For some time now, there have been rumblings of imminent issuance of guidance to amend the definition of fiduciary under ERISA.
This saga first began in October of 2010 when the Department of Labor’s EBSA proposed a new rule that would broaden the current definition of the term fiduciary under ERISA and extend such status to “any person who provides investment advice to plans for a fee or other compensation.”
Although the proposed rule mirrored the current definition of a fiduciary as stated in Section 3(21)(A)(ii) of ERISA in many regards, the prior DOL regulations limit the meaning of the term “investment advice” with a five-part test; all elements of which must be met before a person will be considered a fiduciary. The specificity of this regulation eliminates investment advisers from being considered fiduciaries under ERISA if they do not meet all the elements of the test.
The proposed EBSA rule caused consternation among investment advisors and brokers because it states, among other conditions, that any person who is an investment advisor under the Investment Advisors Act of 1940 will be a fiduciary as long as he or she provides investment advice for a fee. Also, one part of the five-part test (the requirement that advice be provided on a regular basis) was removed; under the DOL proposal, a single instance would suffice for a person to be considered a fiduciary under the proposed rule. The breadth of this rule was met with strong opposition and assertions that the proposed rule amounts to over-regulation and will lead to increased investment costs for middle class families.
Given the strong opposition to its proposal, EBSA withdrew these proposed regulations in 2011 with stated intentions to re-propose them. In the following discussion, we will summarize the current state of that promised guidance.
On October 29, 2013, the House of Representatives passed a bill (named the “Retail Investor Protection Act,” discussed here) which, among other things, is intended to defer the release of new regulations by the DOL that modify the definition of the term fiduciary under ERISA. The bill states that the DOL cannot release any new ERISA regulations defining the term fiduciary until sixty (60) days after the Securities and Exchange Commission (“SEC”) has issued a final ruling regarding the “standards of conduct for brokers and dealers pursuant to the second subsection (k) of section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 780(k)). The house bill would also require the SEC to publish formal findings in the Federal Register that the rule would benefit retail customers by minimizing any confusion surrounding standards of conduct for brokers and dealers, and to “consider the differences in the registration, supervision, and examination requirements applicable to brokers, dealers, and investment advisors.” The bill has been referred to the Senate; however, even if it passes in the Senate, the President has indicated his intentions to veto it.
Barring some new legislation, we expect that the EBSA announcement from late 2013 that the rule would be re-proposed in August 2014 should carry the day. This August 2014 deadline was intended to accommodate talks between DOL Secretary Thomas Perez and representatives from both sides of the political divide (and, in doing so avoid the need for legislation like the Retail Investment Protection Act). Accordingly, August, 2014 would be the earliest date by which we could expect to have regulations that modify the current definition of fiduciary under ERISA.
On February 4, 2014, the Committee on Ways and Means sent two bills to the House that, if enacted, would affect the requirement that employers share responsibility for health coverage costs by narrowing the definition of “full-time employee” for purposes of the employer mandate provisions of the Affordable Care Act (“ACA”).
The ACA includes employer shared responsibility provisions that are applicable to employers with 50 or more full-time employees. According to these “employer mandate” or “play or pay” provisions of the ACA, such employers must either provide adequate health insurance coverage for their full-time employees or pay a penalty. Currently, the ACA generally provides that a full-time employee is one who performs at least 30 hours of service per week in any given month.
The first bill (H.R. 2575, Save American Workers Act of 2014) working its way through Congress was drafted in response to concerns that employers will lay off employees or cut hours in order to fall below the 50 full-time employee threshold and avoid having to offer health coverage or pay penalties. To alleviate some of these concerns, the bill seeks to increase the minimum service hours to 40 hours per week for purposes of the ACA. (A copy of the Joint Committee on Taxation report on this bill is available here.)
The second bill (H.R. 3979, Protecting Volunteer Firefighters and Emergency Responders Act), proposes to exempt bona fide volunteer services from being considered services by a full-time employee. The rule also recommends that the hours of volunteer firefighters and other volunteer emergency responders should not be used for purposes of calculating the 50 full-time employee threshold. The proposed rule follows existing Federal wage and hour laws applicable to volunteers. (A copy of the Joint Committee on Taxation report on this bill is available here.)
On February 10, 2014, the Department of Treasury and the Internal Revenue Service issued regulations providing guidance on the employer mandate, as described in our prior post. The guidance includes a clarification that service performed for government or tax-exempt entities by bona fide volunteers such as volunteer firefighters and emergency responders will not be counted for purposes of determining the number of full-time employees under the ACA. As a result, there seems to be a general consensus that such volunteer hours should not be counted as full-time service hours, and it may be likely that H.R. 3979 will become a law. However, it remains to be seen whether H.R. 2575 will be enacted. Because its passage could potentially benefit some large employers, its development should be closely monitored.
We thank our extern, Marsha Clarke, for her help in preparing this post.
The long awaited final regulations regarding the employer shared responsibility provisions of the Affordable Care Act were released on February 10, 2014. They offer new transition relief and provide much needed guidance in several areas including how to determine which employees are “full-time” for purposes of the mandate. Although the 59 pages of regulations will surely provide ample fodder for numerous future posts, we’ll start with a rundown of some of the most notable provisions:
New Transition Relief
Employers with 50-99 full time employees have an additional year to comply
The new compliance date for these employers is January 1, 2016 (or the first day of new plan year beginning in 2016 for non-calendar year plans). In order to avail themselves of the transition relief, these employers must certify that they satisfy the following eligibility conditions:
- The employer must employ on average at least 50 full-time employees but fewer than 100 full-time employees on business days during 2014.
- The employer must not reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition. A reduction for a bona fide business reason such as a sale of a division, a change in the economic marketplace in which the employer operates or a termination of employment for poor performance will not affect eligibility for the transition relief.
- The employer must not eliminate or materially reduce the health coverage it offered to employees as of February 9, 2014. This requirement is satisfied if (1) the employer continues to provide a contribution toward the cost of employee-only coverage that either: (a) is at least 95 percent of the dollar amount of the contribution that it offered on February 9, 2014, or (b) is the same or higher percentage of the cost of coverage that it offered on February 9, 2014; (2) any change in benefits under the employee-only coverage must continue to provide “minimum value”; and (3) the employer must not narrow or reduce the class or classes of employees and dependents to whom coverage is offered.
Employers with 100 or more employees must still comply in 2015 but the coverage requirement is temporarily eased
The employer mandate will still apply to these employers beginning January 1, 2015 (or the first day of the new plan year beginning in 2015 for non-calendar year plans); however, the following transition relief applies:
- For the 2015 plan year only, these employers will be treated as satisfying the mandate if they offer coverage to at least 70 percent (rather than 95 percent) of full-time employees.
- Beginning January 1, 2016 (or the first day of the new plan year beginning in 2016 for non-calendar year plans) these employers will need to offer coverage to at least 95 percent of full-time employees in order to avoid the “play or pay” penalty.
- This transition relief is available only if the plan year is not modified after February 9, 2014 to begin on a later calendar date.
“Full Time” Employee Guidance
Employers have struggled to determine which of their employees are “full time” for purposes of the employer mandate. It has proven difficult to apply the rules to certain types of employees. The final regulations provide the following clarifications:
- Volunteer hours performed for government or tax-exempt entities by “bona fide volunteers” such as volunteer firefighters and emergency responders will not be counted.
- Generally, compensation provided to a “bona fide volunteer” must be limited to reimbursement for reasonable expenses incurred in the performance of services and reasonable benefits including length of service awards and customary nominal fees.
- Work-study hours performed by students participating in federal or state-sponsored work-study programs will not be counted.
- All other types of student employment performed for an educational organization or other employer must be counted.
- No special rule was adopted for interns and externs; general rules apply.
- Educational Employees:
- Educational employees such as teachers will not be considered to be part-time just because their school is closed or it operates on a limited schedule during the summer.
- Adjunct Faculty:
- Until further guidance is issued, employers may use any reasonable method for crediting hours of service that is consistent with the employer mandate rules.
- One reasonable method expressly recognized in the final regulations is to credit adjunct faculty members with 2 ¼ hours of service per week for each hour of teaching or classroom time in order to account for additional activities such as class preparation, grading, office hours and faculty meetings.
- To the extent that any future guidance modifies this “bright line” rule, employers will be permitted to rely on this rule for at least six months after issuance of the guidance and at least through the end of 2015.
Stay tuned for future ruminations regarding these and other provisions in the regulations!
As was widely reported last week, and subsequently reversed on Friday, America Online’s CEO announced that, due to a $7.1 million cost increase resulting from the Affordable Care Act, AOL was going to change how it made its 401(k) matching contribution in order to offset costs. In short, AOL would have imposed a requirement that employees be employed on the last day of the plan year to receive the match. For employees who leave during the year, the match would be $0. After an employee uproar, AOL reversed course.
AOL was (predictably) being criticized by ACA supporters for blaming the ACA and was (predictably) applauded by ACA opponents as providing further evidence that the ACA is harmful to the economy. The fact is, AOL is not the first employer to suggest that ACA is increasing costs. A study done by Deloitte, and reported here, showed that 85 percent of employers said ACA increased costs. Additionally, a more recent report by the National Small Business Association showed that a third of small businesses surveyed are intentionally not growing due to the increased costs from ACA.
As plan sponsors wrestle with these increased costs, one place they can look to offset these costs (as AOL did) is to retirement plans. The thinking could be that there are only so many benefit dollars to go around, so it makes sense to rob retirement to pay healthcare. As a general rule, humans tend to discount risks that are far in the future, so a decrease in retirement contributions will seem to many employees to be less harmful than an increase in health insurance premium contributions.
However, cutting retirement contributions, in a way, could be just trading one problem for another. As the President’s myRA proposal and Sen. Harkin’s recent legislative proposal show, there is also ample concern in Washington over retirement readiness. So is cutting retirement contributions the right answer?
As the NSBA report shows, there are other measures that employers can take to avoid the increased ACA costs. Our point is not to criticize the AOL decision (or its reversal); each company has to make its own decisions about what makes sense. And money, of course, isn’t free and not everyone can issue billions of dollars of debt to China. However, before cutting retirement contributions, employers should consider the impact that will have on the long-term retirement health of their employees.
Senator Tom Harkin (D-IA) recently proposed legislative language for his USA Retirement Funds that we initially wrote about last year. The new proposed legislation would establish these USA Retirement Funds, which would be privately run by non-profits, employer associations, employee organizations, financial institutions and other organizations approved by the DOL. The Funds incorporate some defined contribution and some defined benefit plan features.
Like a pension plan:
- The funds would be independently managed, rather than participant-directed.
- The benefits would be paid over a person’s life with survivor benefits and certain spousal protections (although some DC plans do offer these features as well).
Like a defined contribution plan:
- It would have employee payroll deduction contributions, more like the current 401(k) plan system, and individuals would be automatically enrolled.
- Employee contributions would be capped at $10,000/year.
- Employer contributions would be optional and capped at $5,000/year (indexed for inflation).
- Individuals could make a one-time, lump sum withdrawal after age 60 for hardship. Many DC plans allow hardship distributions and/or distributions after age 59 1/2.
All employers (other than governments and churches) with more than 10 employees in the prior year who received at least $5,000 in compensation would be subject to these rules. An employer would otherwise only be exempt from automatically enrolling its employees in the USA Retirement Funds if it offered a pension or what Sen. Harkin calls a “good 401(k).” To Sen. Harkin, a “good 401(k)” is one with automatic enrollment and a lifetime income option. Additionally, frozen pension plans would not count as offering a pension plan for purposes of this exemption under his proposed legislation.
Some other interesting tidbits from the proposed legislative language are:
- The automatic contribution to the USA Retirement Funds would be 3% for employees who are automatically enrolled in 2015 and would increase 1% per year until 2018 at which point it would be fixed at 6%. In other words, the level of the employee’s automatic contribution depends on the year in which the employee is automatically enrolled It does not appear that employee contributions are “auto-escalated” (i.e. automatically increased each year).
- If an employee opted out of the automatic contribution, or elected a different percentage, that election would be revoked after 2 years and the employee would be reenrolled at the applicable automatic contribution rate unless he or she took action to change it.
- Each Fund will be governed by a board of trustees of at least 3 people who are independent of service providers under the fund and meet certain other qualification requirements.
- Each board of trustees must, among other requirements, establish procedures allowing participants to petition the board to remove a trustee and to comment on the management and administration of the Fund. Additionally, if a Fund has more than $250 million in assets, the participants must be allowed to cast a non-binding vote to approve or disapprove the compensation of the trustees at least once every three years (a trustee “say on pay” if you will).
- Payments must begin before age 72. So for participants looking to avoid RMDs, they could push them back a bit by rolling over into one of these funds.
Also buried in the Harkin legislation are some ERISA amendments that would allow open multiple employer plans (the legislation refers to them as “pooled employer plans”), subject to meeting certain requirements. There are also several additional ERISA changes.
The full text of the bill is available here.
The Director of the White House’s Office of Health Reform, Jeanne Lambrew, reportedly announced recently at a health services and policy research conference that the Obama administration hopes to “ratchet up” grants for the State Innovation Models Initiative in 2014 to aid in development of the marketplace throughout this year.
As described on CMS’s website, all states with the exception of Alaska have applied for and received differing level of grants to establish a Health Insurance Marketplace. Grant levels are impacted by the pace at which states are progressing and, as reported by CMS, “[s]tates that are moving ahead on a faster pace can apply for multi-year funding, known as level two establishment grants. States that are making progress in establishing a Marketplace through a step-by-step approach can apply for funding for each project year, known as level one establishment grants.” The Kaiser Family Foundation is tracking the amount of the grants by type (i.e., planning or establishment/implementation).
Check out CMS’s interactive map to see how your state is progressing with receipt of its grant.
Americans are notoriously poor savers. Research shows that unless a savings program like a 401(k) plan is offered at the workplace, Americans do not save regularly. As the retirement savings model has moved away from a guaranteed income model found in defined benefit plans to the requisite self-sufficiency of savings through a defined contribution arrangement, pressure has been placed on the retirement system to make certain that American workers have sufficient assets for a dignified retirement.
In an effort to change the non-saving culture, the Treasury Department, as ordered by the President without the need for Congressional approval, is developing the myRA (my Retirement Account) to give people the opportunity to save in what should be a simple and straightforward manner. The myRA (and note, Treasury says it is not pronounced “Myra”) is intended to supplement Social Security and other possible savings. It is not expected to be the primary source of retirement income for Americans. In many respects, it looks like a payroll reduction Roth account for small savings amounts.
Here are some of the features of myRA as announced by the Treasury Department:
- Looks and feels like a Roth IRA with the same tax treatment (after-tax contributions, tax-free growth) with annual income eligibility limits beginning at $129,000 for an individual and $191,000 for a couple, both of which will be subject to COLA adjustments.
- It is a no-load arrangement, i.e., there will be no fees for the investments (although a White House fact sheet hints that there could be some other costs).
- A myRA can be opened with as little as $25, and direct salary reduction of at least $5 can be funded into the myRA.
- The account balance will never go down in value.
- Security for a myRA will be the full faith and credit of the United States – in other words, myRAs will be invested in U.S. savings bonds and other Treasury instruments while earning interest at the variable rate that is the Government Securities Investment Fund rate in the Thrift Savings Plan for Federal employees, i.e., a very low rate of return.
- There will be no employer contributions.
- There will be no requirement for employers to participate – but Treasury believes that participation by employers will help them attract and retain employees at little or no cost (just the cost of processing and transmitting the contributions) and that doing so will be an easy way for them to assist employees in improving their financial situations through saving.
- Once an employer agrees to participate, employees will sign up online. Details will need to be provided in order to coordinate the employee enrollment with the employer payroll system.
- myRA is fully portable.
- myRA contributions can be withdrawn at any time on a tax-free basis .
- Earnings in a myRA will be tax-free unless withdrawn before the saver is 59½.
- Savers can build their account for 30 years or until the myRA reaches $15,000. Once the first of these is reached, the myRA will rollover to a private-sector Roth IRA. Treasury will promulgate rollover rules.
- myRAs are not intended to replace other savings arrangement like 401(k) plans and 403(b) plans. myRAs are intended to benefit those employees who do not have access to an employer sponsored plan.
- Treasury expects myRAs to be available in late 2014.
- For more information, check out the Treasury’s new website.
Whether it will actually change the savings culture is certainly open for debate and much will depend on the details. However, the voluntary nature of myRAs may undermine their usefulness in increasing savings, as research shows (and the President’s fact sheet agrees) that automatic enrollment has a more significant effect on encouraging participation than merely sponsoring a plan. Additionally, payroll-deduction IRAs already exist (although not necessarily backed by government securities), so myRA is more of a twist on an existing idea than a whole new vehicle. All of that said, most retirement professionals will not have a problem adding another tool to the toolbox of saving for retirement and another line on the long list of abbreviations in the retirement space.