Compliance News
Art by Cecile Kim
IRS Contribution Limits for 2019
The IRS has announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019.
• According to Notice 2018-83, the contribution limit for employees who participate in 401(k), 403(b) and most 457 plans, or the federal government’s Thrift Savings Plan, is increased from $18,500 to $19,000.
• The catch-up contribution limit for employees ages 50 and over who participate in 401(k), 403(b), most 457 plans or the federal government’s Thrift Savings Plan remains unchanged at $6,000.
• The limit on annual contributions to an individual retirement account (IRA) will increase from $5,500—the amount set in 2013—to $6,000.
• The catch-up contribution limit for individuals ages 50 and older saving in an IRA is not subject to an annual cost-of-living adjustment and remains $1,000.
IRS Proposes Changes to Hardship Withdrawals
The IRS has issued a notice of proposed rulemaking related to hardship distributions from 401(k) plans.
The proposed regulations modify the Internal Revenue Code (IRC) Section 1.401(k)-1(d)(3)(iii)(B) safe harbor list of expenses that are deemed acceptable for meeting an immediate and heavy financial need by adding:
• “Primary beneficiary under the plan” for an individual who may need to pay qualifying medical, educational and funeral expenses;
• Damage to a principal residence—not necessarily in a federally declared disaster area—that would qualify for a casualty deduction under Section 165; and
• Expenses incurred as a result of certain disasters.
DOL Seeks to Expand Access to MEPs
Under the direction of President Donald Trump, the Department of Labor (DOL) is seeking to make it easier for small businesses to form association defined contribution (DC) retirement plans within a single administrative framework.
To this end, the DOL has published a set of proposed regulations under Title 29 of the Code of Federal Regulations to expand access to retirement saving options by clarifying the circumstances under which an employer group, association or professional employer organization (PEO) may sponsor a workplace retirement plan.
In particular, the proposed regulation clarifies that employer groups or associations and PEOs can, when satisfying certain criteria, constitute “employers” within the meaning of Section 3(5) of the Employee Retirement Income Security Act (ERISA) for purposes of establishing or maintaining an individual account “employee pension benefit plan” within the meaning of ERISA Section 3(2).
As an “employer,” a group or association may sponsor a defined contribution plan for its members, as can a PEO sponsor a plan for its client employers. All such plans are referred to as multiple employer plans, or MEPs. The proposed regulation would allow different businesses to join a MEP, either through a group or association or through a PEO.
Fiduciary-Standard Plans at Both the DOL and SEC
The Department of Labor (DOL)’s Employee Benefit Security Administration (EBSA) has a number of items on its regulatory agenda—for example, a proposed rule on the definition of “employer” for multiple employer plans (MEPs) and an interim final rule on the adoption of an amended and restated Voluntary Fiduciary Correction Program (VFCP).
Perhaps of widest interest is the continuation of the final rule stage for the DOL’s fiduciary rule and prohibited transaction exemptions (PTEs). The pertaining item notes that, on April 8, 2016, the agency replaced the 1975 regulation defining “fiduciary” with a new regulatory definition. However, its new definition was vacated by the 5th U.S. Circuit Court of Appeals.
The agency said it is considering regulatory options in light of the 5th Circuit opinion and has on its timeline that a final rule will be issued next September.
Meanwhile, a look at the regulatory agenda for the Securities and Exchange Commission (SEC) also shows a September 2019 date for a final action on its Regulation Best Interest. In April, the commissioners of the SEC voted by a four-to-one majority to propose a multi-pronged set of new impartial conduct standards and disclosure requirements that will apply to both financial advisers and broker/dealers (B/Ds) serving retail clients, which, in the eyes of the SEC, include retirement plan participants. The retirement plan and adviser industries have long called for the DOL and SEC to work together on a new fiduciary—or conflict-of-interest rule. There is conjecture that the corresponding dates on the agencies’ agendas signify this is happening.
PTE Request for Automatic Portability
The Department of Labor (DOL) has issued an advisory opinion letter in response to a prohibited transaction exemption (PTE) request by J. Spencer Williams, founder, president and CEO of Retirement Clearinghouse (RCH). Williams had sought the DOL’s opinion concerning the status of certain parties as fiduciaries within the meaning of Section 3(21)(A) of the Employee Retirement Income Security Act (ERISA) and Section 4975(e)(3) of the Internal Revenue Code (IRC). His request pertained to actions undertaken as part of RCH’s automatic portability program.
According to the DOL, when plan sponsors or other responsible fiduciaries choose to have a plan participate in the RCH program, they are acting in a fiduciary capacity and would be subject to the general fiduciary standards and prohibited transaction provisions of ERISA in selecting and monitoring the RCH program.
However, once the assets are transferred to the default individual retirement account (IRA), the plan sponsor of the former employer’s plan has no discretion or authority over the decisions of the IRA owner or RCH related to any future transfer of the default IRA assets.
A Call for Stronger Best Interest Regulations
The Securities and Exchange Commission (SEC)’s Investor Advisory Committee (IAC) submitted its views on the SEC’s proposed Regulation Best Interest, Form CRS [Customer Relationship Summary] and proposed Investment Advisers Act fiduciary guidance.
The IAC says, “All personalized investment advice to retail customers [should] be governed by a fiduciary duty, regardless of whether that advice is provided by an investment adviser or broker/dealer [B/D], to ensure that financial professionals act in their customers’ best interests and do not place their own interests ahead of their customers’ interests.”
The IAC says there are some actions the SEC should take to ensure that this goal is put into action, starting with clarifying that the standard for broker/dealers and investment advisers should always be to act in their customers’ best interests. The IAC would also like the SEC to expand the best interest obligation to dual registrant firms with respect to rollover and account recommendations.
Further, the IAC would like the SEC to explicitly characterize the best interest standard as a fiduciary duty and says the commission should continue to test the feasibility of proposed Form CRS disclosures.
The American Council of Life Insurers (ACLI) and the Investment Adviser Association (IAA) both commented on the SEC’s standard of conduct proposals, for the most part saying that additional interpretation of standards of conduct for investment advisers is unnecessary and that imposing broker/dealer standards on life insurers and investment advisers is inappropriate.
As for Form CRS, which would create a requirement for a uniform relationship disclosure document to be used by broker/dealers and investment advisers, the ACLI says it is not conducive to life insurance products.
UBS Sued Over Alleged RMBS Misrepresentations
The U.S. Justice Department filed a civil complaint against UBS AG and several of its U.S. affiliates, alleging that UBS defrauded investors throughout the U.S., as well as the world, in connection with its sale of residential mortgage-backed securities (RMBS) from 2006 through 2007.
RMBSs are often used by defined benefit (DB) plan sponsors in their portfolios.
As detailed in the complaint, over those two years, UBS misled investors about the quality of billions of dollars in subprime and Alt-A—i.e., alternative A-paper—mortgage loans backing 40 RMBS deals. Specifically, the complaint alleges, in publicly filed offering documents, UBS knowingly misrepresented key characteristics of the loans, thereby concealing the fact that they were much riskier and much more likely to default than UBS represented. Ultimately, the 40 RMBS sustained catastrophic losses.
“The complaint alleges that instead of ensuring that their representations to investors were accurate and transparent, UBS affirmatively misled investors and withheld crucial information from them about the loans in its deals,” stated U.S. Attorney Byung J. Pak in an announcement. “These practices resulted in massive losses to investors, harmed homeowners and ultimately jeopardized the banking system.”
However, UBS has fired back, saying the Justice Department’s claims are not supported by the facts or the law.
Putnam to Seek Supreme Court Input
Putnam Investments has asked, and the 1st U.S. Circuit Court of Appeals has approved, a stay in a case alleging that the investment firm engaged in self-dealing by including high-expense, underperforming proprietary funds in its own 401(k) plan.
In its motion, Putnam asked the Appellate Court to stay the case pending the filing and disposition of a petition for a writ of certiorari to the U.S. Supreme Court. The question for the Supreme Court is whether the plaintiff or the defendant bears the burden of proof on loss causation under Employee Retirement Income Security Act (ERISA) Section 409(a).
The circuit courts are split on the issue of whether, when a plaintiff shows that a fiduciary’s breach of duty led to plan losses, the burden shifts to the fiduciary to prove the loss was not caused by its breach, or the burden is on the plaintiff to prove that the fiduciary’s imprudence resulted in the loss. The question was set to go to the Supreme Court in a different case, but the parties in that settled before the high court had a chance to weigh in.