Bank of America Merrill Lynch

News from D.C.

Retirement plan regulation:
What to expect

by Randy Hardock, partner, Davis & Harman, LLP

Last month, we considered the prospects for retirement legislation for the second half of this year. This month, we address the retirement-related regulatory activity that is possible in 2018.

Randy Hardock

President Trump came into office last year with a pledge to lift regulatory burdens, especially including certain Obama-era initiatives. In many areas, the White House has begun the process of deregulation. For retirement plans, that work has so far included the administrative and judicial rollback of the Department of Labor’s (DOL’s) new ERISA fiduciary rule and the nullification of various regulations under the Congressional Review Act (including the DOL’s safe harbor regulations for state- and city-facilitated retirement plans).

Now, as we pass the midpoint of 2018, it appears that the issuance of new regulatory or subregulatory guidance on retirement plan issues is likely to slow to a trickle.” —  Randy Hardock, partner, Davis & Harman, LLP

This regulatory slowdown stems from a variety of factors, but the root cause is that retirement issues are being overshadowed by other issues that are a higher priority for the Administration. The Treasury Department and IRS are buried in myriad time-sensitive issues that resulted from the enactment of the 2017 tax reform bill (which largely left retirement plans alone). At the same time, the DOL’s Employee Benefits Security Administration (EBSA) has, pursuant to presidential executive orders, been very busy rewriting health-related regulations (i.e., the recent relaxation of ERISA limits on Association Health Plans and two ongoing projects DOL is working on with Treasury and the Department of Health and Human Services—revised guidance on short-term limited duration health insurance; and changes in Health Reimbursement Arrangement rules). Moreover, the agencies are being asked to deal with their extensive new workload (both adding and subtracting guidance) with reduced resources and limited leadership. For example, since 2010 the IRS has seen its budget cut by 17% (after adjusting for inflation) and its staff reduced 23%. And the two top political appointees at the IRS—the Commissioner and Chief Counsel—are still awaiting confirmation.

This combination of circumstances has resulted in the agencies’ need to triage the necessary guidance work and a natural reluctance by career staff to push new initiatives. Time-sensitive and politically sensitive issues have (and will continue to) receive priority consideration and others issues will likely be fit in only if there is time. As a result, any retirement plan guidance published this year will likely deal only with limited targeted issues such as those described below.

Ongoing evolution of fiduciary rules

The saga that began in 2010 with the release of the DOL’s first attempt at rewriting the ERISA fiduciary rule is expected to continue this year and beyond. With DOL’s decision not to appeal the Fifth Circuit Court of Appeals decree vacating the DOL fiduciary rule, it appears likely that the Obama Administration’s regulation (and associated prohibited transaction exemptions) will remain voided, although there remains a small chance that some states might still try to intervene at the Supreme Court level. For now, the issue has shifted back to the DOL, with EBSA placing it on its long-term agenda with the notation that the “next action is undetermined.” So don’t expect DOL to reopen the broader ERISA fiduciary issue any time soon. EBSA will, however, continue its evaluation of the need for further relief on transitional issues, potentially building on the retroactive non-enforcement policy announced in Field Assistance Bulletin 2018-02.

For now, the main fiduciary rule activity has shifted to the Securities and Exchange Commission (SEC), where a new regulatory structure requiring broker-dealers to act in the “best interest” of retail customers has been proposed. These new rules would apply to recommendations regarding IRA investments and rollovers out of a plan to an IRA, but do not appear to apply to advice to qualified plan fiduciaries. The SEC’s package of proposed changes also includes interpretations of investment adviser standards of conduct and detailed disclosure requirements for broker-dealers and investment advisers. Comments on the SEC proposal are due by August 7, 2018.

Other DOL guidance

The DOL regulatory agenda indicates that the agency hopes to issue an interim final rule that expands the scope of transactions eligible for correction under the Voluntary Fiduciary Correction Program by September 2018. Also promised this year is an interim final rule that facilitates the termination of, and distribution of benefits from, individual account pension plans that have been abandoned by their sponsoring employers. Otherwise, DOL retirement-related projects appear to be on the back burner for the time being, with EBSA stating that the timing of further action is “undetermined” with respect to various other ongoing projects (including proposed rules revising the Form 5500, lifetime income illustrations, and qualified default investment alternatives).

Treasury/IRS guidance

The Treasury/IRS regulatory agenda on retirement issues is only slightly more robust than DOL’s. Most notably, guidance has been promised on the changes to the hardship distribution rules that were made in February’s Bipartisan Budget Act of 2018 (BBA). The BBA changes, which generally go into effect for 2019 plan years, include a direction to Treasury to eliminate the six-month prohibition on plan contributions immediately following a hardship distribution. Treasury has indicated that its target date for issuing a proposed rule is August 2018, a date that should allow time for Treasury to meet the BBA’s February 9, 2019 deadline for finalizing the changes. Further guidance is also expected on the BBA modifications that (1) provide that a distribution will not fail to be a hardship distribution solely because the employee does not take any available loan under the plan and (2) allow earnings on elective deferrals, QMACs (and related earnings), and QNECs (and related earnings) to be withdrawn upon hardship.

Another area where Treasury/IRS guidance may be forthcoming is with respect to the 2017 tax reform changes that (1) eliminated the ability of taxpayers to recharacterize Roth IRA conversions; (2) extended the deadline for rolling over plan loan offset amounts; and (3) provided tax relief for retirement plan distributions taken by individuals affected by certain natural disasters. In addition, the 2017 tax bill’s amendments to the personal casualty loss deduction limitations may have indirectly (and unintentionally) modified eligibility for certain safe harbor hardship distributions. Those and other issues may be addressed in regulatory or subregulatory guidance this year.

But it is also good to remember to expect the unexpected. For example, there could be consequences for retirement plans and retirement plan administrators caused by upcoming guidance on totally unrelated tax provisions. The 2017 tax reform bill lowered the corporate tax rate to 21% and provided a new 20% deduction for owners of certain pass-through entities. Once more is known about how those (and other) new rules work, some enterprises might elect to switch from corporate form into a partnership or other form of business eligible for pass-through taxation—or vice versa. Or existing pass-through entities that don’t qualify for the 20% pass-through deduction might decide it is in their best interest to shift to corporate tax status given the reduced corporate tax rate.

Similarly, because of the way the 20% deduction and other changes such as the limitation on the deduction of business interest are calculated, some businesses might find it advantageous to restructure into multiple businesses or to consolidate. Others business may find it advantageous to turn some of their independent contractors and leased employees into W-2 employees. All of those decisions will be made independent of the implications for existing retirement plans, but they will have potential consequences for retirement plans maintained by those businesses.

Of course, the lack of any significant new retirement plan guidance this year may be good news or bad news, depending on your perspective. Often you wish they would just leave you alone. But sometimes you need an answer to your question. Other times you only want an answer if you get the answer you want. Good or bad, we will keep you up to date.

Randy Hardock is a regular columnist for Workplace Insights focusing on legislative and regulatory matters affecting employee benefit plans. He is a partner in the Washington, D.C., law firm of Davis & Harman, LLP, having previously served as Benefits Tax Counsel at the Treasury Department and as Tax Counsel to the Senate Committee on Finance. The opinions expressed are Mr. Hardock's and do not necessarily reflect the opinions of Bank of America Merrill Lynch. Davis & Harman, LLP is not an affiliate of Bank of America Corporation.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.