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Legislative Update

Current Developments from Washington, D.C.

November 2018

David Schultz, J.D.

THE DOL FIDUCIARY RULE

AND THE 5TH CIRCUIT DECISION

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5th Circuit Kills Fiduciary Rule!

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• Chamber of Commerce, et al. v.

U.S. Dept. of Labor

– 2-1 majority:

Directly contradicts statute and

Congressional intent

Unreasonable interpretation of the law

The rule and PTEs are “vacated”

• DOL not enforcing rule at present

– Anywhere

What Else Could Happen …

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• SEC issued preliminary proposed regulation

– Not ready for prime time, just first pass

• DOL can try to rewrite regulation to fit parameters of decision

– Don’t expect it to be the top

priority of this administration

• Congress could act

– Who are we kidding?

2018 Limits

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Section Limit 2017 Limit 2018 Limit

415(b) Max DB Benefit $215,000 $220,000

415(c) Annual Addition $54,000 $55,000

401(a)(17) Compensation $270,000 $275,000

402(g) Deferral $18,000 $18,500

414(v) Catch-up $6,000 $6,000

408(p) SIMPLE Deferral $12,500 $13,000

414(q) HCE $120,000 $120,000

416(i) Key EE Officer $175,000 $175,000

Social Security Taxable

Wage Base

$127,200 $128,400

LEGISLATION –

THE PRESIDENT AND CONGRESS

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Tax Cut and Jobs Act

• Actual Name: “An act to provide for reconciliation pursuant to titles II and V of the

concurrent resolution on the budget for fiscal year 2018”

• Comprehensive tax legislation with some retirement plan provisions

What Could Have Been There …

But Wasn’t

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•$2,400 limit on pre-tax 401(k) contributions

–Remainder Roth

•Compensation limit on catch-up contributions

•Stricter rules for 409A and 457(f) arrangements

•Consolidation of 403(b) and 457 plans with 401k plans

–Elimination of special 403(b), 457(b) catch-ups

•Expand 10% §72(t) early distribution penalty to gov’t

457(b) plans

•Reduction or freezing of limits (e.g., §§415, 401(a)(17),

402(g) etc.)

•Changes to the nondiscrimination and coverage rules

Tax Rates Cut

• Standard deduction increased

• Joint return rate comparison

2017 2018

Tax

Rate

Upper

bound

Tax

Rate

Upper

bound

10% $18,650 10% $19,050

15% $75,900 12% $77,400

25% $153,100 22% $165,000

28% $233,350 24% $315,000

33% $416,700 32% $400,000

35% $470,700 35% $600,000

39.6% 37%

Other Adjustments:Watch the Deductions Disappear

•Limit on home mortgage interest to $750,000 of

acquisition indebtedness, with no deduction home

equity loans

•Limit on deductions for state and local taxes

•Casualty loss limited to federally declared disasters

• Increase in charitable contribution limit, but repeal of

deduction for payments made in exchange for

college athletic event seats

•Repeal of miscellaneous itemized deductions,

alimony, moving expenses, and limit on certain

itemized deductions

•Repeal of “individual mandate” that applied a tax to

individuals not covered by health insurance

Corporate Rate Cuts

• Highest tax rate for C corporations cut from 35% to 21%

– If you “zero out” income annually, you don’t care about rate

• Modifies deductions for many business expenses (and permits expensing for some

things that were previously capitalized)

New Deduction for QBI

Qualified Business Income: Code §199A

Can deduct up to 20% of QBI

Applies to:

• Sole proprietorships

• Partnerships

• S corporation shareholders

• Estates and trusts

Two Limits on QBI Deduction

• If fully phased in:

– No QBI deduction for specified service trades or

businesses (SSTB)

– QBI deduction limited based on wages/depreciable assets

(UBIA)

Taxable income computed before 199A

deduction

Single Married

Filing Jointly

Limits don’t apply if taxable income less

than

$157,500 $315,000

Limits fully phased in at $207,500 $415,000

Three Kinds of Owners

• C Corporation;• Taxable income over $415K, $207.5K and

• SSTB or• Wages/UBIA = $0

• Phase-in territory; SSTB• Wages/UBIA too low

• Taxable income below $315K, $157.5K• Not SSTB; lots of wages/UBIA

Specified services

•Health,

•Law,

•Accounting,

•Actuarial science,

•Consulting,

•Financial services

•Brokerage services,

•Performing,

•Athletics,

• “Any trade or business where the principal

asset of such trade or business is the

reputation or skill of 1 or more of its

employees”

Deliberately left

off the list:

• Architecture

• Engineering

SSTB: Specified Service Trades or Businesses

Have I Got a Plan for You!

•Prospective client

–Single emergency room doctor,

sole proprietor

–QBI = $250,000 (20% = $50,000)

–Taxable income = $210,000

–No QBI deduction

•Add 401(k) plan ($53,500 contribution)

–Taxable income before QBI = $157,500

–Full QBI deduction ($31,500)

Retirement Plan Deduction Affects QBI

•Doctor: Sole proprietor, married

•Bottom line schedule C: $340,000

• Itemized deductions $40,000

•Net tax benefit of plan = $10,560, 19.2% of $55,000

QBI without plan QBI with plan

Bottom line schedule C $340,000 $340,000

Retirement plan deduction $0 $55,000

Taxable Income Before QBI $300,000 $245,000

199A deduction $60,000 $49,000

Final taxable income $240,000 $196,000

Tax $46,179 $35,619

Other Retirement Plan Provisionsof TCJA

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•Extension of time to roll over plan loan offsets

–Setup: P has participant loan outstanding. P leaves the

company (or the plan terminates). Plan offsets participant

loan, causing it to be taxed through to P

–Old rules: If P wants to avoid taxation on loan, must

cobble together equal amount of money and roll it to an

IRA or other employer plan within 60 days

–New rules: P has until tax return due date (including

extensions) to deposit the offset funds to a rollover account


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•Denial of recharacterization of Roth contributions and

rollovers

–Setup: P makes a contribution or rollover to a normal IRA,

but then decides it should be a Roth rollover (or vice versa)

–Old rule: P can ask trustee of IRA to transfer the funds to

the other kind of IRA before tax return due date and it’s

treated like it was always that kind of IRA

–New rule: cannot recharacterize once deposited

–Note: this does NOT apply to deposits made in 2017 that

were intended to be recharacterized by 10/15/18

Other Retirement Plan Provisionsof Tax Act

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•Codified relief for those who were affected by 2016

disasters if distribution made by 12/31/17

–No mandatory withholding or 10% premature distribution

tax

–Permitted if plan amended by end of 2018, even if money

not normally eligible for distribution (e.g., pre-age 59½

401(k) funds

–Three-year averaging of distribution

–Can redeposit distribution within three years and treated as

rollover (with no tax due on distribution)


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•No SH hardship for many casualty losses

–Setup: IRS regulatory safe harbor hardship includes

deductible casualty losses

–Old law: Personal casualty affecting taxpayer’s property is

deductible if not covered by insurance

–New law: Casualty is deductible only if in

federally declared disaster area

–Notes: This looks like an unintended

consequence of deduction change

–Effective 1/1/2018


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•Loss of Deduction for Overpayment Repaid to Plan

–Setup: Plan overpays participant in year one and

participant repays plan in later year

–Old rule: Participants used to be able to claim misc.

itemized deduction for repayments to plan

If amount exceeded $3,000, as alternative can claim

credit for prior year tax on amount repaid

–New rule: Misc. itemized deduction repealed

–Effective date: Repayments after 12/31/2017

But Wait: Congress Gives UsSome Sugar!

• Bipartisan Budget Act of 2018

– Adopts some of the proposed

Retirement Plan Simplification rules

that were in original Tax Law proposals

• Changes:

– 401(k) Hardship Simplification

– Disaster Relief to California

Wildfire Victims

Hardship Changes Effective for Plan Years After 12/31/18

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• Safe harbor hardship will not require six-month deferral suspension

• Allow hardships to be taken from

– Deferrals

– QNECs and QMACs

– Earnings on the above

• No requirement to take loan before taking hardship

• Amendment by end of 2019 likely required

August 31, 2018 Executive Order

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• Increase availability of MEPs

– DOL:

Clarify and expand circumstances under which employers can adopt MEP subject to appropriate safeguards

Increase retirement security for part-time workers, sole proprietors, working owners, and other gig economy workers

by expanding access to retirement plans

Within 180 days consider issuing rules

– Proposed Rule submitted to OMB on Sept 25, 2018

– Proposed Rule issued on Oct 22, 2018

– IRS:

Within 180 days consider modifying bad apple rule

DOL MEP Proposal – Association MEPs

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• Candidly, a little underwhelming

– Doesn’t BROADLY expand use of MEPs by unrelated ERs

• Proposed reg expands the types of organizations that can sponsor a MEP

– Does not apply to Open MEPs or MEPs covering EEs of related ERs not in the same controlled group

• Provides for “Bona Fide Groups or Associations of ERs” and “Bona Fide PEOs”

• Still waiting on Treasury to address the “one bad apple” rule

Bona Fide Groups or Associations

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• To be considered bona fide, the group or association must –

– Have a formal organizational structure with a governing body and bylaws or other similar indications

of formality;

– Be controlled, in form and substance, by its employer members, who also must control the MEP;

– Have at least one substantial business purpose unrelated to offering and providing employee benefits

to its employer members, though the primary purpose of the association or group may be to offer and

provide MEP coverage;

– Limit plan participation to employees and former employees of employer members and their

beneficiaries;

– Have members with a commonality of interests, meaning the employers must be either (i) in the same

trade industry, line of business, or profession or (ii) have a principal place of business within a region

that does not exceed the boundaries of the same state or same metropolitan area;

– Ensure that each employer member acts directly as an employer for at least one employee

participating in the MEP; and

– Not be a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm

(including recordkeepers and third party administrators) or an entity owned or controlled by such a

financial services firm.

Bona Fide PEO

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• To be considered “bona fide,” a PEO must –

– Perform substantial employment functions on behalf of the client employers;

– Have substantial control over the functions and activities of the MEP and assume responsibility for the

MEP as plan sponsor (under ERISA section 3(16)(A)), named fiduciary (under ERISA section 402),

and plan administrator (under ERISA section 3(16)(A), and (iii));

– Ensure that each client employer that adopts the MEP acts directly as an employer of at least one

employee who is a participant covered by the MEP; and

– Ensure that participation in the MEP is available only to employees and former employees of the PEO

and client employers and their beneficiaries.

• “Substantial employment functions” are defined in the reg

August 31, 2018 Executive Order (con’t)

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• Notices

– Within 1 year, IRS and DOL explore ways to

Make disclosures more understandable and useful

Reduce costs and burdens

Broader use of electronic delivery

• RMDs

– Within 180 days IRS:

Examine RMD tables

Determine whether they should be update annually or on other periodic basis

The Family Savings Act (H.R. 6757)

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• Addresses MEP issues

• Creates Universal Savings Accounts (USA)

• Eliminates SH Notice requirements for SH NECs

• Allows for late-year adoption of SHs using NECs

• Allows rollover to another account if an ER discontinues offering a lifetime income

option

• Allows for adoption of a plan by the due date of the ER’s tax return

• Provides a fiduciary safe harbor for guaranteed retirement annuity contract provider

selection in a DC plan

IRS GUIDANCE

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New VCP Fees …

Higher for Small Plans

Old fees

based on participants

New fees

based on assets

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Participants User fee

Less than 21 $500

21-50 $750

51-100 $1,500

101-1,000 $5,000

1001-10,000 $10,000

Over 10,000 $15,000

Assets User fee

Less than $500,001 $1,500

$500,001 - $10,000,000 $3,000

Over $10,000,000 $3,500

No special fees for participant

loans, late amender, RMDs, etc.

EPCRS: Rev. Proc. 2018-52

• Last revisions to EPCRS in 2016, 2013, 2008

• Changes found in Rev. Proc. 2018-52:

– Replaces Rev. Procs. 2016-51, 2013-12

– Incorporates guidance from

Rev. Proc. 2015-27 (loan failures/overpayments) and

Rev. Proc. 2015-28 (elective deferral failures)

– DL applications not permitted/required when filing under EPCRS

– Converts EPCRS fees to User Fees

– Provides that IDPs without a “current” DL may still use SCP

– Revises audit cap sanctions

– No partial refunds for anonymous submissions

– Removes references to IRS/SSA Letter Forwarding Programs

– Mandates electronic filing via Pay.gov – effective 4/1/19

Audit Memo on RMDs and Lost Participants

• Instructs auditors not to challenge qualified plan for failure to make RMD when due

if plan:

– Searched plan and related plan, sponsor, and publicly available records or directories for alternative

contact information

– Used any of the following:

A commercial locator service

A credit reporting agency

A proprietary internet search tool for locating individuals

– “Attempted contact via United States Postal Service (USPS) certified mail to the last known mailing

address and through appropriate means for any address or contact information (including email

addresses and telephone numbers)”

Preapproved Plan Program Revamped

(Rev. Proc. 2017-41)

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•Prototype and Volume Submitter combined into a single

program

–“Preapproved”

–Choice: Standardized or

nonstandardized

Nonstandardized can make minor

modifications

–Choice: Basic plan/adoption agreement

or specimen document

Notice 2018-5: DB Restatement Deadline

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• IRS issued approval letters for DB plans 3/30/18

• Restatement/5307 deadline is 4/30/20

• IRS will delay next DB cycle

– Otherwise next submission deadline

would be 1/31/2020

LABOR GUIDANCE

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New EBSA Leader

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•Preston Rutledge was

affirmed as Assistant

Secretary of Labor for EBSA

•Mr. Rutledge has been a Senior

Tax & Benefits Counsel at the Senate Finance Committee

•Has historically been sympathetic to retirement plan

practitioners

Final Disability Claims RegsEffective 4/1/18

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• Applies to qualified plans that adjudicate whether someone is disabled

– i.e., do not rely on outside determination, such as Social Security or Long-Term Disability Insurer

• More disclosure

• Big issue: “Culturally & Linguistically Appropriate Notice” – If 10%+ of population

in a county speaks only the same non-English language, need translated notices,

customer assistance lines

Final Disability Claims Regs

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• Relevant Languages: (https://www.cms.gov/CCIIO/Resources/Fact-

Sheets-and-FAQs/Downloads/CLAS-County-Data_Jan-2016-update-

FINAL.pdf)

Where Language

262 counties over 24 states and Puerto

Rico

Spanish

Apache County, Arizona Navaho

Aleutians East Borough and Aleutians

West Census Area, AlaskaTagalog

San Francisco County, California Chinese

Final Disability Claims Regs

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• Is there any reason why a qualified plan should not use outside source to adjudicate

disability?

– Use of Code section 105(c) disability language

– Other?

New Missing Participants Program

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• Includes terminating DC plans and small professional service DB plans

– One-time fee for benefits over $250. No ongoing maintenance or distribution charges

• Provides database and directory for unclaimed pensions from terminated plans

• Periodic PBGC searches for missing participants

• Effective for plan terminations on or after 1/1/18

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Questions?

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