REVIEW OF FINAL FIDUCIARY RULE
In early April, the DOL released final rules regarding fiduciary standards to address conflicts of interest. In addition, the DOL issued a revised Best Interest Contract Exemption (BICE) and the final amendments to existing exemptions under ERISA’s prohibited transaction rules. The new rule expands the types of activities that trigger fiduciary status.
However, the rule includes some key exceptions and exemptions. One of the key exceptions includes participant education and advice, which the rule treats as not fiduciary in nature when provided by large plan fiduciaries and other professionals. The most important exemption is BICE, which provides relief from some of the most stringent parts of the rule. For example, the BICE exemption may allow certain reasonable compensation for recommendations as long as the advisor does not provide misleading statements, acknowledges their fiduciary status, gives prudent and impartial advice, and discloses potential conflicts while including information on their revenue model.
Congressional Republicans have contemplated using the Congressional Review Act (CRA) or other alternatives to invalidate the rule, arguing that they are seeking to prevent an unworkable standard. However, we do not anticipate any significant legislation in 2016 related to the fiduciary rule given the abbreviated congressional calendar, upcoming elections, and threat of veto by President Obama.
EMPLOYEES OR INDEPENDENT CONTRACTORS
While this has not materialized into legislation or proposed regulations, the recent $100 million settlement by Uber with its drivers in California and Massachusetts on whether drivers are employees or independent contractors is having effects on a number of different employment issues. These effects have been noticed by Washington policy makers and have been noted as retirement-related issues, specifically relating to retirement security. Currently, many protections and benefits are afforded to traditional employees, but not independent contractors. This distinction may materialize as legislation or proposed regulations if policy makers seek to promote more portable retirement benefits. We are already seeing this at the State level, with many States passing legislation to create a State-run retirement plan that provides employees who do not have access to a retirement plan at work with a way to save for retirement.
EXPANSION OF OVERTIME COVERAGE
In May, the DOL released final regulations updating the overtime exemption for executive, administrative, and professional employees. The updated regulations will become effective December 1, 2016. The final regulations will more than double the current salary exemptions from overtime to $47,476 annually, up from $23,660 annually. The DOL estimates that the final rule will increase the number of workers eligible for overtime by approximately 4.2 million employees, moving workers from exempt status to overtime eligible. This change may require plan design changes to satisfy nondiscrimination rules if an employer’s lower paid employees have a greater percentage of pay that is not eligible for retirement benefits or contributions.
PRE-TAX AND AFTER-TAX CONTRIBUTIONS
In May, the IRS published final regulations amending rules for designated Roth accounts under qualified plans, essentially amending a less flexible position by the IRS in 2014. Previously, distributions that were “split” between multiple destinations were treated as a single distribution. The new position should provide significant tax planning rollover opportunities for plans allowing both pre-tax and after-tax contributions.
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.