Current Regulatory Happenings in the Benefits World

Ilene H. Ferenczy, Esq.

As we begin 2016, we find ourselves in an interesting maelstrom of potential changes that may make the new year particularly challenging. While Congress is mired in political upheaval (which will likely get worse as the election year progresses), the Treasury/IRS and the Department of Labor are busy pursuing their own agendas.

The Fiduciary/Conflict of Interest Regulation

Unless you have been doing a “Rip Van Winkle” for the past year, you know that the DOL has reproposed its regulation relating to the definition of who is a fiduciary, and has expanded this definition to include many new people, as well as providers of certain services to IRAs.

At this point, the real story is the amount of negative reaction to the regulation. The DOL received more than 3,100 comment letters, including more than 30 from collections of members of Congress and the Senate. It is significantly harder for an incoming administration to retract regulations that have been finalized than it is to put a halt to a regulation that is still only proposed. This explains the DOL’s push to finalize the regulation before the inauguration of a new president in 2017. As the stated effective date of the regulation is eight months after publication in final form, one need only walk back the calendar from 2017 to realize that the regulation must be finalized in the first quarter of 2016.

How will the final version of the regulation change from the proposal? That is one of the great uncertainties. How much change can the DOL make (and is willing to make) in the short time left to it before its self-imposed deadline? Furthermore, a bill (H.R. 1090, the Retail Investor Protection Act) was passed by the House of Representatives in October that would put a halt to the DOL’s fiduciary regulation process until 60 days after the Securities and Exchange Commission issues a final rule governing the standards of conduct of brokers and dealers. However, all expectations are that the bill will not pass the Senate or, if it does, that it will be vetoed by the President.

While there is a lot of speculation about what will happen, it is impossible to know at this time. No one can really plan for the future in this regard, so “Keep Calm and Carry On” until we hear more.

IRS Plan Document Issues … More Preapproved Plans, Fewer Services

While the end of the defined contribution preapproved plan restatement period approaches (all restatements must be done by April 30, 2016), the IRS has been working on the next cycles to come up. In particular, lead documents for the 403(b) preapproved plan program were due to the IRS earlier in 2015, with the restatement period expected to begin in 2017. In addition, the lead documents for preapproved defined benefit plans — including newly permitted cash balance plans — were due to the IRS by Oct. 30, 2015. The actual restatement period for defined benefit plans is likely to begin sometime in 2018. Therefore, those who provide documents to plan sponsors can expect there to be a lag in 2016, but activity in the last two to three years of the decade.

In the meantime, the IRS has taken another significant step in its efforts to discourage the use of individually designed plans. In Announcement 2015-19, the IRS told stunned practitioners that, starting in 2017, it will no longer issue favorable determination letters except on initial adoption and termination. This action is apparently motivated by budget challenges being faced by the IRS, and will theoretically allow the IRS to redirect the energies of some of its employees away from determination letter review to other departments.

While there are some practitioners that prefer individually designed plans in principle, there are many, many plan provisions that are commonly adopted that are inconsistent with preapproved plans. For example, while the preapproved program now permits cash balance provisions in defined benefit plans, these provisions are quite limited. In general, a cash balance plan that is of a flavor other than plain vanilla may not fit properly on a preapproved document, such as plans that allow participant choice of investments for purposes of determining the rate of interest in the plan or those that contain floor offset arrangements.

Similarly, while the IRS is also permitting ESOP provisions in preapproved plans, those provisions are also limited. For example, ESOPs that permit preferred stock or stock bonus plans are not available on a preapproved document.

The IRS apparently anticipates that attorneys will “attest” to the qualification of plan documents, although that is not practical under the current rules. The IRS does not always publish its positions regarding permissible plan provisions, and those positions can change at any time. For example, the IRS’s current position that forfeitures cannot be used to reduce 401(k) safe harbor contributions is inconsistent with language that it permitted in the EGTRRA documents. The decision to deny permission for these provisions to continue was not pursuant to any change in law, regulation or official IRS guidance, and could not have been predicted by practitioners. If something like this happens after determination letters are unavailable, there will be no way for a lawyer to know if previously permitted provisions in an individually designed plan have become disfavored until the plan is audited.

Practitioners are encouraging the IRS to modify positions and procedures in relation to individually designed plans to provide the predictability that is needed to ensure that plans do not have surprise disqualifications. Furthermore, changes will be needed to Revenue Procedure 2013-12 (i.e., the Employee Plan Compliance Resolution System or EPCRS) to enable plans that cannot obtain current determination letters to be eligible for correction. As it stands, favorable determination letters (or their preapproved plan equivalents) are a prerequisite to be able to use the EPCRS procedures.

And finally, without the five-year cycle that has been present for individually designed plans since 2007, it will be impossible to know when the remedial amendment period for these plans expires. The IRS will need to fine-tune these rules, as well.

We’re Not Here to Help

Also apparently motivated by budgetary issues, the IRS has determined that its %