HSA Bank, a division of Webster Bank, N.A., released a new brief entitled “Now is the Time to Plan for the Cadillac Tax”, written by Kevin Robertson, senior vice president at HSA Bank.
The Cadillac Tax is a provision of the Patient Protection Affordable Care Act (ACA) implementing a 40% excise tax on high-cost health plans designed to help fund the expansion of insurance coverage and encourage employers to make their health plans more efficient. It was initially set to go into effect in 2018, and has been delayed to 2020—a welcome delay by most employers.
In the brief, the Cadillac Tax is defined and reasons for the delay are discussed (disproportionate impact on workers where higher wages were traditionally traded for richer health benefits, the tax will likely impact nearly all plans over time, and variations in the geographic effects of the tax). Implications of the delay (allowing lawmakers more time to address concerns may only be putting off the inevitable) as well as things employers should watch for in the coming months are also pointed out.
Charts are included to show how the Cadillac Tax rises as health plan costs rise.
“The Cadillac Tax will loom large for employers until more concrete reform is enacted, most likely sometime between the presidential election this year and 2020, the year in which the tax is currently set to take effect,” says Robertson. “Meanwhile, CDH/HSA plans continue to provide the best bet for those employers planning for the worst effects of the tax.”
After the better part of a decade in the making, the new
fiduciary rule from the Department of Labor (DOL) has finally arrived, and on first
review it appears to look a lot like the version proposed in the Spring of 2015, albeit
with some important softening around the sharpest edges.
Labor Secretary Thomas Perez introduced the final regulation
during a pre-release conference call with reporters on Tuesday evening, during
which he stressed the final version of the DOL’s
fiduciary rule is the result of years of collaboration and discussion between
government regulators and the financial services industry, especially
recordkeepers and advisory firms concerned about what the rulemaking will do to
their compensation models.
He also stressed from the start that the DOL knows the “vast
majority of men and women giving retirement advice already do right by their
clients.” However, he said, “there are some powerful interests aligned against
this rule, who will insist that the only good rule is no rule at all. If your business
model rests on bilking people out of hard-earned money in retirement plan
accounts, you don’t belong in this industry and you will not like this final
rule.”
Running through what he referred to as the most important changes in
the final version compared with the proposed version, Perez first observed, “We
were asked to address mechanics of the best-interest contract (BIC) exemption,
and we did this.”
“Industry practitioners said they were worried they would
have to put the BIC in place from the very first second they were introduced to
a potential new customer, even if that individual never ended up working with
the firm or purchasing a service or product,” Perez explained. “Now we have
confirmed that the contract can be papered at the same time as all the other
paperwork associated with a new purchase or a new client relationship. It’s
then and only then that you will have to execute the BIC, which can be as
simple as a page or even a paragraph added to existing documentation.”
Perez said the rule’s “forward-looking point-of-sale
disclosures were pretty heavily criticized, so we eliminated entirely the one-,
five- and 10-year forward-looking disclosures, as well as the annual disclosure
requirement. Other disclosures have been streamlined and simplified, as well.”
NEXT: DOL also addresses ‘anti-proprietary bias’
Continuing down the list of key changes programmed into the
final rule, Perez said, “Firms that sold proprietary products have been
readdressed, too.”
“We heard a variety of concerns about how proprietary
products were to be treated under the proposal and that there might be a bias
against proprietary products,” he said. “We listened carefully to these
concerns and we addressed them, and I will confirm right now that there is no
bias against proprietary products in the final rule. We’ve added clarifications
on all this that will be very helpful, I believe. We think we have made it very
clear there is no bias against proprietary products.”
The final implementation date, when firms will have to be in
full compliance with all the new provisions being implemented, has been
extended from the proposed eight months to a full year, “meaning firms will
have until January 1, 2018, to be in full compliance.”
Perez added that, “for firms that have millions of existing
customers that would require a BIC under the final rule, there are also
changes. Unlike in the proposed version, firms can now simply send a notice
that tells these clients that the firm has taken on new obligations for them as
a result of the new fiduciary standard. An email or letter will suffice
when it comes to alerting existing customers of the change.”
Perez concluded the call by noting “these are just a few
examples of the lengthy list of issues that have been clarified in the final
rule, while also remaining true to our North Star of greater consumer
protections. There are many advisers who are already using this best interest
model. They have all told me putting customers first has been great for
business.”
Beyond all these changes, Perez also said the final rule
“does not include a list of approved assets qualifying for use under the BIC
exemption or other exemptions.”
NEXT: DOL fact sheet reveals additional changes
Following the call with reporters, the DOL circulated a
dense fact sheet that lists in greater detail the differences between the
proposed rule and the final version. The rulemaking package also includes a
regulatory impact analysis outlining the monetary harm caused to retirement
investors from conflicted advice and the expected economic impact of the
rule.
According to the fact sheet, “Under the rule, any individual
receiving compensation for making investment recommendations that are
individualized or specifically directed to a particular plan sponsor running a
retirement plan (e.g., an employer with a retirement plan), plan participant
or individual retirement account (IRA) owner for consideration in making a
retirement investment decision is a fiduciary. Being a fiduciary means that the
adviser must provide impartial advice in their client’s best interest and
cannot accept any payments creating conflicts of interest unless they qualify
for an exemption intended to assure that the customer’s interests are
protected. This change expands protections to IRA owners and people rolling
over their savings into an IRA from a 401(k), who now must receive investment
advice in their best interest.
“The rule includes examples of communication that would not
rise to the level of a recommendation and thus would not be considered advice,”
the fact sheet continues. “It specifies that education is not included in the
definition of retirement investment advice, so advisers and plan sponsors can
continue to provide general education on retirement saving without triggering
fiduciary duties.”
The fact sheet suggests that, under the BIC exemption, firms
and their individual advisers can continue to receive most common forms of
compensation for advice to retail customers and small plan sponsors to invest
in any asset so long as the firms “commit to providing advice in the client’s
best interest, charge only reasonable compensation, and avoid misleading statements
about fees and conflicts of interest; adopt policies and procedures designed to
ensure that advisers provide best interest advice, and prohibiting financial
incentives for advisers to act contrary to the client’s best interest; and
disclose conflicts of interest. The firm must direct the customer to a webpage
disclosing the firm’s compensation arrangements and make customers aware of
their right to complete information on the fees charged.”
The final package also revises existing exemptions,
including limiting the so-called “insurance exemption” to recommendations of
“fixed-rate annuity contracts.” To sell other insurance products such as variable
and indexed annuities, firms may use the BIC exemption, the DOL affirms. “New
preamble language emphasizing that fees are not the only factor in making
investment decisions and giving firms more flexibility on how to comply with
disclosure provisions should also make it easier for insurance firms to recommend
their products.”
NEXT: More from the DOL’s fact sheet
The final rule “defines a variety of investment education
activities that fall short of fiduciary conduct and makes clear that advisers
do not act as fiduciaries merely by recommending that a customer hire them to
render advisory or asset management services. The final rule also expressly
provides that investment advice does not include communications that a
reasonable person would not view as an investment recommendation, including
general circulation newsletters; television, radio and public media talk show
commentary; remarks in widely attended speeches and conferences; research
reports prepared for general circulation; general marketing materials; and
general market data. Under the final rule, all appraisals—as opposed to just employee stock ownership plan
(ESOP) appraisals in the proposal—will not be considered advice for purposes of
this rule but will be reserved for a future rulemaking.”
Turning specifically to the much-discussed BIC exemption,
the DOL says, under the final rule, “Advisers recommending any asset—not just those
on an asset list included in the proposal—can take advantage of the BIC
exemption to continue receiving most common forms of compensation.The
BIC exemption will be available for advice to small businesses that sponsor
401(k) plans, as well as for advice to IRA customers and plan
participants. Additionally, under the final rule, recommendations to plan
sponsors managing more than $50 million in assets (vs. $100 million in the
proposed rule) will not be considered investment advice if certain conditions
are met and hence will not require an exemption.”
The final BIC exemption “includes special provisions
clarifying how it can be used for recommendation of proprietary products,
including a requirement that firms determine that the limitations are not so
severe that the adviser will generally be unable to satisfy the exemption’s
best interest standard and other requirements.”
In other ways, the BIC has really been scaled back, Perez
said. For example, the final rule “eliminates the contract requirement for
ERISA plans and their participants and beneficiaries. Firms must acknowledge in
writing that they, and their advisers, are acting as fiduciaries when providing
investment advice to the plan, participant or beneficiary, but no contract is
required.”
For advice to IRA holders, the final rule “provides firms
flexibility on when to enter into the contract. Some commenters expressed
concern that advisers would need to present a contract as soon as someone
walks in the door—before they’ve even decided whether to hire that adviser. The
final exemption makes clear that is not the case. Rather, the contract
may be signed at the same time as other account opening documents. However, any
advice given before the contract was signed must be covered by the contract and
also meet a best interest standard. The exemption also permits existing clients
to agree to the new contractual protections by negative consent.”
While there are other changes in the final rule language, the
fact sheet concludes by noting the updated BIC exemption contains a streamlined
“level fee” provision, “which enables advisers and firms that receive only a
level fee in connection with the advice they provide to rely on the exemption
without entering into a contract so long as special attention is paid and
documentation is kept to show that certain specific recommendations, including
a recommendation to rollover assets from an employer plan to an IRA, are in the
customer's best interest.” The DOL defines level-fee fiduciaries as those who
“receive the same compensation regardless of the particular investments the
client makes (e.g., they may be compensated based on a fixed percentage of
assets under management or a fixed dollar fee) and are not compensated based on
commissions or transaction fees.”
An FAQ document, fact sheet and chart comparing the proposed rule to the final rule are available at http://www.dol.gov/protectyoursavings/ in the section "FINAL RULE."