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SEC Best Interest Regulation (and Associated Rules)
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• SEC issued regulations relating to investment advisor/broker conduct
• Officially rejected having a “one size fits all” standard of conduct for all investment people
– Distinguishes between BDs, who are transaction-oriented and who do not necessarily have ongoing responsibilities once the sale is complete or fiduciary responsibilities, and IAs, who do
– Provides that the BD’s compliance with the rules is judged based on an objective standard, looking at the facts and circumstances at the time of the sale (and not with hindsight)
• Craig will review in more detail in Washington Update
MEP Problem
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• DOL issued proposed regulations expanding MEPs
– Associations (based on Association Health Plan Regs)– PEOs– Working Owners (based on AHP Regs)
• District court struck down AHP Regs
– Action based on concern for interaction between AHPs and ACA
– DOL has appealed– Should this affect ARP regs? Will it?
– In the case of “affected taxpayers,” . . . the IRS may permit a postponement of the filing of the Form 5500 or Form 5500-EZ “Affected Taxpayers: unable to obtain on a timely basis information necessary
for completing the forms from a bank, insurance company, or any other service provider because such service providers' operations are located in a covered disaster area”
IRS postponement of the Form 5500 series filing due date under section 7508A also will be permitted by the Department of Labor and PBGC for similarly situated plan administrators and direct filing entities
IRS Hardship DistributionRelief for Harvey, Irma Maria, Florence, Michael, 2017 California Wildfires
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• Qualified plan or 403(b) plan can make hardship distribution to affected employee–Only plans that can make hardship distributions - not pension
plans
• Governmental 457(b) plan can make unforeseeable emergency distribution to affected employee
• Applies whether or not:
–Plan has hardship language
–Plan recognizes this hardship
• Can rely on employee’s reasonable representations of hardship need and amount
• No need for six-month deferral suspension
• Applies if participant, spouse, ancestor, or descendant lived or worked in disaster area
Compare: New Hardship Deemed Distribution
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• Expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by [FEMA] . . ., provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster
• IRS revised “safe harbor” notices for eligible rollover distributions
– Last revision 2014
• Includes:
– Extended period for rollover of loan offsets afteremployment or plan termination
– Self-certified waivers of 60-day rollover period
– Disaster relief waivers of 60-day rollover period
– Issues for governmental employees
– Roth 457(b) plans
Temporary Relief for Closed DB Plans
• Notice 2014-5 – Provided gateway relief for plans closed to new members that become subject to gateways
– Had to pass coverage and nondiscrimination for 2013 either on a standalone basis or, if aggregated, had to have not been subject to the minimum allocation gateway Primarily DB or broadly available separate plans
– If so, exempt from min allocation gateway for years beginning before 2016
– Extended by Notices 2015-28, 2016-57, 2017-45, 2018-69, and2019-49…now runs through years beginning before 2021
• In 2015, IRS restricted ability of DB plans to offer annuity retirees a window to convert to a lump sum
– Plan to modify regulations
• In 2019 IRS withdrew proposal
• Can now offer lump sum windows
– No private letter rulings
Proposed Regs for MEPs “Bad Apple Rule”
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• MEP is single plan for IRS purposes
– It’s all qualified or all disqualified
– No special EPCRS fees for MEP
• Proposed regs (taxpayers CANNOT rely)
– “Bad Apple Rule” renamed the “Unified Plan Rule”
– Allow MEP administrator to salvage plan qualification if threatened by unresponsive or uncooperative employer
– Series of three increasingly threatening 90-day notices to bad employer demanding that it fix problem or take spinoff (3rd notice includes DOL and participants as recipients)
• SEC issued final Regulation Best Interest for broker-dealers
– Corresponding rules for investment advisors
– New mandatory disclosures
– Covers transactions with retail investors, including plan participants
– Covers rollover advice
• The DOL Secretary has said that the DOL is looking to rewrite fiduciary regulation to fit parameters of 5th Circuit decision and to dovetail with SEC Rule
• In 2014, Congress enacted Cooperative and Small Employer Charity Pension Flexibility Act (CSEC), which required special Form 5500 reporting for MEPs
– Implicates only those plans that are MEPs for DOL purposes, so not Open MEPs
– Requires that Form 5500 filing include a list showing: Name and EIN of each participating employer A good-faith estimate of the percentage of the MEP’s contributions
made by that participating employer (including both employer and employee contributions) (n/a for certain health plans)
– Obligation began for 2014 Form 5500
FAB 2019-01: Reporting Relief for Closed MEPs
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• Provides transitional relief for plans that did not meet this filing obligation:
– If timely file complete Form 5500 for 2018, all is forgiven Automatic extension to 10/15/19 for calendar year plans (and maybe
2½-month extension for other plan years) – use Part 1, Line D and insert “FAB 2019-01” on related line
If Form 5500 was filed before FAB issued, can amend by 10/15 to repair
– If do not take advantage of transitional relief, could be subject to nonfiling penalties for 2014-2018 (up to $2,194 per day per form)
• Historically, if you were asking the PBGC to make a ruling as to coverage, the application process was pretty casual (an email could do)
• New forms are now on their website for such an application, which at least attempts to collect the relevant information: https://www.pbgc.gov/prac/other-guidance/insurance-coverage
• Provides separate sections or the reasons for the application: substantial owner plan, small professional employer plan, church plan, Puerto Rico-based plan, other exemption
• Identifies what information they need to make ruling
– For owner-only plan: organizational documents, list of participants, descriptions of family relationships between owners and other participants
– For professional service employers: website for the company, description of business, breakdown of services performed and percentage of revenue for each service, education levels of owners/managers, education and licensing requirements for the profession
– Also provides space for narrative
• Application is sent via email or US mail
New Coverage Application Procedure
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• Historically, could not get determination unless there was a plan
• PBGC has set up a pilot program where such a request can be made using the new forms “in limited circumstances,” i.e.:
– Is the employer a professional service employer?; or
Key Fiduciary Breach Issue: Shifting Burden of Proof?
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• Courts are examining who has the burden of proving that there are losses due to a fiduciary breach:
– Some courts say: once breach proven, the burden shifts to the fiduciary to show that losses were not the result of the breach (1st, 4th, 5th, and 8th Circuits)
– Other courts say: plaintiff must prove breach and losses as a result of the breach (2nd, 6th, 7th, 9th, 10th, and 11th Circuits)
• Putnam offered participants in its plan a selection of proprietary funds, as well as an SDBA
• Participants sued, claiming prohibited transaction, and breach of prudence and loyalty
• District court found that participants did not demonstrate that the loss was due to any breach by the defendants
Brotherston v. Putnam (1st Cir. 2018)
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• On appeal, the 1st Circuit joined the 4th, 5th, and 8th Circuits in deciding that, once a breach and a loss have been demonstrated by the plaintiffs, the burden of proof shifts to the fiduciary to show that its actions did not cause the loss
• Putnam is appealing to the Supreme Court
• The Supreme Court has not yet accepted the appeal (the Solicitor General of the US is filing a brief with his thoughts as to whether the Supreme Court should accept)
– Company entered into contracts and service agreements with Transamerica for administration and recordkeeping for its plan
– Contract set Transamerica compensation as a fixed percentage of plan assets
– Participants sued, saying that Transamericabreached its duty by, among other things,receiving too much in fees
A Fiduciary Is Not a Fiduciary ….
• The court held that Transamerica was not a fiduciary when it negotiated its own fees and the Company, not the service provider, is responsible for determining whether fees are reasonable
• After Transamerica became a fiduciary, its ability to withdraw fees to pay itself was governed by a contract that did not permit it discretion
• Dorman files class action suit against his employer (Schwab) for fiduciary breach in relation to 401(k) plan investments
• Schwab moves to compel arbitration based on an arbitration clause in the plan document. District court denies. Defendants appeal
• 9th Circuit had a longstanding history of courts not permitting mandatory arbitration in relation to ERISA claims, because it deemed arbitrators to “lack the competence of courts to interpret and apply” ERISA
• Then, Supreme Court decided American Express v. Italian Colors, in which it ruled that arbitration is an adequate forum so long as the plaintiff can vindicate its statutory cause of action there
Arbitration of ERISA Claims: Dorman v. Schwab
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• 9th Circuit found that, in light of Amex Decision, it must overrule its prior precedent against arbitration of ERISA cases
• Note: In another case heard by the 9th Circuit last year (USC v. Munro), the court denied arbitration, but not on the grounds that it was inappropriate for an ERISA case. The reason in that case is that the court found that the arbitration agreement between the parties did not apply to the ERISA plan. So, the Dorman decision is not contradictory to the USC case
• Nonfiduciary plan representatives give theparticipant misinformation about the effect ofcertain elections on both the health benefits whilehe is alive (and ailing) and the death benefits to hisspouse after he dies
– Based on those misrepresentations, he elects not to retire during his lifetime, so as to preserve his health coverage (to the detriment of the level of post-death benefits to his wife)
Misrepresentation of Agents of the Plan
• SPD was unclear
• Under the plan’s terms, however, he would have preserved his health benefits AND gotten the higher benefit for his wife had he retired while alive
• Supreme Court said in Varity v. Howe that plan administrators act as fiduciaries when they answer beneficiaries’ questions about the plan
• But the plan administrator did not talk to the participant and his wife here: agents of the plan administrator did
And the Award for Litigant With the Most ChutzpahGoes To ….
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• Court said:
– Check was made out to the company not the plan, so the company could decide how to allocate the money When company does so, it acts as a company, not as a fiduciary
– Since what she owes the plan is > her account, she’s not a participant and has no standing to sue for fiduciary breach