Retirement Updates

On November 27, 2023, the IRS issued Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k). As a reminder, the Setting Every Community Up for Retirement Enhancement (SECURE) Act required employers to deem part-time employees eligible for the 401(k) plan once they had completed three consecutive 12-month periods with 500 hours of service or more. The SECURE 2.0 Act followed that up by reducing the number of consecutive periods to two consecutive 12-month periods.

While the SECURE Act provision for long-term, part-time eligibility took effect on January 1, 2021, service that was completed before that date was not taken into account. As such, the first long-term, part-time employees that may become eligible under this provision will become effective as of January 1, 2024 (if they have completed three consecutive years with 500 hours of service each).

Given the impending effective date of the long-term, part-time (LTPT) employee provision, the IRS released the proposed rule to provide clarity on a number of subjects. The proposed rules define “long-term, part-time employee,” confirm participation and vesting requirements, speak to employer nonelective and matching contributions, and discuss employer elections.

“Long-Term, Part-Time Employee” Defined
LTPT employees are eligible to participate in 401(k) plans once they’ve completed 500 hours of service in each of three consecutive 12-month periods (or two consecutive 12-month periods beginning in 2025). The proposed rule clarifies that LTPT employees must still satisfy the age requirement (age 21) by the close of the last 12-month period with 500 hours. Additionally, the requirement to extend eligibility to LTPT employees does not apply to employees who are covered by a collective bargaining agreement or are nonresident aliens with no US-source income. Governmental plans and church plans are not exempt from the requirement, but the IRS is requesting comments on the application of these rules to those entities.

The IRS also clarified that employees who become eligible through some other framework of eligibility are not considered LTPT employees. Specifically, where an employer provides immediate entry into the 401(k) plan or implements another permissible service requirement, employees who become eligible are not LTPT employees even if they work 500 hours in the requisite number of years. Likewise, an employee who becomes eligible under a plan with an elapsed time method of crediting service (such that employees are eligible after a certain time period, regardless of hours worked) would not be considered an LTPT employee.

Participation
The IRS also provided guidance on the entry date for LTPT employees. Specifically, as for any other employee that becomes eligible for a 401(k) plan, LTPT employees’ participation in the plan must occur no later than the earlier of the first day of the plan year following satisfaction of the eligibility requirements or the date that is six months after the date the LTPT employee satisfied the eligibility requirements.

The IRS goes on to confirm that 12-month periods with 500 hours must be consecutive. So, if an ineligible employee has a year with less than 500 hours of service after a year where they completed 500 hours, the three consecutive year count starts over. On the other hand, LTPT employees who become eligible under these rules are locked in and will not lose eligibility to participate if they have a subsequent year with less than 500 hours of service.

The IRS also explained that while an employee’s initial 12-month period would begin on date of hire, subsequent 12-month periods could be counted based on the first day of the plan year.

Vesting
Although employers aren’t required to provide employer contributions to LTPT employees who become eligible for the plan, they will have to follow vesting rules if they choose to provide them. For these purposes, each 12-month period during which the LTPT employee is credited with at least 500 hours of service will be treated as a year of vesting. However, no service before January 1, 2021, will be counted towards LTPT employees’ service for vesting purposes.

The IRS also introduced the concept of former LTPT employees, who are LTPT employees who subsequently complete one year of service with 1000 hours (i.e., “normal” eligibility). These formal LTPT employees would cease to be considered LTPT employees such that they would be included in nondiscrimination and top-heavy testing. For vesting purposes, former LTPT employees will still be credited with a year of service even if they only work 500 hours in subsequent years.

Nonelective and Matching Contributions
Employers may choose not to provide nonelective or matching contributions to LTPT employees (with the exception of “former LTPT employees”). While the proposed rules would allow employers to elect to exclude LTPT employees for purposes of nondiscrimination testing, minimum coverage, and top-heavy testing, the IRS will not allow an employer sponsoring a SIMPLE 401(k) to exclude LTPT employees from matching or nonelective contributions.

Employer Elections
If employers choose to exclude LTPT employees from nondiscrimination testing, then they will be excluded from every nondiscrimination and coverage testing provision. Employers that have adopted a safe harbor plan must amend their documents to elect to exclude LTPT employees from the safe harbor (and related nondiscrimination testing). They must do the same to exclude LTPT employees from top-heavy testing. Employers may elect to exclude LTPT employees from nondiscrimination and top-heavy testing even if they decide to provide an employer contribution to them.

The proposed rules also confirmed that LTPT employees are eligible to make catch-up and Roth contributions. However, if an employer elects to exclude LTPT employees from nondiscrimination and coverage testing, they may choose to exclude LTPT employees from making catch-up and Roth contributions.

The proposed rules are set to apply to plan years beginning on or after January 1, 2024. The IRS is soliciting comments through January 26, 2024. They have also scheduled a public hearing on the proposed rule for March 15, 2024.

Employers should work with their retirement advisors, recordkeepers, and payroll or tracking vendors to ensure compliance with LTPT eligibility requirements.

Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k) »

On November 21, 2023, the IRS released Revenue Procedure (Rev. Proc.) 2023-37, which combines, conforms, clarifies, and updates rules for qualified pre-approved plans and Section 403(b) pre-approved plans previously set forth in prior revenue procedures.

A pre-approved plan is a plan document that has been submitted by the document provider (i.e., the legal or financial institution that drafts and maintains the document) to the IRS for approval before it is adopted by an employer. The IRS issues a favorable opinion letter if the form of the document satisfies applicable requirements. Under prior guidance, the IRS has implemented remedial amendment cycles for pre-approved plans. During each cycle, the IRS issues a cumulative list of changes in the plan requirements that must be incorporated into the plan documents. Each cycle involves a submission period during which the pre-approved plan provider submits the document to the IRS for review and an adoption period during which employers adopt the IRS-approved document form.

Accordingly, Rev. Proc. 2023-37 consolidates and updates the rules regarding remedial amendment periods, the remedial amendment cycle system, and plan amendment deadlines. Under the guidance, every pre-approved plan has a recurring remedial amendment cycle, although defined contribution-qualified pre-approved plans, defined benefit qualified pre-approved plans, and 403(b) pre-approved plans each have different cycles. Additionally, although the same cycle applies with respect to all defined contribution qualified pre-approved plans, separate cycles apply with respect to all defined benefit-qualified pre-approved plans and all Section 403(b) pre-approved plans. Providers may apply for new opinion letters for each cycle. The rules reflect numerous changes and clarifications, including provisions that impact plan amendment deadlines and an employer’s eligibility to adopt a pre-approved plan under certain circumstances.

Rev. Proc. 2023-37 also sets forth the provider application process and clarifies the scope of review for an opinion letter. The rules clarify that an opinion letter will not be issued for amendments made between submission periods. Instead, a provider must submit a restated plan that incorporates the amendments during the next submission period. Furthermore, the IRS’s review of a pre-approved plan’s application for an opinion letter will consider only the terms of the plan document and adoption agreement, as applicable, and not the terms of any trust or custodial account, investment arrangements or other documents incorporated by reference.

Additionally, Rev. Proc 2023-37 explains the process for an adopting employer to apply for a determination letter, which provides assurance that the employer’s specific plan meets applicable requirements. The guidance also clarifies the circumstances under which a pre-approved plan will be treated as an individually designed plan and the consequences of such treatment.

Although the updated procedures are primarily of interest to plan document providers who are directly involved in the submission process, retirement plan sponsors should be aware of the guidance and contact their plan service providers for further information.

IRS Revenue Procedure 2023-37 »

On November 17, 2023, the DOL, IRS and Pension Benefit Guaranty Corporation released the 2023 Form 5500 series, including Form 5500, Form 5500-SF, Form 5500-EZ, Schedules, and Instructions.

The key revisions for 2023 reflect changes made by the SECURE Act as described in a previous agency action (see our February 28, 2023, Compliance Corner article). A few of the changes, most of which relate to defined benefits plans, were previously implemented in 2022 (see our June 7, 2022, Compliance Corner article).

The most significant changes include:

• A new filing option for a defined contribution group (DCG), called a DCG reporting arrangement, and a new Schedule DCG (Individual Plan Information) to report individual plan information. Large plans in a DCG and small plans that do not meet audit waiver conditions are subject to separate plan-level audits.
• A new Schedule MEP (Multiple-Employer Pension Plan Information) to report information specific to MEPs, including participating employer and aggregate account information.
• Changes to how defined contribution retirement plan participants are counted by basing the count on the number of participants with account balances rather than the current method that counts individuals who are eligible to participate even if they have not elected to participate and do not have an account in the plan.
• Amendments to Schedules H, R, and SB to improve financial transparency and reporting, including the new subcategories for administrative expenses in Part II of Schedule H.
• The addition of certain Code compliance questions to improve tax oversight and compliance of tax-qualified retirement plans.

The instructions have also been updated to reflect the current maximum DOL administrative penalty for Form 5500 filing failures of $2,586 per day.

2023 Form 5500 Series »
News Release »
Fact Sheet (Released February 23, 2023) »

On November 3, 2023, the DOL published a proposed rule broadening the definition of an investment advice fiduciary under ERISA. The newest iteration of this rule is the most recent attempt by the DOL to update the definition of fiduciary after the 2016 Conflict of Interest Rule (the 2016 rule) was set aside by the US Court of Appeals for the Fifth Circuit in litigation.

Ultimately, the DOL seeks to again update the original five-part test that has been used to identify fiduciaries who render investment advice for a fee. Under the five-part test, an investment advice fiduciary is one who: 1) renders advice as to the value of securities; 2) on a regular basis; 3) pursuant to a mutual agreement; 4) the advice serves as the primary basis for investment decisions; and 5) the advice is individualized. The DOL views the five-part test as outdated, given the developments in retirement savings vehicles and changes in the investment advice marketplace. They posit that the five-part test is “underinclusive” in its application. Specifically, they argue that the “regular basis,” “mutual agreement,” and “primary basis for investment decisions” requirements defeat investor expectations of impartial advice and allow for some retirement advice to occur without an applicable best interest standard.

The proposed rule deems a person to be an investment advice fiduciary if they:

• Provide investment advice or make an investment recommendation to a retirement investor (including a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary).
• Charge a fee or receive other compensation, direct or indirect.
• Make the recommendation in one of the following contexts:
  • They directly or indirectly have discretionary authority or control with respect to purchasing or selling securities or other investment property for the retirement investor.
  • They make investment recommendations to investors on a regular basis as part of their business. The recommendations are based on the particular needs or individual circumstances of the retirement investor, and the investor may rely upon the recommendations as a basis for investment decisions that are in their best interest.
  • They represent or acknowledge that they are acting as a fiduciary when making investment recommendations.

The DOL believes this proposed rule will create a uniform standard for investment transactions that are not currently covered by federal securities laws (including the SEC’s Regulation Best Interest), state laws, or conduct standards. They also believe it to be more narrowly tailored than the 2016 rule and responsive to the Fifth Circuit’s arguments.

The DOL proposes that the rule take effect 60 days after the publication of a final rule in the Federal Register. They are requesting comments on many aspects of the rule.

In addition to the proposed rule, the DOL proposed amendments to several Prohibited Transaction Exemptions (PTEs):

• PTE 2020-02 – This PTE provides the conditions by which investment advice fiduciaries may be compensated for investment advice. The proposed amendment would build on the existing PTE by proposing additional disclosures to inform retirement investors and providing more guidance to financial institutions and investment professionals on impartial conduct standards. In a departure from the 2016 rule, the proposed amendment to the PTE will not require a contract for investment advice to IRAs. Instead, financial institutions will be tasked with reporting any nonexempt prohibited transactions stemming from fiduciary investment advice to the IRS through excise tax filings.
• PTE 84-24 – This PTE allows IRA fiduciaries to receive compensation when plans and IRAs enter certain insurance and mutual fund transactions that the fiduciaries recommend. The proposed amendment would impose conditions but provide exemptive relief to independent producers who serve as fiduciaries and recommend non-securities annuities or other insurance products to retirement investors on a commission or fee basis.
• PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 – These PTEs currently provide investment advice fiduciaries with relief for different types of transactions involving employee benefit plans and IRAs. The proposed amendments would remove fiduciary investment advice from the purview of these PTEs, allowing the application of a single standard of care (as dictated in PTE 2020-02) to all fiduciary investment advice, regardless of the specific type of product or advice provided. They also make certain other administrative changes.

The industry will likely provide robust commentary to the DOL on this rule. While the rule goes through the rulemaking process, it’s important for retirement plan fiduciaries to remember their duties under ERISA. Taking steps to ensure that any investment decisions are made in the best interest of plan participants and beneficiaries remains the standard under ERISA, and plan sponsors should work with their service providers to document adherent processes.

Retirement Security Rule: Definition of an Investment Advice Fiduciary »
Fact Sheet: Retirement Security Proposed Rule and Proposed Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries »

On November 1, 2023, the IRS issued Notice 2023-75, which provides certain cost-of-living adjustments for a wide variety of tax-related items, including retirement plan contribution maximums and other limitations. Several key figures are highlighted below. These cost-of-living adjustments are effective January 1, 2024.

The elective deferral limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan increases from $22,500 to $23,000 in 2024. Additionally, the catch-up contribution limit for employees aged 50 and over who participate in any of these plans remains at $7,500. Accordingly, participants in these plans who have reached age 50 will be able to contribute up to $30,500 in 2024.

The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts has increased from $15,500 to $16,000. The catch-up contribution limit for employees 50 and over who participate in SIMPLE plans remains $3,500 for 2024.

The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $69,000 (from $66,000). The limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) also increases to $275,000 (from $265,000). Additionally, the annual limit on compensation that can be considered for allocations and accruals increases from $330,000 to $345,000.

The threshold for determining who is a highly compensated employee under Section 414(q)(1)(B) increases to $155,000 (from $150,000). The dollar limitation concerning the definition of a key employee in a top-heavy plan increases from $215,000 to $220,000.

Employers should review the notice for additional information. Sponsors of benefits with limits that are changing will need to determine whether their plan documents automatically apply the latest limits or must be amended to recognize the adjusted limits. Any applicable changes in limits should also be communicated to employees.

Notice 2023-75 »

On October 20, 2023, the IRS published final regulations prescribing mortality tables under Code Section 430 that apply to defined benefit pension plans. The IRS also issued proposed regulations to update the requirements for a single-employer-defined benefit plan to use customized mortality tables as a substitute for the IRS-prescribed tables.

The mortality tables are used to calculate the present value of a stream of expected future benefit payments to determine the minimum funding requirements for a defined benefit plan and are also relevant to determining the minimum required amount of a lump-sum distribution from such a plan.

Although the tables must be updated at least every 10 years, the IRS generally provides annual mortality improvement scales that reflect adjustments based on recent and projected mortality experience. The last such adjustments were proposed in April of 2022 to take effect in 2023, but that was delayed in December 2022.

The final regulations adopt the April 2022 proposed regulations with some modifications to reflect the expected ongoing impact of COVID-19 on mortality rates and the 0.78% annual cap on mortality improvement rates as required by the SECURE 2.0 Act.

The final regulations apply to valuation dates occurring on or after January 1, 2024, and restrict the use of static mortality tables to plans with 500 or fewer participants, multiemployer plans and cooperative and small employer charity pension plans. All other plans must use the generational mortality tables.

The proposed regulations are intended to apply to plan years beginning on or after January 1, 2025, and allow any previously approved plan-specific substitute mortality tables to continue until amendments to the plan-specific substitute mortality regulations are finalized, and an updated revenue procedure that reflects those final regulations is issued.

Employers that sponsor defined benefit pension plans should be aware of the updated guidance and consult with their plan actuaries and consultants regarding any potential impact on plan costs. The deadline for submitting comments to the IRS on the proposed regulations is December 19, 2023.

IRS Mortality Tables for Determining Present Value Under Defined Benefit Pension »
IRS Plan-Specific Substitute Mortality Tables for Determining Present Value »

On September 21, 2023, the Federal District Court for the Northern District of Texas (the court) issued a ruling on a case involving a challenge to a 2022 amendment to the DOL’s 2020 Investment Duties Rule (the 2020 Rule). (The amendment is referred to hereinafter as the 2022 Rule). The court determined the 2022 Rule should remain in effect.

On January 26, 2023, twenty-five states and some oil and gas entities, including Western Energy Alliance, a trade association representing 200 oil and gas companies, filed the lawsuit against Martin Walsh, the Secretary of Labor, and the DOL, requesting that the court invalidate the 2022 Rule, which was scheduled to take effect on January 30, 2023. The 2022 Rule clarifies the duties of fiduciaries to ERISA employee benefit plans concerning the selection of investments and investment courses of action.

The plaintiffs alleged that the 2022 Rule violates the Administrative Procedure Act (APA) because it is arbitrary and capricious and runs afoul of ERISA. The legal arguments in the case focused largely on fiduciary duties under ERISA, and specifically, whether and how a retirement plan fiduciary may take environmental, social, and governance (ESG) issues into account when making plan investment decisions. Prior to 2020, the DOL recognized that ESG issues are proper components of the fiduciary’s primary analysis of the economic merits of plan investments and that ERISA’s obligations do not forbid consideration of collateral or nonfinancial benefits in the selection of competing investments. In 2020, the DOL under the Trump Administration changed the Investment Duties Rule to allow consideration of other factors, such as ESG issues, only when investments being considered are indistinguishable based on pecuniary factors alone.

In 2022, the DOL under the Biden Administration released the 2022 Rule, which changed the wording back to similar wording prior to the 2020 Rule, allowing plan fiduciaries to make investment decisions based on risk and return analysis, including ESG factors, depending on the facts and circumstances of the situation.

Since both parties moved for summary judgment, the court determined that it was required to determine if the 2022 Rule violates ERISA in two steps. First, has Congress addressed the specific question at issue in the case? The court found that Congress had not. Second, is the 2022 Rule arbitrary or capricious in substance or manifestly contrary to ERISA? The court found that it is neither.

The court also considered the requirement under the APA that courts set aside agencies’ actions if they are found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Agencies are also required to examine all the evidence and explain their actions, including a rational connection between the facts found and the action taken. The court found that the DOL took action based on comments received on the existing and proposed Rules and, therefore, could not conclude that the DOL’s actions violated the APA.

The court denied the plaintiffs’ motion and granted the defendants’ motion. The 2022 Rule is in effect and has been since January 30, 2023.

Retirement plan fiduciaries should be aware of this ruling and consult with their counsel or plan investment advisors for further information.

Opinion: Utah v. Walsh »

On September 13, 2023, the IRS released Revenue Procedure (Rev. Proc.) 2023-31, which provides guidance on exceptions from electronic filing requirements for certain filers of Forms 8955-SSA and 5500-EZ. Rev. Proc. 2023-31 applies to filings submitted with respect to plan years beginning on or after January 1, 2024.

Rev. Proc. 2023-31 supersedes Rev. Proc. 2015-47 and updates the procedures related to hardship waivers for Forms 8955-SSA (Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits) and 5500-EZ (Annual Return of a One Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan). This prior guidance outlined procedures a plan or plan administrator could follow to request a hardship waiver of the requirement to file these forms electronically.

This updated guidance informs plans that the procedures for seeking either an undue hardship waiver of, or administrative exemption from, the electronic filing requirements for Form 8955-SSA, or an undue economic hardship waiver of the electronic filing requirements for Form 5500-EZ, will generally be available in the respective form’s instructions, or “in applicable IRS publications, forms, or other guidance, including postings to the IRS.gov website.”

Employers that may need to file either a Form 8955-SSA or Form 5500-EZ should review this guidance and follow the prescribed procedures for requesting hardship waivers in future plan years.

IRS Rev. Proc. 2023-31 »

On July 17, 2023, the IRS released an issue snapshot on the deductibility of employer 401(k) contributions made after the plan year end. Issue Snapshots represent the IRS’ periodic research summaries on tax-related issues. This snapshot discusses how IRC timing rules apply to employers who establish a new 401(k) plan after the end of the tax year. These rules determine whether a retirement plan can be retroactively established and, if so, whether plan contributions are allocable to and deductible in the prior year. The snapshot provides guidance and examples of the application of changes made by the SECURE Act and the SECURE 2.0 Act. Regulations include four separate timing rules for plans to consider including rules related to establishing a plan, the timing of elective deferrals, the timing of deductible profit-sharing or matching contributions, and the timing of allocations to participant accounts.

A qualified plan must be established before contributions can be deducted. Employers can establish a plan retroactively as long as the plan is established prior to the due date of the employer’s tax return, including any applicable extensions, although timing limits apply to certain plan contributions.

Elective deferrals under a qualified cash or deferred arrangement (CODA) can only be made for an amount not yet currently available to the employee as of the date of the election; retroactive elective deferrals are not permitted. However, beginning in 2023, the SECURE 2.0 Act allows a single-member 401(k) plan to adopt a new 401(k) plan after the end of the taxable year and, for the first year only, elect to defer net earnings from self-employment in the prior year.

Regulations permit an employer’s deductible profit-sharing or matching contributions to be made after the close of the tax year but before the due date of the employer’s tax return, including any applicable extensions. Retroactive payment is allowed if the employer treats the contribution as having been made in the prior tax year. These contributions must be paid to participants’ accounts no later than 30 days after the end of the employer’s extended tax return due date. Notably, although contributions can be allocated after this date, they cannot be deducted unless they were paid prior to the extended tax return due date. Contributions paid and allocated after the extended due date would be deductible in the following plan year, subject to existing IRC limits.

To illustrate these concepts, the snapshot provides five examples employers can use and additional audit tips to navigate compliance in the event of an audit. Employers that sponsor 401(k) plans may find the snapshot and related examples helpful.

Issue Snapshot — Deductibility of employer contributions to a 401(k) plan made after the end of the tax year | Internal Revenue Service (irs.gov) »

On August 25, 2023, the IRS released Notice 2023-62, which provides transition relief for implementation of the new Roth catch-up contribution requirement under section 603 of the SECURE 2.0 Act.

Under present rules, 401(k), 403(b) and governmental 457(b) plans can allow participants who are age 50 or older by year end to make catch-up contributions, which are additional elective deferrals that exceed the otherwise applicable elective deferral limit. Currently, as permitted by the plan, catch-up contributions can be made either on a pre-tax basis or as designated Roth contributions.

The SECURE 2.0 Act provision requires that, effective in 2024, any catch-up contributions made by plan participants with prior year Social Security wages exceeding $145,000 must be designated as after-tax Roth contributions. However, industry groups voiced practical concerns regarding the ability to conform plan operations to satisfy the new requirements by the 2024 deadline.

Notice 2023-62 and related guidance, IR-2023-155, respond to these concerns by announcing a two-year administrative transition period for implementation of the new requirement. Accordingly, defined contribution plans will not be required to designate catch-up contributions made by higher income participants as Roth contributions until 2026. The IRS also clarified that plan participants who are age 50 and over can continue to make catch‑up contributions after 2023, regardless of income.

Employers that sponsor defined contribution plans should be aware of this transition relief and consult with their advisors for further information. The IRS intends to issue future guidance and invites public comments on the matters discussed in Notice 2023-62. Comments must be submitted in writing on or before October 24, 2023.

IR-2023-155 »

Notice 2023-62 »

On August 4, 2023, the Ninth Circuit Court of Appeals affirmed in part and reversed in part the US District Court for the Central District of California’s granting of summary judgment to the defendants in an ERISA class action brought by former AT&T employees who contributed to AT&T’s retirement plan (the plaintiffs), a defined contribution plan. Defendants in the case are the plan’s administrator, AT&T Services, Inc., and the committee responsible for some of the plan’s investment-related duties, the AT&T Benefit Investment Committee (the defendants).

The plaintiffs alleged that when the defendants amended their contract with the recordkeeper to allow the recordkeeper to engage a brokerage account platform and investment advisory services for participants, it failed to investigate and evaluate all the compensation that the plan’s recordkeeper received for these additional services. According to the plaintiffs, this failure resulted in the contract between the defendants and recordkeepers being a “prohibited transaction” under ERISA Section 406. The plaintiffs also alleged that the failure to consider the compensation to the recordkeeper was a breach of the defendants’ fiduciary duty of prudence. By granting the defendants’ summary judgment motion, the district court was, in effect, finding that, even if the plaintiffs proved all their allegations, there was still no violation of the law.

By reversing the grant of summary judgment, the Ninth Circuit concluded that when the defendants amended their contract with the plan recordkeeper to add brokerage and investment advisory services, it engaged in a prohibited transaction under ERISA. This conclusion is contrary to what two other circuit courts have found, creating the possibility of an appeal to the Supreme Court.

The Court remanded the case to the district court to determine if any exemptions from the prohibited transaction rule exist, whether the contract was “reasonable,” whether the services were “necessary,” and whether no more than “reasonable compensation” was paid for services. Specifically, the district court was instructed to consider whether the plan recordkeeper received no more than “reasonable compensation” from all sources, both direct and indirect, for the services provided to the plan. The Court also reversed the granting of summary judgment for the breach of fiduciary duty claim, in the context of failure to monitor the compensation the recordkeeper received from the brokerage services company.

While this case involved a retirement (401(k)) plan, the ERISA sections involved apply also to ERISA health plans. This ruling reflects an expansion of which types of contracts between plan administrators and plan service providers constitute prohibited transactions. Health plan and retirement plan administrators should keep the prohibited transactions section of ERISA in mind when contracting with service providers to make sure service providers receive only reasonable compensation.

Bugielski v. AT&T Services, Inc. »

On August 11, 2023, the DOL published a request for information (RFI) soliciting public comments on certain SECURE 2.0 provisions that impact ERISA’s reporting and disclosure framework. The public feedback will inform future DOL rulemaking or other guidance.

Numerous sections of SECURE 2.0 establish new, or revise existing, ERISA reporting and disclosure obligations. In some cases, SECURE 2.0 also requires the DOL to undertake a review of existing or new requirements and submit reports to Congress on their findings.

Accordingly, the RFI is comprised of questions on specific topics affected by SECURE 2.0 reporting and disclosure changes, including:

1. Pooled Employer Plans (PEPs). Section 344 of SECURE 2.0 directs the DOL to study the PEP industry and report their findings to Congress and the public every five years, with recommendations on how PEPs can be improved through legislation. The RFI seeks data sources to perform this study, including information on PEP selection and monitoring, investment ranges and fees, and participant disclosures.
    
2. Pension-linked Emergency Savings Accounts (PLESAs). Section 127 of SECURE 2.0 amended ERISA to add PLESAs. PLESAs allow non–highly compensated employees in section 401(k), 403(b), or governmental 457(b) plans to make after-tax Roth contributions to a separate account and withdraw from that account to pay for unexpected short-term emergency expenses. If a plan offers PLESAs, the employer must provide participants with initial and annual disclosures that explain the PLESA’s purpose, limits, tax treatment, investment options, fees, contributions and withdrawal process, among other items. The RFI asks whether employers need further guidance to implement PLESAs and whether they would benefit from model notices to comply with disclosure obligations.
    
3. Performance Benchmarks for Asset Allocation Funds. Section 318 of SECURE 2.0 specifies criteria for blended performance benchmarks applicable to designated investment alternatives that contain mixed asset classes. The RFI asks if additional factors should be included to ensure employers and participants can effectively use the benchmarks and how to assess participants’ understanding of the benchmarks.
    
4. Defined Contribution Plan Fee Disclosure Requirements. Section 340 of SECURE 2.0 requires the DOL to review and report on ERISA 404a-5 disclosure requirements in participant-directed individual account plans. The report must include recommendations for legislative changes to help participants better understand defined contribution plan fees and expenses, including the cumulative effect over time. The RFI seeks comments on the adequacy of the current disclosures and changes to the content, design, format, or delivery method that may improve the effectiveness.
    
5. Eliminating Unnecessary Plans Requirements Related to Unenrolled Participants. Section 320 of SECURE 2.0 amended ERISA to eliminate disclosure obligations to unenrolled employees, except for an annual reminder notice of their plan eligibility and election deadlines or if the disclosure is requested. The RFI asks whether employers need additional guidance, such as a model annual notice, to implement this change.
    
6. Requirement to Provide Paper Statements in Certain Cases. Section 338 of SECURE 2.0 directs the DOL to update their 2002 electronic delivery safe harbor to provide that employees who first become eligible to participate after December 31, 2025, must be furnished a one-time initial paper notice of their right to request all ERISA documents in paper form prior to the electronic delivery of any pension benefit statement. The RFI seeks input on any needed updates to existing electronic delivery rules to effect this requirement and whether an employer’s continued use of electronic delivery should be conditioned on access in fact (meaning the employer’s verification that an individual has accessed the document).
    
7. Consolidation of Defined Contributions Plan Notices. Section 341 of SECURE 2.0 requires the DOL and IRS to issue regulations providing that plan administrators may consolidate certain notices, such as notices for qualified default investment alternatives, automatic contribution arrangements, and nondiscrimination safe harbors. The RFI seeks input regarding any current legal impediments to consolidation and the pros and cons of such an approach.
    
8. Information Needed for Financial Options Risk Mitigation. Section 342 of SECURE 2.0 changed disclosure rules for defined benefit pension plans that offer lump sum payments. The new rules require plans to provide certain information to participants before the lump sum becomes available, such as the value of the lump sum relative to annuities available under the plan, the interest rate and mortality figures used to calculate the lump sum and the related tax implications. The DOL must develop a model notice for this purpose. The RFI asks for sample model notices and whether additional implementation guidance is needed.
    
9. Defined Benefit Annual Funding Notice. Section 343 of SECURE 2.0 modifies the content requirements for defined benefit plan annual funding notices. The RFI seeks certain input regarding the content requirements and suggestions for updating the existing funding notice to reflect the changes.

Employers that sponsor retirement plans should be aware of this RFI. Those wishing to submit comments to the DOL for consideration must do so by October 10, 2023, in accordance with the specific RFI instructions.

Federal Register: Request for Information-SECURE 2.0 Reporting and Disclosure »

The IRS recently issued Notice 2023-54, which provides transition relief to address changes made by the SECURE Act and the SECURE 2.0 Act in required minimum distribution (RMD) requirements for qualified plans such as 401(k) plans, IRAs, Roth IRAs, 403(b) plans, and 457(d) eligible deferred compensation plans.

RMD rules ensure that qualified retirement accounts are used for their intended purpose by making accountholders draw down their retirement savings upon reaching a certain age. The adjustments made by the SECURE Act and the SECURE 2.0 Act were intended to preserve that aim while also accounting for continually increasing life expectancy rates among Americans who are living and working longer than ever before.

Accordingly, the SECURE Act increased the age for determining an individual’s required beginning distribution date from 70 1/5 to age 72, which the SECURE 2.0 Act then increased to age 73 beginning January 1, 2023.

Payers and plan administrators have expressed concerns to IRS that they did not have adequate time to update their systems to reflect the changes to RMD rules made by SECURE 2.0, which were signed into law only three days before taking effect. As a result, certain 2023 distributions were characterized as RMDs – and therefore ineligible to be rollover distributions – but should not have been characterized as such under the new rules.

The transition relief clarifies that a payer or plan administrator who did not treat certain distributions made between January 1, 2023, and July 31, 2023, to participants born in 1951 (or their surviving spouses) as eligible rollover distributions (in other words, the distributions were characterized as RMDs) will not be considered to have failed to meet SECURE 2.0 Act requirements.

The relief also extends the 60-day rollover period for these distributions to September 30, 2023, and grants a similar extension to IRA owners (or their surviving spouses) regarding distributions made between January 1, 2023, and July 31, 2023, to IRA owners born in 1951 (or their surviving spouses) that would have been RMDs under the previous rules.

The transition relief also updates previous relief relating to otherwise required RMDs to beneficiaries after the deaths of participants (otherwise known as “specified RMDs”) in 2020 and 2021 to include the same for otherwise required RMDs related to participant deaths in 2022. Accordingly, defined contribution plans will not be treated as failing to satisfy the RMD rules for failure to make a specified RMD in 2023, and no taxpayer will not be subject to an excise tax for having failed to take a specified RMD.

Employers should be aware of this welcomed transition relief and consult with their advisors for further information.

Transition Relief Guidance, Notice 2023-54 »

On July 11, 2023, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule on benefits administration for terminated single-employer pension plans. The final rule aims to increase transparency of benefits administration for terminated plans while also clarifying and simplifying regulatory language.

Key updates include clarification on the following:

• PBGC’s rules on payment of a lump sum are unaffected by the election of a lump-sum distribution before plan termination.
• A de minimis benefit of a married participant who dies after plan termination will be paid as an amount due a decedent, not as a qualified preretirement survivor annuity.
• Benefits will be paid to estates only as a lump sum.
• Accumulated mandatory employee contributions may not be withdrawn if benefits are in pay status when the plan becomes trusteed.
• The form of benefit in pay status when a plan becomes trusteed will not be changed.

Additionally, the final rule:

• Changes wording that refers to the current statutory dollar amount subject to cash out ($5,000) to instead refer to the statutory provision that specifies the maximum dollar amount to avoid the need for annual regulatory updates.
• Requires that fair market value or fair value, as appropriate, be used for purposes of valuing assets to be allocated to participants’ benefits and in determining employer liability and net worth.

The final rule is effective August 10, 2023, and applies to plan terminations thereafter. However, PBGC notes that the final rule codifies practices PBGC has followed for many years and will continue to follow in the interim. Employers who sponsor single-employer pension plans should be aware of this final rule.

Federal Register: Benefit Payments and Allocation of Assets »

The SECURE 2.0 Act made significant changes to the Employee Plans Compliance Resolution System (EPCRS) self-correction program but also granted the IRS broad latitude to limit self-correction as it deems appropriate.

The IRS has now provided interim guidance pursuant to these provisions in Notice 2023-43, which provides that plan sponsors may self-correct an "eligible inadvertent failure," defined as a failure that occurs despite the existence of practices and procedures that satisfy standards set forth in section 4.04 of Rev. Proc. 2021-30, so long as certain conditions are met, including:

1. The failure is not identified by the IRS prior to any actions demonstrating a specific commitment to implement a self-correction.
2. The self-correction is made within a reasonable time after the failure is identified.
3. The failure is not egregious, does not relate to the diversion or misuse of plan assets, and is not directly or indirectly related to an abusive tax avoidance transaction.
4. The correction satisfies all provisions applicable to self-correction in the current version of EPCRS.

Self-correction is also available for certain eligible inadvertent failures related to plan loans but not for failures to initially adopt a written plan, significant failures in terminated plans, and corrections of operational failures by a plan amendment that results in less favorable treatment for a participant than the original terms of the plan.

Notice 2023-43 also suspends the existing EPCRS requirement that a plan be the subject of a favorable determination letter as well as its prohibition against self-correcting demographic failures and employer eligibility failures.

Because Notice 2023-43 is IRS guidance, it does not address areas over which the DOL has authority, such as the recovery of plan overpayments and the correction of automatic contribution errors.

Plan sponsors may apply a good faith, reasonable interpretation of the SECURE 2.0 Act changes for any self-correction completed in the interim period between the passage of the Act on December 29, 2022, and the publication of Notice 2023-43.

Plan sponsors may also rely on Notice 2023-43 until such time as subsequent EPCRS guidance is published. In the meantime, IRS has requested comments on this guidance and any other aspect of section 305 of the SECURE 2.0 Act, with particular emphasis on additional correction methods to be used to correct eligible inadvertent failures, including general principles of correction if a specific correction method is not otherwise specified in the rules or other guidance.

Comments are due by August 23, 2023, and may be submitted electronically at the regulations.gov website.

The IRS recently released updated instructions for Form 5300, Application for Determination for Employee Benefit Plan; Form 5307, Application for Determination for Adopters of Modified Non-standardized Pre-Approved Plans; and Form 5310, Application for Determination for Terminating Plan.

Form 5300 is filed to request a determination letter from the IRS for the qualification of an individually designed or preapproved defined benefit or a defined contribution plan and the exempt status of any related trust and a determination that a 403(b) plan meets the requirements of §403(b). Form 5307 is filed if an employer has made limited modifications to a preapproved plan that does not create an individually designed plan. Form 5310 is used to request a determination letter as to the qualified status of a defined contribution or defined benefit plan upon plan termination.

The Form 5300 and Form 5310 instructions were updated to include §403(b) defined contribution plans. These changes are part of a larger IRS effort to align the procedures for §403(b) plans with those applicable to qualified §401(a) plans. The Form 5307 instructions reflect numerous format and information revisions for completion of the form electronically on pay.gov as of July 1, 2023.

Rev. Proc. 2023-4 contains the guidance under which the determination letter application programs are administered. For information regarding program changes under Rev. Proc. 2023-4, please see our January 18, 2023, article. An application should be filed under Rev. Proc. 2022-40 (with respect to individually designed plans) or Part III of Rev. Proc. 2016-37 (with respect to preapproved plans).

Plan sponsors seeking a determination letter for their defined contribution or defined benefit plan should be aware of the updated instructions and consult with their service providers for further information.

Instructions for Form 5300 (Rev. June 2023)
Instructions for Form 5307 (Rev. June 2023)
Instructions for Form 5310 (Rev. May 2023)

On May 10, 2023, in Su v. Sherrod, the Seventh Circuit affirmed the district court's grant of summary judgment to the DOL in a case involving breaches of ERISA duties of loyalty and prudence. The rulings follow a civil enforcement action brought against Dr. Shirley Sherrod and Leroy Johnson, the trustee and plan administrator, respectively, of a defined benefit retirement plan established in 1987 for employees of Sherrod's ophthalmology practice.

The case involved the plan's trust account, which had been closed to deposits since the practice was sold and all employees were terminated in 2008. The buyer later prevailed in a breach of contract action against Sherrod in 2011, after which Sherrod took a $250,000 distribution from the plan's cash bond for her appeal of that case, launching a five-year-long pattern of distributions to herself from the plan. Johnson, whom Sherrod appointed as the plan's administrator in May of 2012, was also involved. All of these distributions were either improperly accounted for as plan expenses or losses or otherwise unaccounted for.

The DOL brought its action against Sherrod and Johnson in 2016, by which time the defendants had distributed almost $1.1 million of plan assets for Sherrod's personal benefit. The DOL asked the court to remove the two from their plan fiduciary positions, to enjoin them permanently from serving as fiduciaries for any ERISA-covered plan, and to appoint an independent fiduciary to administer and terminate the plan.

Finding no genuine dispute of fact material as to whether Sherrod and Johnson had repeatedly violated their fiduciary duties, the district court granted summary judgment for the DOL. The defendants then appealed this decision to the Seventh Circuit, arguing (in part) that the granted relief was "excessive" given the "extraordinary circumstances" Sherrod faced and her assertions of good faith efforts to protect the plan, including a purported attempt to reimburse the plan for the initial $250,000 distribution, but for which she could provide no direct documentation and which occurred (if at all) three years after the fact.

The appellate court rejected all the defendants' arguments, observing that the defendants "d[id] not dispute that Sherrod often acted at her own direction and not ‘at the direction of the Administrator,'" unilaterally withdrawing funds from the plan without consulting Johnson. Accordingly, the Seventh Circuit found there was no dispute that Johnson did not "authorize and direct" those payments as required by the plan. The Seventh Circuit observed that, in effect, "Sherrod gave herself the keys to the bank vault, and Johnson let her use them."

Affirming all the relief imposed upon the defendants by the trial judge, the Seventh Circuit panel concluded that "[g]iven the gravity and frequency of defendants' breaches of their fiduciary duties, they are fortunate that the relief against them has thus far been relatively modest."

While this case doesn't break any new legal ground-raiding plan assets for one's own personal benefit is the classic example of an ERISA fiduciary violation-it is for that very reason a useful reminder of how strong the urge can be for ostensible fiduciaries under financial strain to misappropriate retirement plan assets for their own benefit. ERISA plan fiduciaries must ensure they never violate their duties of prudence and loyalty with respect to plan assets, regardless of their financial circumstances.

Su v. Sherrod »

On April 25, 2023, the DOL's Employee Benefits Security Administration (EBSA) issued Field Assistance Bulletin No. 2023-01, providing guidance to multiemployer plans on how they can comply with ERISA annual funding disclosure requirements when they receive special financial assistance (SFA) under the American Rescue Plan Act. The EBSA presents the guidance as 11 Q&A's, which are explained in order below.

1. The EBSA states that multiemployer plans should not consider any SFA they receive when disclosing the funded percentage and the actuarial value of assets in their annual funding disclosures. SFA is not included in these items. However, the plans may want to include information in the annual funding notice explaining why the funded percentage stated in the notice is lower than participants and beneficiaries might have expected, given that the plan received SFA.
2. The agency states that the annual funding notice must include a "statement of the fair market value of plan assets as of the last day of the notice year, and as of the last day of each of the two preceding plan years as reported in the annual report filed under Section 104(a) of ERISA for each such preceding plan year." Accordingly, the statement of fair market value of plan assets should reflect any SFA that the multiemployer plans received during that time. If the statement does include SFA, then the notice must include a statement explaining that the plan received SFA, and that the actuarial value of assets used to determine the funded percentage does not include the SFA account's assets.
3. The agency makes clear that the receipt of SFA triggers the 'material effect' explanation in the annual disclosure notice. SFA is a government transfer that has a material effect on plan assets. Further, a plan that suspended benefits due to insolvency under Section 4245(a) of ERISA (or under the Multiemployer Pension Reform Act), but receives SFA, should reinstate suspended benefits going forward and pay make-up payments for those previously suspended benefits to participants and beneficiaries who were in pay status on the SFA payment date. These reinstated benefits and make-up payments could have a material effect on plan liabilities. Finally, the agency states that the multiemployer plan administrator is not required to project the effect on the plan's liabilities through the end of the current plan year, because the amount of SFA attributable to the reinstatement of benefits is expected to offset the increase in liabilities through at least 2051.
4. The EBSA states that the material effect explanation must be included in the annual funding notice for the plan year in which the plan received SFA. If a multiemployer plan receives additional SFA under a supplemented application in a different plan year other than the plan year the plan received SFA under the initial application, the receipt of additional SFA is a material effect event for which an explanation is required.
5. The agency states that when a plan's receipt of SFA triggers the "material effect" explanation required under the annual disclosure notice, that explanation must include the amount of SFA and the date it was paid to the plan. If the plan received additional SFA under a supplemented application, the explanation must state the amount and date of the SFA received under the initial and supplemented applications separately along with a statement explaining why the plan is receiving supplemented SFA. The Q&A then includes language that plans can use when providing this explanation.
6. The EBSA makes clear that a plan that has received SFA is deemed to be in critical status, beginning with the plan year in which the plan first received SFA and ending with the plan year ending in 2051. The Q&A provides language that plans can use to explain this in the annual disclosure notice.
7. The agency states that a plan's receipt of SFA affects the general description of the plan's investment policy. For plans that have received SFA, the description of the plan's investment policy must reflect the restrictions and limitations on investments applicable to the separate account.
8. The EBSA states that the plan administrator does not have to separately identify the assets in the SFA account. The percentage allocation of investments under the plan, as required by the annual disclosure notice, is based on total plan assets, including the assets that make up the SFA account. However, the agency states that the plan administrator should include an explanation that SFA is included in the allocations. The Q&A has model language for this explanation.
9. The agency states that if a plan receiving SFA subsequently becomes insolvent, the plan "will be subject to the current rules and guarantee for insolvent plans." Therefore, a plan receiving SFA should include the same summary of the rules governing insolvency as a plan that does not receive SFA.
10. The EBSA states that an insolvent plan that is eligible for, but has not applied for, SFA can modify the model language in Appendix B of 29 CFR 2520.101-5, summarizing the rules governing insolvent plans to inform participants that the plan is eligible for SFA. The Q&A also includes model language that a multiemployer plan administrator of an insolvent plan eligible for SFA that has not been approved for SFA or does not have an application for SFA under review by the Pension Benefit Guaranty Corporation (PBGC) on the last day of the notice year may use in the annual disclosure notice.
11. Finally, the agency states that the annual funding notice of a plan that received SFA can include a statement describing the prohibition against the plan applying to suspend benefits in the future even if the plan is in critical and declining status and otherwise meets the requirements for suspension. The Q&A includes model language that can be used for this statement.

Employers participating in multiemployer plans that received SFA should be aware of this new information.

Field Assistance Bulletin No. 2023-01 »

The Seventh Circuit Court of Appeals (Seventh Circuit) has remanded two of three of the plaintiffs' claims for further proceedings in Hughes v. Northwestern University after the US Supreme Court overturned its previous ruling that dismissed all three claims.

The plaintiffs originally sued Northwestern in 2016, alleging breaches of ERISA fiduciary duties regarding its defined contribution retirement plans, including:

• Retaining plan recordkeepers that charged 'excessive' revenue-sharing fees rather than a flat (or 'per capita') fee.
• Offering investments in 'retail' share classes (generally intended for the individual investor market) rather than identical 'institutional' share classes (generally made available for companies and organizations with employees that invest on behalf of others), even though institutional share classes charged lower fees than the retail classes.
• Presenting so many different and 'duplicative' investment alternatives that caused confusion, 'decision paralysis,' and bad investment decision making on the part of participants.

The lower district court dismissed all these claims and, on appeal, the Seventh Circuit affirmed that ruling. The Seventh Circuit reasoned, in part, that because Northwestern's plan included the type of low-cost investment options plaintiffs claimed to prefer in addition to the 'higher-cost' options complained of in their lawsuit, there was no need to further examine the latter options under ERISA.

However, in 2022, the Supreme Court (the Court) overturned the Seventh Circuit on the well-established grounds that plan fiduciaries have a continuing duty to monitor investment options separate from and in addition to the duty to prudently select those options in the first place. Please see our February 1, 2022, article on the Court's decision.

Writing for a unanimous Court, Justice Sotomayor was especially critical of the Seventh Circuit's rationale that the mere availability of some 'prudent' investment options in a retirement plan precluded any need to review the investment options on offer: 'That reasoning [is] flawed. Such a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account [Northwestern's] duty to monitor all plan investments and remove any imprudent ones.'

Considering this directive, the Seventh Circuit reassessed the plaintiffs' claims as follows:

• Excessive Fees: The Seventh Circuit held that while the use of revenue sharing for plan expenses is not in and of itself a violation of a fiduciary duty under ERISA, neither does that mean that using such an arrangement necessarily fulfills a plan fiduciary's duty of prudence. Therefore, the plaintiffs made a plausible claim of Northwestern's breach of its fiduciary duty, which the trial court must evaluate further.
• 'Retail' v. 'Institutional' Share Classes: Emphasizing that 'no prudent fiduciary would purposely invest in higher cost retail shares,' the Seventh Circuit requested that the trial court evaluate the plaintiffs' plausible claims of institutional share class availability against Northwestern's denial of same.
• Too Many Investment Options: Observing that 'plans may generally offer a wide range of investment options and fees without breaching any fiduciary duty' and that the plaintiffs had failed to specify just 'how [they] were confused and personally injured by the multiplicity of funds,' the Seventh Circuit dismissed this allegation as too vague and speculative to merit any further consideration and thus reaffirmed the trial court's original dismissal of this claim.

Retirement plan fiduciaries should take this ruling (as well as the Supreme Court decision preceding it) as a stark reminder that their fiduciary obligations do not end once investment options have been selected. Rather, they've only just begun, given their duty to monitor those investment options on an ongoing basis, including removing the imprudent ones as may be required to comply with their obligations to plan participants under ERISA.

Hughes v. Northwestern University »

The IRS recently released its Employee Plans Examination Process Guide, which provides a general explanation of the EP Examination process and provides resources for retirement plan compliance. The guide is divided into six sections:

• Section 1 - Overview of EP Examinations: Provides a general overview of the examination process from initial contact through conclusion, including a helpful flowchart showing the various steps in the examination process.
   
• Section 2 - Initiation of an Examination: Provides insight into how plans are selected for examination and the procedures used to contact taxpayers, schedule appointments, and request information. It also includes information on an individual's rights as a taxpayer and the right to representation during the examination.
   
• Section 3 - Communications During Examination: Includes samples of communications that may occur during the examination, such as exam appointment requests, information requests, and extension requests. It also provides information on how to request a status update during an examination.
   
• Section 4 - Audit Guidelines: Provides information on the forms used during a Form 5500 audit, including the Internal Review Manual, EP workpaper summary, and referral to the Pension Benefit Guaranty Corporation (for certain retirement plans only).
   
• Section 5 - Resolution of Issues and Closing the Examination: Depending on whether or not the plan sponsor and examination agent agree or disagree on the issue and resolution, there are procedures both parties will follow to communicate and come to a resolution. Once a resolution is reached, it results in a closing agreement which is outlined in further detail in the IRS' Audit Closing Agreement Program (Audit CAP).
   
• Section 6 - Appeals Process: Outlines the appeals process for various aspects of the examination, including discrepancy adjustments, excise taxes, and unrelated business taxable income. This section also provides an overview of the statute of limitations, prohibited transactions, and procedures used by the IRS when protecting a statute.

Employers and plan sponsors should review the guide and be aware of the examination process and their rights in the event of a retirement plan audit.

EP Examination Process Guide »

Retirement plan fiduciaries may continue to consider the potential financial benefits of investing in funds that take 'the economic effects of climate change and other environmental, social, and corporate governance factors' ('ESG factors') into account without fear of automatically running afoul of ERISA's fiduciary duty requirements after President Biden's veto of a House resolution on March 20, 2023.

The point of controversy was a rule promulgated by the Democratic Biden administration ('the Biden rule') that changed a Republican rule made final in the waning weeks of the Trump administration ('the Trump rule'). The Trump rule required plan fiduciaries to base investment decisions solely on 'pecuniary factors,' defined as factors that a fiduciary 'prudently determines' are expected to have a 'material effect' on the risk or return of an investment, and was viewed as limiting consideration of ESG factors in plan investment decisions.

Pursuant to President Biden's executive order (issued just after his inauguration), the DOL announced it would not enforce the Trump rule in March 2021. The DOL then proposed a rule explicitly allowing for the consideration of ESG factors in October 2021 and finalized this rule in December 2022. Please see our December 6, 2022 article for further information regarding the Biden rule. The newly Republican-controlled House of Representatives then passed (and the Senate later agreed to) a resolution to nullify the Biden rule, which President Biden vetoed.

Thus, retirement plan fiduciaries wanting to consider ESG factors can take some comfort that the Biden rule is here to stay, at least for the foreseeable future. However, its long-term prospects remain murky, especially with the White House up for grabs in 2024.

Fiduciaries should also be mindful that while the Biden rule ensures that taking ESG considerations into account would not be deemed an automatic ERISA violation by those fiduciaries, the rule also does not absolve fiduciaries of ERISA's standard duty of prudence in investment and financial decisions by simple virtue of those ESG considerations.

That is, the Biden rule is not a 'safe harbor' rule. Retirement plan fiduciaries are still required to exercise the same level of prudence and care when considering ESG factors for investment and financial decisions as they are when taking into account any other consideration for the same purposes.

Message to the House of Representatives '” President's Veto of H.J. Res 30 »

On February 27, 2023, the IRS published a proposed rule in the federal register relating to the use of forfeitures in qualified retirement plans, including a deadline for the use of forfeitures in defined contribution plans. Previous guidance and regulations prohibited plan administrators from applying forfeitures arising from severance of employment, death, or for any other reason to increase the benefits any employee would otherwise receive under the plan. Previous regulations also required plan administrators to use those forfeited amounts as soon as possible to reduce the employer's contributions under the plan. However, the agency determined that subsequent regulation that established minimum funding requirements for defined benefits plans made the requirement to use the forfeitures 'as soon as possible' infeasible.

Under the proposed rule, plan administrators can use forfeitures in the following ways to:

1. Pay plan administrative expenses;
2. Reduce employer contributions under the plan; or
3. Increase benefits in other participants' accounts in accordance with plan terms.

Note that the proposed rule does not prohibit a plan document from specifying only one use for forfeitures, but the plan may fail operationally if forfeitures in a given year exceed the amount that may be used for that one purpose.

The proposed rule also requires that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.

The proposed regulations will apply for plan years beginning on or after January 1, 2024. Thus, for example, the deadline for the use of defined contribution plan forfeitures incurred in a plan year beginning during 2024 will be 12 months after the end of that plan year. Taxpayers, however, may rely on these proposed regulations for periods preceding the applicability date.

The agency asks for comments within 90 days from February 27, 2023. The agency specifically asks for comments concerning:

• Whether the rules for the use of forfeitures in defined benefit and defined contribution plans can be further simplified to reduce administrative costs and burdens; and
• Whether any issues arise concerning other unallocated amounts (in addition to forfeitures) with respect to qualified retirement plans, and if issues do arise, whether guidance should be provided addressing those issues.

Retirement plan sponsors should be aware of this proposed rule and monitor developments.

Federal Register: Use of Forfeitures in Qualified Retirement Plans »

SECURE 2.0, which we covered in detail in our January 4, 2023, edition of Compliance Corner, delayed the required beginning date for required minimum distributions (RMDs) for IRA owners. IRS Notice 2023-23 provides relief for financial institutions tasked with filing Form 5498 (IRA Contribution Information) for individuals for whom an RMD would have been due in 2023 had the delay under SECURE 2.0 not occurred.

However, the delayed beginning date may result in some financial institutions sending Form 5498 erroneously. Therefore, as long as the IRA owner is notified by the financial institution no later than April 28, 2023, that an RMD is not actually required for 2023, the financial institution will be in compliance.

The IRS encourages financial institutions to clearly communicate these RMD changes to affected individuals.

IRS Notice: Relief for Reporting Required Minimum Distributions for IRAs for 2023 »

On February 24, 2023, the DOL, IRS and Pension Benefit Guaranty Corporation (collectively, 'agencies') released a final rule announcing changes to the Form 5500 and Form 5500-SF and related instructions. These changes will go into effect for the 2023 annual reports. The changes to the forms and instructions address the remaining changes originally proposed in September 2021 (see our September 28, 2021, Compliance Corner article). Some changes, mostly related to defined benefit plans, were previously implemented in 2022 (see our June 7, 2022, Compliance Corner article).

Highlights of the final set of changes include, but are not limited to:

• Creation of a new filing option for a defined contribution group (DCG), called a DCG reporting arrangement, and a new Schedule DCG (Individual Plan Information) to report individual plan information. Large plans in a DCG and small plans not meeting audit waiver conditions are subject to separate plan-level audits.
• Creation of a new Schedule MEP (Multiple-Employer Pension Plan Information) to report information specific to MEPs, including participating employer and aggregate account information.
• Changes to how defined contribution plan participants are counted by basing the count on the number of participants with account balances instead of the number of eligible participants.
• Amendments to Schedules H, R and SB to improve financial transparency and reporting.
• Addition of certain Code compliance questions to improve tax oversight and compliance of tax-qualified retirement plans, including plans in a DCG filing.

The notice provides illustrations of the changes to the forms and instructions. Advance copies of the 2023 forms and instructions will be released later this year.

Sponsors of retirement plans should be aware of the upcoming changes to Form 5500.

Federal Register: Annual Information Return/Reports »
Fact Sheet: Changes for the 2023 Form 5500 and Form 5500-SF Annual Return/Reports »

On February 13, 2023, in American Securities Association v. DOL, a Florida district court struck down portions of 2021 DOL interpretive guidance regarding Prohibited Transaction Exemption (PTE) 2020-02 that expanded the circumstances in which an investment advisor is subject to fiduciary duties under ERISA.

Under a 1975 DOL regulation, an ERISA retirement plan fiduciary includes a person who, pursuant to a mutual agreement, renders individualized investment advice to the plan 'on a regular basis,' where the advice will serve 'as a primary basis' for investment decisions with respect to plan assets. PTE 2020-02 permits financial professionals who provide fiduciary investment advice to retirement investors to receive compensation otherwise prohibited by ERISA and extends to rollover transactions arising from a plan to an IRA. The 2021 guidance, which was in the form of FAQs, addressed the question of when a recommendation to roll over plan assets into an IRA was considered 'on a regular basis' under the fiduciary rule. Specifically, DOL FAQ #7 indicated that if the rollover recommendation were part of an ongoing relationship or the beginning of an intended future relationship, then it would trigger fiduciary duties under ERISA.

The lawsuit was brought by the American Securities Association (ASA), a trade association of regional financial services firms, whose members were concerned that a single rollover recommendation by an advisor could result in significant additional compliance costs and obligations to qualify for PTE 2020-02. ASA argued that the policy referenced in FAQ #7 was a legislative rule rather than an interpretive rule that improperly amended the existing DOL rule without the required notice and comment period.

The court did not agree that the guidance was a legislative rule. However, the court vacated parts of the rule due to inconsistency with ERISA. In the court's view, because investment advice to a plan must be given on a regular basis to trigger fiduciary duties, the definition excludes one-time transactions like IRA rollovers. For example, the future provision of advice pertaining to an IRA would not fall within the definition of rendering investment advice to an employee benefit plan because assets kept in an IRA are no longer workplace plan assets.

Although other courts have ruled similarly on this issue, the final outcome is unknown. The DOL may appeal the decision to ensure that rollover transactions are properly regulated. Alternatively, the DOL might issue new guidance that considers the court's ruling.

Retirement plan sponsors should be aware of the decision and monitor for additional developments.

American Securities Association v. DOL »

On February 6, 2023, the IRS released an Operational Compliance List (OC List) to help plan sponsors and practitioners achieve operational compliance by identifying changes in qualification and Code Section 403(b) requirements effective during a calendar year. The OC List was posted pursuant to IRS Revenue Procedure 2022-40, which was issued on November 7, 2022, and allows 403(b) retirement plans to use the same individually designed retirement plan determination letter program currently used by qualified retirement plans. Please see our December 6, 2022, article for further information on IRS Revenue Procedure 2022-40.

The OC list is available on the IRS website and identifies matters that may involve either mandatory or discretionary plan amendments or significant guidance that affects daily plan operations. The IRS updates the OC List periodically to reflect new legislation and IRS guidance.

Examples of items updated in 2023 include, but are not limited to:

• Proposed regulations to allow the use of an electronic medium to make participant elections and spousal consents, which was discussed in our January 4, 2023, article.
• Guidance relating to certain required minimum distributions (RMDs) for 2021 and 2022 under Notice 2022-53, which provided clarification and transitional relief regarding changes to RMDs under the SECURE Act of 2019. Please see our October 25, 2022, article.
• Extensions of plan amendment deadlines relating to the CARES Act and Relief Act provisions that provide special tax treatment with respect to a COVID-19-related distribution or a qualified disaster distribution, respectively. Please see our October 11, 2022, article.
• Extension of plan amendment deadlines relating to the SECURE Act of 2019 and certain provisions of the Miners Act and Cares Act to December 31, 2025, under Notice 2022-33; please see our August 16, 2022, article.

However, the OC List is not intended to be a comprehensive list of every item of IRS guidance or new legislation for a year that could affect a particular plan. I.e., a plan must comply operationally with each relevant IRS requirement, even if the requirement is not included on the OC List. Additionally, a plan must be operated in compliance with a change in requirements from the effective date of the change.

Sponsors of qualified and 403(b) retirement plans may want to review the OC List and should consult with their advisors for further information.

Operational Compliance List »

On February 8, 2023, the IRS released Announcement 2023-6, indicating that they intend to issue opinion letters for pre-approved defined benefit plans that were amended based on the 2020 plan qualification requirements changes and were filed with the third six-year remedial amendment cycle. The IRS expects to issue the opinion letters on and after February 28, 2023.

Beginning in 2016, the IRS implemented a staggered remedial amendment process for pre-approved plans by creating separate six-year remedial amendment cycles. Originally, the third cycle was set to end on January 31, 2025. This announcement extends the third six-year remedial amendment cycle to March 31, 2025. As such, employer plan sponsors that would like to maintain their pre-approved defined benefit plan for the third six-year remedial amendment cycle will have from April 1, 2023, to March 31, 2025, to submit applications for individual determination letters. The IRS provided additional guidance on this update in Revenue Procedure 2023-4.

Defined benefit plan sponsors should be aware of this guidance and work with their service providers in adopting their plan documents.

Announcement 2023-6 »

On January 26, 2023, the Pension Benefit Guarantee Corporation (PBGC) issued a final rule providing a withdrawal liability condition exception for certain multiemployer pension plans that access special financial assistance (SFA). As background, the American Rescue Plan Act (ARPA) authorized PBGC to provide SFA to multiemployer pension plans that are in critical and declining or critical status, were approved to suspend benefits under the Multiemployer Pension Reform Act of 2014, or became insolvent after December 16, 2014, but have not been terminated. The changes in this rule were made after the PBGC received comments concerning the SFA final rule.

Under ERISA, employers that withdraw from underfunded multiemployer plans would generally owe withdrawal liability, which represents that employer's share of unfunded vested benefits. The SFA final rule included rules on how plans must go about calculating withdrawal liability. This final rule provides an exception process whereby withdrawing plan sponsors may request an exception from withdrawal liability conditions if they can show that the exception won't increase the risk of loss to the plan or the expected employer withdrawals. The final rule indicates that a plan may submit an exception request before the SFA application is filed or before a revised application is filed.

Employer plan sponsors that are a part of a multiemployer plan that took advantage of the SFA should be aware of this new exception to the withdrawal liability conditions and work with their service provider to comply with all PBGC requirements.

Special Financial Assistance by PBGC - Withdrawal Liability Condition Exception »

The IRS recently released the new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, to replace Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, in certain instances. Form W-4P, and now Form W-4R as well, are used to address federal income tax withholding for taxable IRA distributions.

Form W-4R was optional in 2022 but is now required in 2023 for IRA distributions considered nonperiodic, which are those paid on demand as opposed to a specific schedule. Form W-4R will be updated annually to incorporate current marginal tax rate tables, which are used as part of the withholding calculation. Individuals receiving IRA distributions should familiarize themselves with the new form and consult with their tax advisor on applying each form to their situation.

Form W-4R »
Form W-4P »

On January 3, 2023, the IRS released Revenue Procedure (Rev. Proc.) 2023-4, which outlines the procedures for requesting determination letters and private letter rulings from the IRS for qualified retirement plans. Rev. Proc. 2023-4, which is published in Internal Revenue Bulletin 2023-01, is a general update to the information previously provided in Rev. Proc. 2022-4. Determination letters indicate whether the IRS finds the form of an employer's employee benefit plan document meets the necessary qualification requirements. Private letter rulings interpret and apply the Internal Revenue Code to a set of facts presented by a taxpayer.

In addition to minor non-substantive changes, the updates include the following:

• Sections 6, 8, 9, 10, 11, 19, and 20 and Appendix B were revised to provide the procedures for obtaining a determination letter with respect to a Section 403(b) individually designed plan, beginning June 1, 2023. Appendix A adds user fees for these submissions. (As reported in our December 6, 2022, article, the determination letter program has expanded availability to individually designed Section 403(b) plans.)
• Sections 6.02 and 16 are revised to provide that Form 5307, Application for Determination for Adopters of Modified Nonstandardized Pre-Approved Plans, and Form 5316, Application for Group or Pooled Trust Ruling, may be submitted electronically beginning June 1, 2023, and must be submitted electronically beginning July 1, 2023, including payment of the user fee.
• Sections 3 and 31 and Appendix A reflect the temporary suspension of the opinion letter program for prototype IRAs (traditional, Roth and SIMPLE IRAs), SEPs (including salary reduction SEPs (SARSEPs)), and SIMPLE IRA plans.
• Section 9.02 reflects changes to the scope of determination letters.
• Appendix A has been modified to increase certain user fees.
• A new Appendix G has been added, which provides a checklist for applications for nonbank trustee approval letters.

Retirement plan sponsors who may apply for a determination letter or request a private letter ruling should familiarize themselves with this updated guidance.

Internal Revenue Bulletin: 2023-01 »

On January 12, 2023, the Pension Benefit Guaranty Corporation (PBGC) published revised civil penalty amounts for failure to provide certain notices or other material information, as required by ERISA. The amounts apply to penalties assessed on or after the publication date. The adjusted maximum amounts are $2,586 (up from $2,400) for Section 4071 penalties and $345 (up from $320) for Section 4302 penalties, which are related to multiemployer plan notices.

PBGC Revised Penalties »

On December 30, 2022, the IRS proposed regulations to permanently change retirement plan rules that require certain participant elections and spousal consents to be witnessed in the physical presence of a notary or plan representative. If specified conditions are met, the proposed regulations will allow affected qualified retirement plans to also accept remote notarization or witnessing by a plan representative.

IRS regulations have historically required that certain participant elections and spousal consents (e.g., a defined benefit plan lump sum distribution) be physically witnessed by a notary public or plan representative. However, in Notice 2020-42, the IRS provided temporary COVID-19 relief from the physical presence requirement and allowed the use of an electronic medium for participant elections and spousal consents. This relief was extended several times but was set to expire at the end of 2022. The proposed regulations make this relief permanent, with modifications.

Under the proposed regulations, a participant election or spousal consent witnessed remotely by a notary public or plan representative must satisfy the general requirements for participant electronic elections. Under these requirements, the electronic system must be one that the individual making the election can effectively access and that is reasonably designed to prevent anyone else from making the election. The system must also give the individual a reasonable opportunity to review, confirm, modify or rescind the election before it becomes effective and provide a compliant paper or electronic election confirmation within a reasonable time.

Additionally, for a plan to accept remote witnessing by a notary public, the notary public must witness the signature of the individual (e.g., spouse) signing the consent using live audio-video technology and adhere to applicable state laws.

If a plan representative performs the remote witnessing, the process must also meet the following requirements:

• The individual signing must present a valid photo ID during the live audio-video conference.
• The live audio-video conference must allow for direct interaction between the individual and plan representative.
• The individual must transmit (via fax or electronic means) a copy of the signed document directly to the plan representative on the same date it was executed.
• The plan representative must acknowledge the signature has been witnessed by the plan representative in accordance with these requirements and must send the executed document (and acknowledgment) back to the individual using a compliant notice system.
• The plan representative must record the live audio-video conference and retain the recording in accordance with plan document retention requirements. (This is an additional requirement that was not reflected in the temporary relief.)

Retirement plan sponsors should be aware of the proposed regulations and may welcome the flexibility to allow remote witnessing on a permanent basis. However, sponsors are not required to permit remote witnessing. If the sponsor chooses to do so, remote witnessing cannot be the sole option. (Sponsors must still accept notarizations witnessed in the physical presence of a notary.)

Comments on the proposed regulations are being accepted through March 30, 2023, and a telephonic public hearing has been scheduled for April 11, 2023, at 10:00 a.m. Final regulations, once issued, are proposed to apply six months after publication in the Federal Register. Sponsors are permitted to rely upon the proposed regulations in the interim.

Sources

NFP Compliance Corner

Govinfo.gov, IRS Proposed Rule - December 30, 2022 (PDF)

On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 (HR 2617) into law. The main purpose of this legislation is to continue funding certain government operations. However, the bill also adopts the SECURE 2.0 Act of 2022 (SECURE 2.0) relating to retirement plans.

SECURE 2.0 follows the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which was passed as part of the 2020 appropriations bill. (You can read about the SECURE Act in the January 7, 2020, edition of Compliance Corner.) SECURE Act 2.0 introduces new provisions affecting how retirement plans are offered, and it amends some of the provisions found in the SECURE Act.

As background, SECURE 2.0 comes after multiple follow-ups to the SECURE Act that were introduced in the House and Senate. First, the Securing a Strong Retirement Act was passed in the House in March 2022. Next, the Senate Health, Education, Labor and Pensions Committee approved a version known as the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act in June 2022. Finally, the Senate Finance Committee approved the Enhancing American Retirement Now (EARN) Act in September 2022. SECURE 2.0 includes provisions from each of those bills.

SECURE 2.0 is broken up into seven titles, and some of the major provisions affecting employer-sponsored retirement plans are summarized as such:

• Title I: Expanding Coverage and Increasing Retirement Savings
  • Requires new 401(k) and 403(b) plans to institute automatic enrollment and escalation. (Sec. 101)
  • Increases start-up credit for small employers who begin to offer retirement plans to their employees. (Sec. 102)
  • Changes the federal Saver's Credit to a Saver's Match that will be deposited into taxpayers' retirement plan or IRA and provides that the Treasury will publicize the match. (Secs. 103 and 104)
  • Allows 403(b) plans to participate in open multiple employer plans (MEPs) and pooled employer plans (PEPs). (Sec. 106)
  • Increases the age for required minimum distributions from age 72 (as provided in the SECURE Act) to age 73 beginning in 2023 and age 75 beginning in 2033. (Sec. 107)
  • Indexes the IRA catch-up limit and allows for additional catch-up contributions at ages 60, 61, 62 and 63. (Secs. 108 and 109)
  • Allows student loan repayments to be treated as elective deferrals for retirement plan matching purposes. (Sec. 110)
  • Allows an annual tax-free distribution for emergency expenses. (Sec. 115)
  • Permits automatic portability transfers from a terminating employee's IRA to their new employer's retirement plan. (Sec. 120)
  • Changes SECURE Act provision requiring eligibility for long-term part-time workers to require that participation be offered to employees working part-time for two years (down from the three years required in the SECURE Act). (Sec. 125)
  • Allows for transfers from 529 plans to Roth IRAs, provided certain conditions are met. (Sec. 126)
  • Permits the creation of emergency savings accounts for non-highly compensated employees to use in conjunction with their defined contribution plans. (Sec. 127)
  • Enhances 403(b) plans by allowing them to utilize collective investment trusts. (Sec. 128)
• Title II: Preservation of Income
  • Amends the requirements imposed on qualifying longevity annuity contracts (QLACs). (Sec. 202)
  • Creates insurance-dedicated exchange-traded funds. (Sec. 203)
• Title III: Simplification and Clarification of Retirement Plan Rules
  • Allows plan sponsors to choose not to recoup overpayments made to retirees. (Sec. 301)
  • Reduces the tax penalty for failure to take required minimum distributions from 50% to 25% (and to 10% if the distribution is from an IRA and the failure is corrected in a timely manner). (Sec. 302)
  • Instructs DOL to create online database retirement savers can use to locate any pension or 401(k) they've lost track of. (Sec. 303)
  • Increases the limit for employers to automatically distribute out terminated employees to $7,000 (up from $5,000). (Sec. 304)
  • Expands the Employee Plans Compliance Resolution System (EPCRS). (Sec. 305)
  • Limits repayment of qualified birth or adoption distributions to three years. (Sec. 311)
  • Allows employers to accept employee self-certification of the need for hardship withdrawals. (Sec. 312)
  • Provides opportunity to amend plan to increase benefits through the employer's tax return due date. (Sec. 316)
  • Limits the notices employers must provide to unenrolled but eligible participants of the retirement plan. (Sec. 320)
  • Requires paper statements be provided once annually for defined contribution plans and once every three years for defined benefit plans. (Sec. 338)
• Title IV: Technical Amendments
  • Makes certain technical and clerical changes to the SECURE Act. (Sec. 401)
• Title V: Administrative Provisions
  • Allows for plan amendments reflecting SECURE 2.0 changes to be made on or before the last day of the first plan year beginning on or after January 1, 2025 (or 2027 for governmental plans). (Sec. 501)
• Title VI: Revenue Provisions
• Title VII: Tax Court Retirement Provisions

Like the SECURE Act, this legislation will overhaul of many of the retirement regulations that have been in place for decades. Some provisions of the bill are effective upon enactment; others are effective for plan years beginning January 1, 2023, while others will become effective at later dates. Retirement plan sponsors should work with their plan advisers, recordkeepers and other service providers to amend their plan as necessary.

Consolidated Appropriations Act, 2023 (SECURE Act begins on page 817) »