fiduciary fitness | PLANADVISER March/April 2017

Trump Order and Employee Benefits

Will the updating of existing regulations be treated as new regulations?

By Marcia Wagner | March/April 2017

For employee benefits practitioners, the key takeaway from a recent Trump administration executive order on reducing regulations and controlling regulatory costs is this: “For every one new regulation issued, two prior regulations must be identified for elimination.”

This order, issued January 30, may seem to have little relevance for retirement plan advisers, but will likely have a significant impact if tax reform becomes a reality.

It is also unclear what a “new regulation” is. For example, one of the projects on the Internal Revenue Service (IRS) regulatory guidance priority list is the issuance of regulations that affect combined defined benefit (DB) and qualified cash or deferred 401(k) arrangements. There has been no prior guidance, so any regulation in this area would be a new regulation. However, that same IRS guidance listed projects such as updating rules with respect to employee stock ownership plans (ESOPs), service crediting and vesting rules, as well as top-heavy rules.

Will the updating of existing regulations be treated as new regulations? The top-heavy rules require that minimum contributions or benefits be provided if 60% or more of the benefits under the plan are for certain key officers and owners of the company. The service crediting and vesting rules are used to determine when a plan participant has a nonforfeitable interest in his benefit under a plan.

There are a number of regulatory projects that could be affected by the new regulatory order that are on the IRS agenda for the current fiscal year: clarification of the documentation required to substantiate hardship withdrawals; guidance with respect to the timing of the use or allocation of forfeitures in defined contribution (DC) plans; guidance under the prohibited transaction rules; regulations with respect to distributions made from plans to payees outside the U.S.; and annual reporting. It remains to be seen what effect the Trump administration’s executive order will have on these regulatory projects.

The order could also affect issues related to executive compensation, which would impact retirement plan advisers’ recommendations to pension plans.

In an interpretive bulletin published in December, the Department of Labor (DOL) stated that “consideration of the appropriateness of executive compensation” is important when pension plans determine how to vote proxies and exercise shareholder rights under the Employee Retirement Income Security Act (ERISA). For example, a pension plan should not vote in favor of a new, clearly excessive executive compensation arrangement for a company in which it invests, as that could harm the value of its investment.

The appropriateness of executive compensation would relate not only to the amount but also to the manner in which it is provided. So, for example, if the alternative minimum tax were eliminated from the Internal Revenue Code (IRC), incentive stock options might receive a resurgence in interest. If Section 162(m) of the code—which generally imposes a $1 million cap on compensation for the CEO and the next four most highly compensated officers—were repealed, the base pay of these officers would likely increase and the need for shareholder approval of modifications to performance-based compensation would be removed. If the Dodd–Frank act were repealed or substantially modified, other compensation practices might be modified.

Any tax legislation would almost certainly require the issuance of regulatory guidance in some form, and any such regulatory guidance would be affected by this recently issued executive order, as such guidance would either be delayed or not issued at all, requiring advisers to make reasonable, good faith judgments with respect to what the new law requires.

More broadly, the executive order seemingly covers soft forms of guidance such as answers to frequently asked questions, such as the FAQ issued by the DOL with respect to the fiduciary rule and those issued jointly by the DOL, the IRS and the Department of Health and Human Services (HHS) that implement the Patient Protection and Affordable Care Act (ACA). If the executive order is, in fact, that broad, the issuance of needed and helpful soft guidance might be curtailed, leaving advisers with uncertainty and increased risk.

It’s also unclear how the issuance of regulations mandated by Congress will be affected. For example, under the Affordable Care Act, the IRS is required to issue guidance with respect to discriminatory insured group health plans. If the agency can implement that guidance only by eliminating two other regulations, the issuance of guidance in that area may continue to be delayed.

We are living in interesting times, and nothing is as simple as it appears.

Marcia Wagner is an expert in a variety of employee benefits and executive compensation issues, including qualified and nonqualified retirement plans, and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 30 years. She is a frequent lecturer and has authored numerous books and articles.