Magazine

Compliance Update | Published in March 2017

Rules and Regulations

Summaries of the latest news from Washington and the courts—what's coming, what's contemplated and what's critical for plan sponsors to know.

By PLANSPONSOR staff | March 2017
Art by Alex Eben Meyer
Court Victories Add to Confusion
Over Fate of Fiduciary Rule

Much remains uncertain about the future of the Department of Labor (DOL) fiduciary rule. One fact that is increasingly clear, however, is that federal district courts across the U.S. are ready to give broad authority to the DOL in enforcing its agenda, demonstrated by the simple fact that they have so far been unwilling to defang the agency’s rulemaking, which would turn pretty much anyone receiving compensation for advising retirement savers into a full-fledged fiduciary. It may mean little in the end that the DOL has now posted a fourth district court victory related to the fiduciary rule—this one coming in the U.S. District Court for the District of Kansas in a case filed by annuity firm Market Synergy Group.
 
When all this is added to the news that the Trump White House has submitted an order for the DOL to review the fiduciary rule, and the fact that the department has actually now started asking for stays in fiduciary-focused litigation still outstanding in other district courts, it all makes for quite a confusing picture. As several Employee Retirement Income Security Act (ERISA) attorneys have suggested, at this point, only time will tell what is in store for advisers’ fiduciary future.
 
Procedures for Determination Letter Requests
The Internal Revenue Service (IRS) has updated the procedures for requesting determination letters, modifying those procedures to reflect the elimination of the five-year remedial amendment cycles for individually designed plans and other changes as described in Section 4 of Rev. Proc. 2016–37. To the extent that employers maintaining individually designed plans may still request a determination letter under the third Cycle A, the procedures described in Sections 6 and 7 of Rev. Proc. 2016–6 still apply. Rev. Proc. 2016-37 says a plan may request a determination letter only if any of these pertain: It has never received a letter before; the plan is terminating; or the IRS makes a special exception. The agency anticipates making exceptions based on program capacity to work on additional applications and the need for rulings in certain areas. It said it will measure need in a variety of ways including annual input from the Employee Plans (EP) community.
 
In Rev. Proc. 2017-4, the IRS says procedures for requesting determination letters were modified to note that an employer may request such a letter asking whether covered employees are leased employees only to the extent that the employer may otherwise apply for a determination letter under Rev. Proc. 2016–37.
 
Additionally, procedures were modified to reflect that determination letters on partial terminations, issued to individually designed plans, will be limited to whether a partial termination has occurred, unless the employer is eligible to apply for a determination letter under Rev. Proc. 2016–37.
 
IRS Updates Taxable Wage Base For Permitted Disparity

The Internal Revenue Service (IRS) has issued Revenue Ruling 2017-05, revealing the taxable wage base for permitted disparity formulas used in defined contribution (DC) plans. Permitted disparity formulas allow larger contributions or benefits with respect to compensation in excess of the Social Security wage base. For purposes of determining covered compensation for the 2017 year, the taxable wage base is $127,200. To determine an employee’s covered compensation for a plan year, the taxable wage base is the one in effect as of the beginning of that plan year. The ruling also provides tables of covered compensation for determining contributions to qualified pension, profit-sharing and stock bonus plans.
 
PBGC Adjusts Penalties for Reporting Failures

As required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, the Pension Benefit Guaranty Corporation (PBGC) is adjusting monetary penalties for failure to provide certain reporting. Based on the cost-of-living multiplier provided by the Office of Management and Budget (OMB), the new maximum penalty under Employee Retirement Income Security Act (ERISA) Section 4071 for failure to provide certain notices or other material information is $2,097. Under ERISA Section 4302, for failure to provide certain multiemployer plan notices, the maximum penalty is now $279. The final rule went into effect on January 31.
 
Lawmakers Pass Resolutions To Stop DOL Rule on State-Run Plans
The U.S. House of Representatives has passed two resolutions, introduced by lawmakers in mid-February, that would block regulations issued by the Department of Labor (DOL) regarding the setup of state- and municipally-run retirement plans for private-sector employees. The resolutions would still have to be passed by the U.S. Senate and signed by President Donald Trump in order for the regulations to be halted. Therefore, they do not affect states in the process of implementing the laws, or the program launched this year by the state of Washington, says John Scott, director of retirement savings at Pew Charitable Trusts in Washington, D.C.
 
Scott says there are some complicating factors that do not lend to a straightforward analysis of how those plans would be affected if the resolutions get signed into law. He notes that the basis for the DOL final rule dates back to regulations in the 1970s about payroll deductions for individual retirement accounts (IRAs). Back then, the DOL said that if an employer sets up a payroll deduction for a contribution to an employee’s IRA, it is not considered an employer plan under the Employee Retirement Income Security Act (ERISA). The new rule clarifies this, specifically for those plans that would use automatic enrollment into a state- or municipally-run plan.
 
“If they take away this newer guidance, it’s an open question whether these plans can go forward or not,” Scott says. “Some states have already passed laws and some have not. There is a lot of uncertainty now, so it’s unsure what they should do.” According to Scott, when the DOL issued the rule, it said it was ultimately for the courts to decide. “A judge will have to rule on this at some point. That may be the ultimate answer,” he says.
 
Second Attempt to Sue Over Stable Value Fund Fails

U.S. Magistrate Judge Patricia Sullivan of the U.S. District Court for the District of Rhode Island has recommended that claims in a suit against CVS Health Corp., its benefits plan committee and its stable value fund manager Galliard Capital Management be dismissed. Sullivan previously recommended that the plaintiffs’ first complaint be dismissed because they offered “the Court nothing from which to conclude that the Stable Value Fund’s short-term fixed-income holdings were unreasonable in view of all the considerations a prudent fiduciary might have found relevant, much less that the Fund’s fiduciaries failed to use appropriate methods to investigate and make those investment allocation decisions.”
 
The plaintiffs filed an amended complaint and the defendants, again, filed a motion to dismiss. Sullivan noted in her opinion that fiduciaries are not required to predict the future and cannot be held liable for deciding to avoid risks that, in hindsight, could have been tolerated. Nor are they held to the standard of looking to the average and copying what they see.
 
Not Liable for Termination Liabilities Of Single-Employer Plan
A federal court judge has concluded that the Pension Benefit Guaranty Corporation (PBGC) may not recoup termination liabilities for a single-employer plan from a personal trust of the owner or the asset purchasers of the sponsoring company. Findlay Industries Inc. established a pension plan in June 1964. Findlay remained the sponsor and administrator of the plan from its inception until its termination, effective July 2009. The PBGC claims several defendants are jointly and severally liable for the termination liabilities that Findlay incurred.
 
The court stated that, “As Congress has established several categories of persons and entities which may be pursued for contributions to underfunded single-employer pension plans, [the PBGC] has avenues of redress to protect the pensions of vested employees. Adding more targets is not necessary to fulfill ERISA [Employee Retirement Income Security Act]’s policy of protecting plan participants.”

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