IRS Issues Endowment Tax Regulations | Chief Investment Officer

The IRS has issued 58 pages of proposed regulations for the so-called “endowment tax,” a 1.4% excise tax on the net investment income of certain private colleges and universities that was included in the Tax Cuts and Jobs Act (TCJA) of 2017.

The tax applies to any private college or university that has at least 500 full-time tuition-paying students (more than half of whom are located in the US) and that has assets other than those used in its charitable activities worth at least $500,000 per student. According to the IRS, an estimated 40 or fewer institutions are affected by the endowment tax.

The proposed regulations define several of the terms necessary for educational institutions to determine whether the excise tax applies to them. For affected institutions, the guidance clarifies how to determine net investment income, including how to include the net investment income of related organizations, and how to determine an institution’s basis in property.

According to the regulations, fair market value of assets per student is based on the total number of all students attending the institution, not just the number of tuition-paying students. The IRS also said universities and collegesshould base the definition of “tuition-paying” on the definition of qualified tuition and related expenses that is provided for education tax credits in section 25A(f)(1) of the Internal Revenue Code.

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The proposed regulations also require that a student be both enrolled at and attend the applicable educational institution. They also must be enrolled or accepted for enrollment in a degree, certification, or other program (including a program of study abroad approved for credit by the eligible institution at which such student is enrolled) leading to a recognized educational credential.

Additionally, it’s up to each institution to determine which students are considered full-time and part-time as long as those decisions are consistent with the institution’s practices in determining full-time and part-time status for other purposes.

The notice of proposed rulemaking has a 90-day public comment period, which means the comments will be due by Oct. 1.

Harvard University, one of universities opposed to the new excise tax, declined to say if it intends to submit a formal public comment, according to student newspaper The Harvard Crimson. Brigid O’Rourke, a university spokesperson, told the Crimson that the university was opposed to the endowment tax and would continue to advocate its repeal.

“We are working to analyze the proposed guidance … and legal requirements of this new tax,” O’Rourke told the Crimson. “We will continue to work with policymakers and others in the higher education community to push for Congress to re-examine this misguided and damaging provision in light of the Congress’ stated goals of increasing access and affordability.”

Tags: Endowment Tax, Endowments, IRS, taxes

The Pensions Regulator (TPR) has launched a consultation outlining proposals to reduce the number of poorly governed pension plans in the UK. The regulator of work-based pensions warned that if trustees cannot meet its standards, they should consolidate their plan into one that’s managed better.

“The trustee model isn’t broken, but it does need to be greatly improved,” David Fairs, TPR’s executive director of regulatory policy, analysis, and advice, said in a release. “There is stark evidence that the current system doesn’t work for all and there is a clear disparity between the experience of savers in well-run and badly-run schemes. If trustees cannot meet the standards we expect, we believe they should wind up and consolidate savers into a better run scheme.”

In the consultation, TPR says it will seek to facilitate and encourage pension plan consolidation as a way of supporting efficiency and closing the quality gap to which Fairs referred.

The consultation will be open for 12 weeks and will close on Sept. 24. Responses can be submitted through the TPR website.

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TPR said trustees of underperforming plans will need to consider whether they are able to offer value for members or whether savers are better provided for in larger plans, which typically benefit from economies of scale. The regulator said that authorized master trusts offer a route for consolidating defined contribution plans, with group personal pensions (GPPs) providing an alternative for securing savers’ benefits.

“We are working with the Department for Work and Pensions to find a solution to support defined benefit (DB) consolidation, with discussions currently considering the shape of an authorization and supervision regime for DB superfunds,” said TPR in the consultation.

The consultation also said TPR is considering how to promote more diversity on boards, including encouraging the make-up of the board to reflect the savers it represents. It also said it is considering whether an accredited professional trustee should sit on every board. TPR said that having a professional trustee on every board may help to improve standards of governance and administration.

In addition to offering proposals to reduce the number of poorly governed pension plans, the consultation poses questions to the industry about how to improve and evidence trustee knowledge and understanding, how to encourage diversity on boards, the role of accreditation, and whether sole trustees are able to govern effectively.

“We believe all savers should be in well-run schemes that deliver good value,” said Fairs. “There is still a subset of disengaged trustees who either refuse or are unable to improve standards in their schemes.”

Questions posed to the pensions industry in the consultation include:

Should there be an accredited professional trustee on every board?
Are sole trustees on a pensions board able to run pension schemes appropriately?
How can barriers to consolidation be removed?
Should a legal requirement be brought in for trustees to meet minimum standards of knowledge and understanding, and ongoing learning?
How can diversity on pension scheme boards be improved?

TPR Tightens Regulatory Grip

Tags: Consolidation, Consultation, Pension, performance, The Pensions Regulator, UK