IRS Issues Tax and Reporting Relief for Proposed Fiduciary Standard Consistent with Department of Labor Regulations

By Monte Schatz

There have been a significant series of regulatory announcements and rulings related to the fiduciary duty and its application to employee benefit plans.  The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The President by Memorandum to the Secretary of Labor directed the Labor Department to examine the impact of the fiduciary duty rule.  On March 2nd the DOL published 82 FR 12319 seeking public comments about questions raised in the Presidential Memorandum.  The March 2nd notice also provided that a 60-day delay in implementation would be effective on the date of publication of a final rule

The Principal Transactions Exemptions and the accompanying Best Interest Contract provisions, included as part of the fiduciary duty rule, also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. The BIC Exemption effectively states that the fiduciary advisor must sign a “Best Interests Contract” (BIC) with the client, stipulating that the advisor will provide advice that is in the Best Interests of the client.   The Principal Transactions Exemption allows compensation for certain transactions by certain broker-dealers, insurance agents, and others that will act as investment advice fiduciaries that would otherwise violate prohibited transaction rules that trigger excise taxes and civil liability.

Most investment industry groups’ concerns regarding any non-compliance during a “gap period” of the financial fiduciary rule focused on Department of Labor and its potential civil liability enforcement provisions as outlined under ERISA.  Additional concerns were raised concerning Internal Revenue Service enforcement provisions found in Internal Revenue Code §4975 prohibited transaction rules that provides for the imposition of excise taxes for violations of that rule.

As a result of delays of the Fiduciary Standard rules, the Department of Labor published Field Assistance Bulletin (FAB) 2017-01.  FAB 2017-01 provides that, to the extent circumstances surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance.

In Announcement 2017–4 the IRS stated, Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

SOURCES:

http://www.asppa.org/News/Article/ArticleID/8480

https://www.irs.gov/pub/irs-drop/a-17-04.pdf

© 2017 Vandenack Weaver LLC
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IRS Announces New Corrective Procedure for Failure to Adopt a Plan Restatement

By Joshua A. Diveley

Retirement plan sponsors that adopted a defined contribution plan document pre-approved for use by the IRS generally must restate their plan in full every six years. The next restatement deadline is April 30, 2016. If a plan sponsor does not adopt a restated plan document by the deadline, the plan is considered disqualified and is no longer entitled to tax-favored treatment. This may reduce the permissible deduction for contributions to the plan and make it harder for employees to save for their retirement and make tax-favored rollovers of distributions to other plans or individual retirement accounts.

Previously, the only way an employer could correct a failure to adopt a pre-approved plan by the deadline was to complete a submission under the Voluntary Correction Program. A new option allows a financial institution or service provider to request a closing agreement on behalf of plan sponsors. These would be similar to a group submission under the VCP, but under these closing agreements the organization doesn’t need to have made a systemic error.

For more information regarding the new corrective option, see: https://www.irs.gov/Retirement-Plans/New-Program-Allows-Providers-of-Pre-Approved-Plan-to-Correct-Missed-Deadlines.

© 2016 Vandenack Williams LLC
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SEC Announces Priorities for 2016; Protecting the Retail Investor From Retirement Advisors

The Securities and Exchange Commission (SEC) announced their priorities for 2016 and examining retirement plan advisors remains a focal point. In June of 2015, the SEC, through their Office of Compliance Inspections and Examinations (OCIE), launched the Retirement-Targeted Industry Reviews and Examinations initiative (ReTIRE). Since that time, OCIE has conducted over 160 examinations of retirement advisors and brokers, with over 115 on the advisors. The purpose, generally, is to protect retail investors and their retirement accounts.

With a priority on protecting retail investors, OCIE is examining SEC registered advisors to ensure they are taking adequate steps to follow their fiduciary obligation towards their client’s best interests. This often means the advisor’s fee is scrutinized, with practices such as reverse churning being the target. Reverse churning, in sum, is a practice of advisors putting investors into accounts that pay a fixed fee to the advisor, but usually fail to perform in a manner to justify that fee. For 2016, the review is expanding and will now include the practice, disclosures, and sales strategies for exchange traded funds (ETF). Two other new priorities include examining the sale of variable annuities and undisclosed public pension advisor gifts and entertainment.

The effort by OCIE is not to be confused with the Department of Labor (DOL) examination on retirement advisors, which is running concurrently. The DOL examinations under the Employee Retirement Income Security Act, however, is similarly focused on protecting the retail investor. Comments by those at the SEC and DOL suggest that the focus on protecting the retail investor through these investigations are likely to continue for some time.

© 2016 Vandenack Williams LLC
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IRS Instructs Employers to Disregard Compliance Questions Included on Form 5500

By Joshua A. Diveley

The IRS has instructed employers to disregard various compliance questions included on the “final” version of the 5500 forms and instructions released in late 2015 by the DOL. Among others, the questions no longer requiring answers address topics including:

– Recent plan amendments
– Coverage testing
– ADP/ACP testing
– In-service distributions
– Unrelated business taxable income
– Paid preparer information

The updated guidance was required due to the questions not being approved for use with 2015 filings by the Office of Management and Budget. Employers and practitioners are encouraged not to complete the questions for 2015 filings, however, doing so will not cause the filings to be rejected. Corrective instructions from the DOL and IRS have been issued, but the forms continue to contain the questions to be disregarded.

For the IRS press release, see: https://www.irs.gov/Retirement-Plans/IRS-Compliance-Questions-on-the-2015-Form-5500-Series-Returns.

© 2016 Vandenack Williams LLC
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Changes to Qualified Plan Determination Letter Program

The Internal Revenue Service (IRS) has made changes to the determination letter process for individually designed qualified retirement plans. For qualified plans currently in existence, several changes will occur beginning January 1, 2017. The 2017 changes will eliminate the 5 year remedial amendment cycle for individually designed plans and the accompanying determination letter process. Although the IRS will still accept determination letters for initial plan qualification and in other limited contexts, the 5-year amendment cycle and accompany determination letter process will largely be eliminated in 2017. The IRS has requested comments from practitioners on additional regulatory and other guidance needed to assist plan sponsors as a result of the changes announced by the IRS.

In addition, the availability of “off-cycle” determination letters has also been eliminated effective immediately. A plan’s determination letter application is filed off-cycle if it is submitted anytime other than during the last 12-month period of the plan’s remedial amendment cycle. Except for initial plan qualification determination letters, the IRS will no longer issue determination letters outside the parameters of the 5 year retroactive compliance cycle.

The IRS cites the need for more efficient use of resources in the eventual elimination of the 5 year retroactive amendment cycle determination letter process, and the immediate elimination of the off-cycle letters.

The IRS announcement may be found at the following link: http://www.irs.gov/pub/irs-drop/a-15-19.pdf

© 2015 Houghton Vandenack Williams
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Unbundling Fiduciary Fees

Recently, the Internal Revenue Service (IRS) issued final guidance on Internal Revenue Code (IRC) Section 67 as it pertains to a 2 percent floor for miscellaneous itemized deductions. This is important to fiduciaries of non-grantor trusts and estates because it will impact what fees can be deducted for the taxable year. The issue stems from several court cases, including a United States Supreme Court case, that placed confusion regarding the generally held notion that all fees and expenses associated with trust and estate administration were deductible.

The specific question pertains to a 2 percent floor and whether administration expenses, in aggregate, must exceed 2 percent of the adjusted gross income prior to being deductible. Before this confusion, a fiduciary could simply bundle all their administration expenses, classify it as such, and not concern themselves with the 2 percent floor. However, the various court interpretations have interjected confusion regarding fee bundling and whether each fee inside the bundle is subject to the 2 percent floor.

The guidance issued by the IRS attempts clarify the problem. Although the expenses can still be bundled, they must be bundled as expenses subject to the 2 percent floor and expenses that are not. This is much simpler in theory than in practice. Determining whether an expense falls into one category or the other remains tricky. Ultimately, this means that all expenses incurred by fiduciaries in the administration of a non-grantor trust or estate must be unbundled and classified. Although the IRS guidance lists specific expenses, it is not an exhaustive list. Unfortunately, there is not a perfect solution to this process and great care must be taken in the classification process.

© 2014 Parsonage Vandenack Williams LLC

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