Compliance January 29, 2016

OMB Confirms Receipt of Fiduciary Rule Language

After years of speculation and an intense, ongoing retirement plan industry debate, the Department of Labor has advanced its conflict of interest regulations to the Office of Management and Budget for final review. 
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The Office of Management and Budget (OMB) confirmed receipt of the Department of Labor’s (DOL) hard-fought fiduciary regulation, which now stands in final form.

To be clear, investment and retirement plan industry professionals will have to wait a little longer to actually see the final fiduciary rule, and compare it to the proposed regulation language published last year. There could be substantial changes included in the rule language currently being looked at by OMB, but given the fact that comment periods on the regulations ended fairly recently, it is unclear whether major changes could or would have been made in that time. 

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Interestingly, the news that OMB is reviewing a final fiduciary rule comes despite Labor Secretary Thomas Perez’s comments just this week that implied reports that the conflict of interest rule would be sent to OMB soon were incorrect. Perez had said the DOL was still “neck deep” in the process of reviewing the significant number of comments submitted in last fall’s comment period and “hopes to reach a conclusion in the coming months,” which would indicate some changes to the rulemaking language are certainly  possible.

In any case, the news that a final fiduciary rule has been formed and submitted to OMB is certain to irk many in the investment and retirement plan industries. In just the last few weeks several groups again voiced concerned with where the proposal is heading, what’s in it and how fast it’s moving. One group wants to defund the DOL initiative via Congress, while another group is suggesting the DOL be required to re-propose the rule with another short comment period next year. That move would significantly change the timing of the issuance and effective date of the rule and give interested parties an opportunity to see how the DOL may be resolving concerns raised during the first comment period.

Traditionally the OMB has 60 to 90 days to review regulations of this nature and to make public the final rule language, but given the limited time the current administration has in office and the high-profile nature of the rule, OMB may also use its discretion for an expedited review.

Compliance January 28, 2016

IRS Proposes Nondiscrimination Relief for Closed DBs

The proposed rule will help closed DB plans continue to satisfy minimum coverage and other testing requirements.
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The Internal Revenue Service (IRS) has proposed nondiscrimination relief for closed defined benefit (DB) plans and additional changes to the retirement plan nondiscrimination requirements.

Last year, the IRS extended temporary relief which permitted certain employers that sponsor closed DB plans and also sponsor a defined contribution (DC) plan to demonstrate the aggregated plans comply with the nondiscrimination requirements of Internal Revenue Code Section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for individual testing on that basis.

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The IRS explained that a significant number of DB plans have been closed to new entrants, and the plan sponsor of a closed DB plan typically provides a DC plan for its new hires. Under these arrangements, in the early years after the DB plan has been closed to new entrants, the plan may be able to satisfy the coverage requirement of § 410(b) without being aggregated with the DC plan. However, the § 410(b) minimum coverage test typically becomes more difficult for the closed DB plan to satisfy over time, as grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering the DC plan.

If the closed DB plan cannot satisfy the coverage requirement of § 410(b) on its own, it will need to be aggregated with another plan in order to satisfy that coverage requirement, the IRS continued. If the DB plan is aggregated with a DC plan that covers the employer’s new hires to satisfy the coverage requirement, then it is also required to be aggregated with the DC plan for purposes of satisfying the nondiscrimination requirements of § 401(a)(4). In the typical case, the aggregated plans will fail the requirements of § 401(a)(4) unless they are permitted to demonstrate compliance with the nondiscrimination requirements on the basis of equivalent benefits.

NEXT: Elements of the proposed rule

Under its proposal, the IRS modifies the rules applicable to defined benefit replacement allocations (DBRAs), which allow certain DC plan allocations to be disregarded when determining whether a DC plan has broadly available allocation rates. The rules applicable to DBRAs allow employers to provide, in a nondiscriminatory manner, certain allocations to replace DB plan retirement benefits without having to satisfy the minimum aggregate allocation gateway.

The IRS says the group of employees who receive a DBRA must be a nondiscriminatory group of employees under the minimum coverage requirements of section 410(b) for the first five years after the closure date.

The proposed regulation adds a new exception to the requirement that a DB/DC plan must satisfy the minimum aggregate allocation gateway once the other conditions under §1.401(a)(4)-9 are not met, called the "closed plan rule." This closed plan rule, which applies to a DB/DC plan that includes a closed plan, provides an exception to the minimum aggregate allocation gateway that would otherwise apply, but only if the closed plan was in effect for five years before the closure date and no significant change was made to the closed plan during or since that time (except for certain permitted amendments).

There is also a special testing rule for the nondiscriminatory availability of a benefit, right, or feature provided to a grandfathered group of employees. The special testing rule applies to plan years beginning on or after the fifth anniversary of the closure date and applies on a plan-year by plan-year basis. To be eligible for the special testing rule, the benefit, right or feature must be currently available to a group of employees that satisfies the minimum coverage requirements of section 410(b) for the plan years that begin within five years after the closure date.

The proposal also includes a modification of testing options for DB/DC plans, including DB/DC plans that do not include a closed plan. The proposed regulations expand the ability to use the average of the equivalent allocation rates under the defined benefit plan for purposes of satisfying the minimum aggregate allocation gateway by permitting the averaging of allocation rates for non-highly compensated employees under the defined contribution plan for this purpose.

The proposed rule will be published in the Federal Register January 29, and comments will be received for 90 days. Text of the proposed rule is here.

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