Employer and other employee benefit plan sponsors, fiduciaries and investment and financial service providers and other plan service providers should review their plans for possible transactions that may qualify for excise tax relief under new guidance issued today by the Internal Revenue Service and Department of Labor.
IRS Announcement 2017-04, scheduled for publication in the Federal Register as IRB 2017-16 on April 17, 2017, provides relief from the excise taxes under section 4975 of the Internal Revenue Code and any related reporting requirements to conform to the temporary enforcement policy described by the Department of Labor (DOL) in Field Assistance Bulletin (FAB) 2017-01 with respect to the final fiduciary duty rule published in the Federal Register on April 8, 2016 (81 F.R. 20946), entitled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice” and related prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC Exemption), the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption), and certain amended prohibited transaction exemptions (collectively, PTEs)
The relief parallels similar relief provided by the Department of Labor to these individuals in a recently released Field Assistance Bulletin.
The new DOL and IRS guidance gives temporary relief to the DOL final regulation defining who is a “fiduciary” of an employee benefit plan under § 3(21)(A)(ii) of ERISA as a result of giving investment advice to a plan or its participants or beneficiaries published April 6, 2016. That final rule, which also applies to the definition of a “fiduciary” of a plan under § 4975(e)(3)(B) of the Code, treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan as fiduciaries in a wider array of advice relationships than was true of the prior regulatory definition. Concurrent with its publication of the final rule, the DOL published the PTEs, which provide two new administrative class exemptions from the prohibited transaction provisions of ERISA and the Code, as well as amendments to previously granted exemptions.
The PTEs would allow, subject to appropriate safeguards, certain broker-dealers, insurance agents, and others that act as investment advice fiduciaries, as defined under the final rule, to continue to receive a variety of forms of compensation that would otherwise violate prohibited transaction rules, triggering excise taxes and civil liability.
The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The PTEs also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018, for the BIC Exemption and the Principal Transactions Exemption.
President Trump, by Memorandum to the Secretary of Labor dated February 3, 2017, directed the DOL to examine whether the fiduciary duty rule may adversely affect the ability of Americans to gain access to retirement information and financial advice and to prepare an updated economic and legal analysis concerning the likely impact of the rule as part of that examination.
After requesting comments on the final rule on March 3, DOL on March 10, 2017, announced a temporary enforcement policy related to its proposal to extend for 60 days the applicability date of the fiduciary duty rule and the related PTEs. The policy announced in FAB 2017-01 provides that:
- If DOL issues a final rule after April 10 implementing a delay in the applicability date of the fiduciary duty rule and related PTEs, the DOL will not initiate an enforcement action because an adviser or financial institution did not satisfy conditions of the rule or the PTEs during the “gap” period in which the rule becomes applicable before a delay is implemented, including a failure to provide retirement investors with disclosures or other documents intended to comply with provisions of the rule or the related PTEs.
- If DOL decides not to issue a delay in the fiduciary duty rule and related PTEs, the DOL will not initiate an enforcement action because an adviser or financial institution, as of the April 10 applicability date of the rule, failed to satisfy conditions of the rule or the PTEs, provided that the adviser or financial institution satisfies the applicable conditions of the rule or PTEs, including sending out required disclosures or other documents to retirement investors, within a reasonable period after the publication of a decision not to delay the April 10 applicability date.
Field Assistance Bulletin 2017-01 provides that, to the extent circumstances
surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance. Following the issuance of the FAB, stakeholders have raised concerns about the potential application of excise taxes under Code § 4975 and related reporting obligations in cases covered by the DOL’s temporary enforcement policy.
Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS determined it appropriate to adopt a corresponding temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, ,Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, as further reflected in and facilitated by the statutory Reorganization Plan, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, Announcement 2017-04 provides that the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.
The new collective guidance provides a short reprieve from the obligation to comply with the otherwise applicable of the fiduciary rule pending the new administration to review and reconsideration of that rule. How many will welcome this relief, plan sponsors, fiduciaries and service providers need to keep in mind that it’s provisions are temporary in nature and do not preclude a participant or beneficiary from seeking to establish liability of an individual providing advice or assistance with respect to services under the facts and circumstances in an ERISA lawsuit. Because of the risk of litigation even when the agencies are standing down from enforcement, plan sponsors and fiduciaries and the service providers that assist them with reviewing and making investmentat all times should take care to be able to defend their actions under the fiduciary rules.