January 2023 Issue:
117th Lame Duck Congress Enacts Year-End Government Funding Bill
The mammoth $1.7 trillion government funding package includes the new retirement savings law, SECURE 2.0. It also includes an extension of the National Flood Insurance Program (NFIP) and the enactment of the Registered Index-Linked Annuities (RILA) Act. It does not include any tax rules changes that impact NAIFA members’ and their clients’ interests.
The SECURE 2.0 package includes such new rules as an increase in the age at which required minimum distributions (RMDs) from retirement savings accounts are required, a rule that will require sponsors of new retirement savings plans to automatically enroll workers in the plan (at required contribution levels but subject to allowing workers to opt out), a new “starter” 401(k) plan design, new emergency savings account choices, and a rule—aimed at offsetting the cost of the package—that will require Roth treatment (after-tax contributions, tax-free distributions) of many catch-up contributions. A summary of the provisions of most interest to NAIFA members is in the story below.
The RILA provisions remove some of the regulatory barriers that prevented people from choosing to purchase a registered index-linked annuity. Prior to the RILA changes, the Securities and Exchange Commission (SEC) required paperwork that was both burdensome and inappropriate for RILA products. Under the old SEC rules, financial institutions had to submit forms more often used for initial public offerings or other “catch-all” forms that require a great deal of extraneous information not relevant to RILAs, and not readily available to insurance firms offering RILAs. The new law makes it easier for companies to provide investors with more options and directs the SEC to streamline RILA paperwork.
Despite furious lobbying to persuade Congress to include a full package of tax law changes (generally called “the extenders,” provisions that have already expired or are set to expire), lawmakers left out of the new law all tax law changes except those contained in SECURE 2.0 and one other—dealing with conservation easements. That decision eliminated the risk of revenue-raising tax law changes to offset the cost of the extenders. That was a win for NAIFA.
Prospects: A raft of regulatory activity—including the mandated SEC streamlining of RILA paperwork rules—will come now that H.R.2617 is the law. It will take a while for these regulations to work their way through the system, but NAIFA will watch and report to you on proposed regulations when they are announced.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
117th Lame Duck Congress Enacts SECURE 2.0
SECURE 2.0 is now the law. The lame duck 117th Congress passed it as part of the omnibus government funding bill which President Biden signed into law on December 29. The Senate approved the measure on December 19 by a 68 to 29 vote. The House followed suit on December 20, by a 225 to 201 to 1 vote. The retirement savings package, now officially named SECURE 2.0, contains 90 provisions, many of which will impact NAIFA members who advise clients on their retirement savings choices. A summary of what is in it follows.
Auto-enrollment: The bill includes a requirement that new retirement savings plans include an automatic enrollment feature that automatically enrolls eligible plan participants in a plan that defers three percent of their compensation (up to a maximum of ten percent) into the plan. The provision does not require employer contributions, and it allows employees to opt out of the automatic compensation deferral. It also requires an automatic escalation of the percentage of compensation to be deferred into the retirement plan, at the rate of one percent per year until it reaches a maximum of at least ten percent, but not more than 15 percent. The new rule exempts very small businesses (those with ten or fewer employees), church plans, governmental plans, and new plans (those sponsored by businesses that have been in business for fewer than three years). The provision would take effect for plan years beginning after December 31, 2024.
Required Minimum Distributions (RMDs): This provision increases the age at which RMDs are required. The new rule states that the age at which RMDs will be required will be 73 for those who reach age 72 after December 31, 2022, and age 73 before January 1, 2023. The RMD age will be 75 for those who reach age 73 before January 1, 2033.
Emergency savings: SECURE 2.0 contains two separate emergency savings provisions. One would permit withdrawal, without tax penalty, from retirement plans of up to $1,000 in a year, in the case of unforeseeable or immediate financial need relating to personal or family emergency expenses. The withdrawal could be repaid within three years. Further withdrawals would be permitted only if the existing withdrawal has been repaid. This emergency savings provision takes effect for distributions made after December 31, 2023.
The other emergency savings provision authorizes the creation of pension-linked emergency savings accounts in defined contribution plans. Non-highly compensated employees (NHCEs) could contribute up to $2,500 to a pension-linked emergency savings account (which would be a separate account within the retirement savings plan). Contributions would be subject to Roth rules (after-tax contributions/tax-free withdrawals) and would be treated as elective deferrals for purposes of retirement matching contributions. At separation from service, the pension-linked emergency savings account could be rolled over into a Roth IRA or Roth-defined contribution plan. These accounts could not charge fees for the first four withdrawals for emergencies and there is anti-abuse, fiduciary and reporting rules attached to them. Generally, contributions would get Roth treatment. Withdrawals from these accounts would not halt matching contributions to the plan. The pension-linked emergency savings provision would take effect as of 12 months of the omnibus bill’s date of enactment.
Starter 401(k) plan: A new “starter 401(k)” plan design is included in SECURE 2.0. Generally, the new plan design allows for an annual $6000 (indexed) contribution limit. It’s subject to automatic enrollment rules (which allow for an employee opt-out) and requires automatic matching contributions of three to 15 percent of compensation, applied uniformly among eligible employees. This new plan design becomes available for plan years beginning after December 31, 2023. It is available to employers that do not currently offer a retirement savings plan.
Automatic portability: SECURE 2.0 allows a retirement plan service provider to provide plan sponsors such services as the automatic transfer of a participant’s default IRA into the participant’s new employer’s retirement plan unless the participant affirmatively elects otherwise. The rule would be effective for transactions occurring on or after 12 months after SECURE 2.0’s date of enactment.
Annuities: The bill eases the minimum distribution rules applicable to life annuities by permitting such features as modest benefit increases of only one or two percent, return of premium death benefits, and period certain guarantees. These eased rules would become effective as of the calendar year ending after the date of enactment of the omnibus bill.
Also in the bill is a provision repealing the qualifying longevity annuity contract (QLACs) 25 percent limit and allowing up to $200,000 (indexed) from a retirement plan account balance to be used to purchase a QLAC. The provision includes spousal survival rights and allows for a free look period of up to 90 days. The new rules will take effect for contracts purchased (or received in an exchange) on or after the omnibus bill’s date of enactment.
In addition, the SECURE 2.0’s annuity provisions include a directive that Treasury update ETF (exchange-traded funds) regulations to allow for insurance-dedicated ETFs so that these investments can be made in variable annuities. The regulations must be updated by seven years of the omnibus bill’s date of enactment.
Finally, the new law would allow an account holder to aggregate distributions from an account that holds an annuity with the rest of the account’s assets for purposes of calculating RMDs. Effective on the bill’s date of enactment, the rule includes a directive to Treasury to update the relevant regulations.
Increase in SIMPLE plan contribution limit: The bill increases the SIMPLE plan nonelective contribution limit from either two percent of compensation or three percent of employee elective deferral contributions to the lesser of up to ten percent of compensation or $5000 (indexed). This takes effect in 2024. It also ups a SIMPLE plan’s annual deferral limit at age 50 by ten percent (as compared to the inflation-adjusted limit for this year) for SIMPLE plan sponsors with no more than 25 employees. For employers with 26 to 100 employees, the higher deferral limit would be available if the employer provides either a four percent matching contribution or a three percent employer contribution. These changes also apply to SIMPLE 401(k) plans. These provisions go into effect for plan years beginning after December 31, 2023.
Roth treatment of catch-up contributions: Generally, the legislation requires Roth treatment (after-tax contribution/tax-free distribution) of catch-up contributions made by those earning $145,000/year or more (indexed). This Roth rule takes effect for taxable years after December 31, 2023.
Roth treatment of SEP plan contributions: The provision allows Roth (after-tax contributions/tax-free distributions) treatment for SEP plan contributions, as of 2024.
Long-term part-time employees: The omnibus bill includes a provision that makes long-term (those with at least two years of service, down from current law’s three years of service) part-time (those with 500 hours/year of service) eligible to participate in an employer-sponsored plan.
MEPs and PEPs: SECURE 2.0 allows Pooled Employer Plans (PEPs) to name a fiduciary (other than an employer participating in the plan) to collect contributions to the plan, subject to “reasonable, diligent, and systematic” written collection procedures. This would take effect next year, for plan years beginning after December 31, 2022. Multiple employer plans (MEPs) would become available to 403(b) plans, as of next year (plan years beginning after 12/31/22). The legislation also allows, for three years, employers that join an MEP to qualify for the small employer pension plan start-up plan credit.
Small Employer pension plan start-up costs tax credit: This provision increases the small business start-up credit from 50 percent of administrative costs, up to a cap of $5,000, to 100 percent of those costs for employers with up to 50 employees. There will also be an additional credit (not available to defined benefit plans), equal in the first two years to 100 percent of the employer’s contribution to its employees, up to a per-employee cap of $1,000. The full additional credit is available to employers with 50 or fewer employees, but phases down for employers with between 51 and 100 employees. The credit is available for five years, but phases down, at the rate of 25 percent per year, for years three, four, and five. These tax credits become available for taxable years beginning after December 31, 2022.
Indexing IRA catch-up limit: The bill includes a provision that indexes the IRA catch-up contribution limit of $1,000. The bill also increases the IRA catch-up limit for those who are 60, 61, 62 and 63 years old. The limit for these people increases from $6,500 ($3,000 for SIMPLE plans) to the greater of $10,000 (indexed) or 50 percent more than the regular catch-up amount in 2025. This provision takes effect in 2025.
Saver’s Tax Credit: SECURE 2.0 contains an enhancement of the Saver’s tax credit—under this provision eligible individuals (generally, those with joint income of up to $41,000 to $71,000; $20,500 to $35,500 for single or married filing separately taxpayers; and $30,750 for heads of household). These amounts are indexed. These taxpayers will get a matching contribution from the government of 50 percent of the amount they contribute to a retirement savings plan or an IRA, up to a cap of $2,000. The 50 percent match is payable by Treasury, directly into the retirement plan or IRA designated by the taxpayer, after the taxpayer files his/her/their tax return. The provision becomes effective for taxable years beginning after December 31, 2026.
Long-term care insurance (LTCi): The legislation would allow individuals to use up to $2,500 (indexed) to pay for “certified” LTCi without incurring an early withdrawal penalty tax. The LTCi would have to offer benefits available under a qualified LTCi policy. And there are rules regarding notice and disclosure to both Treasury and the policyholder. This provision would take effect three years after the bill’s date of enactment.
Student loans: SECURE 2.0 allows employees to qualify for employer matching payments under a 403(b), 401(k), 457(b) or SIMPLE plan based on them making qualified student loan payments. Discrimination testing will be separate for matching contributions made relative to student loan payments. The provision is effective for plan years beginning after December 31, 2023.
Rollovers from 529 plans: The omnibus bill allows 529 plan owners, who have owned their plans for at least 15 years, to roll over up to $35,000 (over a lifetime) to a Roth IRA. The rollovers would be subject to Roth annual contribution limits. The rule would take effect for distributions after December 31, 2023.
403(b) plan/CITs: The bill allows 403(b) plans to offer collective investment trusts (CITs) among their plan’s investment options. This would be effective after the date of enactment. However, banking system rules remain in effect, making this CIT relief difficult to access.
Mandatory distributions: Effective for distributions made after December 31, 2023, a new rule in the bill would allow employers to transfer former employees’ retirement accounts into an IRA if their account balance is less than $7,000. This is an increase from current law’s $5,000 limit.
Charitable distributions: The bill allows for a one-time $50,000 distribution to charities through charitable gift annuities, charitable remainder trusts, and charitable remainder annuity trusts. It also indexes for inflation the annual IRA charitable distribution limit of $100,000. The effective date for these provisions is taxable years ending after the date of enactment.
Reliance on employee self-certification: The bill provides that plan sponsors can rely on employee self-certification that they have a qualifying hardship event that allows them to take a hardship withdrawal from their retirement savings account. This is effective for plan years beginning after the date of enactment.
Termination of variable rate premium indexing: SECURE 2.0 also provides that there will be a flat $52 premium for each $1,000 of unfunded vested benefits in variable rate premium pricing. This takes effect as of the bill’s date of enactment.
Excess pension funds can go to retiree health plans: The bill extends the rule that allows an employer to use assets from an overfunded pension plan to pay retiree health and life insurance benefits. The extension is from the end of 2025 to the end of 2032. Overfunding amounts that could be used for retiree health benefits can be no more than 1.75 percent of plan assets and the plan must be at least 110 percent funded.
SECURE 2.0 also contains provisions regarding simplification of reporting, notice, and disclosure requirements; ESOPs; government and first-responder plans; de minimus financial incentives to encourage participation in an employer-sponsored plan; rules applicable to special needs and domestic abuse situations; the processes used to correct errors in retirement plan administration; “lost-and-found” rules; distributions related to natural disasters; paper statement requirements; and various studies on the effectiveness of current rules and programs. Also included in the bill are technical corrections to the SECURE Act.
Prospects: In addition to numerous regulations to implement the new SECURE 2.0 rules, lawmakers, regulators, and the private sector will begin gathering information and suggestions for yet another retirement savings package (some are already calling it SECURE.3.0). However, do not expect a new retirement bill to be proposed any time soon. The dust has barely settled on both SECURE 1.0 and SECURE 2.0. It is worth noting that before the two SECURE Acts, the last large pension reform bill was enacted in 2006. So, both lawmakers and regulators will want time to assess the impact of these two laws before trying to move a new law. NAIFA remains in close touch with those working on retirement savings issues, though, and will be instrumental in the effort to add even more incentives for retirement savings.
Exclusive Event January 26 at 11 am eastern: NAIFA Webinar to Take a Deep Dive into SECURE 2.0 Retirement Legislation. Join Jamie Hopkins, Esq., LLM, CFP, ChFC, CLU, RICP, Managing Partner, Wealth Solutions at the Carson Group; Jayne Fitzgerald, Director of Government Relations with NAIFA; and Dani Kehoe, Principal of DBK Consulting, for the NAIFA members-only webinar "Secure 2.0 Has Passed: What the Law Means for You & Your Clients." Register for Webinar.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
House GOP (Finally) Elects Its Speaker
In the wee hours of January 7, Rep. Kevin McCarthy (R-CA), after four days and 15 ballots, was elected Speaker of the House for the 118th Congress. It was a drama-filled process that has Washington madly speculating about what it means for governing over the next two years.
For virtually all of the four days of non-stop balloting, 20 or 21 House Republicans opposed Rep. McCarthy, leaving him lacked 16 or 17 short of the votes he needed to win the Speaker’s gavel. Finally, late in the day of December 6, after intense negotiations by Rep. McCarthy and his allies with the hard-right conservative holdouts, a package of concessions was fashioned that allowed the dissidents to either vote for Rep. McCarthy or vote “present” (and thus lower the threshold needed for him to win the majority required to gain the Speakership).
Right after Speaker McCarthy took his own oath of office, he swore in the full House of Representatives, which then officially opened for business. About half the concessions made to win the votes of those opposing his candidacy are embodied in the package of House rules that will govern how the House operates in the 118th Congress. And although some of those concessions raised concerns among the rest of the House GOP Conference, the House did approve the package on January 9. The partisan vote (normal for a start-of-session rules package) was 220 to 213.
Some of the House rules package’s controversial elements include:
- A rule that allows any one Member from either party to bring a motion to vacate—i.e., oust the Speaker of the House. This is a change from the current rule that requires leadership to bring a motion to vacate. It substantially weakens a Speaker’s power. However, this is not a brand-new concept—the one-person threshold to bring a motion to vacate had been the rule for decades prior to it changing during the upheaval over then-Speaker John Boehner (R-OH) and his replacement (former Rep. Paul Ryan (R-WI)) back in 2015. The hard-right conservatives who won this change—something Rep. McCarthy had steadfastly resisted for weeks leading up to the Speakership election—promised to “not abuse” the lower threshold.
- A requirement that bills coming to the House floor for a vote be “single issue” and open to a germane amendment process. Arguably, this rule could eliminate the gigantic omnibus packages that have so distressed many Members of Congress over the years—but since the Senate must also enact a bill before it can become law, there is a high likelihood that omnibus bills (or bills with multiple issues, or titles, in them) will continue to happen with regularity.
- A requirement that at least 3/5 of the House approve legislation that would raise tax rates.
- Replacement of the pay-go rule (which required offsetting tax increase provisions for any tax cut provision) with cut-go rules (which will require offsetting spending cuts for any mandatory spending increase provision).
- Promises to bring to the House floor for a vote legislation tying spending cuts to increasing the debt limit, term limits for all House members, and a balanced budget Constitutional amendment.
There are other rules, too, which are largely procedural and will impact how legislation gets to the House floor. And many of the McCarthy concessions—things like promises to place hard-right conservatives in key committee spots, which have to be ratified by the House GOP Steering Committee and Conference—are not in the rules package.
The rules package is significant, and it will certainly impact the way the House operates over the next two years. Note, though, that most if not all of these rules will be trumped by the reality of having to get House-passed legislation through the Democratic-controlled Senate and then signed into law by the President. So, for example, don’t expect an end to omnibus appropriations bills, or other “big-bill packages.” Ultimately, the House’s legislative process rules will have to give way to the reality of compromising with the Senate.
Prospects: Of particular concern to all, including NAIFA, is the issue of raising (or suspending) the debt ceiling. Currently, the House conservatives want to tie a debt ceiling resolution to spending cuts, particularly in Social Security and/or Medicare. That would set up a battle royale, as Social Security changes are traditionally “the third rail” of politics and are the most controversial of issues. But failure to raise (or suspend) the federal debt limit would have, virtually every economist says, catastrophic economic results both domestically and internationally. So, it will put Congress between a rock and a hard place and very likely will lead to a white-knuckle confrontation when the issue comes to a head next fall.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
House GOP Steering Committee Chooses Key Committee Chairs
On January 9, the House GOP Steering Committee chose Rep. Jason Smith (R-MO) as chairman of the Ways & Means Committee, and Rep. Virginia Foxx (R-NC) to helm the Education & the Workforce Committee for 2023-2024.
Rep. Jason Smith beat out Reps. Vern Buchanan (R-FL) and Adrian Smith (R-NE) in a contest that was too close to call until the final vote. Rep. Foxx prevailed over Rep. Tim Walberg (R-MI) just a few hours later. The full House GOP Conference must ratify the Steering Committee’s choices, but that ratification is widely viewed as a formality.
Rep. Smith promises to focus on jobs-building tax provisions, with a particular emphasis on small business tax concerns. He described his planned agenda in an announcement shortly after the vote to make him the committee’s chairman.
He said, “Under House Republicans, the Ways and Means Committee will champion an agenda that works for working families by focusing on delivering more jobs, higher wages, and greater investment in America, including:
- Utilizing the tax code to increase jobs, grow wages, and build financial and health care security for families.
- Reasserting Congress’s oversight responsibility by investigating politically motivated leaks of taxpayer information by the IRS and rolling back efforts by the Biden Administration to use the agency to target the middle class.
- Re-shoring and strengthening supply chains to create food, medical, and energy independence.
- Advancing the interests of American workers and punishing unfair trade practices that benefit China at the expense of the American workforce and job creators.
- Unleashing American energy production that rebuilds America’s energy independence while lowering costs for consumers.
- Restoring and strengthening policies that will transition able-bodied adults off of welfare and back to the workforce.”
Ways & Means is the committee with jurisdiction over a long list of issues of concern to NAIFA members—all tax rules, including those impacting life and health insurance, annuities and retirement savings, and employer-provided benefits. The committee also has jurisdiction over Social Security and Medicare, and trade.
Rep. Foxx won a waiver from the House GOP’s term limit rules so she could advance her bid to again take charge of the Education & the Workforce Committee. The NAIFA issues that fall under the purview of Education & the Workforce include worker classification (independent contractor versus employee status) and ERISA-based retirement savings issues. Based on her record, it appears likely that she will be in agreement with NAIFA on most if not all of these key issues. This is particularly important with respect to the worker classification issue, which is high on the regulatory agenda of the Department of Labor (DOL).
Prospects: The specific legislative agendas of both the Ways & Means and the Education & the Workforce Committees are not yet certain. However, expect Ways & Means to try to extend the individual tax cuts enacted at the end of 2017, including the section 199A 20 percent deduction for non-corporate business income, estate tax rules, and income and capital gains tax rates. At Education & the Workforce, the worker classification issue will likely be a top priority. However, retirement savings issues are likely to be quiescent for a while given the recent enactment of SECURE 2.0, but committee staff will likely participate in gathering suggestions for a third-generation retirement savings bill to be put together at some point in the future.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
NAIFA Comments on DOL Worker Classification Rule
On December 13, 2022, NAIFA submitted comments to the Department of Labor (DOL) on its proposed worker classification rule (RIN 1235-AA43). NAIFA also joined in a coalition comment letter signed by 13 trade associations on the issue.
NAIFA cautioned the DOL that its rule, due to its lack of clarity on how it would impact financial advisors, would result in wrongly classifying independent contractor financial advisors as employees, despite the fact that they work with multiple financial services companies and a wide variety of investment products.
“NAIFA believes that DOL’s proposed definition of employee…wrongly construes the scope of FLSA (Fair Labor Standards Act) coverage and would thus misclassify many independent insurance agents and brokers as employees. DOL’s proposed definition of what it means for a worker to be “economically dependent” sweeps far too broadly and must be clarified to conform to FLSA text and precedent,” NAIFA wrote.
NAIFA’s comments also provided data on just how many people—independent advisors (more than 130,000) operate as independent contractors. The comments also noted how many people are employed by these independent business people (more than 330,000), and the number of new businesses (some 54,000) and new jobs (174,000) that were created in the five years between 2015 and 2019. Further, NAIFA said, independent contractors account for about 27 percent ($47 billion) of the output of financial advisory and insurance brokerage industries.
NAIFA recommended that DOL provide an exemption or carve-out for the insurance industry from the proposed worker classification rule. Failure to do so, NAIFA said, would “severely limit the scope of insurance products consumers would have access to.”
The coalition letter pointed to the very large number of independent contractors in the financial services industry and noted that those operating as non-employees highly value their independence, flexibility, and the opportunity to build their own businesses. And importantly, the comments noted, “the option to offer independent contracting opportunities helps to expand the availability of financial advice and related services to middle-income households.”
The coalition letter also said, “Our primary concern is that this proposed regulation will result in fewer independent contracting opportunities within the financial services sector and makes licensed financial professionals' worse off, reduces financial literacy rates, and harms working Americans’ ability to accumulate wealth and save for retirement.”
In conclusion, the coalition letter said, “We encourage the Department to ensure its final rule provides sufficient clarity and is carefully tailored to avoid hurting those who benefit from the opportunity of working as and with independent financial professionals.”
Prospects: It will take weeks if not months before the proposed new worker classification rule completes its journey through the regulatory process. DOL is currently reviewing and evaluating literally thousands of comments on its controversial proposed rule, and after probably modifying its proposal to reflect its judgment on those comments, the proposal has to go to the White House (the Office of Information and Regulatory Affairs, or OIRA), where more changes are possible. Thus, it will be quite a while before we know what changes, if any, DOL will make to its proposal, including whether there will be a carve-out for insurance agents.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
SBA Office of Advocacy Recommends Change to Independent Contractor Rule
On December 12, the Small Business Administration’s (SBA’s) Office of Advocacy (Advocacy) submitted comments to the Department of Labor (DOL) on its proposed new independent contractor (worker classification) rule. Advocacy told DOL it must reassess the compliance costs of the new rule, especially for small businesses.
Advocacy’s first recommendation is that DOL reconsider its proposed new worker classification rule. Alternatively, Advocacy said, the agency should clarify the factors it will use to assess a worker’s status as an employee or as an independent contractor to avoid confusion among affected businesses who told Advocacy that they need more clarity to effectively comply with the rule.
In addition, Advocacy noted that DOL’s estimate of the cost of compliance with the new rule “severely underestimates” the economic impact the rule would have on small business and independent contractors. The economic impact “may be detrimental and disruptive to millions of small businesses that rely on independent contractors as part of their workforce,” Advocacy told DOL. Consequently, DOL should “consider significant alternatives that would accomplish the objectives of the statute while minimizing the economic impacts on small entities as required by the Regulatory Flexibility Act.”
Advocacy concluded its comments by calling on DOL to “publish a Small Business Compliance Guide, complete more small business outreach, marketing, education and training for small businesses and independent contractors regarding this rule to help with compliance.”
Prospects: DOL is currently analyzing literally thousands of comments on its proposed worker classification rule. Modifications to the proposed rule as a result of these comments are likely. But the process still has weeks, and perhaps months, to go before it concludes.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
ACA Reporting Deadline Extended
On December 15, the Treasury Department and Internal Revenue Service (IRS) issued a final regulation granting an automatic extension of the deadline for reporting to employees on employer-provided health insurance. The reporting is required by the Affordable Care Act (ACA). The new deadline is 30 days after January 31.
Per the ACA, employers with 50 or more full-time equivalent employees must report information about their offers (or lack thereof) of ACA-compliant health insurance to the government on Form 1094-C. The same information must be reported to employees on Form 195-C. The automatic extension of the deadline applies to calendar years beginning after December 31, 2021 (i.e., 2022). The regulation also states that if the extension deadline falls on a weekend or a legal holiday, employers have until the next business day to provide the information. This new extension replaces the old 30-day extension rule. The old rule required employers to request an extension for good cause.
The final rule also allows employers with self-funded plans to meet the reporting requirement with respect to part-time employees and non-employees by posting the information on Forms 1094-C or 1095-C in a “clear and conspicuous notice” on the employer’s website. The notice must include an offer to provide the employee with a copy of the statement if the employee requests it. Further, employers that offer self-funded coverage to non-employees may use Forms 1094-B and 1095-B to meet their reporting requirements.
Also made clear in the final rule is the fact that Medicaid coverage limited to certain COVID-19 testing and diagnostic services does not qualify as ACA-compliant minimum essential coverage. Thus, eligibility for this limited coverage will not prevent a person from qualifying for ACA’s premium tax credit. The new final regulation also eliminates the “transitional” good faith relief (under which penalties for failure to report adequately were not imposed). That transitional good-faith relief was available for calendar years 2016 to 2020.
The rule is printed in the Federal Register, Vol. 87, No. 240, dated December 15, 2022. It can be found at https://www.govinfo.gov/content/pkg/FR-2022-12-15/pdf/2022-27212.pdf.
Prospects: Per the final regulation, any employer with at least 50 full-time equivalent employees will have to submit the required reporting forms by, approximately, March 1, 2023.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
CMS Proposes New Rules for Private Medicare Advantage Plans
On December 14, the Centers for Medicare and Medicaid Services (CMS) proposed a new rule that impacts private Medicare Advantage (MA) plans. The proposed new rule, RIN 0938-AU96), would require prior authorization for a full course of a beneficiary’s treatment. The rule also requires the plans to review their utilization management policies each year, and that MA plan coverage determinations be reviewed by professionals with “relevant expertise.”
The new proposed rule also includes provisions for “stronger monitoring of agent and broker activity and recommends codification of guidance that “ensures people are not pressured into enrolling into plans that may not best meet their needs, CMS said. Further, the proposed rule “strengthens Medicare prescription drug coverage,” said CMS, and requires most MA plans to “include behavioral health service in care coordination programs.” Plus, the guidance implements Inflation Reduction Act provisions that expand eligibility under Medicare’s low-income subsidy (LIS) program. The LIS program applies to people with incomes of up to $150,000 of the federal poverty level and who meet statutory resource requirements. The subsidies become available on January 1, 2024. They eliminate deductibles and premiums for those enrolled in benchmark plans, and set fixed, lower copayments for certain medications.
The proposed rule is on the web at https://public-inspection.federalregister.gov/2022-26956.pdf.
Prospects: Comments on the proposed rule are due to CMS by close of business on February 13, 2023. CMS will review comments, then make any modifications they are inclined to make to their proposed new rule, and then send it to the White House’s Office of Information and Regulatory Affairs (OIRA) for approval before the proposed rule can be finalized. Thus, final resolution of this rule is months away.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
IRS Proposes Rule to Continue Use of Regulated Online Spousal Consent
On December 29, the Treasury Department, and the Internal Revenue Service (IRS) proposed a rule that would allow the COVID-lockdown-era rule that permits online (but live) spousal consent to joint survivor or pre-retirement survivor annuity benefit. The rule, RIN 1545-BQ50, will be the subject of a public hearing on April 11, 2023.
Many joint survivor and pre-retirement survivor annuities require both spouses to consent, in person and in front of plan representatives or a notary, to plan distributions. However, during the COVID-19 lockdown years, the rules were eased to allow that consent to take place using live, online audio-visual software. This newly-proposed regulation continues that eased requirement.
Under the proposal, plan participants seeking a pre-death/pre-retirement distribution could get the required spousal consent using the online process if both spouses provide valid photo IDs. In addition, the software used must allow interaction among all parties, and documents that need to be signed must be transmitted on the same date as the date the spousal consent document is signed.
Prospects: No doubt there will be comments on the details of how the permanent online spousal consent process would work, but odds are good that a permanent rule allowing the option will be finalized. It will take months, however.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
PBGC Hikes Terminating Single Employer Pension Plan Termination Rates
The Pension Benefit Guaranty Corporation (PBGC) has announced an increase in the interest rate assumptions that apply when a terminating single-employer pension plan is doing a valuation of the plan’s benefits.
Per the PBGC announcement, first quarter 2023 interest rate assumptions will be 4.86 percent for the first 20 years following the valuation date, and 4.7 percent thereafter. That’s a 0.96 percent increase in select and a 1.05 percent increase in ultimate rates over the fourth quarter of 2022, the agency said.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.
NAIFA Continues Leadership Roles within Interstate Organizations
NAIFA holds strong leadership positions within the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) moving into 2023. We have continued participation and support of the NCOIL Industry Education Council (IEC). The IEC provides NAIFA an opportunity to sponsor NCOIL legislator participation, as well as educate lawmakers on other emerging policy issues we care about. But, more importantly, our membership and presence foster strong relationships with NCOIL legislators. Additionally, Public Policy Director Maeghan Gale will be joining the Board of the Industry Advisory Council for 2023.
Maeghan Gale continues to serve as NAIFA’s representative on the National Insurance Producer Registry (NIPR) Board of Directors. Through her work in that position, Maeghan enhances our advocacy in support of new services that make it easier for our members to comply with state-based producer compliance. In addition, she enters the 2nd year term serving on the Interstate Insurance Compact’s Industry Advisory Committee.
Prospects: NAIFA will continue to positively influence model regulations and legislation and regulation used by commissioners and state legislators through active participation and leadership representation.
NAIFA Staff Contact: Maeghan Gale – Policy Director – Government Relations, at mgale@naifa.org.
NCOIL Adopts Four Model Laws during Annual Meeting
NCOIL ushered in its 2023 leadership which will see Arkansas Assemblywoman Deborah Ferguson as the new President. Serving as Vice President will be Texas Representative Tom Oliverson, M.D., while New York Assemblywoman Pamela Hunter and Minnesota Senator Paul Utke will serve as Treasurer and Secretary, respectively. Indiana Representative will continue to serve as Immediate Past President due to the outgoing President, California Assemblyman Ken Cooley narrowly losing his bid for reelection last November.
During the annual meeting, NCOIL adopted four Model Laws, including the Insurance Innovation Regulatory Sandbox Model Act. Based on Kentucky Representative Bart Rowland's legislation (KY HB 386), the model allows insurers to BETA test products and enables regulators to provide an extended or limited safe harbor from administrative or regulatory action. In addition, the model specifies that innovation applications must consider consumer value and public interest and be economically viable for the applicant with the appropriate consumer protections that do not pose an unreasonable risk. Of interest, six states have adopted sandbox legislation (KY, NC, SD, UT, VT, and VA), and nine other states say they have the authority to allow for sandbox innovations. The possibility of insurance departments waiving specific statutes in a sandbox setting that otherwise cannot be waived outside the sandbox is important to the industry and producer community.
The NCOIL Life Insurance and Financial Planning Committee adopted a Paid Family Leave (PFL) Insurance Model Act. The model would establish PFL as a class of insurance and authorize regulators to receive and approve policies. The hope is that life or disability insurers will develop policies to assist employers in offering PFL as an employment benefit in an increasingly competitive employment market. Legislators argued it could work in states with or without mandatory PFL as it is designed so that a state could enact the whole thing or simply the portion authorizing regulators to promulgate rules to facilitate the product. Virginia has similar legislation, and Minnesota will consider it this upcoming session.
The other two models adopted are the NCOIL Delivery Network Company (DNC) Insurance Model Act and the Dog Breed Insurance Underwriting Protection Model Act.
NCOIL also continued their discussions on the NCOIL Insurance Underwriting Transparency Model Act, which has been under development since last year. The author, Representative Matt Lehman (IN), has solicited industry input because agents need more information on the reasons for rate increases. There are several outstanding issues, but he hopes to get a model adopted before the states and regulators begin issuing underwriting bans. APCIA and NAMIC said the draft is too broad and would expose propriety information. Rep. Lehman said the model is relatively straightforward, such as the triggers to disclose an increase and sharing the factors.
NCOIL continued their discussion on private equity in insurance by inviting Michael Porcelli from AM Best Rating Services to educate them about how they rate investments. He said capital models and methodology always drive AM's best views. He specifically stated that meetings with management teams allow AM Best to "sniff out" any excessive management focus on short-term gains that might not serve policyholders, and they look for capital commitment over the long term. Jennifer Webb, Head of State Government Affairs for Pacific Life, said the NAIC has also looked at PE-backed insurers, but that arrangement has not been a significant focus and that Risk-Based Capital (RBC) scores apply to all insurers.
NAIFA was honored to sponsor NCOIL’s First Annual Charity Golf Tournament, which raised funds for the legislator scholarship fund and supports state legislators’ attendance at future NCOIL Meetings. The tournament was a great success, and the NAIFA logo was featured prominently on all the commemorative ball caps.
Prospects: Additional discussion particularly around the Insurance Underwriting Transparency Model Act is expected during the NCOIL Spring meeting in March 2023.
NAIFA Staff Contact: Maeghan Gale – Policy Director – Government Relations, at mgale@naifa.org.
NAIC Elects Officers at Annual Meeting
At the NAIC, we are pleased to report Missouri Director Chlora Lindley-Myers was elected as the first black woman President of the NAIC. Her executive team is rounded out by President-Elect Andrew Mais from Connecticut, Vice President Jon Godfread from North Dakota, and newly elected Secretary/Treasurer Scott White from Virginia.
The NAIC committees discussed several topics of interest to NAIFA including Innovation, Technology, Cybersecurity, and Privacy Protections, NARAB and Producer Licensing, Healthcare and Insurance Reform, Life Insurance & Annuities.
Innovation, Technology, Cybersecurity, and Privacy Protections
The NAIC's new (H) letter committee devoted specifically to Innovation, Cybersecurity, and Technology continued their progress in several areas. The following updates are of interest to NAIFA:
- The Big Data and Artificial Intelligence Sub Group shared that they have issued a report on their survey focusing on the use of AI and machine learning in private passenger autos. There was no discussion about including life and health lines at this time, but there is a tentative plan to issue a whitepaper to inform any future regulatory model law regulations. In addition, the subgroup continues its work on homeowners and life surveys.
- The NAIC has created a collaboration forum for regulators to find information on these topics in one place and is encouraging information sharing across NAIC working groups. In addition, there will be a dedicated public NAIC webpage with the H Committee's work this summer.
- The NAIC will develop and adopt a regulatory framework for the use of AI by the insurance industry. They will do this in a model bulletin rather than a model law, as many regulators felt they already have authority under existing models. The framework will be principles-based, not prescriptive, focusing on governance requirements and AI use protocols, such as NIST standards.
- Regarding third-party oversight, NAIC regulators indicated a strong preference to continue their oversight through insurers rather than licensing and regulating the actions of third parties.
- The committee also shared an update on the adoption of the Insurance Data Security Model Law #668. Twenty-one states have adopted the model, and it is pending in two states, including Illinois.
The NAIC Privacy Protections working group formally announced they would create a new NAIC privacy model law incorporating aspects from previous models #670 and #672. The working group plans to release a draft of the new model by the end of January, followed by a 60-day comment period. They will hear comments on the draft at the NAIC Spring meeting in March. In addition, the working group has published a helpful list of state privacy laws for review.
The NAIC also heard from Brandon Wayles, Executive Director of the Cybersecurity & Infrastructure Security Agency (CISA). Mr. Wales said their mission is to coordinate national efforts around critical infrastructure challenges, both physical and cyber. He said they would work with entities to provide information, guidance, and technical advisories. He also outlined further the CIRCIA Act of 2022 and noted for incident reporting; they are most interested in the community of emerging threats and protecting future victims. They are particularly interested in knowing which systems were targeted, was their lateral compromised, and collecting as much information as quickly as possible. NAIC Regulators were interested in what role CISA will play during a cyber event. CISA said it depends on the victim, but very rarely do they get involved in formal incident response. Instead, they supplement other capabilities or if an event has a unique aspect driven by intelligence sources. Regulators were also asking how they could collaborate with the agency. For example, CISA said they are working with the Treasury on the cyber insurance RFI and whether there should be a federal backstop for cyber insurance.
NARAB and Producer Licensing
NAIFA continues to prioritize our focus on implementing the NARAB board. In addition, to our continued extensive outreach, we were pleased to learn the NAIC identified ten Commissioner nominees, which they submitted to the White House for consideration on November 18, 2022. Meanwhile, the industry, including NAIFA, has submitted recommendations for the business entity board members and will continue working with the White House Office of Personnel to ensure the appointment of the board.
The NAIC Producer Licensing Task did not meet at the national meeting; instead, they adopted their charges back in October. They also announced the exposure of guidelines to allow changes to the licensing uniform producer application and are soliciting changes through February 1, 2023. After they receive these requests, they will be exposed for a 30-day comment period. Then the Task Force will meet in closed session at the 2023 summer meeting to adopt any changes. After that, any changes must be approved by the D Committee before a final vote is conducted at the fall 2023 Executive and Plenary meeting.
Healthcare and Insurance Reform
NAIC regulators are concerned about the marketing of health insurance plans and the NAIC Market Regulation D Committee continued their efforts to move forward to amend the Unfair Trade Practices Act (#880) model act to include oversight of lead generators and aggregators. The new Improper Marketing of Health Insurance working group met in an open session to discuss revisions to the Unfair Trade Practices Act #880. As of December, ten states have already adopted model #880, with two other states considering adoption in 2023. The proposed revisions address concerns regarding health insurance marketing by third-party administrators, aggregators, and lead-generation sites. Troubles began with short-term limited duration, fixed indemnity, and health-sharing ministry plans marketing themselves as comprehensive coverage products. Regulators are expanding their scope to include the marketing of ACA and Medicare Advantage plans. The proposed changes would create a new definition of "lead generators" and provide the insurance department with regulatory oversight over the marketing activities of lead generators and third-party administrators. The charge is focused solely on health insurance, but any changes may spill over into other lines.
Life Insurance and Annuities
The NAIC Accelerated Underwriting Working Group continues to develop regulatory guidance and is working closely with the H and D Committees. They plan to hold an open meeting early next year to expose draft regulatory guidance, including market conduct guidelines. The Annuity Suitability Working Group continues to work on the implementation of the 2020 revisions to Annuity Suitability model #275, including the safe harbor and comparable standards revisions. Of note, 30 States have adopted model #275, and 8 jurisdictions have legislation or regulations pending.
On the Long-Term Care front, The NAIC continues to work on identifying issues related to insurer reserves and solvency, such as morbidity trends, cost of care inflation, benefit utilization, potential shifts in care, impact on asset adequacy protections, and the need for increased reserves to cover future claims. In addition, regulators believe the rise in interest rates and the wind-down of COVID-19 protocols are creating uncertain impacts on the finances of LTC blocks.
Concerns regarding consumer as well as financial professionals' understanding, and use of reduced benefit options remain high. As a result, the LTC Task Force will survey state departments to see how they use consumer notice checklists and review insurer communications with their agents and clients. Task Force members encouraged departments to focus and review these communications and also created an ad hoc group of (CA, PA, and VT) to review the NAIC checklist and make any necessary edits, which will be exposed for a 30-day comment period.
The NAIC Long Term Care Task Force also met in a regulator-only session to review the results of five companies that participated in the new Multistate Actuarial (MSA) Pilot Project. The information they learn will help them understand how individual insurance departments and participants can benefit from the MSA process and how the departments use the MSA report recommendations.
Prospects: NAIFA will continue its active participation in the task forces, working groups, and committees to ensure our members’ and their clients’ interests are represented. The next NAIC meeting is scheduled for March 22-25, 2023.
NAIFA Staff Contact: Maeghan Gale – Policy Director – Government Relations, at mgale@naifa.org.
NAIFA Hails Passage of RILA Act to Benefit Consumers Preparing for Retirement
Passage of the Registered Index-Linked Annuities (RILA) Act as part of the 2023 Omnibus Appropriations bill greatly benefits consumers as well as the insurance financial professionals who help them prepare for retirement and achieve financial security. The National Association of Insurance and Financial Advisors (NAIFA) has strongly advocated on behalf of RILA throughout the 117th Congress.
Registered index-linked annuity products offer a good option for some consumers who want to benefit from market growth while reducing their exposure to market losses. These are long-term, tax-deferred investments that are often well-suited for investors who are preparing for retirement, especially those who are retired, or are nearing retirement and wish to reduce the impact of market downturns.
Unfortunately, the Securities and Exchange Commission (SEC) paperwork required to register RILAs is unnecessarily burdensome and confusing. It requires financial institutions to submit forms more often used for initial public offerings or other “catch-all” forms that require a great deal of extraneous information not relevant to RILAs, and not readily available to insurance firms offering RILAs. The current legislation makes it easier for companies to provide investors with more options and directs the SEC to streamline RILA paperwork.
Prospects: On December 29, President Biden signed RILA into law as part of the 2023 Omnibus Appropriations package.
NAIFA Staff Contact: Michael Hedge – Director – Government Relations, at mhedge@naifa.org.
Thirty States Adopt the NAIC Suitability in Annuity Transactions Model
NAIFA is celebrating reaching the milestone of 30 states adopting the NAIC Suitability in Annuity Transactions Model. The new rule adopted by the Massachusetts Division of Insurance adds to the nationwide drive for enhanced protections for consumers seeking lifetime income through annuities.
Massachusetts is the 30th state to implement the ‘best interest of consumer enhancements’ in the NAIC model. These new laws and regulations also align with the SEC’s Regulation Best Interest. With these enhanced state and federal consumer protections, savers can be assured that financial professionals must act in the consumer’s best interest when offering recommendations about annuities.
Unlike a fiduciary-only approach, these measures ensure that all savers, particularly financially vulnerable middle-income Americans, can access information about different choices for long-term security in retirement. A recent survey finds that middle-income retirement savers would be very concerned about a regulation keeping them from accessing the professional financial guidance they want and need.
In 2022 alone, 11 states adopted the model regulation. There are currently active proposals in Washington, Nevada, Wyoming, Oklahoma, Oregon, Illinois, Louisiana, Tennessee, West Virginia, Georgia, and Vermont.
Prospects: NAIFA will lead efforts to support the model's adoption in the remaining states.
NAIFA Staff Contact: Bianca Alonso Weiss – State Government Relations Manager, at bweiss@naifa.org.
NAIFA Encourages NARAB Implementation
NAIFA strongly supports the implementation of the National Association of Registered Agents and Brokers (NARAB) Act of 2015 to promote economic growth by improving efficiency in the insurance agent licensing process and recommends former NAIFA Trustee Tom McLeary for the NARAB Board.
The Act requires the establishment of a NARAB Board of Directors - consisting of thirteen members appointed by the President with the advice and consent of the Senate. Unfortunately, no NARAB Directors have been confirmed in the many years since the law establishing it was passed. Nominees were sent in 2016 including Mr. McLeary; however, the Senate was not able to confirm them prior to the end of that Congress.
NARAB was enacted in January 2015 to provide a national, standardized process for insurance agents and brokers to obtain eligibility to do business outside of their home states. Under the terms of the legislation, any individual or entity that is licensed in his, hers, or its State of domicile and that satisfies the NARAB membership criteria established by the NARAB Board would be eligible for licensure for the same lines of authority in any other State provided that the non-resident state licensure fees are paid through NARAB. The legislation enjoyed strong, bi-partisan support in Congress and remains widely supported today.
Prospects: Presidential Personnel is reviewing the list of industry representatives that the Obama Administration submitted including Mr. McLeary. Senate Banking Chairman Sherrod Brown has identified implementation as a priority, and NAIFA remains optimistic that the White House will advance nominees to the Senate for approval.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Michael Hedge – Director – Government Relations, at mhedge@naifa.org; or Maeghan Gale – Policy Director – Government Relations, at mgale@naifa.org.
