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IRS Issues “Mirror” Excise Tax Relief for Fiduciary Rule Non-Compliance

Given the chance that the DOL Fiduciary Rule will not be delayed before April 10, the IRS has now issued a non-enforcement policy for excise taxes that mirrors the DOL policy. As we explained in our March 14 alert, there is some possibility (although slight) that the proposed delay of the Rule will not be effective before its scheduled applicability date. To address that, the DOL issued a temporary non-enforcement policy in Field Assistance Bulletin 2017-1 (the “FAB”). But concern remained because there was no corresponding relief for prohibited transaction excise taxes. This led to the IRS action.

As of today, delay by April 10 seems more likely. The regulation governing the Rule’s applicability date has been sent from the DOL to the Office of Management and Budget (OMB). We don’t yet know how quickly the OMB will turn it around, or exactly what the regulation provides. However, we continue to expect that it will delay the applicability date by 60 days, and that it will be finalized and published in the Federal Register before April 10. If this is correct, the relief provided by the IRS policy (and the FAB) would not be necessary. However, they provide an “insurance policy” in case this does not occur.

Here are the key takeaways for advisers and financial institutions:

  • If the Rule and related exemptions are not delayed until after April 10, many advisers and financial institutions would become fiduciaries during the “gap period.” This would be true, even for recommendations that might not be “fiduciary” advice under existing rules.

  • Many forms of compensation – such as commissions, 12b-1 fees and management fees for proprietary products – would be prohibited absent compliance with the Best Interest Contract Exemption (BICE) or another new or amended exemption under the Rule.

  • Unless an exemption is satisfied, a two-tiered excise tax applies to prohibited transactions. The first tier is 15 percent of the “amount involved”; this increases to 100 percent if the transaction is not corrected within certain time frames.

  • The IRS policy provides that no excise taxes will be imposed for non-compliance with the Rule and related exemptions during a “gap period” – that is, under the same circumstances as the DOL non-enforcement policy. This would apply, for example, where BICE Transition Period disclosures have not been furnished to retirement investors.

  • If the Rule and its related exemptions do become applicable on April 10 with no delay, under the FAB, advisers and financial institutions would have a “reasonable period” after that decision is announced to come into compliance. The IRS policy would similarly apply under these circumstances, meaning that prohibited transactions triggered by temporary non-compliance would not cause advisers and financial institutions to become liable for excise taxes.

We continue to expect that the Rule’s applicability date will be delayed by 60 days (to June 9), and that this will become “official” prior to April 10. Nonetheless, the IRS policy fills an important void that the FAB could not. Taken together, they provide meaningful relief if a gap period should occur or if the Rule is not delayed.

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Fred Reish, Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney
Partner

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

(310) 203-4047
Bruce Ashton, Drinker Biddle Law Firm, Los Angeles, Employment Benefits Attorney
Partner

Bruce L. Ashton has more than 35 years of experience handling employee benefits matters. His practice concentrates on representing plan service providers (including RIAs, independent record-keepers, third-party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. His experience includes representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and liabilities, and structuring qualified plans, non-qualified deferred compensation arrangements.

Combining his employee benefits and transactional experience, Bruce is also active in the installation and funding of employee stock ownership plans (ESOPs).

310-203-4048
Bradford Campbell, Drinker Biddle Law Firm, Washington DC, Labor and Employment Attorney
Partner

Bradford P. Campbell is a nationally recognized figure in employer-sponsored retirement plans. He is the former Assistant Secretary of Labor for Employee Benefits and former head of the Employee Benefits Security Administration. As ERISA’s former “top cop” and primary federal regulator, Brad provides his clients with insight and knowledge across a broad range of ERISA-plan related issues. He provides employee benefits advice to financial service providers and plan sponsors, particularly in relation to ERISA Title I issues, including fiduciary conduct and...

202-230-5159
Joshua Waldbeser, Employment lawyer, Drinker Biddle
Partner

Joshua J. Waldbeser counsels plan sponsors and committees with respect to their fiduciary responsibilities under ERISA, as well as design and operational considerations for 401(k) plans, ESOPs and other defined contribution plans, cash balance and traditional defined benefit plans, and deferred compensation arrangements of all types. Josh also works extensively with insurance companies, investment advisors and funds, banks and trust companies, broker-dealers, record keepers, TPAs and other service providers with respect to ERISA, tax, securities and...

312-569-1317
Sandra Dawn Grannum, Finance, Securities Lawyer, Drinker Biddle Law Firm
Partner

Sandra Dawn Grannum concentrates her practice on securities, broker/dealer arbitration, litigation, mediation and regulatory defense.

Sandy has tried complex multimillion-dollar arbitrations before FINRA, AAA and JAMS across the country. She has tried more than 50 arbitrations before the NASD and FINRA through award represented brokerage firms, banks, clearing firms, and associated persons. In addition, she has successfully pursued cases in state and federal courts and in adversarial proceedings before bankruptcy courts.

973-549-7015