While Congress’ attention has most recently been focused on the American Health Care Act, that bill will most likely not be the only proposed legislation that Congress will consider in 2017. It appears that a tax reform plan (the “2017 Tax Proposal”), which could also have a wide-reaching impact, is also on the agenda.

If the 2017 Proposal includes provisions relating to defined contribution retirement plans sponsored by private employers, such as 401(k) plans, the impact will be felt by employers and investment managers, as well as by plan participants. While the Trump Administration has stated that the current version of its 2017 Tax Proposal does not reduce pre-tax contributions to 401(k) plans, speculation continues that a later draft may include curtailment of these contributions or other changes with a similar impact.

Reduction of benefits under defined contribution plans as a means of raising tax revenues is not a novel idea. The Tax Reform Act of 2014 (the “2014 Tax Proposal”), which was introduced in 2014 by former Republican Congressman Dave Camp, included various provisions that would have potentially reduced the availability of, or tax benefits under, 401(k) plans and other defined contribution plans.  A summary of certain of these provisions follows, along with an analysis of the potential impact on participants, plan sponsors and investment managers:

Reduce pre-tax contributions. Under the 2014 Tax Proposal, participant pre-tax deferrals into 401(k) plans would have been limited to 50% of the Internal Revenue Code limits for pre-tax contributions and catch-up contributions. Participants could make contributions in excess of the 50% limit (up to 100% of the limits) as Roth contributions, which are made on an after-tax basis. For 2017, the limits on pre-tax and catch-up contributions are $18,000 and $6,00 respectively. This provision would have made similar changes to plans sponsored by tax-exempt organizations and state and local governments.

Impact:  For participants who traditionally make the maximum pre-tax deferrals permitted, this provision would increase their annual income taxes and potentially reduce their retirement savings.  This provision could also decrease participant investments in 401(k) plans, which would reduce the amount of retirement plan assets available for management by investment managers.  Sponsor of plans that do not permit Roth contributions may feel obligated to amend their plans to permit Roth contributions, which would involve expenses that generally could not be paid from the plan.

Accelerate required minimum distributions. The 2014 Tax Proposal would have required participants who became 5% owners of their employer after age 70 ½, but before retirement, to begin to take distributions by April 1 of the following year. Under current law, the required date is April 1 of the year following retirement. Additionally, the 2014 Tax Proposal would have required that distributions to certain beneficiaries be made within five years following the death of the participant.. Under current law, distributions may, in some cases, be over the life expectancy of the beneficiary.

Impact:  This provision would accelerate income taxes on the minimum required distributions to 5% owners and certain beneficiaries, as minimum required distributions are not eligible for rollover to an IRA. Investment managers would feel the impact of this change to the extent that the affected participants reduce their contributions to pay the taxes due on these accelerated required minimum distributions.

Suspend inflation adjustment to contribution limits. The 2014 Tax Proposal would have suspended the inflation adjustment for the annual limit on employee pre-tax contributions to 401(k) plans and other defined contribution plans. Under current law, these limits are indexed annually for inflation.

Impact:  Suspension of the inflation adjustment on pre-tax contributions would reduce contributions to defined contribution plans.  This reduction would result in increased income taxes and potentially reduced retirement savings for participants and reduced retirement plan assets available for management by investment managers.

No new SEPs or SIMPLE 401(k) plans. The 2014 Tax Proposal would have prohibited employers from establishing new Simplified Employee Pensions (“SEPs”) and Savings Incentive Match Plans (“SIMPLE 401(k)s”). Under current law, certain employers may make contributions to SEPs up to the maximum permitted, which, for 2017, is the lesser of $54,000 and 25% of compensation. In a SIMPLE 401(k), which is available to employers with no more than 100 employees, participants may make deferrals on a pre-tax basis (up to $12,500 in 2017) and employers make either a 2% matching contribution for the employee deferrals or a 3% profit-sharing contribution to all eligible employees.

Impact:  By prohibiting adoption of new SEPs and SIMPLE 401(k)s, this provision would have restricted employers’ ability to design a compensation and benefits program that met the needs of their business and employees.  Their employees would be denied the ability to make pre-tax contributions and to defer income tax on those deferrals to a later date, which would affect their current tax obligations and, potentially their retirement savings.  This provision also would reduce the amount of retirement plan assets available for management by investment managers.

Conclusions

While the details of the final version of the 2017 Tax Proposal are not yet knowable, the 2014 Tax Proposal provides some insight into the types of provisions that ultimately could be included. Given the potential impact of the 2017 Tax Proposal on defined contribution plans, plan sponsors may want to defer significant amendments to their plans until the extent of that impact is more certain.

Sharon L. LippettBased on recent guidance from the Department of Labor (the “DOL”), many sponsors of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA Plans”) should have additional comfort regarding the impact of the conflict of interest rule released by the DOL in April 2016 (the “Rule”) on their plans. Even though it is widely expected that the Trump administration will delay implementation of the Rule, in mid-January 2017, the DOL released its “Conflict of Interest FAQs (Part II – Rule)”, which addresses topics relevant to ERISA Plan sponsors.  As explained below, these FAQs indicate that the Rule, as currently designed, should not require a large number of significant changes in the administration of most ERISA Plans.

Covered Fiduciary Investment Advice Clarified

The FAQs indicate that most of the communications between ERISA Plan sponsors and their employees and plan participants will not be considered fiduciary investment advice covered by the Rule. Under the Rule, a “recommendation” is defined as a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient (for example, an ERISA Plan participant) engage in or refrain from taking a particular investment-related course of action.  An investment-related course of action includes recommendations on transfers, distributions and rollovers from a plan or IRA.  This distinction between recommendations and other types of communication is important because, if the person making the recommendation receives a fee or other compensation (direct or indirect), then the recommendation is fiduciary investment advice that is covered by the Rule.

For example, the DOL confirms that a recommendation to an ERISA Plan participant from the plan sponsor to increase plan contributions is not investment advice, as long as the plan sponsor does not receive a fee or other compensation for the recommendation. The DOL further states that, when employees of an ERISA Plan sponsor develop reports, recommendations and other deliverables for their employer, those employees are not providing fiduciary investment advice that is covered by the Rule.

Several of the FAQs explain why information frequently provided by ERISA Plan sponsors or their delegates to plan participants can be considered investment education, which is non-fiduciary advice and not covered by the Rule.  The DOL provides the following information:

  • Product Feature Information. Information on product features, investor rights and obligations, fee and expense information, risk and return characteristics or historical return provided by representatives in the call center for a 401(k) plan (a type of ERISA Plan) is not investment advice, as long as the call center representatives do not address the appropriateness of the product for a particular ERISA Plan participant. The DOL indicates that this type of information is considered “plan information”, which is a type of investment education.
  • Increasing Contributions. Information provided to an ERISA Plan participant by a call center representative about the benefits of increasing contributions to a 401(k) plan to maximize the plan match is investment education and not investment advice.
  • Certain Interactive Investment Tools. Interactive investment tools that help ERISA Plan participants estimate future retirement needs and assess the impact of different asset allocations on retirement income may be treated as investment education, if the tools satisfy the conditions outlined in the Rule. These conditions include a requirement that the materials be based on generally accepted investment theories that take into account the historic returns of different asset classes.
  • An Asset Allocation Model. An asset allocation model offered by an ERISA Plan that is limited to the plan’s 15 designated core investments is investment education, even if the plan also has a brokerage window that offers an additional 2000 investment options. However, the model must provide information required by the Rule on the plan’s other designated investment alternatives with similar risk and return characteristics. The required information includes a statement identifying where information on these investment alternatives may be obtained.

Next Steps for Plan Sponsors

Based on these FAQs, many ERISA Plan sponsors will be able to conclude that most of their current plan administration policies and procedures will not run afoul of the Rule. Even if the DOL under the Trump administration modifies the Rule, it is unlikely that such modifications will impose significant additional restrictions or obligations on ERISA Plan sponsors.

By Stuart M. Gerson

While by most accounts the current term of the Supreme Court is generally uninteresting, lacking anything that the popular media deem to be a blockbuster (the media’s choice being same-sex marriage or Affordable Care Act cases), the docket is heavily weighted towards labor and employment cases that potentially affect employers in all industries including  retail, health care, financial services, hospitality, and manufacturing.  In chronological order of argument they are as follows.

The Court already has heard argument in Integrity Staffing Solutions, Inc. v. Busk, No. 13-433, which concerns whether the Portal-to-Portal Act, which amends the Fair Labor Standards Act, requires employers to pay warehouse employees for the time they spend, which in this case runs up to 25 minutes, going through post-shift anti-theft screening. Integrity is a contractor to Amazon.com, and the 9th Circuit had ruled in against it, holding that the activity was part of the shift and not non-compensable postliminary activity. Interestingly, DOL is on the side of the employer, fearing a flood of FLSA cases generated from any activity in which employees are on the employers’ premises.  This case will affect many of our clients and should be monitored carefully.

On November 10th, the Court will hear argument in M&G Polymers USA,  LLC v. Tackett, No. 13-1010, which I see as an important case, though most commentators don’t seem to realize it. The question involves the so-called “Yard-Man Presumption” in the context of whether the courts should infer that silence as to the duration of retirement health insurance benefits established under a CBA are meant to apply for the lifetimes of covered retirees.

In two other cases involving an issue of discretion and judicial review set for argument on December 1st, Perez v. Mortgage Bankers Ass’n, No. 13-1041; and Nichols v. Mortgage Bankers Ass’n, No. 13-1052, the Court will decide whether DOL violated the Administrative Procedure Act by not affording notice-and-comment rulemaking to a reversal of a wage and hour opinion letter issued in 2006.  The DC Circuit ruled against DOL in both cases (one in which DOL is the petitioner; another in which affected loan officers are petitioners), rejecting DOL’s contention that the policy change was an “interpretive rule” not subject to APA notice-and-comment strictures. The case at bar itself doesn’t involve much, but as a precedent concerning how free agencies like DOL (a particular worry to employers during this administration), are to regulate unilaterally, free of judicial oversight it will be important, especially in the DC Circuit where there are so many agency cases.

On December 3rd, the Court will hear argument in Young v. United Parcel Service, Inc., No. 12-1226, which poses whether the Pregnancy Discrimination Act requires an employer to accommodate a pregnant woman with work restrictions related to pregnancy in the same manner as it accommodates a non-pregnant employee with the same restrictions, but not related to pregnancy. The 4th Circuit had ruled in favor of the company, which offered a “light duty program” held to be pregnancy blind to persons who have a disability cognizable under the ADA, who are injured on the job or are temporarily ineligible for DOT certification. Ms. Young objects to being considered in the same category as workers who are injured off the job. This case, too, will create a precedent of interest to at least some of our clients. Of  note, last week United Parcel Service sent a memo to employees announcing a change in policy for pregnant workers advising that starting January 1, the company will offer temporary light duty positions not just to workers injured on the job, which is current policy, but to pregnant workers who need it as well. In its brief UPS states “While UPS’s denial of [Young’s] accommodation request was lawful at the time it was made (and thus cannot give rise to a claim for damages), pregnant UPS employees will prospectively be eligible for light-duty assignments.”  The change in policy, UPS states, is the result of new pregnancy accommodation guidelines issued by the Equal Employment Opportunity Commission, and a growing number of states passing laws mandating reasonable accommodation of pregnant workers.

In a case not yet fully briefed or set for argument, Mach Mining LLC v. EEOC, No.13-1019, the Court will  decide whether the EEOC’s pre-suit conciliation efforts are subject to judicial review or whether the agency has unreviewable discretion to decide the reasonableness of settlement offers. The Seventh Circuit has ruled in favor of the EEOC in the instant case, but every other Circuit that has considered the matter has imposed a good-faith-effort standard upon the EEOC.

On October 2nd, the Supreme Court granted cert. in a Title VII religious accommodation case, EEOC v. Abercrombie & Fitch Stores, Inc., No. 14-86. The case concerns whether an employer is entitled to specific notice, in this case  of a religious practice – the wearing of a head scarf —  from a prospective employee before having the obligation to accommodate her.  In this case, the employer did not hire a Muslim applicant. The Tenth Circuit ruled that the employer was entitled to rely upon its “look” policy and would not presume religious bias where the employee did not raise the underlying issue. Retail clients and others will be affected by the outcome.

Finally, also on October 2nd, the Supreme Court granted cert. in Tibble v. Edison Int’l, which raises the issue of whether retirement plan fiduciaries breach their duties under ERISA by offering higher-cost retail-class mutual funds when identical lower-cost institutional class funds are available and the plan fiduciaries initially chose the higher-cost funds as plan investments more than six years (the notional statute of limitations) before the claim was filed. This issue has been around for years and the Court finally will resolve it.   The dueling rationales have been discussed in depth on many financial pages, for example recently in the New York Times. The potential importance of the case relates to whether trustees have a separate duty to reconsider their past decisions under a continuing violation theory that would supersede ERISA’s statute of limitations. The Solicitor General, in an amicus brief, argued on behalf of the United States that trustees of ERISA plans owed a continuing duty of prudence, which they breach by failing to research fund options and offer available lower-cost institutional-class investments during the six-year period prior to the filing of the complaint. The Court apparently took the case on the SG’s recommendation that noted the unresolved split on the issue in the Circuits.  If the Solicitor General proves correct, and the Petitioner prevails, fiduciaries all across the employment spectrum will be exposed to greater risk of scrutiny for their past actions.

More will follow as developments warrant.