Friday, January 8, 2016

2015 a Year of Mixed Blessings

When we were youngsters, one of the lessons our parents tried to teach us was that we were unlikely to get everything we wanted.  We were to be appreciative when things went our way, but not be whiners when they didn’t.  The 2015 year now ending was just that kind of year for those who serve the retirement industry.  We have some things to be grateful for, and some things we might have preferred to have turned out differently.  Our glass may not be full, but neither is it empty, so we won’t whine unreasonably.

For much of the year the dominant story was the DOL’s fiduciary regulations, renamed – some think – for public relations purposes as the “conflicted advice” regulations.  In my nearly three decades in the retirement industry I doubt there has been another set of regulations that has generated so much public comment, whether live in public hearings or in written comments submitted to the Department. 

The polarization between opponents and supporters has been profound.  Some within the certified financial planner (CFP) community have voiced support for the proposed regulations; these advisers already consider themselves fiduciaries.  There has also been support from some retiree, consumer advocacy and public policy groups.  Many financial industry firms, affiliated industry groups, and individual investment professionals on the other hand, have been extremely critical of a fiduciary standard they fear will ultimately deprive less affluent savers of badly needed assistance.  There was also an unprecedented level of bipartisan effort in Congress to delay or thwart implementation of these proposed rules.  Many do not think they will ultimately be in savers’ best interest.

Some opponents hoped the Consolidated Appropriations Act – the must-pass federal budget legislation enacted during the week before Christmas – would provide a vehicle by which Congress could intervene via amendment, but efforts to do so were unrewarded.  Advocates of this strategy reportedly may attempt to introduce stand-alone legislation aimed directly at delaying DOL’s issuance of the final regulations.  But overcoming an almost certain presidential veto is thought to have a less-than-an-even chance of succeeding.

Such preoccupation with the proposed fiduciary regulations left the industry open to a virtual blind-side when the DOL in November issued guidance on states establishing or coordinating retirement plans for private sector workers.  Many had expected that the guidance would begin and end with automatic payroll withholding IRA contribution programs, with some states mandating them for most employers that do not establish a recognized retirement plan – however sophisticated or simple.  Instead, DOL went well beyond this, handing states a playbook for assisting businesses in establishing qualified plans. 

Under either the IRA or qualified plan regimen sketched out by DOL’s proposed regulations and interpretive bulletin, states could readily find themselves involved in functions that put them in competition with financial organizations and service providers in the public sector.  DOL, by the way, in its interpretive bulletin created what many feel is an unprecedented and inexplicable exception to its past guidance limiting the creation of multiple employer plans (MEPs).
We understand the numerous states’ clamor for guidance so that they might confidently proceed in encouraging retirement saving by private sector workers within their borders.  This, in the face of inaction by Congress to legislate options or parameters.  But it’s hard not to view this DOL state-coordinated plan guidance as anything but legislation by regulation.

One area in which reason did prevail in 2015 retirement developments is in the requirements for annual plan reporting to the IRS and DOL, via the 5500-series forms.  Proposed for 2015 plan years was a new reporting regimen for filers of Form 5500, 5500-SF, and 5500-EZ, to provide detailed information not only on plan characteristics, but on operations, testing, amending and other elements of compliance.  Apart from an unprecedented level of intrusiveness and “audit mining” in the questions on draft 2015 forms and schedules, also to be required was disclosure of preparer/client relationships.  

Just as most audacious was the matter of timing, and the lack of lead time for plan sponsors and service providers to prepare for the capture, retrieval, and outputting of the information sought in the 2015 plan year reporting cycle.  Fortunately, IRS and DOL were ultimately convinced that plans and service providers needed more time to comply, and this compliance-related information will be optional on Forms 5500-, 5500-SF and 5500-EZ for 2015 plan years.   

Exactly one week before Christmas day, Congress and the President found themselves for once pulling in the same direction and enacted the Consolidated Appropriations Act of 2016.  Within this extremely full and complicated package were some provisions affecting qualified savings programs, including IRAs, SIMPLE IRA, church retirement and 529 college savings plans, and the new ABLE accounts for special needs individuals.

Worthy of special mention is the qualified charitable distribution, or QCD, option for those age 70 ½ or older with IRAs.  This option, which has been with us under numerous legislative extensions since 2006, allows a taxpayer to donate up to $100,000 of IRA assets annually to a qualifying charity, tax-free.  It was made permanent by CAA 2016.  Instead of such taxpayers generally being limited to a charitable tax deduction up to 50 percent of annual income, the amount contributed under QCD can be as much as 100 percent of income, but no more than $100,000.

One might guess that this option would be availed by only a limited number of taxpayers.  But based on evidence from our retirement consulting practice, it was the most-asked-about provision in this legislation.  Also based on our informal data, it’s certainly not the case that every taxpayer using this option gives the maximum amount.  Far from it.  Donating under the QCD program is not “a wash” tax-wise for the giver, either.  Keeping, rather than donating the amount, would still be a net cash benefit to the taxpayer.  While the tax break may be generous, so is the charitable giving! 

One can argue that this tax provision has a cost in tax revenue that must be borne by other taxpayers.  But that can be said of just about any of the several dozen tax benefits in the Act.  Very few of these have at their core the creation of an incentive to be generous.  Among these many so-called “tax extender” provisions, this is one that a taxpayer can be proud to have taken advantage of.

Have a happy and prosperous New Year!