For employee benefits practitioners, the key takeaway from a recent Trump administration
executive order on reducing regulations and controlling regulatory costs is this: “For every one new regulation issued, two prior regulations must be identified for elimination.”
This order, issued Jan. 30, may seem to have little relevance for retirement plan advisers, but is likely to have a significant impact if
tax reform becomes a reality, particularly with respect to issues of executive compensation.
Here's one example.
In an interpretive bulletin published in December, the Labor Department stated “consideration of the appropriateness of executive compensation” is important when pension plans determine how to vote proxies and exercise shareholder rights under ERISA. (For example, a pension plan should not vote in favor of a new clearly excessive executive compensation arrangement for a company in which it invests, as that could harm the value of its investment.)
The appropriateness of executive compensation would relate not only to the amount of compensation, but also to the manner in which it is provided. For example, if the alternative minimum tax were eliminated from the Internal Revenue Code, incentive stock options might receive a resurgence in interest from executives. If section 162(m) of the code (which generally imposes a $1 million cap on compensation for the CEO and the four other most highly compensated officers) were repealed, the base pay of these officers would likely increase, and the need for shareholder approval of modifications to performance-based compensation would be removed. If Dodd-Frank were repealed or substantially modified, other compensation practices might be modified by corporations to make executive compensation arrangements more flexible and beneficial to executives.
Any tax legislation would almost certainly require the issuance of regulatory guidance, in some form, concerning these issues, and any such regulatory guidance would be affected by Mr. Trump's executive order, as such guidance would either be delayed, or not issued at all. That would require advisers to make reasonable, good-faith judgments with respect to what the new law requires.
More broadly, the executive order seemingly covers soft forms of guidance like answers to frequently asked questions, such as the
FAQs issued by the DOL with respect to the fiduciary rule and those issued jointly by the DOL, Internal Revenue Service and Department of Health and Human Services implementing the Affordable Care Act. If the executive order is, in fact, that broad, the issuance of needed and helpful soft guidance might be curtailed, leaving advisers with uncertainty and increased risk.
It's unclear how the issuance of regulations mandated by Congress will be affected. For example, under the Affordable Care Act, the IRS is required to issue guidance with respect to discriminatory insured group health plans. If the IRS can only implement that guidance by eliminating two other regulations, the issuance of guidance in that area may continue to be delayed.
It is also unclear what a “new regulation” is. In some cases, that determination will be simple and uncontroversial. For example, one of the projects listed on the IRS semiannual regulatory guidance is the issuance of regulations under Code section 414(x), the combined defined benefit and qualified cash or deferred (401(k)) arrangements. There has been no prior guidance under this code section, so any regulation in this area would be a new regulation.
However, that same IRS guidance listed projects such as updating rules with respect to employee stock ownership plans, service crediting and vesting rules under Code section 411, and top-heavy rules under Code Section 416. Will the updating of existing regulations be treated as new regulations? (Top-heavy rules require minimum contributions or benefits be provided if 60% or more of the benefits under the retirement plan are for certain key officers and owners of the company. The service crediting and vesting rules are used to determine when a plan participant has a non-forfeitable interest in benefits under a plan.)
There were a number of regulatory projects that could be affected by the new regulatory order that were on the IRS agenda for the current fiscal year: clarification of the documentation required to substantiate hardship withdrawals; guidance with respect to the timing of the use or allocation of forfeitures in defined contribution plans; guidance under the prohibited transaction rules of code section 4975; regulations under code section 3405 with respect to distributions made from plans to payees outside the United States; and annual reporting under code section 6057. It remains to be seen what effect the Trump administration's executive order will have on these regulatory projects.
We are living in interesting times, and nothing is as simple as it appears.
Marcia S. Wagner is the managing and founding partner of The Wagner Law Group. She specializes in ERISA and employee benefits.
