Another Extension Expected for DOL Fiduciary Rule/Prohibited Transaction Exemptions
As reported in last quarter’s “Current Developments,” the Department of Labor’s expanded definition of “fiduciary” and related prohibited transaction exemptions (“PTE”) became effective June 9. Recognizing this guidance will likely be revised, the DOL implemented a “transition exemption” to address financial conflict of interest issues until December 31, 2017. Since then, the DOL has proposed to extend the “transition exemption” until July 1, 2019. This proposal is expected to be finalized, and would provide time for the DOL to revise these Obama Administration rules. While the DOL has stated it will not enforce the PTEs through December 31, 2017, Union Bank expects this non-enforcement policy to be extended until July 1, 2019.
With health care repeal and replace efforts on hold, the Republican Congress and Trump Administration have turned their attention to tax reform. Although it is too early to predict how tax reform will affect retirement plans, two ideas have emerged:
- Rothification — So-called “Rothification” would prohibit participants from making pre-tax deferrals to 401(k) plans. All deferrals would be Roth deferrals. Some lawmakers consider pre-tax contributions to be a tax loophole. Forcing participants to make Roth deferrals would raise more revenue within the 10-year budget window (because Roth deferrals are taxed up front rather than at distribution) compared to pre-tax deferrals. The retirement plan industry largely believes this is a “budget gimmick” because it ignores the fact that pre-tax deferrals, and earnings thereon, are eventually taxed at distribution. This is different than other tax deductible dollars (e.g., mortgage interest deduction, charitable deductions, etc.) that are never taxed. The retirement plan industry is expected to lobby hard against Rothification due to its potential negative effect on overall participant retirement savings. Possible compromise: Rothification for higher paid workers but not lower paid workers.
- Proposed Cap on Small Business “Pass-Through” Income — Tax reform advocates have proposed to cap at 25% the tax rate for “pass-through” income applicable to most partnerships, S corporations, and LLCs. According to ASPPA, a non-profit association for retirement plan professionals, pass-through entities sponsor more than 320,000 plans with an average of 75 participants in each plan. Retirement plan professionals are concerned that, if passed, this would discourage small “pass-through” businesses from maintaining retirement plans. This is because small business owners would see it as more beneficial to be taxed at a 25% pass-through rate, and investing those after-tax dollars in investments that would eventually be taxed at even lower capital gain tax rates compared to making contributions to a retirement plan where distributions would be taxed at a higher (e.g., 35%) ordinary tax rate upon distribution.
The IRS has issued several tax relief provisions for victims of Hurricanes Harvey, Irma and Maria. The special relief allows a participant to receive a hardship distribution (or borrow up to specified plan loan limits) based on a hurricane-related hardship even if such hardship is not for an enumerated safe harbor hardship reason. Similarly, a participant can receive a hardship distribution to assist family members affected by the hurricanes. Finally, legislation is moving through Congress that would provide additional retirement plan relief to hurricane victims. For more information about hurricane relief, please contact your Union Bank Relationship Manager.