On February 3, 2017, President Trump directed the DOL to re-examine the final rule’s impact. As a result, on March 2, 2017, the DOL opened a 15-day comment period (which ended last Friday) on a proposed 60-day delay of the rule’s effective date, from April 10, 2017 to June 9, 2017.
Simultaneously, the DOL opened a 45-day comment period on the substance of the actual rule. This second comment period affords the DOL with an opportunity to review comments before June 9, 2017 (the proposed delayed effective date). At such point, the DOL could allow the final rule to take effect, propose an additional extension in order make amendments to the rule based on the comments received or withdraw the rule.
With the final rule’s current effective date quickly approaching and no indication on whether a delay would occur, there was growing uncertainty among members of the retirement services industry about how to proceed. For example, if the DOL doesn’t announce its decision to delay implementation of the rule until after April 10, 2017, a “gap” would exist between April 10, 2017 and the date the DOL actually issues the final rule delaying the implementation. The other issue is that with entities ceasing their compliance efforts in anticipation of a delay it is highly unlikely such entities will be able to comply with the rule by April 10, 2017, if the delay does not occur.
The DOL issued Field Assistance Bulletin 2017-01 to assuage the above concerns. Pursuant to the Bulletin, the DOL will not take enforcement action against an adviser or financial institution during the “gap” period. In addition, in the absence of a delay in the final rule’s effective date, the DOL will refrain from initiating enforcement actions provided the adviser or financial institution complies with the final rule, including sending out required disclosures to retirement investors, within “a reasonable period” after the publication of a decision not to delay the effective date.
So breathe easy for the moment, but recognize this development relates to a delay, and not repeal, of the final rule.
For additional insight and perspective, read this client alert from our broker-dealer practice.
In a prior post, we covered President Trump’s order directing the Department of Labor to review the new regulation and, as it deems appropriate, to take steps to revise or rescind it. The Employee Benefits Security Administration (“EBSA”) has taken the first step in response to that order by proposing a 60 day delay in the applicability date. The final rule had an applicability date of April 10, 2017. Likewise, the prohibited transaction exemptions (“PTEs”) included in the final rule, such as the Best Interest Contract Exemption, had an applicability date of April 10, 2017.
In light of the President’s prior order, EBSA has released the text of a proposed rule, to be published on March 2, 2017, delaying the applicability date of the final rule and the PTEs by 60 days. EBSA noted that there were only 45 days until the rule and the PTEs became effective and said that it felt it needed more time to perform the analysis required by the President’s order.
EBSA is inviting comments on the proposal to extend the applicability date of the final rule and PTEs. Comments must be submitted quickly; the comment period will end 15 days after publication.
On January 20, 2017, President Trump signed an executive order entitled “Regulatory Freeze Pending Review” (the “Freeze Memo“). The Freeze Memo was anticipated, and mirrors similar memos issued by Presidents Barack Obama and George W. Bush during their first few days in office. In light of the Freeze Memo, we have reviewed some of our recent posts discussing new regulations to determine the extent to which the Freeze Memo might affect such regulations.
The Regulatory Freeze
The two-page Freeze Memo requires that:
- Agencies not send for publication in the Federal Regulation any regulations that had not yet been so sent as of January 20, 2017, pending review by a department or agency head appointed by the President.
- Regulations that have been sent for publication in the Federal Register but not yet published be withdrawn, pending review by a department or agency head appointed by the President.
- Regulations that have been published but have not reached their effective date are to be delayed for 60 days from the date of the Freeze Memo (until March 21, 2017), pending review by a department or agency head appointed by the President. Agencies are further encouraged to consider postponing the effective date beyond the minimum 60 days.
Putting a Pin in It: Impacted Regulations
We have previously discussed a number of proposed IRS regulations which have not yet been finalized. These include the proposed regulations to allow the use of forfeitures to fund QNECs, regulations regarding deferred compensation plans under Code Section 457, and regulations regarding deferred compensation arrangements under Code Section 409A (covered in five separate posts, one, two, three, four and five).
Since these regulations were only proposed as of January 20, 2017, the Freeze Memo requires that no further action be taken on them until they are reviewed by a department or agency head appointed by the President. This review could conceivably result in a determination that one or more of the proposed regulations are inconsistent with the new administration’s objectives, which might lead Treasury to either withdraw, reissue, or simply take no further action with respect to such proposed regulations.
A Freeze on Reliance?
The proposed regulations cited above generally provide that taxpayers may rely on them for periods prior to any proposed applicability date. Continued reliance should be permissible until and unless Treasury takes action to withdraw or modify the proposed regulations.
The DOL Fiduciary Rule
The Freeze Memo does not impact the DOL’s fiduciary rule, which was the subject of its own presidential memorandum, discussed in detail elsewhere on our blog.
On Friday, President Trump issued an order directing the Department of Labor to review the new regulation to determine whether it is inconsistent with the current administration’s policies and, as it deems appropriate, to take steps to revise or rescind it.
The long awaited Fiduciary Rule expanded protection for retirement investors and included a requirement that brokers offering investment advice in the retirement space put clients’ interests first. Financial institutions that either implemented, or were rapidly completing, their compliance efforts to comply with the Fiduciary Rule will need to assess the impact of this order on these efforts. Notwithstanding many earlier reports that the rule would be delayed 180 days, the date on which the rule was to take effect (April 10, 2017) has not been delayed. However, it is anticipated that a delay will be forthcoming, making the decision whether or not to proceed with further compliance efforts a difficult one. Many of those institutions may choose to implement only certain aspects of the Fiduciary Rule, while delaying complying with other aspects of that rule, pending the results of the DOL review.
Some have speculated that regardless of whether the Fiduciary Rule is finally made effective, compliance with the Fiduciary Rule could become the new “best practice” model; however, it is unlikely that financial institutions will voluntarily assume most of the obligations and resulting exposure of serving retirees in a fiduciary capacity.
Last week, the Department of Labor (DOL) released adjusted penalty amounts which are effective for penalties assessed on or after January 13, 2017, whose associated violations occurred after November 2, 2015. You might remember that these penalties were just adjusted effective August 1, 2016 (also for violations which occurred after November 2, 2015); however, the DOL is required by law to release adjusted penalties every year by January 15th, so you shouldn’t be surprised to see these amounts rise again next year.
All of the adjusted penalties are published in the Federal Register, but we’ve listed a few of the updated penalty amounts under the Employee Retirement Income Security Act of 1974 (ERISA) for you below:
- For a failure to file a 5500, the penalty will be $2,097 per day (up from $2,063).
- If you don’t provide documents and information requested by the DOL, the penalty will be $149 per day (up from $147), up to a maximum penalty of $1,496 per request (up from $1,472).
- A failure to provide reports to certain former participants or failure to maintain records to determine their benefits remained stable at $28 per employee.
Pension and Retirement
- A failure to provide a blackout notice will be subject to a $133 per day per participant penalty (up from $131).
- A failure to provide participants a notice of benefit restrictions under an underfunded pension plan under 436 of the tax code will cost $1,659 per day (up from $1,632).
- Failure of fiduciary to make a properly restricted distribution from a defined benefit plan will be $16,169 per distribution (up from $15,909).
- A failure of a multiemployer plan to provide plan documents and other information or to provide an estimate of withdrawal liability will be $1,659 per day (up from $1,632).
- A failure to provide notice of an automatic contribution arrangement required under Section 514(e)(3) of ERISA will also be $1,659 per day per participant (also up from $1,632).
Health and Welfare
- For a multiple employer welfare arrangement’s failure to file a M-1, the penalty will be $1,527 per day (up from $1,502).
- Employers who fail to give employees their required CHIP notices will be subject to a $112 per day per employee penalty (up from $110).
- Failing to give State Medicaid & CHIP agencies information on an employee’s health coverage will also cost $112 per day per participant/beneficiary (again, up from $110).
- Health plan violations of the Genetic Information Nondiscrimination Act will also go up to $112 per day per participant/beneficiary from $110. Additionally, the following minimums and maximums for GINA violations also go up:
- minimum penalty for de minimis failures not corrected prior to receiving a notice from DOL: $2,790 (formerly $2,745)
- minimum penalty for GINA failures that are not de minimis and are not corrected prior to receiving a notice from the DOL: $16,742 (up from $16,473)
- cap on unintentional GINA failures: $558,078 (up from $549,095)
- Failure to provide the Affordable Care Act’s Summary of Benefits and Coverage is now $1,105 per failure (up from $1,087).
The penalty amounts listed above are generally maximums, but there is no guarantee the DOL will negotiate reduced penalties. If you’re already wavering on some of your new year’s resolutions, we recommend you stick with making sure your plans remain compliant!
It has been an eventful 10 days in the courts and in Congress for halting impending regulations and setting the stage to roll-back new rules implemented by the Obama Administration. Employers can expect a repeal of recently passed regulations is on the horizon in the area of benefits regulation.
ACA — 1557 Regulations: Discrimination Based on Gender Identity or Pregnancy Termination
A nationwide injunction prohibiting the Department of Health and Human Services (HHS) from enforcing nondiscrimination rules promulgated under ACA section 1557 as they relate to discrimination on the basis of gender identity or termination of pregnancy was imposed by a federal judge on December 31, 2016. (Franciscan Alliance, Inc. v. Burwell, N.D. Tex., No. 16-cv-108, 12/31/16) The plaintiffs argued that section 1557 regulations forced health care professionals and religious-based facilities to provide gender transition services against their medical judgment and religious beliefs.
Regulations under 1557 have been challenged in a number of suits across the country, the most recent being a case filed by a collection of Catholic organizations in North Dakota. (Catholic Benefits Ass’n v. Burwell, D.N.D., No. 3:16-cv-432, filed 12/28/2016) Plaintiffs are arguing that the rules improperly require religious health-care organizations and benefits providers to provide services and insurance coverage relating to certain procedures that are in violation of their religious beliefs.
Since the passage of these regulations, employer-sponsors of health plans have been scrambling to determine if the rules require that they cover gender reassignment, among other things. Generally speaking, most employer-sponsored health plans are not “covered entities” under Section 1557 because they do not receive direct subsidies from HHS.
The remaining antidiscrimination provisions of the 1557 regulations which prohibit discrimination on the basis of disability, race, color, age, national origin, or sex other than gender identity, were generally effective January 1, 2017.
The DOL Fiduciary Rule: Proposed 2-Year Delay for Effective Date (H. R. 355)
A bill was introduced by Rep. Joe Wilson (R-S.C.) on 1/6/2017 proposing a 2-year delay in the effective date of the DOL Fiduciary Rule. The Fiduciary Rule is scheduled to take effect April 10, 2017, with full compliance required by January 1, 2018.
Republicans have repeatedly challenged the DOL Fiduciary Rule, but presumably stand a better chance of success under President-elect Donald Trump.
En Bloc Reconsideration of Agency Regulations by Congress – Retroactive Consideration
Bills have been introduced in both the Senate (S.34) and the House (H.R 21) that would empower Congress to make a wholesale repeal at once of multiple regulations that were passed by the Obama Administration in the last half of 2016. The House passed the Midnight Rules Relief Act (H. R. 21) on 1/4/17, one day after it was introduced. The Senate bill was introduced 1/5/2017.
The measures amend the Congressional Review Act (“CRA”) to allow Congress to repeal multiple rules and regulations in one joint resolution. The CRA currently requires that regulations be considered individually.
Regulations promulgated in the last half of 2016 by the Department of Labor and the Department of Health and Human Services as well as other agencies could come under review under these bills.
New Requirements of the Process of Agency Adoption of Regulations
Two bills have been introduced in the House to add substantial Congressional review of regulations promulgated by governmental agencies, such as the National Labor Relations Board, The Equal Employment Opportunity Commission, and the Department of Labor. The “Executive in Need of Scrutiny Act” (H. R. 26) and the “Regulatory Accountability Act of 2017” (H.R. 5) substantially limit agencies by requiring multiple additional steps in the rulemaking process.
The “Executive in Need of Scrutiny Act” (H. R. 26) requires Congress to act before any major rules take effect. Under the bill, an agency promulgating rules would have to publish certain information in the Federal Register and include in its report to Congress and to the Government Accountability Offices 1) a classification of the rule as major or non-major, and 2) a copy of the cost-benefit analysis of the rule that includes an analysis of any jobs added or lost. The bill includes standards for determining if a rule is major or non-major and sets forth the congressional approval procedure for major rules and the congressional disapproval procedure for non-major rules.
The “Regulatory Accountability Act of 2017” (H.R. 5) likewise imposes a number of steps on the formulation of new regulations and guidance documents, clarifies the nature of judicial review of agency interpretations, and requires a rigorous analysis of potential impacts of proposed rules on small entities.
If statistics are any guide, by now a significant number of you have already broken your New Year’s resolutions. However, there’s still plenty of time to make new ones that you can break, er, keep. If you sponsor or work with an employee benefit plan (and odds are, if you’re reading this, that you do), then here are some ideas to keep in mind in the upcoming year:
- Fiduciary, Know Thyself. It important to know your fiduciaries (or know if you are one). Reviewing plan documents, charters, and delegations, among other possible documents, are key to determining who is an ERISA fiduciary. You should make sure that any individuals who have been designated are still willing and able to serve and, if not, they should be removed. While not as much of an issue for plan sponsors, advisors should also closely review the DOL’s conflict of interest/fiduciary rule to determine if it applies to them.
- Look Over Your Service Providers’ Shoulders. Even if you think you have outsourced one or more of your plan responsibilities, you’re still required, under ERISA, to monitor those providers to make sure they are doing their jobs properly. Additionally, if you have not done an RFP in a while for a particular service provider, it may be time to do one.
- Resolve to Improve Your Plan Governance. As we have detailed previously, the specter of litigation can be made considerably less scary by reviewing, and improving your plan governance.
- Wrap Yourself in the Protective Cloak of Procedurally Prudent Process. Not only is following a procedurally prudent process necessary to satisfy your fiduciary obligations, it is also your best protection from fiduciary breach claims. What does this mean? For each fiduciary decision you should: 1) inquire, 2) analyze, 3) consider alternatives, 4) seek help and advice as appropriate, and 5) document the process, actions and basis for the decision.
- And Add a Protective Layer of Fiduciary Insurance. After all, ERISA fiduciary liability is personal …and joint! Which means you could be liable for the sins of your fiduciary brothers and sisters.
- Calendar Reporting and Disclosure Requirements. From ACA reporting to sending out 401(k) statements and filing Forms 5500s, sponsoring an ERISA plan can involve a dizzying array of reporting and disclosure obligations. Take the time to sit down and review the obligations for each plan and calendar when they are due. This will prevent them from becoming deadlines that creep up on you unexpectedly. For assistance with retirement plans, consult the Retirement Plan Reporting and Disclosure Guides issued by the IRS and the DOL. Note also that your plan vendor may also publish a reporting calendar that will help you fulfill these obligations.
- Keep an Eye on Twitter (Yes, Really). Given the President-elect’s propensity to make economic news 140-characters at a time (no account required for that link to work), including tweeting about the ACA, it makes sense to keep an eye on what’s going on there. Of course, you could also follow us on Twitter for the latest benefit updates (whether or not Trump-related).
- Or at Least Keep an Eye on D.C. More generally, with Republicans controlling both houses of Congress and the White House, it’s possible that this year and next year could result in some significant changes in the employee benefits landscape. The Republicans are already working to repeal the ACA and are talking about tax reform, both of which will have substantial impacts on employee benefit plans. While both topics have been discussed frequently in recent years, only now do [to] the Republicans really have the ability to implement them. So stay tuned.
- Keep the Other Eye on the Courts, Particularly on Fee Litigation. Plaintiff’s lawyers continue to expand not only the plans which they are targeting for challenge, but also the type of fees being challenged. Plans sponsored by educational institutions were targets in 2016.
- And if you have one eye left, keep it on government enforcement action. We will report shortly on the 2017 enforcement priorities, but one area that is always at the top of the list is timely contribution to the plan of employee deferrals and loan repayments. Remember, the DOL requires that such amounts be paid into the plan “as soon as reasonably practicable”. The 15th day of the following month is a NOT a safe harbor.
It was bound to happen. For several years, the plaintiffs’ bar has sued fiduciaries of large 401(k) plans asserting breach of their duties under ERISA by failing to exercise requisite prudence in permitting excessive administrative and investment fees. It may be that the plaintiffs’ bar has come close to exhausting the low-hanging lineup of potential large plan defendants, and, if a recent case is any indication, the small and medium-sized plan fiduciaries are the next target. See, Damberg v. LaMettry’s Collision Inc., et al. The allegations in this class action case parallel those that have been successful in the large plan fee dispute cases. Now that the lid is off, small and medium sized plan fiduciaries should be forewarned of the need to employ solid plan governance to avoid, or at least well defend, a suit aimed at them.
Exceptional plan governance means that, at a minimum, plan sponsors (and designated fiduciaries) should consider the following items to help demonstrate that they are primarily operating their plans to the benefit of participants and their beneficiaries and then to reduce liability exposure for themselves:
- Understand and exercise procedural prudence – process, process, process
- Identify plan fiduciaries and know their roles and duties
- Seek and obtain fiduciary training for all plan fiduciaries
- Adopt a proper plan committee charter or similar document
- Appoint fiduciaries and retain service providers prudently and monitor them
- Know the difference between a 3(16), 3(21) and a 3(38) fiduciary and make prudent decisions with respect to retaining them
- Utilize a qualified administrative committee of no fewer than three members that meets regularly and memorializes its decisions properly
- Utilize a corporate trustee/custodian
- If you adopt an investment policy statement (as you probably should), follow it
- Understand and properly evaluate plan fees and 408(b)(2) disclosures and services and service contracts
- Monitor plan administration
- Memorialize actions taken and the reasons for doing so
- Retain a qualified independent investment advisor (although it may not make financial sense for small plan sponsors to pay for this service)
- Engage in periodic comparisons of fees and services being charged for similar plans (RFPs, RFIs, benchmarking)
- Address participant concerns promptly and, if necessary, seek advice of counsel in responding to participant complaints
- Understand and evaluate a proper operational structure for your plan
- Know the difference between a bundled structure and an unbundled one – with a really good record keeper
- Appreciate the nature of services to be provided
- Evaluate cost to participants and reasonable of fees for needed services
- Determine cost that the plan sponsor is willing to share
- Identify parties that will be making statements regarding the plan and its operation (like the plan’s TPA) and how there is control to avoid misstatements
- Determine responsibility for keeping plan documents current and confirm that it is ongoing
- Determine responsibility for claims processing and confirm that it is ongoing
- Verify that a proper ERISA bond is in place
- Procure fiduciary insurance
- Seek assistance of counsel as needed
- Evaluate the investment platform regularly, and, if a brokerage window is made available, be certain to understand it, how it works, and what its limitations might be
- Assure 404(c) compliance, if applicable
- Understand target date funds and how they work in your plan
- Establish solid internal controls
- Review current systems to confirm segregated responsibilities and that the IT systems being used for the plan (particularly payroll) are effective
- Confirm that those maintaining plan records are knowledgeable
- Confirm “good transfers” regularly
- Make certain that the proper definition of compensations is being used for example, by reviewing payroll coding against the plan document
- Be certain someone is responsible to verify data, particularly for nondiscrimination testing
While this list does not address every possible governance practice, following the applicable items appropriately should result in good plan governance. It will also be of value to your participants by demonstrating that you have their best interests at the forefront of plan operation. Additionally, the result should be better liability protection for you and the other plan fiduciaries. While the list may seem daunting, once you understand each of the steps and implement them, it will become easier and, with regularity, can become second nature.
The new Department of Labor rule defining the scope of who is an ERISA fiduciary (see our prior post here) has caused much consternation among investment professionals. Much of the new rule is focused on reworking the outer fringes of the ERISA landscape capturing those in the investment industry offering IRA and annuity products.
Given that investment professionals appear to be the primary target of the new fiduciary rule, employers may believe that this is one room in the ERISA house of horrors that they do not have to enter. To a large extent that is true because the concept of fiduciary status and the fee disclosure rules, as applied to traditional retirement plans, are already well entrenched. Still, employers need to consider whether certain providers to their retirement plans are newly covered by the revised fiduciary rule and determine whether those relationships are being conducted in accordance with the new rules.
In reviewing existing arrangements, employers having group health plans supplemented by health savings accounts should be aware that health savings accounts are specifically covered by the new fiduciary rule. As ERISA welfare plans, health savings accounts were outside the reach of the earlier fee disclosure rules. The rationale for covering health savings accounts under the new fiduciary rule is presumably the belief that a number of employees maintaining these accounts are using them as a way of establishing another source of retirement savings.
Before the new fiduciary rule takes effect, employers should examine their role with any health savings account arrangements to assess how the health savings accounts are being made available to employees, how the providers offering those services are being compensated, whether the compensatory arrangement needs to comport with the new fiduciary rule, and if so, how the provider intends to satisfy the requirements of the rule.
Earlier today, the Department of Labor (DOL) released the Conflict of Interest Final Rule. Click here to explore all 200+ pages. Among other things, this rule expands the definition of fiduciary, and requires that persons who give investment advice to retirement investors act in the best interests of those investors.
The DOL released significant additional guidance in connection with the Final Rule, including the best interest and principal transaction exemptions, a chart illustrating changes from the proposed rule, and FAQs. To access that additional guidance click here. We will examine the Rule in further detail, as well as the industry’s reaction to it, in future posts.