Videos and Webinars

The Tax Cuts and Jobs Act of 2017

Apr 25, 2018

The Tax Cuts and Jobs Act of 2017 and re-affirmed a national tax policy in favor of broad-based retirement savings plans.

They also allow corporations to continue to attract, retain, and reward talent through incentive and non-qualified deferred compensation plans. How are plan sponsors nationwide responding to the new law and how will it impact your business? 

In this informative webinar we will explore these questions and cover changes under the act, along with the following topics: 
  • Tax provisions affecting executive compensation
  • Tax provisions affecting life insurance
  • Tax provisions and potential impact  on employer-funded retirement plans
  • Effective Date
  • Transition Rile
  • Outlook for further developments in 2018.
The webinar will help plan sponsors better understand the specific impact of tax reform on new retirement plans, including a new tax law questions and answers.

Click here to download a copy of this presentation, and here for a transcript of the Q&A.

Test your knowledge. Click here for a quick quiz about The Tax Cuts and Jobs Act of 2018.
Discover how Newport Group can help you with retirement, insurance and consulting.

Webinar Transcription

Claire:  Hello, everyone. Welcome to today's webinar about The Tax Cuts and Jobs Act of 2017.
Claire: Before we get started, I would like to go over a few items, so you'll have to participate in today's event. We've taken a screenshot of an example of the attendee interface. You should see something that looks like this on your own computer desktop in the upper right corner. When you joined today's webinar, you selected to join either by phone call or computer audio. If for any reason you would like to change your selection, you can do so by accessing your audio pane in your control panel.

Claire: You may submit questions to today's presenters at anytime by typing your questions into the question's pane of the control panel. We will answer as many questions as possible during the Q & A session at the end of today's presentation. I would now like to introduce, Jeff Wirth. Welcome, Jeff.

Jeff Wirth: Thank you, Claire. This is Jeff Wirth. I am executive vice president at Newport and head of Client Service. I'd like to welcome our plan sponsors today. We appreciate your business to our... and really, thank you for coming to our quarterly plan sponsor series. We have around 200 registered for today's meeting. For those of you who have attended one of these sessions before, welcome back. For our new attendees, we welcome you and hope you return for future presentations.

Jeff Wirth:  To get us started, we're going to do a quick poll question. I'll just read it just, so we have a chance to look through it, but how many of you are thinking that you'll have to or want to make some changes to your plan because of the changes in the tax code? If, A, no changes will be needed, B, yes, we'll be making changes as required by tax code changes, yes, we'll be making changes to take advantage of the tax code changes, and D, not sure. We'll give you a quick time to respond to those and give us some feedback on where you're at, and then in a minute I'll announce the results, and then we'll get started.

Jeff Wirth: I don't know about the rest of you, but I'm joining you from sunny Florida. It's 81 degrees today, a beautiful day. Hopefully for those of you who've had a rough Winter, Spring is coming, and it'll soon be nice in all parts of the country. For those of you in the nicer parts, I'm certainly hopefully you're having a good day and, once again, we do appreciate you joining us.

Jeff Wirth: It looks like based on some of the responses that we've gotten today, it looks like many of you are either making some changes, or thinking about changes, or you're not sure. All three of those are good answers for this seminar and probably the reason you chose to attend to get some insight into why you may want to make changes, or don't need to, or just to clarify for you, so let's go ahead and get started.

Jeff Wirth: What I'd like to do first is introduce our speaker who is presenting today. Sam Brkich is vice president and general counsel for Newport's Orlando Legal Department. They are responsible for the firm's position on ERISA, tax, and securities issues for qualified, non-qualified, and other lines of business here at Newport. Sam has made his life's work working in this area and has extensive experience in employee benefits and executive compensation, representing many of our clients in investment matters, focusing on institutional plan sponsors and pension funds, and assisting clients in developing products for pension fund investors. Before joining Newport sometime ago, I think a little over 15 year ago Sam joined, he was also a partner at some large law firms focused in the same area. Without further ado, I'll turn it over to you, Sam, so you can take us through the presentation.

Sam Brkich: Great. Thanks, Jeff. The right slide. Before delving into the slides, I just want to give you some background on the tax legislation. The legislation in 2017 was originally known as, The Tax Cuts and Jobs Act of 2017. It represents the most sweeping overhaul of the US tax code since 1986. The act reduces the top marginal tax rate for corporations from 35% to 21%. This is a permanent change to the tax code compared to most of the provisions that are applicable to individuals that expire in 2025. The act also reduced the top individual rate from 39.6% to 37%, but this rate will expire after the end of the 2025 window.

Sam Brkich: Reducing the corporate tax rate was the primary focus of the legislation intended to make the US code more competitive with the corporate tax rates in other countries. The 21% rate is not the lowest among US trading partners, so for example, Ireland is at 12 1/2%. But the reduction was seen as critical to discouraging expatriation of US corporations. The act also contains a reduced tax rate for overseas profits in order to remove barriers to repatriation under the pre-act rules.

Sam Brkich: Dropping the corporate rate from 35 to 21% represented a cost of approximately 1.4 trillion dollars to the US Treasury, which along with other concessions under the act would have resulted in deficits that were far in excess of the 1.5 trillion dollars over 10 years that was authorized under the budget reconciliation rules that were enacted and paved the way for the passage of the act last Fall.

Sam Brkich: In order to pass the legislation, Congress needed revenue raisers. Whenever revenue raisers are the topic, the conversation frequently turns to tax favored employee benefit programs. To give you some sense of scale, the US retirement system, both public and private, currently holds approximately 28 trillion dollars in assets. 5.3 trillion of those are held in 401k plans. Almost all of this is pre-taxed dollars that would not be taxed during the 10 year budget window that was used for purposes of scoring the cost of the legislation, so with so much tax revenue available to pay for budget shortfalls, the act is mostly notable for what it does not contain.

Sam Brkich: For example, prior to the House bill introduction on November 2nd of 2017, there was speculation that Congress would adopt proposals based on Ways and Means Chairman David Camp's proposed Tax Reform Act of 2014, which would have reduced pre-tax deferrals to 401k plans to 50% of the annual 402(g) limited, which is currently at 18.5.

Sam Brkich: Proposals to fully Rothify the 401k contributions, so that there was no pre-tax deduction for contributions to the plan, but would make the earnings tax free were being discussed in October of 2017 right before the bill was introduced. This change alone would have raised several hundred billion dollars of tax revenues.

Sam Brkich: The Senate version of the bill would have made contributions subject to a uniform limit under code section 402(g) at 18.5, and would have extended that limitation on a combined basis to 401(k), 403(b), and 457(b) arraignments. The Senate bill also would have extended the 10% Early Withdraw Tax to governmental 457() plans.

Sam Brkich: On the executive benefits side, there was a proposal to eliminate most forms of non-qualified deferred compensation narrowing tax deferred income to compensation that was subject to a substantial risk of forfeiture. The substantial risk of forfeiture was limited to the performance of substantial future services. The provision would have disregarded other common forfeiture contingencies such as corporate events, or performance based vesting criteria.

Sam Brkich: The transition rules under the proposal would have required all existing non-qualified plans to pay out all benefits to employees by 2026. By not including these provisions at a time when all revenue raisers were on the table, Congress appears to be reinforcing a strong commitment to the private retirement system.

Sam Brkich: On this slide in slide 7... Let me skip over here to slide 8. Although retirement plans were largely unaffected by the act, executive compensation continues to be an area of focus for policy makers as evidenced by the changes made to Internal Revenue Code section 162(m). As I will discuss shortly, the changes to 162(m) could indirectly affect the design, or the operation of a company's non-qualified deferred compensation plans.

Sam Brkich: By way of background on section 162, generally limits permissible deductions against business income to a reasonable business expenses, including compensation paid to employees. However, in 1993, Internal Revenue Code section 162(m) was added in its response to reports of record setting executive compensation pay packages, and the perception that the board of directors had internal conflicts of interest as they were approving executive compensation packages. Section 162(m) attempted to reign in excessive pay by adopting a per se limitation on deductible compensation to one million dollars for each covered employee in the corporation's taxable year.

Sam Brkich: Under the old rules, covered employees included the principle executive officer who is the CEO for most companies, and the top three highest paid officers of a publicly held company as shown on the company's annual proxy statement. Covered employees are determined, or were determined under the old rules, as of the last day of the taxable year, which was December 31st for companies with calendar taxable years. The one million dollar deduction limited applied only to compensation paid while the individual was a covered employees.

Sam Brkich: Two things to note on pre-act 162(m) is that first, the CFO was not a covered employee due to a change in the SEC rules that resulted in a mismatch with the treasury regulations that were issued under 162(m) that defined the covered employees. Secondly, publicly traded means a corporation was publicly issued stock subject to registration under the Securities Exchange Act of 1934.

Sam Brkich: 162(m) provided an exemption from a deduction limit for performance based pay, which was viewed as a desirable form of compensation that aligned the interest of management with the interest of the shareholders. In order to address the perceived conflicts of interests at the board level in favor of management 162(m) conditioned the exemption on four criteria including objective performance criteria, established in advance, approval of those criteria by two or more board members who were outside directors, secondary approval by the shareholders prior to the payment of the bonuses, and certification by the independent directors that the objective criteria were met.

Sam Brkich: Although not specifically identified as an exempt form of compensation, non-qualified deferred compensation plans that paid upon separation from service were fully deductible. This resulted from the definition of a covered employee, which required an annual determination of covered employees on the last day of the taxable year of the corporation.

Sam Brkich: Covered employees who separated from service during the year were no longer covered by 162(m), so their deferred compensation was deductible. Although this would seemed to have been an unintended loophole, the treasury department at least acknowledge, if not outright endorsed this result when it adopted the treasury regulations under 409 café. That regulation allowed scheduled payments of non-qualified deferred compensation to be rescheduled to a later year if the corporation reasonably believed that the compensation would not be deductible as originally scheduled.

Sam Brkich: For example, if a salary was $900,000 and the scheduled deferred compensation payments in year one were $200,000 the corporation could pay and deduct a $100,000 of the deferred compensation and reschedule the other half of the deferred compensation payment for a following year. Under the regulation, the non-deductible deferred compensation could continue to be rolled over in this manor until separation from service when the employee was no longer a covered employee, and the compensation became fully deductible.

Sam Brkich: 162(m)'s focus was arguably more about corporate governance than it was about raising revenue. The SEC proxy disclosure rules dovetailed with 162(m)'s corporate governance rules by requiring the compensation committee to explain to shareholders whether the approved compensation packages will be deductible. And if not, the rationale for paying non-deductible compensation.

Sam Brkich: Over the years, some commentators have argued that 162(m) did not really change executive pay practices, or the amount of executive pay as much as it changed the ways those packages were monitored and approved.

Sam Brkich: The act represents a shift away from the good governance approach under the prior version of 162(m) to an absolute deduction limit of one million dollars on all forms of compensation paid to covered employees, and by expanding the rule's coverage. The act achieves this in four ways.

Sam Brkich: First, it defines a larger group of companies that are subject to 162(m), including companies who file statements with the SEC under section of 15(d) of the Exchange Act. This is a much larger group of employers including foreign corporations with American depository receipts traded on the US exchanges, widely held C and S corporations, and corporations with publicly traded debt even though no common stock has been publicly issued by the company.

Sam Brkich:  Secondly, it includes the CFO as a covered employee, which eliminates the glitch that I mentioned earlier.

Sam Brkich: Third, it provides that once an individual is a covered employee, he or she always remains a covered employee. This provision is interesting because it also applies to the beneficiaries who received deferred compensation after the death of the employee, so that the amounts paid upon death to those beneficiaries is also going to be subject to the one million dollar compensation limit on deductibility.

Sam Brkich: Fourth, it specifically excludes limitation for performance based pay.

Sam Brkich: A change to 162(m) is effective for compensation paid in 2018 to individuals who are covered employees as defined under the new rule as of the last day of 2017 taxable year. For example, salary and bonus paid in 2018 is generally subject to the one million deduction limit for covered employees who were determined on December 31st of 2017 for a corporation that has a calendar taxable year.

Sam Brkich: There is a transition rule for written binding contracts in effect on November 2nd, 2017. In general, compensation paid under these arraignments will continue to be deductible under the pre act rules provided that there is no material modification to the contract after November 2nd, 2017. The new rules will not apply to any agreement entered into after November 2nd 2017, or any agreement that renews after that date.

Sam Brkich: As an example, the awards under an annual bonus or LTIP grant made before November 2nd, 2017, and again, depending on the terms of the award, could constitute a written binding contract that meets the transition rules, but the compensation would be otherwise be exempt as performance based pay under the pre-act version of 162(m). The company should be able to deduct compensation when paid in 2018 and beyond.

Sam Brkich: The Conference Committee report on the 162(m) provision shed some additional light on what a written binding contract means. The report states that compensation paid pursuant to a plan qualifies for transition treatment provided the right to participate in the plan is part of a written binding contract with the covered employee in effect on November 2nd, 2017.

Sam Brkich: The report than provides an example of a covered employee whose hired on October 2nd, 2017 under a written contract that provides the employee is eligible to participate on the company's executive deferred compensation plan in accordance with the terms of that plan. In the example, the employee is eligible in six months. The amounts payable under the plan are not subject to discretion, and the company does not have the right to amend material in the plan, or terminate the plan except on a prospective basis before any services are performed.

Sam Brkich: The report goes on to state, that the compensation is grandfathered even though the employee was not actually a participant in the plan on November 2nd of 2017. It isn't exactly clear what grandfathering means for non-qualified deferred compensation. As I mentioned earlier, section 162(m) never exempted non-qualified deferred compensation from the deduction limit. It was only deductible in full if paid after the employee was no longer a covered employee, which typically occurred for payments made after separation from service.

Sam Brkich: Grandfather deferred compensation therefore, is not like grandfathered performance based pay where the compensation because of its nature is fully deductible regardless of whether the covered employees are determined under the pre-act version of 162(m), or under the post-act version of 162(m). For grandfathering to make any difference at all to non-qualified deferred compensation payments, it would seem the pre-act rules for determining who are the covered employee would also have to apply. Meaning that covered employees are determined annually, and a CFO would not be a covered employee. This would mean that sponsors of grandfathered non-qualified plans may need to maintain two lists of covered employees in order to deduct the grandfathered payments. Again, we are speculating here somewhat. The answers to these questions are likely to be addressed in upcoming treasury guidance.

Sam Brkich:  The policies behind the expansion of 162(m) to include some private companies also extends to private sector tax exempt employers as the result of new code section 4960. Since tax exempts are not concerned with business expense deductions, section 4960 attempts to address the problem in a different way by imposing an entity level tax on compensation paid to covered employees over one million dollars and on 100% of all parachute payments. Parachute payments, by the way, are generally severance payments in excess of three times the average pay over the preceding five years. The tax on these excess payments and parachute payments equals the corporate rate, which is currently at 21%.

Sam Brkich:  Tax exempt employers do not have proxy report, so 4960 defines the covered employees to include the top five highest paid employees for the year. Like 162(m), 4960 applies the rule that once the executive is a covered employee he or she remains a covered employee. The rule is particularly relevant to our sponsors of 457(f) arraignments since these arraignments often pay upon the involuntary separation from service and therefore, would tend to bump up post separation pay above the three times threshold for treatment as a parachute payment.

Sam Brkich:  Section 4960 also treats vesting as a payment, so that all 457 accounts are basically treated as lump sums even if the plan provides for payments beyond vesting in installments or some other form of payment. Lump sum treatments would tend to push total compensation toward, if not above, the one million dollar deduction limit.

Sam Brkich: One helpful provision in 4960 is the exemption for payments to providers of medical services. These payments will always be exempt from the 21% tax.

Sam Brkich: One question that sponsors will be asking in 2018 we believe is whether the new limitation on deductibility will change their [inaudible 00:20:33] practices for senior management. For most companies, the analysis is likely to be resolved on an aggregate basis taking into account all of the tax benefits under the act as well as the takeaways.

Sam Brkich: To get some sense of the scale of the dollars involved, the Joint Committee of Taxation estimated the cost of the corporate rate deduction as 1.4 trillion while the new revenue under 162(m) is only 9.2 billion dollars. That's over 10 years. The ratios do not translate to an individual company, but they do give some sense of the relative importance of the 162(m) deduction limit. Full deductibility under 162(m) is not really a factor in realizing the overall tax benefits of the act.

Sam Brkich: Because the business objectives predominate over the tax objectives for most companies, we are not expecting a significant change in the use of short and long term performance based pay. The initial feedback from Newport Group's Executive Compensation Practice, which is headed up by [Rena Somerson 00:21:31], indicates that there is no significant across the boardroom and so far to change performance based pay packages in 2018, nor are the expected to occur in the future because of the change in 162(m).

Sam Brkich: Long term incentive pay continues to be a favored aspect of performance packages by shareholder groups and is a key element in attracting and retaining talent. Some practitioners have gone one step further by taking the view that the elimination of 162(m) is actually beneficial because the oversight provisions will allow corporations where there were relaxed oversight provisions will now allow corporation more flexibility to design incentive pay programs.

Sam Brkich: One possible trend to watch for is the reemergence of incentive stock options. ISOs were disadvantaged because they were never deductible under a separate section of the code, but are now on somewhat of a leveled playing field with non-deductible cash incentives under 162(m). ISOs also confer capital gains tax rates on the employee. However, ISOs are restricted to 100,000 in newly vested shares per year based on the exercise price, which may limit the size of these awards.

Sam Brkich: On this slide, sponsors of deferred compensation plans will need to weigh the cost benefit of grandfathering plans in effect on November 2nd of 2017. The grandfathering may be available only for deferral elections that were filed in 2016 for the 2017 calendar year. The 2017 elections would only be grandfathered if entered into before November 2nd of 2017, and the elections became irrevocable before then. Many plans provide for irrevocability on the last available date under code section 409 café, which is December 31st for the annual elections, which may be too late for the elections that were filed in 2017 for the 2018 calendar year.

Sam Brkich:  Service may be easier to grandfather as they are less dependent on annual enrollments, and the entitlement is based on eligibility to the plan itself rather than to the employer's discretion making contributions. However, if eligibility is determined annually, a form of contract renewal for example, grandfathering may be limited.

Sam Brkich: The benefits of grandfathering may also be limited if a material modification is interpreted narrowly. For example, most non-qualified plans permit participant payment modifications. One would hope that treasury would adopt a rule similar to grandfather split dollar and other grandfathered arraignments where the exercise of a right under the grandfathered arraignment is not treated as a material modification. But again, we're speculating here somewhat.

Sam Brkich: The main point is that if sponsors want to grandfather, Newport Group is here to assist. The grandfathering solution is likely to be specific to the plan design and may require some customization, but we see no hurdles to helping our clients who want to preserve deductibility. We are suggesting, however that there is no advantage to taking action before we have guidance from the treasury department. We do expect guidance to be issued shortly.
Sam Brkich: There we go. Oh, let's see. Let me go back one slide. Let's go back here. There we go, okay.

Sam Brkich: On this slide, the change in the deductibility under 162(m) may also impact the company's balance sheet. Companies with deferred compensation liabilities record the expected tax deduction for the future payment as a current asset on the balance sheet, which is known as a deferred tax asset. If the assumptions about taking the deduction change, as would be the case if the deductions are no longer available due to a change in the tax code, the company may need to change the amount that's recorded as its current DTA.

Sam Brkich: Grandfathering would preserve the deferred tax asset to the extent the payments continue to be deductible under reasonable assumptions. If existing deferrals under a plan cannot be grandfathered as discussed above, the company will need to record a current year charge to earnings, and a reduction in the balance sheet asset for the existing liabilities. Newport Group's Tax and Accounting Group, which is headed up by [Theresa Shrier 00:25:34] is available to assist sponsors on the accounting issues associated with the change under 162(m). Okay, now we go to 17.

Sam Brkich: We expect non-qualified deferred comp plans will be more valuable going forward as the ability to stretch payments over several years is likely to increase the percentage of total comp as deductible. This is particularly true at separation from service where there will be few if any forms of competing compensation resulting in the application of the full one million dollar deduction allowance to the deferred compensation payments.

Sam Brkich: Corporations can engineer this bias into their plans by using a little known provisions of the 409(a) regulations that allows the designated payments to schedule a cap on annual payments for a predetermined amount. This provision is found under the treasury regulations in 1.49 café-3. This approach can be implemented unilaterally for company contributions and [inaudible 00:26:24], but can also be encouraged by incentivizing employees with additional credits if they select longer payment schedules. But the one caveat, of course, is that this cap has to be on the initial election as it's initially filed with the Compensation Committee.

Sam Brkich: Tax exempt employers have fewer options because the constraints of code section 457(f), and the rule in 4960 that applies to the 21% tax investing. The medical services exception is valuable to hospitals, but will require an allocation of compensation between medical comp and administrative management comp in order to identify compensation as potentially subject to the 21% tax. Governmental employers are likely exempt under The Constitution.

Sam Brkich: I was curious as I was reading through these regulations as to how the intermediate sanctions would interact with the 21% tax since both sets of rules pertain to excessive compensation. The good news is that there is a less overlap here than what I expected as the rebuttable presumption of reasonableness for compensation that is approved by the independent board members was not changed as a result of the act.

Sam Brkich: Okay, moving on to the qualified side. The tax act changes are mostly helpful. It's noted in the introduction the tax structure, the contribution limits, and the rules in other key savings provisions were untouched. Most of the changes have to do with how retirement accounts are managed with additional flexibility being the main theme.

Sam Brkich: First, the ability to rollover defaulted loans and determination of employment is extended to the tax filing deadline with extensions for the tax year in which the offset occurs. Under the pre act rule, the rollover had to occurred within 60 days. Because these are cash payments basically repaying the defaulted loan balance to an IRA or a tax qualified plan, the extended period will be helpful in giving participants a chance to accumulate cash for the rollover. This changes operational on the participant side, so there is no need for planned amendments.

Sam Brkich: Re-characterization of Roth conversions is one area where the rules are more restrictive, but the change puts Roth IRAs in the same footing as in plan Roth accounts. Pre-act, the individuals who converted an IRA to a Roth IRA could change their minds before the tax filing deadline and revert the account to a taxable account. The act allotter permits re-characterizations for conversions and pre tax contributions in 2018 and beyond.

Sam Brkich: Safe harbor hardship withdrawal rules have also changed, partially to conform to other changes in the code and to liberalize the requirements for taking a withdrawal. A casualty loss is now tied to a loss associated with a federally declared disaster rather than the otherwise deductible standard for a loss to one's principal residence. The rule requiring suspension of deferrals for six months after withdrawal no longer applies for withdrawals taken in 2019 and beyond. Note that the old suspension rule also required cancellation of elective deferrals in their non-qualifying plans requiring those deferrals to stop for at least the remainder of the plan year. Those deferrals would no longer cancel starting in 2019. The act also clarified that plan loans are not a condition to qualifying for a safe harbor hardship withdrawal.

Sam Brkich: Okay, moving on to disaster relief. The act and two other bills passed just before and after the act provide for a favorable tax treatment for withdrawals taken to pay for economic losses because of the participant's proximity to recently declared federal disaster areas. The rules provide for distributions of up to $100,000, no 10% tax for the early distribution if it's before age 59 1/2, liberal repayment rules over three years to be treated as tax free rollovers, so you could basically take a distribution and roll it back into the plan tax free. The tax on retained payments can be spread over three years if the distribution is capped, so that the year of the distribution, a lump sum, that, that tax can be spread over three years.

Sam Brkich: The relief for the California wildfires provides the same basic relief discussed above as well as additional relief in the form of the ability to return the unused hardship withdrawals to purchase a home that wasn't used, loans of up to $100,000 that provides for deferred payments through 2018 with substantial adjustment, or the subsequent adjustment to the payment schedule, and a possible extension of the loan terms for one additional year, six years max notwithstanding the 72(p) regulations that require that, that loan be limited to five years. Disaster area distributions require planned amendments generally by the end of 2018, and by the end of 2019 for the California wildfire provisions. Newport Group will be adding these provisions to its sponsored prototype in volume submitted documents in 2018.

Sam Brkich: Well, that concludes my presentation. At this time, I'd like to turn over the microphone to Jeff Wirth.

Jeff Wirth: Thank you, Sam. It was some great information there. During Sam's presentation, he certainly in addition that he and his legal team providing support to you as clients of Newport Group, he mentioned some other specialist areas. Certainly, we're always here to help navigate complexity that often comes with any type of legal change. Part of the reason we're doing this is to try to demystify it and work through it.

Jeff Wirth: I see we do have some questions, so let's go ahead and get started with them. The first one, Sam is a two part question, so first, "Is there any guidance on how to handle the extended time frame to rollover the amount of a loan, and will it automatically be defaulted by the record keeper and left up to the participant to file something with the following year return?"

Sam Brkich: We haven't received any guidance as yet, but what we are expecting is that they would be treated as any other distribution that's eligible for our rollover, so it would be reported essentially as a cash distribution even though there is no cash being received just the note that's being canceled. And then the participant would have to report it correctly on their tax return as they are paying it back to complete the rollover.

Jeff Wirth: All right. Thanks, Sam. The second question, "Could you please discuss which disability definition in plan documents are affected by The Tax Cuts and Jobs Act of 2017?"

Sam Brkich:  Oh, that's a great question. We're getting that a lot. The answer is potentially all of the disability provisions in a plan could be affected. But first I'd like to clarify that the disability claims procedures are controlled by the department of labor under regulations that were finalized last year and became effective for disability claims filed after April 1st of this year. The claims procedures are primarily targeted toward long term disability plans, so they're not really part of a retirement plan. But, the regulation also applies to tax qualified and non-qualified plans to the extent that those plans would either accelerate a benefit, suspend deferrals, provide additional accruals, or benefits, or accelerate vesting due to disability. Of course, the plan pays differently in the case of disability. In those cases, a claim could potentially arise.

Sam Brkich: The good news for most retirement type plans is that most plans rely on determinations of disability by third parties such as the Social Security Administration. This means the retirement plan administrator would not be making the disability claims determination. It's also relatively uncommon for disability claims to drive the distributions under retirement plans because the definition is usually so restrictive that under the Social Security definition it means the participant is also going to separate from service and frequently that separation payment will end up controlling the distribution.

Sam Brkich: Disability also tends to overlap with the separation of benefits as I mentioned, so again, here you're talking about a situation where disability in almost every single case is going to occur, so the fact that a plan may or may not have a disability claims procedure, as of April 1 is not necessary a fail to plan for the reasons I just mentioned. It's certainly not a requirement for tax qualifications because of that I mentioned above. [inaudible 00:34:45] qualification requirement is a DOL regulation. The issue also comes up if the claim is denied, and that doesn't happen very often. On the case of a retirement plan where the question is whether the participant is going to be paid on a date X or Y, or in a form X or Y, not necessarily whether they will be paid.

Sam Brkich: The restrictive provisions that are in the proposed regulations are really targeted toward welfare benefit plans where the determination result in either the payment being made or not being made at all. To summarize, The Tax Cuts and Jobs Act didn't really cover disability directly, so it's under a separate labor provision, but it's still a hot topic. I think the pressure is off a little bit in terms of having to have a new procedure in place as a [inaudible 00:35:25], but for plan sponsors that receive a disability claim where it might be contested, I think they would be wise to consider an amendment to all of their plans to the extent that the determination is made under those plans.

Jeff Wirth: Great. Thank you, Sam. Next question, "Will the new tax law affect the fiduciary rule? Is it still alive, dead, or delayed?"

Sam Brkich: [inaudible 00:35:50] the disability rules in the sense that the department of labor controls the fiduciary regulations, it's not really the tax code that does that. The tax code does have provisions that speak to prohibitive transactions and of course, if there is a conflict of interest under the DOL rules they're enforced by the treasury department, but as far as the guidance as far as what constitutes the prohibitive transaction because of a fiduciary conflict of interest, there is really nothing in the tax act that would speak to that because the jurisdiction for that issue is retained by the department of labor.

Sam Brkich: Just coincidentally, recently there was a fifth circuit decision that was handed down that vacated the fiduciary rule, so as we're standing here today, we will not know until May 7th whether we have a fiduciary regulation or not. May 7th is the deadline by which the department of labor would have to file an appeal of the case in the fifth circuit that they just recently lost. And if they decide not to move forward on that basis then that would be the end of the fiduciary rule as we currently know it. That does not mean the issue goes away however, because the SEC recently published its sketch of what it would impose as far as fiduciary obligations for investment advice. Its got a long ways to go in our opinion, but that has been published as of a week, or so ago. I think that the investment community is trying to get their arms around that.

Sam Brkich: In addition to that, there are also some state initiatives, which you may have heard about, and those are still ongoing. They're not affected one way, or the other by the tax act, or by the fifth circuit decision.

Jeff Wirth: Thanks, Sam. The next question, "What changes will take place that affect highly compensated? Are there going to be changes with the ADP and ACP testing rules?

Sam Brkich: We didn't really pick up on anything that would directly impact the testing. The contribution limits are the same. The ADP, ACP test is the same. The definition of who is a highly compensated employee is the same, of course with the annual adjustments to the compensation limit, so really what we're talking about, executive compensation, it's really limited to the 162(m) provisions to the extent that those would potentially impact discrimination testing, so again, we're not seeing anything from the standpoint of compliance with discrimination testing that has to be adjusted, or immediately addressed because of the tax act.

Jeff Wirth: Thanks, Sam. I think we have one last question and this is one of the participants would like us to go back and, "Could you repeat the change to the safe harbor hardship six month rule?" Sam, I don't know if you need to go back to that slide, but they would like that... the changes repeated for that particular item.

Sam Brkich:  Sure. I'm glad to do that. Well basically, under the current rules if you take a safe harbor hardship withdrawal, I'll see if I can get back to the right slide, but in the case my tentacle abilities fail me, the six month rule is a condition for taking a safe harbor hardship withdrawal, so that if you qualify as a participant for that hardship withdrawal, let's just say hypothetically that it's an education withdrawal, so for college expenses, and the withdrawal is given on that basis, then under the old rules the plan was required to suspend ongoing contributions by the participant into its 401(k) account, or her 401(k) account.

Sam Brkich: Let's just say you were deferring it at a 10% rate, and you took that hardship withdrawal, your deferrals would immediately stop. And that would have to stay on in place for six months. And if for any reason the participant also happened to participate in a non-qualified deferred compensation program and making deferrals to that plan, those deferrals would also have to stop. And because those deferrals are done on a calendar year basis, the suspension would have to last through the rest of that year, and if the six months overlap at the end of the year then that participant would be out of the non-qualified plan in terms of contributions for possibly two calendar years.

Sam Brkich: The good news on this one, and again this is 2019 effective date, if a hardship withdrawal is taken in the same example for education, or purchase of a home, one of those safe harbor contingencies, you no longer have to suspend the deferrals that the participant would have otherwise made during the six month period that follows that hardship withdrawal.

Jeff Wirth: Okay. Thank you, Sam. Those are the questions they had today and have time for. Once again, I appreciate all of you taking time out of your busy days to join us. I know I found it very [inaudible 00:40:20] and I'm sure you did too. Hopefully, you find the opportunity to come back and join us for featured topics that are of interest to you.

Jeff Wirth:  On the panel, you'll be able to download the handouts, which include a copy of today's presentation, and a quiz to test your knowledge. When you exit the webinar you'll see three quick questions. Please answer them, so we can continue to bring you topics of interest.

Jeff Wirth: In the next day or so, you will receive an email after the webinar, which will includes links to the replay, and the tools I just mentioned, so you can download if you didn't do so already. On your screen is our contact information should you have any other questions. Once again, thank you for attending today's webinar.


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