Compliance February 26, 2013

ASPPA Asks for More Roth Conversion Guidance

Provisions of the American Taxpayer Relief Act of 2012 (ATRA 2012), which expanded the availability of in-plan Roth conversions, increased the need for additional regulatory guidance.
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In particular, the American Society of Pension Professionals and Actuaries (ASPPA) request that the Internal Revenue Service (IRS) issue guidance confirming that the five-year period of participation required for a tax-free distribution from a Roth account that was created by an internal Roth conversion begins on the first day of the calendar year that contains the date of the conversion, or if earlier, the date of the first designated Roth contribution to the plan.  

In a comment letter, ASPPA explained that Internal Revenue Code section 402A specifies that a distribution from a designated Roth account is “qualified” and not subject to income tax only if it is made following a five-taxable-year aging period (the “Nonexclusion Period”). A fair reading of the statute and Congressional intent would indicate that the Nonexclusion Period for amounts internally rolled-over to a Roth account begins on the January 1st of the year that the In-Plan Roth Rollover contribution was made.   

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However, ASPPA not4ed, an informal IRS response to a question at the 2011 ASPPA Annual Conference reached a contrary result on the basis that a rollover is not a contribution for purposes of starting the Nonexclusion Period.   

The letter contends that Congress’ recent passage of the American Taxpayer Relief Act of 2012, effectively expanding the availability of in-plan Roth conversions by allowing for such conversions with respect to non-Roth funds that are not currently distributable (see “The Increased Availability of Roth In-Plan Conversions”), provides further support that the intent of Congress is to freely permit and encourage conversions.   

“Guidance affirming that the five-year aging period for a qualified distribution begins on the first day of the calendar year in which the IRR was contributed or “converted” within the Plan would be consistent with this and further Congressional intent,” the letter says.

 

Compliance February 26, 2013

What the DOL Has in Store

The Department of Labor (DOL) has released its regulatory agenda for 2013.
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According to Fred Reish, from Drinker Biddle & Reath’s Los Angeles office, the agenda includes: 

  • A re-proposal of a fiduciary advice regulation, including proposed prohibited transaction exemptions; 
  • A proposal to require a “guide” for 408(b)(2) disclosures; 
  • A proposal to require retirement income projections on participant benefit statements; and 
  • An amendment to require additional disclosures for target-date funds (TDFs) under both the participant disclosure rules and the qualified default investment alternative (QDIA) regulation. 

Speaking during the latest audio conference for the Inside the Beltway series, Bradford P. Campbell, from Drinker Biddle & Reath’s Washington D.C. office, said the DOL is scheduled to issue the fiduciary definition re-proposal in July. The original proposal would have significantly expanded who is an investment adviser subject to fiduciary rules to include almost everyone who has previously not been considered an adviser. This includes broker/dealers and insurance brokers that receive certain types of fees, such as referral fees or platform fees, Reish added.  

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According to Campbell, the proposal was less about the way a broker/dealer or insurance broker makes advice decisions or the quality of advice, and more about their business models and how they are paid. Some business models would be considered prohibited transactions. However, the DOL has agreed to provide some new prohibited transaction exemptions for activities that could make broker/dealers or insurance brokers a fiduciary.

Campbell said the DOL will make new rules about the rollover solicitation process, and that could be the new controversial element that reignites debate about the proposal this time. “When [the re-proposal] is finally published, all of us will have to spend a lot of time reading. The DOL has included so many aspects in this guidance, it will really have to make it clear what the rules mean,” Campbell stated.  

Reish told audio conference attendees to think of the “guide” for 408(b)(2) disclosures more like a table of contents. He said the DOL wants very detailed information about the page, section and placement in the section where a particular item is addressed in fee disclosures. Reish speculates the DOL will not require plan providers to issue guides for disclosures already received, because that would be very costly and burdensome, but will make the guide requirement prospective for disclosures going forward.  

The silver lining about the 408(b)(2) disclosure guide, according to Campbell, is that the DOL originally was going to add this requirement to the final disclosure rules but decided to deal with it separately. So, there will be a comment period, and it will realistically be 2014 before the regulation would come out.   

Concerning TDF disclosures, Campbell said the DOL has been talking about some sub-regulatory guidance—maybe a field assistance bulletin (FAB)—giving tips to plan sponsors about what to look for when selecting TDFs. If they do so, it is important for plan fiduciaries to be aware of it and use it in decisionmaking, or they are leaving themselves open to litigation, he warned.

On the subject of retirement income projections on participant statements, the DOL says it will explore whether and how a benefits statement should and could express participants’ accrued benefits in a defined contribution (DC) plan as a lifetime income stream in retirement as well as an account balance, according to Reish. Campbell noted that with this subject, the agency issued an advanced notice of proposed rulemaking, in essence asking what it should consider when crafting the proposal for the regulation. It will review comments, draft a proposed rule and ask for comments.   

Campbell said the two rounds of comments reflect the technical difficulties such a requirement presents, such as how to calculate the income projection and what assumptions about participants and the market are used.  

Reish added that the projections will be garbage if the DOL gets this wrong, but the agency cannot leave the industry wide open for making their own assumptions and calculations, because some will make extreme projection decisions that will make it look like participants are way better- or way worse-off than they are.  

Campbell said the regulation will be a trade-off for service providers, as many are already providing such projections. They may be giving up some flexibility in calculation assumptions, but they will also be gaining some fiduciary protection.

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