Updated Form 5500s Released for 2017

The U.S. Department of Labor’s Employee Benefits Security Administration, the IRS, and the Pension Benefit Guaranty Corporation (PBGC) have releasedadvance informational copies of the 2017 Form 5500 annual return/report and related instructions. The “Changes to Note” section of the 2017 instructions highlight important modifications to the Form 5500 and Form 5500-SF and their schedules and instructions.

Modifications are as follows:

  • IRS-Only Questions. IRS-only questions that filers were not required to complete on the 2016 Form 5500 have been removed from the Form 5500, Form 5500-SF and Schedules, including preparer information, trust information, Schedules H and I, lines 4o, and Schedule R, Part VII, regarding the IRS Compliance questions (Part IX of the 2016 Form 5500-SF).
  • Authorized Service Provider Signatures. The instructions for authorized service provider signatures have been updated to reflect the ability for service providers to sign electronic filings on the plan sponsor and Direct Filing Entity (DFE) lines, where applicable, in addition to signing on behalf of plan administrators.
  • Administrative Penalties. The instructions have been updated to reflect an increase in the maximum civil penalty amount under ERISA Section 502(c)(2), as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Department regulations published on Jan. 18, 2017, increased the maximum penalty to $2,097 a day for a plan administrator who fails or refuses to file a complete or accurate Form 5500 report. The increased penalty under section 502(c)(2) is applicable for civil penalties assessed after Jan. 13, 2017, whose associated violation(s) occurred after Nov. 2, 2015 – the date of enactment of the 2015 Inflation Adjustment Act.
  • Form 5500/5500-SF-Plan Name Change. Line 4 of the Form 5500 and Form 5500-SF have been changed to provide a field for filers to indicate the name of the plan has changed. The instructions for line 4 have been updated to reflect the change. The instructions for line 1a have also been updated to advise filers that if the plan changed its name from the prior year filing(s), complete line 4 to indicate that the plan was previously identified by a different name.
  • Schedule MB. The instructions for line 6c have been updated to add mortality codes for several variants of the RP-2014 mortality table and to add a description of the mortality projection technique and scale to the Schedule MB, line 6 – Statement of Actuarial Assumptions/Methods.
    Form 5500-SF-Line 6c. Line 6c has been modified to add a new question for defined benefit plans that answer “Yes” to the existing question about whether the plan is covered under the PBGC insurance program. The new question asks PBGC-covered plans to enter the confirmation number – generated in the “My Plan Administration Account system” – for the PBGC premium filing for the plan year to which the 5500-SF applies. For example, the confirmation number for the 2017 premium filing is reported on the 2017 Form 5500-SF.

Information copies of the forms, schedules and instructions are available online

Supreme Court Rules ERISA-Exempt “Church Plan” Includes Plan Maintained by Church-Affilaited Organizations (like hospitals and schools)

The United States Supreme Court has held, in Advocate Health Care Network v Stapleton that a benefit plan maintained by a church-affiliated organization, whose principal purpose is to fund or administer a benefits plan for the employees of either a church or a church-affiliated nonprofit (a “principal purpose organization”) is a church plan under ERISA Section 3(33), regardless of who established the Plan. This is in accordance with the long-standing regulatory position adopted by the IRS, Department of Labor and PBGC.

Background on ERISA’s Church Plan Exception

ERISA generally obligates private employers offering pension plans to adhere to an array of rules designed to ensure plan solvency and protect plan participants. “Church plans” however, are exempt from those regulations.

From the beginning, ERISA  defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.”  Congress then amended the statute to expand that definition in two ways:

  • “A plan established and maintained for its employees . . . by a church . . . includes a plan maintained by an organization . . . the principal purpose . . . of which is the administration or funding of [such] plan . . . for the employees of a church . . . , if such organization is controlled by or associated with a church.” (The opinion refers to these organizations  as “principal-purpose organizations.”)
  • An “employee of a church” includes an employee of a church-affiliated organization.

The Case

The Petitioners in Advocate Health Care Network v Stapleton were three church-affiliated nonprofits that run hospitals and other healthcare facilities, and offer their employees defined-benefit pension plans. Those plans were established by the hospitals themselves, and are managed by internal employee-benefits committees. Respondents, current and former hospital employees, filed class actions alleging that the hospitals’ pension plans do not fall within ERISA’s church plan exemption because they were not established by a church. The Supreme Court held for the hospitals, ruling that a plan maintained by a principal-purpose organization qualifies as a “church plan,” regardless of who established it. 

The Court reasoned that the term “church plan” initially “mean[t]” only “a plan established and maintained . . . by a church.” But the amendment provides that the original definitional phrase will now “include” another—“a plan maintained by [a principal-purpose] organization.” That use of the word “include” is not literal, but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition. In other words, because Congress deemed the category of plans “established and maintained by a church” to “include” plans “maintained by” principal purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements.

What Comes Next?

Advocate Health Care Network v Stapleton does not rule on what is or is not a “principle purpose organization”, and that is where we can expect future litigation to focus. The key question will be whether such organization is “controlled by or associated with a church.” Therefore, church-affiliated organizations, such as hospitals, schools, and social welfare agencies, that are relying on ERISA’s church plan exception ought to review their documentation and evidence of either control by or affiliation with a church.

DOL Issues Additional Fiduciary Rule Enforcement Relief and FAQ Guidance

The DOL has issued temporary enforcement relief and FAQ guidance addressing the implementation of the DOL’s final fiduciary rule on investment advice conflicts and related prohibited transaction exemptions (PTEs) during the transition period beginning June 9, 2017 and ending January 1, 2018.

As background, the fiduciary rule and PTEs were effective June 7, 2016, with an initial applicability date of April 10, 2017. The applicability date was delayed 60 days to June 9, 2017. See our prior article here. In connection with the delay, the DOL amended the Best Interest Contract (BIC) exemption and the PTEs to provide transition relief that only requires adherence to the impartial conduct standards (including the best interest standard) through January 1, 2018.The standards specifically require advisers and financial institutions to:

(1) Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:

  • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
  • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;

(2) Charge no more than reasonable compensation; and

(3) Make no misleading statements about investment transactions, compensation, and conflicts of interest.

Highlights of the most recent transition guidance:

Temporary Enforcement Policy on Fiduciary Duty Rule (FAB 2017-02). The DOL announced on May 22, 2017 that it will not pursue claims during the transition period against fiduciaries who are “working diligently and in good faith” to comply with the new fiduciary rule and the related exemptions. The DOL also states that IRS confirms that FAB 2017-02 constitutes “other subsequent related enforcement guidance” for purposes of IRS Announcement 2017-4, which means that the IRS will not impose prohibited transaction excise taxes or related reporting obligations on any transactions or agreements during the transition period that would be subject to the DOL’s nonenforcement policy.

DOL FAQ Guidance on the Transition Period. The DOL also issued FAQs, which review the DOL’s “phased implementation approach”, and confirm that on June 9, 2017, firms and advisers who are fiduciaries need to alter their compensation practices to avoid PTEs or satisfy the transition period requirements under the BIC or another exemption. During the transition, firms should adopt policies and procedures they “reasonably conclude” are necessary to ensure that advisers comply with the impartial conduct standards. However, there is no requirement to give investors any warranty of their adoption, and those standards will not necessarily be failed if certain conflicts of interest continue during the transition period. Other highlights include a clarification that level-fee providers can rely on the BIC exemption during the transition period, and examples of participant communications and non-client-specific investment models that do not provide fiduciary advice. The guidance also indicates that the President’s mandated review (see our prior article here) has not been completed, but when it is, additional changes might be made to the rule or the PTEs.

DOL Delays Fiduciary Duty Rule for 60 Days and Invites Comments on Whether to Further Delay, Amend, or Withdraw the Rule

The U.S. Department of Labor (DOL) today announced a proposed extension of the applicability dates of the fiduciary rule and related exemptions, including the Best Interest Contract Exemption, from April 10 to June 9, 2017.

The announcement follows a presidential memorandum issued on Feb. 3, 2017, which directed the DOL to examine the fiduciary rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. See our prior post, which explained that the President’s memorandum

..instructs the DOL to rescind or revise the rule . . . if it concludes for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the Administration’s stated priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies”.

The DOL’s latest announcement invites comments that might help inform updates to the legal and economic analysis it conducted in originally issuing the rule (during President Obama’s term), including any issues the public believes were inadequately addressed in the prior analysis. The DOL has also invited comments on market responses to the final rule and the related Prohibited Transaction Exemptions (PTEs) to date, and on the costs and benefits attached to such responses. The comment period runs 45 days from today.

Upon completion of its examination, the DOL may decide to allow the
final rule and PTEs to become applicable, issue a further extension of the applicability date, propose to withdraw the rule, or propose amendments to the rule and/or the PTEs.

President Orders Review of Fiduciary Duty Rule

On February 3, 2017, the President issued a Presidential Memorandum on the Fiduciary Duty Rule, ordering the Department of Labor (DOL) to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice”.

DOL Review

The memorandum directs the DOL to “prepare an updated economic and legal analysis concerning the impact of the Fiduciary Duty Rule”, considering whether the rule:

  • has harmed or is likely to harm investors due to a reduction in access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
  • has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; or
  • is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

Possible Revision or Rescission

The memorandum also instructs the DOL to rescind or revise the rule if it makes an affirmative determination as to any of the above considerations, or if it concludes for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the Administration’s stated priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies”.

Possible Delay

While the Memorandum does not directly delay the rule, the acting U.S. Secretary of Labor, Ed Hugler, responded to the President’s direction through a News Release stating that “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”

While it is still unclear whether the DOL will delay the rule, it is entirely possible, likely even, that the DOL will delay the rule within the next few weeks. It is also a good bet that the DOL will ultimately make some revisions to the rule, even if they do not rescind it entirely. In the meantime, financial advisors and others subject to the Rule will need to evaluate their compliance efforts so that they remain as nimble as possible in the face of he constantly shifting regulatory sands.

Plan Sponsors and Plan Administrators should note that neither the Fiduciary Duty Rule, nor the potential impending changes to the rule, directly impact their responsibilities as plan fiduciaries, other than how the rule impacts those providing financial advice to Plan Sponsors and Administrators.

More:

DOL Conflict of Interest Final Rule Page

OSHA Issues Final Rules for Handling ACA Retaliation Claims

The Department of Labor’s Occupational Safety and Health Administration has published a final rule establishing procedures, time frames and burdens of proof for handling whistleblower complaints under the Affordable Care Act (ACA).

The ACA amended Section 18C of the Fair Labor Standards Act to protect employees from retaliation for receiving federal financial assistance when they purchase health insurance through an Exchange. It also protects employees from retaliation for raising concerns regarding conduct that they believe violates the consumer protections and health insurance reforms found in Title I of the ACA.

This rule establishes procedures and time frames for hearings before Department of Labor administrative law judges in ACA retaliation cases; review of those decisions by the Department of Labor Administrative Review Board; and judicial review of final decisions. Significant provisions in the final rule, and implications for employers include:

  • As with other retaliation claims, the complainant need not prove that the initial complaint, which they allege triggered the retaliation, pertained to an actual violation of law. They only need to show that they had a good faith belief that they were complaining about a violation of law.
  • To establish a prima facie case of retaliation for receiving a subsidy or premium assistance through an Exchange, an employee merely needs to show that an adverse action took place shortly after the protected activity.
  • This will be a very easy burden to meet where the employer has knowledge that the employee was receiving a subsidy or  premium assistance. For example:
    • an employee might ask the employer about the coverage available through his employment, for the purpose of applying for a subsidy through the Exchange.
    • in addition, under the ACA, when an exchange provides a premium subsidy it is supposed to notify the employer. This will provide the employer specific notice that the employee has requested or is receiving a subsidy.
    • the employer’s knowledge of the above could prove fatal to the employer’s defense of a retaliation claim, unless the employer scrupulously segregates such knowledge from those making employment decisions.
  • Once a claimant establishes a prima facie case, the burden shifts to the employer to establish by clear and convincing evidence that it would have taken the adverse action even if the protected activity had not occurred. This is a very high standard.

More…

The Final Rule

OSHA’s Affordable Care Act fact sheet provides more information regarding who is covered under the ACA’s whistleblower protections, protected activity, types of retaliation, and the process for filing a complaint.

Significant Changes Proposed for Form 5500

On July 21, 2016 the Department of Labor (DOL), the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) published proposed rules that would make significant revisions to the Form 5500 Annual Return/Report as of the 2019 filing year.

DOL explains in a Fact Sheet that the proposed form revisions and the DOL’s related implementing regulations are intended to address changes in applicable law and in the employee benefit plan and financial markets, and to accommodate shifts in the data the DOL, IRS and PBGC need for their enforcement priorities, policy analysis, rulemaking, compliance assistance, and educational activities.

The major proposed changes are summarized below:

  • Retirement Plan Changes– The new Form 5500 will request more information about participant accounts, contributions, and distributions. It will also ask about plan design features, including whether the plan uses a safe harbor or SIMPLE design and whether it includes a Roth feature. The form will also ask about investment education and investment advice features, default investments, rollovers used for business start-ups (ROBS), leased employees, and pre-approved plan designs.  Schedule R will include new questions about participation rates, matching contributions, and nondiscrimination.
  • Group Health Plan Changes– The most significant change for health plans is that all ERISA group health plans, including small plans that are currently exempt from filing, will be required to file a Form 5500.  The new filing requirement includes a new Schedule J (Group Health Plan Information), which will list the types of health benefits provided, the plan’s funding method (self insured or fully insured), information about participant and employer contributions, information about COBRA coverage, whether the plan is grandfathered under health care reform, and whether it includes a high deductible health plan, HRA, or health FSA.  In addition, most filings (except those for small fully insured plans) would have to provide financial and claims information, disclose stop-loss carriers, third party administrators and other plan service providers, and provide details regarding compliance with HIPAA, GINA, health care reform and other compliance issues.
  • Other Changes– The proposed changes affect many of the existing Form 5500 schedules, including:
    • Schedule C would be revised to coordinate with the service provider fee disclosure rules.
    • Schedule C would be required from some small plans currently exempt from filing it.
    • Schedule H would be expanded to include questions on fee disclosures, annual fair market valuations, designated investment alternatives, investment managers, plan terminations, asset transfers, administrative expenses and uncashed participant checks.
    • Schedule I would be eliminated.
    • Small plans that currently file Schedule I would generally need to file Schedule H.

Effective Date– The new Form 5500 is expected to be required as of the 2019 plan year filings.

Proposed Rule Making Form 5500 Changes

DOL Adjusts ERISA Penalties

The Department of Labor, Employee Benefits Security Administration has issued interim final rules increasing certain DOL compliance penalties effective as of August 1, 2016.  The highlights are:

  • The maximum penalty for failure or refusal to file the Form 5500 annual report is increasing from $1,100 per day to $2,063 per day
  • Failure to furnish information to the DOL under ERISA Section 104(a)(6 will now carry penalties equal to $147 per day (up from $110 per day)
  • The maximum penalty for failing to provide a summary of benefits and coverage for a group health plan is increasing from $1,000 to $1,087 per failure
  • Numerous miscellaneous penalties are increasing from $100 per day to $110 per day, including
    • Certain violations of the Genetic Information Nondiscrimination Act (GINA), such as establishing eligibility rules based on genetic information or requesting genetic information for underwriting purposes, and
    • An employer’s failure to inform employees of CHIP coverage opportunities
  • The penalty for failure to provide benefit statements to certain former participants and beneficiaries in a retirement plan are increasing from $11 per employee to $28 per employee
  • The penalties for failure to furnish a blackout notice (when participants are precluded from changing investment instructions, taking a loan or a distribution) are increasing from $100 per day to $131 per day

Why are the Penalties Being Increased Now? In 2015, Congress passed the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (2015 Inflation Adjustment Act) as part of the Bipartisan Budget Act of 2015. The new law directs agencies to adjust their civil monetary penalties for inflation.

Will the Penalties be Adjusted again in the Future? The law requires federal agencies to adjust their civil monetary penalties for inflation by July 1, 2016. After this initial “catch-up” adjustment, the agencies must adjust their civil monetary penalties annually for inflation.

When are the New Penalty Amounts Effective? The new civil penalty amounts are applicable only to civil penalties assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, the date of enactment of the 2015 Inflation Adjustment Act.

More…

The interim final rule

EBSA Fact Sheet, including full chart showing all the new penalty amounts

DOL Finalizes Regulations and Related Exemptions on ERISA Fiduciary Definition and Conflicts of Interest in Investment Advice

The Department of Labor (DOL) has adopted its long-awaited final rule defining who is a fiduciary investment adviser, and has issued accompanying prohibited transaction class exemptions that allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation, as long as they adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their customers.

Going forward, individuals and firms that provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs and IRA owners must either avoid payments that create conflicts of interest or comply with the protective terms of an exemption issued by the DOL.

Under new exemptions adopted with the rule, firms will be obligated to acknowledge their status and the status of their individual advisers as “fiduciaries.” Firms and advisers will be required to:

  • make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer;
  • charge only reasonable compensation; and
  • make no misrepresentations to their customers regarding recommended investments.

I.  What Is Covered Investment Advice Under the Rule?

Covered investment advice is generally defined as a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA.

A “recommendation” is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.

II.  What Is Not Covered Investment Advice Under the Rule?

The final rule includes some specific examples of communications that would not rise to the level of a recommendation and therefore would not constitute a fiduciary investment advice communication, including:

  • Education about retirement savings and general financial and investment information. For example, education can include specific investment alternatives as examples in presenting hypothetical asset allocation models or in interactive investment materials intended to educate participants and beneficiaries as to what investment options are available under the plan, as long as they are designated investment alternatives selected or monitored by an independent plan fiduciary and other conditions are met. In contrast, because there is no similar independent fiduciary in the IRA context, the investment education provision in the rule does not treat asset allocation models and interactive investment materials with references to specific investment alternatives as merely “education.”
  • General communications that a reasonable person would not view as an investment recommendation
  • Simply making available a platform of investment alternatives without regard to the individualized needs of the plan, its participants, or beneficiaries if the plan fiduciary is independent of such service provider
  • Transactions with Independent Plan Fiduciaries with Financial Expertise. ERISA fiduciary obligations are not imposed on advisers when communicating with independent plan fiduciaries if the adviser knows or reasonably believes that the independent fiduciary is a licensed and regulated provider of financial services (banks, insurance companies, registered investment advisers, broker-dealers) or those that have responsibility for the management of $50 million in assets, and other conditions are met.
  • Employees working in a company’s payroll, accounting, human resources, and financial departments who routinely develop reports and recommendations for the company and other named fiduciaries of the sponsors’ plans are not investment advice fiduciaries if the employees receive no fee or other compensation in connection with any such recommendations beyond their normal compensation for work performed for their employer

III.  Best Interest Contract Exemption

The Best Interest Contract Exemption permits firms to continue to rely on many current compensation and fee practices, as long as they meet specific conditions intended to ensure that financial institutions mitigate conflicts of interest and that they, and their individual advisers, provide investment advice that is in the best interests of their customers. Specifically, in order to align the adviser’s interests with those of the plan or IRA customer, the exemption requires the financial institution to:

  • acknowledge fiduciary status for itself and its advisers
  • adhere to basic standards of impartial conduct, including giving prudent advice that is in the customer’s best interest, avoiding making misleading statements, and receiving no more than reasonable compensation.
  • have policies and procedures designed to mitigate harmful impacts of conflicts of interest and
  • disclose basic information about their conflicts of interest, including descriptions of material conflicts of interest, fees or charges paid by the retirement investor, and a statement of the types of compensation the firm expects to receive from third parties in connection with recommended investments.
  • Investors also have the right to obtain specific disclosure of costs, fees, and other compensation upon request.
  • In addition, a website must be maintained and updated regularly that includes information about the financial institution’s business model and associated material conflicts of interest, a written description of the financial institution’s policies and procedures that mitigate conflicts of interest, and disclosure of compensation and incentive arrangements with advisers, among other information.

IV.  Additional Exemptive Relief

In addition to the Best Interest Contract Exemption, the DOL issued a Principal Transactions Exemption, which permits investment advice fiduciaries to sell or purchase certain recommended debt securities and other investments out of their own inventories to or from plans and IRAs. As with the Best Interest Contract Exemption, this requires, among other things, that investment advice fiduciaries adhere to certain impartial conduct standards, including obligations to act in the customer’s best interest, avoid misleading statements, and seek to obtain the best execution reasonably available under the circumstances for the transaction.

V.  Effective Date

Compliance with the new rule is required as of April 2017.  The exemptions will generally become available upon the applicability date of the rule. However, the DOL has adopted a “phased” implementation approach for the Best Interest Contract Exemption and the Principal Transactions Exemption. Both exemptions provide for a transition period, from the April 2017 applicability date to January 1, 2018, under which fewer conditions apply. This period is intended to give financial institutions and advisers time to prepare for compliance with all the conditions of the exemptions while safeguarding the interests of retirement investors.

During this transition period, firms and advisers must adhere to the impartial conduct standards, provide a notice to retirement investors that, among other things, acknowledges their fiduciary status and describes their material conflicts of interest, and designate a person responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the impartial conduct standards. Full compliance with the exemption will be required as of January 1, 2018.

VI. More…

Regulations and Related Exemptions

DOL Fact Sheet

DOL FAQs

DOL and IRS Releases Updated Form 5500 Series for 2015

DOL and IRS recently posted the new 2015 Form 5500, Form 5500-SF, and a draft of the 2015 Form 5500-EZ. Of significance is the “IRS Compliance Questions” added to the various forms and schedules:

  • Schedules H and I add two new compliance questions about unrelated business taxable income and in-service distributions.
  • Schedule R adds ten new compliance questions in five areas: (1) ADP and ACP testing; (2) coverage testing and plan aggregation; (3) recently adopted plan amendments; (4) the type of plan (whether individually designed or preapproved); and (5) plans maintained in U.S. territories.
  • Form 5500-SF adds the above compliance questions and one additional question about whether required minimum distributions were properly made to 5% owners who are still employed and are were 70-1/2  or older.
  • Form 5500-EZ adds most of the above questions, except the testing and coverage questions, which do not apply to single person plans.

2015 Form 5500 series and Instructions

Draft 5500-EZ and Instructions