Thank You to Our Sponsors!

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2 Thank You to Our Sponsors!

3 Session 1 Washington Update and Late-Breaking Regulatory Developments Craig P. Hoffman, Esq., APM General Counsel American Retirement Association

4 What We Will Cover EPCRS Fee Changes SCP Expansion The Impact of Tax Reform on Retirement Savings Fiduciary Regulation Update What s Up with PEPs and MEPs The Retirement Enhancement and Savings Act of 2018 (if time permits) 4

5 EPCRS Fees Rev Proc Slide 5

6 EPCRS Fees With the release of Revenue Procedure , on January 2, 2018; IRS announced what was described as a user fee reduction in the EPCRS program Program was changed to base user fees on plan asset value rather than number of participants (as had been used in the past) Most alternative reduced fees in the VCP fee schedule were eliminated 6

7 New Fee Schedule Plan Size User Fee $500,000 or less $1,500 $500,001 to $10,000,000 $3,000 $10,000,001 or more $3,500 7

8 Old Fee Schedule Plan Size User Fee 0-20 Participants $ Participants $ Participants $1, ,000 Participants $5,000 1,001 10,000 Participants $10,000 10,001 or more Participants $15,000 8

9 2014 Number of Retirement Plans (Source EBSA 2014 Report) Total DB Plans DC Plans Total 682,531 43, ,066 Under 100 lives 100 or more lives 597, % 84, % 35, ,132 7,643 76,934 * Excludes oneparticipant plans ** Excludes DB Plans not PBGC- Covered 9

10 EPCRS Fees (Other) 5310 for terminating plans was increased from $2,300 to $3,000 but that increase has since been rescinded Special fees for group submissions and terminating orphan plans are unchanged Other special fees eliminated: $375 for late adopter of interim amendments $500 for late adopter of amendment required as condition of FDL 50 percent discount for adopters within one year of extended remedial amendment period $300 for up to 13 loan failures $500 for up to 150 RMD failures 10

11 Advocacy Efforts On January 31, 2018 the ASPPA/ARA GAC filed comments objecting to the new fee structure because it: Will reduce and undercut voluntary compliance Violates Section 1101 of the Pension Protection Act of 2006, which directed the IRS to update and improve EPCRS by taking into account the special concerns and circumstances small employers face with respect to compliance and correction of compliance failures 11

12 IRS Response In a March 6, 2018, response to ASPPA/ARA, Ms. Cathy Jones, Acting Director of the IRS Employee Plans Division, cited IRC 7528 that requires the IRS to periodically examine the costs of the services being provided and adjust the user fee as required The letter simply says: Based on our most recent analysis, we decided to increase the VCP user fees for small plans to more accurately reflect the average time spent on these cases and to reduce the fee for larger plans to reflect the average time it takes to do these cases 12

13 IRS Response It remains to be seen if the IRS will rescind these changes as they did for determination letters at plan termination It should also be noted that under IRC 7528, the IRS has authority to provide for exemptions or reduced fees where appropriate 13

14 SCP Expansion ASPPA/ARA GAC also intends to continue its advocacy for an improved and expanded Self-Correction Program Obviously, a SCP does not require the payment of any user fee Section 1101 of PPA 2006 also directed the IRS to expand the availability of self-correction, so there is a Congressional policy directive in this regard On April 4, 2018, ASPPA/ARA GAC filed a comment letter with a number of recommendations on how to improve SCP 14

15 ARA Recommendations Remove barriers to the use of SCP, including: Extending the period for self-correction of significant errors and permitting self-correction of missed deferral opportunities, regardless of when the error occurred Adding new earnings adjustment calculation methods to the existing safe harbor methods in EPCRS Clarifying the definition of an insignificant operational failure Providing safe harbor corrections related to overpayments and earnings adjustment calculations in defined benefit plans 15

16 ARA Recommendations Expand the types of errors that may be corrected through SCP, including: Correction by retroactive amendment to comply with the actual operation of the plan where the benefits provided were higher than the plan provided for and such operation would not violate other qualification rules (such as IRC 415, 401(a)(4), etc.) Correction by retroactive amendment to comply with the compensation definition used in operation as long as such definition complied with IRC 414(s) nondiscrimination rules Correction of non-amenders discovered within the SCP correction period for significant errors or during a merger/acquisition Corrections to plan loans without adverse participant taxation 16

17 The Impact of Tax Reform on Retirement Savings

18 The Republican/Trump Plan On December 22, 2017, President Trump signed into law, The Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018 The law, which is more popularly known as the Tax Cuts and Jobs Act of 2017 ( TCJA ) is generally effective for tax years beginning on or after January 1, 2018 Many of the individual tax provisions, as well as the pass-through deduction, expire at the end of the 2025 tax year The reduction in the corporate tax rate to 21 percent, however, is permanent

19 Qualified Plan Changes in TCJA

20 What Isn t in TCJA $2,400 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 $500,000 in wages, $250,000 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 Ten percent 72(t) early distribution penalty becoming applicable to government 457(b) plans Reduction or freezing of limits (e.g., 415, 401(a)(17), 402(g) etc.) Changes to the nondiscrimination and coverage rules

21 What Made It Into TCJA Effective January 1, 2018 Extends rollover period for loan offset distributions to the due date of the tax return for the year of distribution. The offset distribution must arise as a result of plan termination or the participant s severance from employment. Repeals the extended time period (i.e., to the due date of the applicable tax return) to re-characterize (and essentially undo) an IRA conversion Distribution and rollover relief for certain 2016 disasters similar to past hurricane relief Casualty loss deduction limited to federally declared disaster zones which will, in turn, affect hardship distributions using safe harbor needs

22 The Pass-Through Issue

23 Through Way? TCJA 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 These entities are referred to as pass-throughs because unlike C corporations, they don t pay income taxes at the entity level Instead, the business income or loss is passed through and reported on the business owners individual tax returns TCJA lowered the corporate rate to 21 percent causing a significant differential from the top individual rate of 37 percent The pass-through deduction is an effort to lower the tax rate on the business income of these entities

24 New IRC 199A provides the owners of pass-through entities a deduction equal to 20 percent of the pass-through entity s qualified business income, resulting in varying effective tax rates depending on the owner s marginal tax rate as follows: Ordinary Income Rate Effective Pass-Through Rate 37% 29.6% 35% 28.0% 32% 25.6% 24% 19.2%

25 Guardrails Concerns were raised as to the potential for abuse by doctors, lawyers, professional athletes, etc., who would endeavor to convert compensation income to pass-through income to qualify for the lower tax rate A guardrail in the final bill is intended to deter high-income taxpayers from trying to convert wages or other personal service income to pass-through income Under the final bill, pass-throughs that engage in specified service activities are eligible for the full deduction ONLY IF the taxpayer s joint taxable income for the year is $315,000 or less and is phased out completely at joint taxable income of $415,000 (individual threshold is 50 percent of the joint amounts)

26 Guardrails Specified services are those involving the fields of health, law, 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 or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities Engineers and architects were left off this list and are therefore not subject to this limitation IRS regulations will be extremely important in clarifying this provision of the new law

27 Guardrails The deduction amount otherwise calculated for each separate passthrough trade or business is limited to the greater of: 50 percent of the W-2 wages or 25 percent of the W-2 wages plus 2.5 percent of qualifying depreciable assets The alternative 2.5 percent qualifying depreciable asset calculation was added in the conference agreement and is expected to be very helpful to real estate business activities The wage limitation does not apply if joint taxable income is below $315,000 and phases in fully as compensation increases to $415,000 ($207.5/$50,000 for individual taxpayer) The deduction is also limited to no more than the taxpayer s taxable income It is not clear if a partnership has wages if there are no common law employees receiving W-2s

28 Pass-Through Approach ASPPA/ARA continues to have concerns that the new pass-through rates will diminish the value of saving in a qualified retirement plan for the owners of the business This is because the deduction for the retirement plan contribution is taken against qualifying business income that would have otherwise been taxed at the lower pass-through rate, while the distribution from the plan at retirement will be subject to the higher ordinary income tax rates Based on the final approach adopted in TCJA, it may not be as detrimental as first feared

29 Pass-Through Not So Bad?? The guardrails in the final bill will result in many professional service providers not being eligible for the deduction because his/her taxable income is too high In addition, the original House proposal would have had a top marginal tax rate of 39.6 percent as compared to a 25 percent passthrough rate that would have resulted in an almost 15 percent differential as compared to the much smaller differentials of 7.4 percent or less in the final bill The modeling of the potential financial penalty assumes the owner will always be in the highest marginal tax bracket in retirement, which under TCJA applies to joint income received over $600,000. As a result and depending on the circumstances, the actual tax rate in retirement may be lower than the pass-through rate at the time of the deduction.

30 Plan Contribution Enables IRC 199A Deduction There are circumstances where the plan contribution will lower an owner s taxable income such that he/she can now qualify for the IRC 199A deduction Because the pass-through deduction phases out as taxable income rises from $315,000 to $415,000 for joint filers, and from $157,500 to $207,500 for individual filers, the retirement contribution could very easily result in taxable income being reduced sufficiently for a specified services business to qualify for the pass-through deduction

31 Plan Contribution Enables IRC 199A Deduction For example, assume a doctor and his or her spouse have joint taxable income of $425,000, $400,000 from the doctor s passthrough business If the doctor made a cash balance plan contribution of $110,000, that would lower taxable income to $315,000. This would allow for a pass-through deduction of $58,000 (20 percent of $290,000). The result is a tax savings of almost $14,000 that would not have been available without the retirement plan contribution

32 Qualified Plan Provisions in the Bipartisan Budget Act of 2018 Slide 32

33 2018 Budget Bill Removes six-month prohibition on contributions after a hardship withdrawal (effective beginning 2019 plan year) Eliminates requirement to take a plan loan before a hardship withdrawal (effective beginning 2019 plan year) Permits hardship withdrawals from matching and other employer contributions (effective beginning 2019 plan year) Waives the ten-percent penalty for early hardship withdrawals up to $100,000, permits repayment, allows taxation over three years, and doubles maximum loan to $100,000 for California wildfires Creates a committee and fast-track process to address multiemployer pension plan underfunding 33

34 Fiduciary Regulation Update

35 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,

36 Effective Date On April 7, 2017, the DOL issued a final regulation that extended the regulation s applicability date for 60 days until June 9, 2017 The BICE transitional period continued 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 November 29, 2017, the DOL issued a final regulation extending the transition period 18 months until July 1, 2019 to provide sufficient time to conduct the review of the regulation per the directive from the President 36

37 What to Expect On March 15, 2018, in U.S. Chamber of Commerce v. DOL, the 5 th Circuit Court of Appeals invalidated the entire regulation and related exemptions The Court held: The regulation applied an unreasonable interpretation of ERISA section 3(21) The DOL exceeded the authority granted under ERISA The regulation violated the APA in that it was arbitrary, capricious, and not in accordance with the law 37

38 What s Next? At this point, it isn t clear if the DOL is going to appeal to the Supreme Court Look for more states to pass laws like Nevada, which imposes a fiduciary duty under state law 38

39 What s Up with PEPs and MEPs

40 MEPs A Multiple Employer Plan ( MEP ) is a single retirement plan that has been adopted by employers who are not part of the same controlled or affiliated service group In contrast, a Multi-Employer Plan is a plan established through collective bargaining that covers union members who work at companies that are unrelated to each other 40

41 MEPs MEPs are governed by IRC 413(c), which provides special rules for service crediting and compliance testing of these plans There is no similar provision in ERISA that specifically focuses on MEPs. The relevant ERISA provisions focus on the definition of employer. 41

42 MEPs IRC 413(c) defines a MEP as a plan maintained by more than one employer and provides special rules for qualification purposes including: IRC 413(c)(1) and (3) require that service with any participating employer be recognized for purposes of eligibility, vesting, and benefit accrual For coverage and non-discrimination testing, however, each employer is disaggregated and tested separately (including the ADP/ACP tests) Likewise, the top-heavy rules are applied separately to each individual employer For IRC 415 limits, all compensation and contributions from any participating employer are aggregated 42

43 MEPs One of the biggest drawbacks under the IRC qualification requirements is the so-called one-bad-apple rule Under IRS regulations, a disqualification defect incurred by any participating employer results in the entire plan being disqualified The IRS EPCRS program is available to cure defects and compliance fees are based on the assets and participants in the one-bad-apple s portion of the MEP 43

44 MEPs MEPs, in general, have been around for sometime According to DOL sub-regulatory guidance, a traditional MEP is generally described as one where the unrelated employers jointly sponsoring the plan have something in common other than merely participating in the same plan Examples of traditional MEP sponsors would include: Members of the same trade association who jointly adopt and control the plan Professional Employer Organizations ( PEOs ) (but not so certain after AO A) Related employers with some degree of common ownership but which is insufficient to be a single controlled group 44

45 MEPs A new type of MEP became popular in the early part of this decade This type of MEP is often referred to as an Open MEP because the participating employers typically have nothing in common other than their joint sponsorship of the plan MEPs, both open and traditional, have been promoted as a way to lower costs and to also reduce a plan sponsor s potential fiduciary exposure under ERISA by outsourcing those responsibilities to the MEP sponsor 45

46 MEPs: Current Status Advisory Opinion A was released on May 25, 2012 The opinion holds that the commonality required to have a single plan that was previously applied in the MEWA context also applied to retirement plans As a result, most Open MEPs will not actually be treated as a MEP but instead will be treated as separate, individual plans under ERISA

47 Association Health Plan Proposed Regulations

48 AHP Proposed Regulation On January 5, 2018, the DOL issued a proposed regulation to redefine employer specifically for purposes of sponsoring a multipleemployer group health plan The proposal significantly relaxes the commonality requirement as set forth in prior sub-regulatory guidance An association may be formed for the sole purpose of sponsoring an AHP as long as participating employers: Are in the same trade, industry, line of business, or profession; or Have a principal place of business in same state or metropolitan area

49 AHP Proposed Regulation The proposed regulation is limited in its application to association health plans The preamble acknowledges, however, that prior sub-regulatory guidance regarding the requirements to satisfy the commonality test were not specifically referred to in ERISA The same policy considerations for this proposal referred to in the preamble, i.e., increased access and reduced costs, could be said to be applicable to multiple employer retirement plans

50 What to Expect The Tax Cuts and Jobs Act did not include the PEP provisions from RESA The Retirement Enhancement Act (RESA) and its provisions on PEPs was recently re-introduced in the 115 th Congress It remains to be seen if a legislative vehicle will arise before the midterm elections and bring activity on Capitol Hill to a crawl

51 What to Expect The new Assistant Secretary of Labor for EBSA is Preston Rutledge As a Senior Aide on the Senate Finance Committee staff, Mr. Rutledge was involved in drafting the PEP provisions that were in RESA Some have speculated that in his new role, Mr. Rutledge may wish to revisit the sub-regulatory guidance relating to multiple employer retirement plans

52 Legislative Developments 52

53 The Retirement Enhancement and Savings Act of

54 RESA 2018 In 2016, the Senate Finance Committee marked up a bill entitled, the Retirement Enhancement and Savings Act of 2016 (S. 3471) The bill was never voted on by the Senate and died with the adjournment of the 114 th Congress On March 8, 2018, the bill was reintroduced by Senators Orrin Hatch and Ron Wyden, respectively, the Chair and Ranking Member of the Senate Finance Committee

55 RESA 2018 Pooled Employer Plans allow for Open MEPs with no commonality if certain requirements are met Form 5500 aggregation Consolidated filings for 414(i) defined contribution individual account plans that: 1. Have the same trustee 2. Have the same one or more named fiduciaries 3. Have the same 3(16) plan administrator 4. Plan years begin on the same date 5. Provide the same investments or investment options

56 RESA 2018 Retirement plan adoption grace period Employers may adopt a retirement plan on or before the due date (with extensions) of the employer s tax return Plan will be treated as being adopted on the last day of the taxable year to which the return relates Does NOT override 401(k) rules requiring plan adoption before elective deferrals may be made Modify auto-escalation safe harbor Removes ten percent cap after the first plan year

57 RESA 2018 Small employer pension plan tax credit increase New amount is the greater of $500 or Lesser of $250 per NHCE or $5,000 Additional $500 per year for up to three years for including or adding automatic enrollment Terminating 403(b) plans: permits distribution of custodial account balances upon plan termination Eliminates annual notice requirement for 401(k) safe harbor plans where safe harbor contribution is a QNEC

58 RESA 2018 Prohibits credit card plan loan arrangements Lifetime income disclosure: would require ERISA DC plans to include annuity equivalent calculation on benefit statements once per year Fiduciary safe harbor for selection of annuity provider

59 RESA 2018 Eliminates the use of the stretch IRA as a distribution option at death to the extent aggregate account balances exceed $450,000 Requires amounts in excess of $450,000 to be paid out within five years of death Exception available for eligible beneficiary, i.e., a surviving spouse, minor child, disabled dependent, or anyone else no more than ten years younger and certain binding annuities in effect on date of enactment 59

60 QUESTIONS? 60

61 Thank You to Our Sponsors!