IMPACT OF TAX REFORM ON RETIREMENT PLANS
As noted in last quarter’s legislative update, there was concern that, in an effort to replace lost tax revenue, the coming tax reform legislation could impact defined contribution retirement plans by lowering current contribution limits, placing restrictions on plans, or even eliminating some of the tax benefits of 401(k) plans and IRAs through the compulsory conversion of retirement plans to Roth-like plans, dubbed “Rothification.” However, while some tax reform changes will have minor impacts on retirement plans, the fears did not materialize and Congress will not force participant contributions to be made after-tax.
Many of the considerations in the House and Senate bills will be effective in 2018, so plan sponsors may need to make operational changes to their plans this year. Included in the list of items that may be impacted by the recent tax proposals are: disaster relief, in-service distributions, hardship distributions, loan offsets, and closed defined benefit plans.
DISASTER RELIEF IMPACT ON LOANS AND HARDSHIP DISTRIBUTIONS
Government organizations have focused on providing tax relief to both individuals and businesses impacted by significant natural disasters, such as the California wildfires and Hurricanes Harvey, Irma, and Maria. IRS Announcements 2017-11, 2017-13, and 2017-15 make relief available to retirement plan participants through loans, hardship distributions, and unforeseeable emergency distributions. The new law raises the loan limits for individuals affected by disasters to the lesser of $100,000 or 100% of the vested account balance (up from $50,000 or 50%). The law also extends loan repayments, allowing them to be delayed up to one year, and participants who default on loans have three years to pay the income tax on defaulted funds (rather than facing an immediate tax bill). President Trump also signed legislation to ease distribution rules and waive the 10% early distribution penalty for participants affected by disasters, if taken by the end of 2018.
Note: Pursuant to Announcement 2017-15, if a plan does not provide hardship distributions or loans but would like to make those available, the plan would need to be amended to allow for this type of action.
ANOTHER EXTENSION FOR FIDUCIARY RULE
The Department of Labor (DOL) released a notice on November 27, 2017 that extends implementation of certain portions of the Fiduciary Rule an additional 18 months, until July 1, 2019. This extension does not apply to the activities that trigger fiduciary status, which went into effect on June 9, 2017, but is intended to allow the DOL time to consider changes and alternatives to the Best Interest Contract Exemption (BICE) and the Principal Transactions Exemption (PTE 84-24). The future of the Rule will be determined by the incoming Assistant Secretary of Labor of the Employee Benefits Security Administration.
FIDUCIARY DUTY RETIREMENT PLAN FEE VICTORY FOR DEFENDANTS
In September, in Sweda v. University of Pennsylvania, a federal district court dismissed a class action against large private colleges. This is an example of a breach of fiduciary claim where the district court dismissed a class action challenging investment and plan fees. It had been alleged that the colleges unreasonably failed to use their bargaining power to negotiate lower administrative costs and also that the plans charged unnecessary fees for poor performing investments. The court observed that there are no longer pronounced differences between 401(k) and 403(b) fiduciary duties and the fiduciary duty standard from the 401(k) case, and therefore these duties would apply equally to 403(b) fiduciary breach claims. The court dismissed the claims of breach of fiduciary duty.
However, it is worth noting that the Supreme Court, in Tibble v. Edison, held that there is a continuing obligation for retirement plan sponsors to monitor investments and remove imprudent investments, including monitoring fees.
IMPORTANT DISCLOSURES: These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—Arnerich Massena cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.