of total income attributable to capital investments and eligible for the pass-through rate Businesses that engage in specified service activities must have a minimum capital percentage of ten percent to make this election

24 Pass Tense? The net result is the business income of these pass-through entities will no longer be subject to the top individual tax rate of 35 percent (or potentially 39.6 percent) Additionally, once the 25 percent pass-through tax has been paid, the net amount remaining can be reinvested in assets that produce capital gains taxed at 20 percent (or more likely 23.8 percent with the net investment tax) Interestingly, the Republican plan does not make any changes to the capital gains tax rates presently in effect

25 Senate Pass-Through Approach The Senate took a different approach Rather that a tax credit, the Senate bill provides for a deduction equal to 23 percent of the pass-through entity s qualified business income Pass-throughs performing specified service activities can qualify for this rate if taxable income is below $500k for a joint return, $250k for an individual Reasonable compensation paid to S Corp shareholders and guaranteed payments to partners reduce qualified business income and therefore the deduction

26 Senate Pass-Through Approach The effect of a deduction approach is that taxpayers in the higher brackets get a larger reduction in the marginal tax rate applicable to pass-through income For taxpayers in the 38.5 percent bracket, a 23 percent deduction equates to 29.6 percent effective tax rate on pass-through income (an 8.9 percent difference) For taxpayers in the 35 percent bracket, a 23 percent deduction equates to a 27 percent effective tax rate on pass-through income (an eight percent difference)

27 35 to 28 Percent Tax Rate Example Pass-Through Income Cash Balance Plan Contribution Qualified Business Income Pass-Through Deduction (23%) Taxable Pass- Through Income Tax on Pass- Through Income (35%) Effective Tax Rate ($118,580 $440,000) $500,000 $60,000 $440,000 $101,200 $338,800 $118, %

28 35 to 28 Percent Tax Rate Example The disincentive for a small business owner to save in a retirement plan can be illustrated through a basic example. Sarah is the owner of a printing company that is organized as a Subchapter S corporation. She has spent a long time building her business and she is now in a position to begin saving for retirement at age 50. She plans on saving $60,000 per year until she reaches age 65 her planned retirement age. She also plans on investing conservatively by purchasing and holding investments expected to produce an annual rate of return of four percent. To accomplish this she is considering a cash balance defined benefit plan since it offers a plan design consistent with her investment objectives.

29 35 to 28 Percent Tax Rate Example Cash Balance Plan Contribution Annual Tax Deferred (27%) Over 15 Years Tax on Accumulations at Ordinary Tax Rates (35%) Post-Tax Retirement Savings $60,000 $16,200 $1,309,472 $458,315 $851,157

30 35 to 28 Percent Tax Rate Example After-Tax Savings on $60,000 (27%) Over 15 Years Tax on Capital Gains Deferred Until Retirement with Buy and Hold Strategy (23.8%) Post-Tax Savings for Retirement Benefit of Saving Outside the Plan $43,800 $955,914 $60,717 $895,197 $40,040

31 Tax Reform As can be seen from the example, the financial penalty to Sarah for saving in a qualified retirement plan is over $40,000 We believe there is a fix that can avoid this financial penalty The solution involves matching the tax rate on the deduction for the allocable retirement plan contributions of the small business owner (which includes deferrals, matches, and profit-sharing plan contributions or defined benefit accruals) with the tax rate the small business owner will pay when the money is withdrawn from the plan at retirement. In other words, a deduction of allocable retirement plan contributions at ordinary income tax rates to match the taxation of retirement plan distributions at ordinary income tax rates

32 Tax Reform This would make the tax treatment consistent at the time amounts are contributed (and deducted) and at the time they are ultimately distributed This in turn would eliminate the tax disincentive for owners of pass-through entities to save in a qualified retirement plan

33 Tax Reform We are advocating for language to be added to the Conference Report to achieve the desired result Grassroots efforts are underway and you can help!! The American Retirement Association is providing Americans an opportunity to speak out against this threat to small business retirement plans. Tell Congress to leave your retirement alone at

34 Qualified Plan Changes in TCJA

35 What Isn t in TCJA $2400 limit on pre-tax 401(k) contributions with the remaining IRC 402(g) limit being limited to after-tax Roth contributions Catch-up contributions being limited to individuals who have less than $500k in joint income, $250k individual. New stricter rules for deferred compensation arrangements Consolidation of 403(b) and 457 plans with 401k plans Elimination of special catch-up contribution rules that apply to 403(b) and governmental 457(b) plans Reduction or freezing of limits (e.g., 415, 401(a)(17), 402(g) etc.) Changes to the nondiscrimination and coverage rules

36 Qualified Plan Changes in TCJA Extends rollover period for loan offset distributions (typically at termination of employment) to the due date of the tax return for the year of distribution. Also in Senate bill. Directs Treasury to modify the 401k regulations to eliminate the six-month prohibition on elective deferral contributions after a hardship distribution. Not in Senate bill. Eliminates the requirement to take all available loans before taking a hardship distribution. Also in Senate bill.

37 TCJA Qualified Plan Changes Allows hardship distribution to be made from QNECs, QMACs and earnings on those amounts as well as earnings on deferrals. Also in Senate bill. Lowers the age for in service distributions from a DB or governmental 457(b) plan to 59 ½ from 62. Not in Senate bill. Provides nondiscrimination relief for frozen DB plans with respect to benefits, rights, and features and benefit accruals for a closed class, under a plan that meets certain requirements. Not in Senate bill.

38 TCJA Qualified Plan Changes Repeals the ability to re-characterize an IRA contribution as pre-tax or Roth up to the due date of the applicable year s tax return. Also in Senate bill. Provides nondiscrimination relief for certain frozen defined benefit plans. Not in Senate bill. Distribution and rollover relief for certain 2016 disasters similar to past hurricane relief. Not in House bill. Allows re-contribution of amounts wrongfully levied by IRS from a qualified plan or IRA. Not in House bill.

39 Fiduciary Regulation Update

40 Effective Date The Final Regulation became officially effective on June 7, 2016 With that said however, the date on which the new rules actually were to be applied (the Applicability Date ) was scheduled to be April 10, 2017 The BIC Exemption was likewise scheduled to become effective on April 10, 2017, with a slimmed down BIC in effect during a transition period that was slated to run from April 10, 2017 until January 1,

41 Effective Date On March 2, 2017, the DOL issued a proposed regulation to extend the Applicability Date by 60 days until June 9, 2017 The purpose of the delay was to provide time for the DOL to examine the final regulation and related exemptions as directed by the President in a Memorandum dated February 3, 2017 ARA/NAPA comment letter recommended an extended delay until at least January 1, 2018, and a corresponding extension of BICE transitional relief until at least July 1,

42 Effective Date On April 7, 2017, the DOL issued a final regulation that extended the applicability date for 60 days until June 9, 2017 The BICE transitional period continues to expire on January 1, Significantly however, the DOL modified the BICE to only require adherence to the impartial conduct standards during the transition period On May 23, 2017, Transition FAQs released by DOL confirmed the June 9 applicability date 42

43 RFI On July 6, 2017, the DOL published a Request for Information ( RFI ) Comments were requested with respect to a number of questions. Among them: Whether the DOL should extend the slimmed down BIC exemption beyond the January 1, 2018 applicability date? Are there market innovations that the DOL should consider in its review of the regulation and related exemptions? Are there alternatives to the BIC exemption they consider? 43

44 ARA Comments With respect to a further extension of the January 1, 2018 applicability date for the full BIC exemption, ARA s comment letter noted the significant potential for further change and/or new exemption alternatives as a result of the DOL s ongoing review Changing compliance standards are costly to providers and confusing to retirement investors ARA recommended that the applicability date for the full BIC exemption be delayed until six months after the later of: The date the final guidance is published; or The date any alternative exemption becomes effective 44

45 What to Expect On August 31, 2017, the DOL published a proposal to extend the transition period 18 months to July 1, 2019, and invited comments ARA comment letter recommended the transition period be extended until the later of July 1, 2019, or if later, 18 months after the date the final changes are announced It remains to be seen how quickly the DOL can complete the review 45

46 What to Expect On November 29, 2017, the DOL issued a final regulation extending the transition period 18 months until July 1, 2019 The reasons for the delay: Provides time to conduct review per Presidential order Consider potential alternative exemptions New streamlined class exemption soon to be proposed but it would not be out by January 1, 2018 Allows further coordination with SEC and FINRA Delay avoids unnecessary costs that would result from changing compliance standards DOL believes they can complete review, coordinate with other agencies, and provide for notice and comment and still have revisions done by July 1,

47 ARA Comments The ARA comment letter also recommended that the DOL issue a new exemption alternative called the Levelized Fee Exemption The four core components of the new exemption are: The impartial conduct standards A level fee Disclosure of compensation Special rules for investments protective of retirement investors 47

48 Levelized Fee Exemption Impartial conduct standards: Advice must be in the best interests of the recipient The adviser must not make any misleading statements The compensation received with respect to the transaction must be reasonable These are the same standards that are already in effect under the BIC and other exemptions 48

49 Level fee Levelized Fee Exemption A fee is level if it is determined on the basis of a fixed percentage of assets or a fixed fee that does not vary on the basis of particular investment recommended Unlike the current BIC Exemption, the Levelized Fee Exemption would permit the use of offset arrangements, rebating arrangements, and similar structures to achieve level-fee status It would also be permissible to determine level-fee status within each type of investment (e.g., mutual funds, annuities, CITs and ETFs, etc.) if the financial institution and adviser are subject to FINRA, SEC, or state insurance law regulation 49

50 Levelized Fee Exemption Disclosure of compensation For transactions with an ERISA-covered plan, the detailed compensation disclosures required under ERISA 408(b)(2) will be deemed sufficient for the exemption For non-erisa accounts, such as IRAs, compensation must be disclosed at the same time and in the same manner as would be required under ERISA 408(b)(2) if ERISA applied to the IRA 50

51 Levelized Fee Exemption Special rules for investments protective of retirement investors There are a number of investments where it is not practicable to levelize fees but which present no real conflicts of interest as a result. For example, advisers often charge no fees with respect to money market investments. Investments exempted from the level fee requirement would include those for which the financial institution and adviser receive no compensation. For example, self-directed brokerage accounts, cash, money market funds, company stock, or other investments specified by the DOL. 51

52 Nevada Fiduciary Standard for Financial Planners

53 Nevada Fiduciary Standard Nevada law for some time has provided that financial planners have the duty of a fiduciary toward a client Effective July 1, 2017, broker-dealers, broker-dealer sales representatives, and most investment advisers licensed under state or federal law became subject to this law when an exemption was removed The net effect is that advisers could be subject to both a federal and a state-imposed fiduciary duty 53

54 Nevada Fiduciary Standard A financial planner is defined as a person who for compensation advises others on the investment of money or upon provision of income to be needed in the future or holds himself or herself out as qualified to perform either of these functions Needless to say, this definition could be read very broadly 54

55 Nevada Fiduciary Standard Under the statute, a financial planner must: At the time advice is given, disclose any gain (such as profit or commission) he or she will receive if the advice is followed Make diligent inquiry to ascertain initially the client s financial circumstances and goals for his or her family Keep currently informed concerning the client s financial circumstances and family goals A claim under state law may be filed for any economic loss caused by the financial planner as a result of negligence or a violation of his or her fiduciary duty 55

56 Nevada Fiduciary Standard With regard to the new law s application to broker-dealers, B/D sales representatives, or licensed investment advisers, the Nevada Division of Securities has been given broad authority to write implementing regulations that: Define or exclude an act, practice, or course of business that is a violation of one s fiduciary duty Prescribe means reasonably designed to preclude one from engaging in acts, practices, or courses of business defined as a violation of such fiduciary duty 56

57 Nevada Fiduciary Standard A workshop on potential regulatory approaches was held by the Nevada Division of Securities on October 6, 2017 ASPPA/ARA GAC submitted comment letters and testified at the October workshop The letters outlined how ERISA pre-empts state laws that relate to ERISA plans, and as a result, the Nevada law would not apply in the context of investment advice given to ERISA plan participants or fiduciaries ASPPA/ARA recommended that the Nevada regulations specifically exclude advice to ERISA plans and participants from being covered by the new law 57

58 Nevada Fiduciary Standard The next step is for the Nevada Division of Securities to draft proposed regulations A second workshop will be held once the proposal is released, probably in January 2018 The Nevada law is important because other states are considering similar legislation Therefore, Nevada s recognition of ERISA s pre-emption could stand as a strong precedent for other states 58

59 SBA Comment Letter

60 SBA Comment Letter ARA works with many federal agencies in Washington, including the Small Business Administration ( SBA ) The SBA is charged with advocating for the interests of small businesses across the full spectrum of federal agencies (including the DOL and IRS) Under the Regulatory Flexibility Act, the promulgation of an economically significant regulation requires consideration of its potential impact on small businesses Similarly, the Paperwork Reduction Act requires a federal agency to certify that it has considered and made efforts to reduce the burdens on small businesses when it seeks to collect information from the private sector The SBA typically weighs in when these reviews are undertaken 60

61 SBA Comment Letter It is anticipated that with the change in Administrations, the SBA will want to take a fresh look at its priorities with regard to advocating for small businesses The ASPPA/ARA Government Affairs Committee recently provided to the SBA a memorandum recommending it weigh in on a number of existing and proposed regulatory initiatives that should be reconsidered for their potential detrimental impact on small businesses 61

62 SBA Comment Letter The ASPPA/ARA recommendations included the following: IRS should not require Form 5500 preparer information to be disclosed on the Internet The DOL should permit self-correction under the Voluntary Fiduciary Correction Program The IRS Employee Plans Compliance Resolution System (EPCRS) should include expanded self-correction options for participant loan failures Electronic transmission of ERISA notices should be permitted as the default method The IRS, DOL, and PBGC should substantially revise the proposal to modernize the Form 5500 and seek additional comment 62

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