On September 28, 2021, the IRS released an issue snapshot on deemed distributions of participant loans. Issue Snapshots represent the IRS’ periodic research summaries on tax-related issues. This snapshot discusses the compliance failures that will cause a participant loan from a retirement plan to be treated as a distribution for tax purposes.
Regulations require participant loans to meet certain requirements. Namely, loans must be operated pursuant to a legally enforceable agreement that provides a repayment schedule with level payments that occur no less frequently than quarterly. The loans must be limited to the lesser of $50,000 or the greater of 50% of the participant’s vested benefit or $10,000. The loan repayment term must also be limited to five years.
If those requirements are not met, then a deemed distribution occurs and the participant will have to pay taxes on the loan amount. The snapshot discusses the cure period that a participant may avail themselves of in the event of a late payment and the CAREs Act relief that allowed participants to take larger loans.
The snapshot provides tips to employers on how to comply with the retirement plan rules and indicates how an IRS investigator would approach certain compliance failures.
On September 14, 2021, the Department of Labor, Department of the Treasury, and Pension Benefit Guaranty Corporation (collectively, “agencies”) released proposed rules regarding changes to the Form 5500 requirements, most of which will affect the filing requirements for retirement plans. The proposed changes include both revisions to the content of the forms and changes to certain Form 5500 regulations.
Employers that sponsor ERISA benefit plans have compliance obligations regarding the annual filing of Form 5500, which is generally due within seven months of the close of the plan year (unless an extension is filed). Form 5500, including all required schedules and attachments, is used to report certain funding and operational information to the DOL concerning employee benefit plans subject to ERISA. In addition, failure to comply with the Form 5500 filing requirements timely can result in penalties under both ERISA and the IRS Code.
The proposed changes mostly incorporate amendments to the Code and ERISA as originally made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. (For an overview of the SECURE Act, see the article from the January 7, 2020, edition of Compliance Corner, “SECURE Act Adopted in Government Appropriations Bill.”)
Highlights of the proposed changes (which are quite extensive) include, but are not limited to:
As mentioned, these rules are only proposed at this time and are not yet final. Comments on the proposed rules are being solicited and must be received by the DOL on or before November 1, 2021. If adopted, the proposed changes would generally be effective for plan years beginning on or after January 1, 2022; however, changes to reporting requirements for MEPs would apply for plan years beginning on or after January 1, 2021.
Employers should be aware of these developments, and we will continue to monitor and communicate any updates accordingly.
On September 1, 2021, the IRS released Rev. Proc. 2021-37, which modifies the opinion letter procedures for pre-approved § 403(b) plans to be more consistent with the procedures applicable to pre-approved qualified § 401(a) plans. The guidance also addresses the deadlines for plan amendments to comply with § 403(b) requirements.
An opinion letter is a written statement issued by the IRS that indicates whether the form of a plan document satisfies the applicable Code requirements. The opinion letter process requires the plan document to be submitted to the IRS within certain prescribed timeframes or cycles. Previous guidance, including Rev. Proc. 2013-22, outlined the submission process for the initial or Cycle 1 pre-approved § 403(b) plan opinion letters. Rev. Proc. 2021-37 describes the submission process for Cycle 2 opinion letters.
The updates under Rev. Proc. 2021-37 include the elimination of the distinction between prototype and volume submitter plans. Essentially, these plans will now be covered by one program for standardized and non-standardized documents. The document format can be either a single document or an adoption agreement plan.
An employer who amends a non-standardized plan document could potentially lose reliance upon an issued opinion letter. However, the procedures allow such an employer to file Form 5307 to request an individual determination letter for the plan.
The IRS intends to issue a cumulative list of changes that identifies the requirements that the IRS will take into account in reviewing § 403(b) pre-approved plans submitted for Cycle 2. This list will be provided prior to the beginning of the Cycle 2 on-cycle submission period, which will run from May 2, 2022, to May 1, 2023.
Rev. Proc. 2021-37 extends the deadline for making interim amendments with respect to a change in
§ 403(b) requirements, for most plans, until the end of the second calendar year following the calendar year in which the change is effective. The procedure also addresses the limited extension of the Cycle 1 remedial amendment period, which otherwise ended on June 30, 2020.
Additionally, the procedure provides rules for allowing employees of church-related organizations to participate in a 403(b) approved plan intended to be a retirement income account, and guidance regarding the corresponding required amendments.
Sponsors of 403(b) retirement plans should be aware of the updated opinion letter procedures and consult with their counsel and document providers for further information. The IRS invites comments regarding Rev. Proc. 2021-37, which can be submitted in accordance with the instructions provided therein.
On August 23, 2021, the IRS released an issue snapshot on the expansion of the types of plans that can roll funds over into a SIMPLE IRA. Issue Snapshots represent the IRS’ periodic research summaries on tax-related issues. This snapshot describes the SIMPLE IRA changes made by the Protecting Americans from Tax Hikes Act of 2015 (the Act).
Before the Act, SIMPLE IRAs could only accept rollover contributions from other SIMPLE IRAs. The Act expanded the types of plans from which SIMPLE IRAs can accept rollovers to include SEP IRAs, 401(k), 403(b) and 457(b) plans if specific requirements are met. Namely, the following restrictions apply:
Retirement plan sponsors should keep this guidance in mind as they administer participant rollovers.
In the August 6, 2021, edition of Employee Plan News, the IRS clarified a provision of the SECURE Act regarding plan adoption. Effective January 1, 2020, the SECURE Act permits an employer to adopt a retirement plan after the close of the employer’s tax year. The employer may treat the plan as having been adopted as of the last day of the taxable year as long as the adoption occurs by the tax return due date (including extensions).
The IRS has now clarified that if an employer adopted a plan in 2021 and treats the plan as having been adopted as of the last day of the employer’s 2020 tax year, the plan sponsor will not be required to file a Form 5500 for the plan year that begins in 2020. Instead, the first filing will be the 2021 Form 5500 on which the plan sponsor will indicate the retroactive adoption of the plan.
On July 28, 2021, the Court of Appeals for the Seventh Circuit held that ERISA did not preempt a claim for state-law breach of corporate fiduciary duties but did preempt a state-law claim for aiding and abetting. In Halperin v. Richards (7th Cir., No. 20-2793, July 28, 2021), the trustees of the Chapter 11 bankruptcy for Appvion filed suit alleging that Appvion’s directors and officers had inflated the company’s stock value to conceal the company’s financial decline and benefit themselves.
Specifically, Appvion was wholly owned by employees through the company’s employee stock ownership plan (ESOP), and the bankruptcy trustees accused the officers and directors of fraudulently inflating the ESOP’s valuations with assistance from the ESOP trustee and its independent appraiser. Accordingly, the bankruptcy trustees filed suit against the directors and officers for breaching their corporate fiduciary duties and against the ESOP trustee and appraiser for aiding and abetting those breaches.
The defendants in the case moved to dismiss all the claims on the theory that their roles in Appvion’s ESOP valuations were governed by ERISA, causing ERISA to preempt state law. The district court agreed with the defendants, dismissing all the claims. But on appeal, the Seventh Circuit reversed the district court as to the claims for corporate fiduciary breach (against the directors and officers) and affirmed the district court as to the claims for aiding and abetting (against the ESOP trustee and appraiser).
In coming to those opposite conclusions, the court analyzed precedence on ERISA preemption. The court decided that ERISA did not preempt state laws on corporate breach of fiduciary duties because the executives in question served in dual capacities. Although ERISA’s “exclusive benefit rule” is paramount and requires that fiduciaries act solely in the interest of ERISA beneficiaries, ERISA also allows for corporate insiders to serve as ERISA fiduciaries. As such, the court held that it was possible for parallel state-law liability against executives who serve in dual roles.
The court also reasoned that if they were to decide that ERISA preempts state law in regard to claims for breach of corporate fiduciary duty, it would leave parties like the plaintiffs without any recourse against the malfeasance of corporate actors serving in dual capacities.
On the other hand, the court found that the ESOP trustee and independent appraiser were involved in the case in a singular role under ERISA. Since they did not have a separate corporate obligation for which the plaintiffs could bring a claim, the court held that ERISA did preempt state aiding and abetting laws against the ESOP trustee and appraiser.
Ultimately, this case serves as a reminder to corporate officers that they could be subject to both ERISA and state laws designed to protect the interests of corporations and their stakeholders.
On August 11, 2021, the IRS released an Issue Snapshot focusing upon the universal availability requirement applicable to 403(b) plans (excluding church plans). The analysis was designed to address a common error with respect to the exclusion of certain employees from plan participation.
Under the universal availability rule, all employees of the 403(b) plan sponsor must be eligible to make elective deferrals if any employee has the right to do so. There are limited exceptions to this rule, including one for certain part-time employees. However, part-time employees cannot be excluded as a general class, such as part-time, temporary or seasonal employees. Rather, such employees can only be excluded if they “normally work less than 20 hours per week.”
An employee is considered to normally work less than 20 hours per week if, during the 12-month period beginning on the employee’s hire date (the initial year), the employer reasonably expects the employee to work fewer than 1,000 hours, and for each plan year ending after the close of the initial year (or subsequent 12-month period), the employee actually works fewer than 1,000 hours. If an employee does not satisfy these requirements for any year (for example, by working more than 1,000 hours), the employee can no longer be excluded from making elective deferrals under the part-time exclusion in any future year (regardless of how few hours the employee works in such future year).
The Issue Snapshot also emphasizes that eligible employees must be given an effective opportunity to participate in the plan, which includes notice of eligibility and the period and conditions for elections. At least once during the plan year, the employee must be able to make or change deferral elections, including, as applicable, catch-up or Roth contributions, up to the dollar limits in effect.
Although the Issue Snapshot is not an official announcement of the law that can be cited as precedent, employers who sponsor 403(b) plans may find this internal analysis helpful. Employers may want to review their plan documents and operations to ensure that any exclusion of part-time employees is in accordance with this guidance. In the event of past exclusion failures, employers should consult counsel regarding possible transition relief under IRS Notice 2018-95.
In July, the Pension Benefits Guarantee Corporation (PBGC) hosted a couple of webinars on the special financial assistance (SFA) for financially troubled multiemployer plans that was provided by the American Rescue Plan Act (ARPA). The 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. (See the July 20, 2021, edition of Compliance Corner for more information on the SFA provided through the ARPA.)
The two webinars hosted by the PBGC provided detailed information on the SFA, including the application and review process for plans seeking to claim SFA. They also provided information on the filing process, specifically showing attendees how to complete a filing.
Multiemployer plan sponsors that will seek to apply for SFA funds should review these webinars for pertinent information.
On July 26, 2021, the DOL released temporary implementing FAQs regarding lifetime income illustrations for ERISA defined contribution plans, which include 401(k) and 403(b) plans. The FAQs largely address questions regarding the timing of the new disclosures to plan participants.
The SECURE Act of 2019 amended ERISA to require that, at least annually, defined contribution plan benefit statements reflect a participant’s account balance as an equivalent lifetime income stream. The income stream must be calculated as a monthly benefit, payable as both a single life annuity and a qualified joint and survivor annuity. On September 18, 2020, the DOL published an interim final rule (IFR) that provided calculations for these lifetime income streams and model language for incorporation in the benefit statements. (For our prior summaries on the IFR, see our previous Compliance Corner articles here and here.)
The FAQs clarify that for participant-directed account plans that provide quarterly statements, the lifetime income illustrations must be included on at least one statement in each 12-month period. The first disclosure must occur within a year of the IFR’s September 18, 2021 effective date. So, for example, a 401(k) plan would need to include the first illustration on any one quarterly statement through the quarter ending June 30, 2022.
For plans that do not allow participants to direct investment of their account assets, the illustrations must be provided on the statement for the first plan year ending on or after September 19, 2021. For most of these plans, the lifetime income information would be included on the statement for the 2021 calendar year, which must be provided to participants no later than the October 15, 2022 (the last date for timely filing the plan’s 2021 Form 5500, assuming the plan sponsor filed for an extension of the July 31 deadline).
Finally, the FAQs indicate that the DOL intends to issue a final rule soon based on comments received in response to the IFR. The DOL also recognized that if the final rule differs materially from the IFR, burdens would be placed on plan administrators if sufficient transition time is not provided to accommodate such changes.
Employers who sponsor defined contribution plans should be aware of this new guidance and work with their service providers to ensure the required illustrations will be timely incorporated in the benefit statements provided to plan participants.
The IRS recently released Rev. Proc. 2021-30, which modifies the Employee Plans Compliance Resolution System (EPCRS). Rev. Proc. 2021-30 supersedes the prior version of EPCRS under Rev. Proc. 2019-19, and generally became effective on July 16, 2021.
EPCRS permits sponsors of retirement plans to correct operational and plan document failures that may impact a plan’s tax qualified status. The EPCRS Self-Correction Program (SCP) allows for correction of insignificant errors or significant errors within specific timeframes without an IRS filing or fee payment.
Significant errors not eligible for SCP can generally be corrected by submitting a Voluntary Correction Program (VCP) application that describes the error and proposed correction, along with the applicable fee payment. The program provides specific safe harbor correction methods for common failures.
Rev. Proc. 2021-30 reflects several important changes to EPCRS, including an extension of the SCP correction period for significant failures by one year (from two to three years following the year in which the failure occurred). Accordingly, plan sponsors have extra time to identify and self-correct certain errors (such as employee elective deferral failures) and thus avoid the VCP process and related fee.
The updated guidance also reinstates the safe harbor correction method for automatic contribution arrangement failures through December 31, 2023. (The prior relief expired on December 31, 2020.)
Additionally, Rev. Proc. 2021-30 expands the ability of a plan sponsor to correct operational failures under SCP via retroactive plan amendment. Under certain conditions, a plan sponsor can now adopt an amendment that increases a plan benefit, right or feature even if the increase applies only to a subgroup of participants (as opposed to all eligible participants, which was previously required).
Notably, the new guidance replaces the prior VCP anonymous submission procedure with an anonymous, no-fee, VCP pre-submission conference procedure. This change is effective January 1, 2022. The conference, which is held at the discretion of the IRS, is designed to allow a representative of a plan sponsor to discuss a proposed correction for a complex failure with the IRS before submitting a VCP application and identifying the plan sponsor. The IRS will provide oral commentary on the error and proposed correction, but the advice will not be binding.
Rev. Proc. 2021-30 also expands the prior guidance regarding recoupment of plan overpayments in several ways. Under the updated procedures, the de minimis threshold for requiring repayment is increased from $100 to $250. If repayment is necessary, participants can be given the option of repayment through a lump sum, installments or by reducing future benefits. Furthermore, for defined benefit plans, no repayment or corrective contribution may be necessary, depending upon the plan’s funding level.
Sponsors of retirement plans should be aware of the updated EPCRS procedures. Comments regarding Rev. Proc 2021-30 can be submitted to the IRS no later than October 14, 2021.
On July 22, 2021, the IRS published a Voluntary Correction Program (VCP) Submission Kit for employers who sponsored a SIMPLE IRA but were ineligible to do so because they had more than 100 employees or sponsored another retirement plan. Employers are only eligible to sponsor a SIMPLE IRA if they have 100 or fewer employees and do not offer any other retirement plan. The VCP Submission Kit provides the steps employers can follow in correcting the mistake of sponsoring a SIMPLE IRA without being eligible.
Specifically, the kit provides a list of the documentation that will be required to apply for VCP relief, including descriptions of the information required to complete a VCP submission compliance statement. The guidance also provides steps on how to submit the VCP application and pay the VCP fee.
Employers who determine that they have incorrectly sponsored a SIMPLE IRA should work with their service provider or counsel to determine if this VCP submission kit is necessary.
On July 23, 2021, the IRS issued a notice of proposed rulemaking, amending the rules for electronically filing certain partnership, corporate income tax, unrelated business income tax, withholding tax, and excise tax returns. The proposed rule requires entities that will file more than 100 forms to file electronically, lowering the threshold from 250 returns to 100 returns. Additionally, the proposed rule clarifies that an entity would aggregate all the required forms when determining if they meet the 100-return threshold. The 100-return threshold will also decrease to 10 returns for any form filed in calendar year 2022.
The employee benefit plan-related information returns that would be subject to this proposed rule include the following:
As with previous guidance, entities that are unable to file electronically may request a waiver from the IRS. Employer plan sponsors who complete any of the forms listed above should consult with their counsel or service providers to ascertain their obligation to file with the IRS electronically.
On July 9, 2021, the Pension Benefit Guarantee Corporation (PBGC) issued interim final rules and assumptions on special financial assistance (SFA) for multiemployer pension plans, as provided by the American Rescue Plan Act (ARPA). The 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 interim final rule discusses how the SFA amount will be calculated, the order in which plans will be permitted to file SFA applications, details on what must be included in applications, how the PBGC will go about reviewing SFA submissions, and the conditions that will apply to plans that receive the SFA.
In determining eligibility for and the amount of SFA, ERISA generally looks to the plan assumptions previously selected by the actuaries. However, the ARPA also allows plans to propose changes to those assumptions (except for the interest rate) if they are no longer reasonable. The PBGC provided guidance on acceptable assumption changes in PBGC SFA 21-02.
Simultaneously with the release of the interim final rules and assumptions guidance, the IRS released Notice 2021-38 to provide guidance to multiemployer plan sponsors that must reinstate certain previously suspended benefits as a condition of receiving SFA. The guidance also clarifies that make-up benefits paid to individuals as a result of the reinstatement of previously suspended benefits may be paid in a lump sum within three months of the receipt of SFA funds or in equal monthly installments over the five year period beginning three months after the receipt of SFA funds. Additionally, the SFA funds received are not taken into account if a multiemployer plan needs to make certain contributions to avoid funding deficiencies. Finally, the IRS guidance indicated that multiemployer plans with suspended benefits must submit an SFA application to the Department of the Treasury, but this requirement will be satisfied if they send the application to the PBGC.
Multiemployer plan sponsors that will seek to apply for SFA funds should familiarize themselves with this guidance and consult with their counsel and tax advisors in complying with the requirements.
On June 24, 2021, the IRS released Notice 2021-40, which extends the COVID-19 temporary relief from the physical presence requirement for certain retirement plan elections. The notice also requests comments regarding whether changes to the physical presence requirement should be adopted on a permanent basis.
Under IRS regulations, certain retirement plan participant elections (such as a spousal consent to a waiver of a qualified joint and survivor annuity) must be witnessed in the physical presence of a plan representative or a notary public. An electronic system can be used to satisfy the physical presence requirement, if the system provides the same safeguards for the elections.
Previously, the IRS issued Notice 2020-42, which provided relief in 2020 from the physical presence requirement for participant elections witnessed by a notary public of a state that permits remote electronic notarization or a plan representative, if certain conditions were satisfied. Subsequent Notice 2021-3 extended this relief through June 30, 2021. (For further details on IRS Notice 2020-42 and IRS Notice 2021-3, please see, respectively, our June 9, 2020, and January 5, 2021, Compliance Corner editions.)
Notice 2021-40 provides an additional 12-month extension of this temporary assistance, through June 30, 2022. The relief is optional; i.e., a participant is still able to have an election witnessed in the physical presence of a notary accepted by a plan.
Additionally, the IRS is seeking comments on whether relief from the physical presence requirement should be made permanent. Specifically, feedback is sought regarding whether such a change would impact costs and burdens for all parties (e.g., participants, spouses and plans) or result in fraud, spousal coercion or other abuse. The agency is also inquiring as to how participant elections are being witnessed, or are expected to be witnessed, as the COVID-19 pandemic abates. Furthermore, in the event of a permanent change, comments are requested regarding necessary procedures to safeguard participant elections and whether the procedures for witnessing by plan representatives should be different from those applicable to notaries.
Sponsors of retirement plans should be aware of the further extension of temporary relief from the physical presence requirement for participant elections. Those wishing to provide comments regarding potential permanent changes to the requirement must do so in writing by September 30, 2021.
On June 11, 2021, the IRS updated the Funding Deficiencies Strategy section of their Employee Plans Compliance Unit (EPCU) webpage. Funding deficiencies generally occur when a defined benefit plan has failed to make the minimum required contributions to sustain the solvency of the plan. The EPCU conducts compliance checks and performs data analysis, focusing on areas of potential noncompliance (such as funding).
The Funding Deficiencies Strategy section of the webpage explains EPCU’s procedure when a funding deficiency is reported on a filed return, such as a Form 5500. When addressing that deficiency, the EPCU contacts fiduciaries to determine whether the funding deficiency was corrected, the required excise tax returns were filed, and appropriate taxes paid. If the minimum required contributions have actually been made, then the EPCU can also assist the fiduciary in identifying and correcting errors in their forms.
This guidance does not provide any new compliance requirements; the EPCU simply indicates their process for addressing issues so that plan fiduciaries are aware of the steps that may be taken to ensure compliance. Any employer who receives a letter from the EPCU should work with their service providers to fully cooperate with the request.
On June 3, 2020, the IRS updated their operational compliance list (“OC List”) to recognize the final regulations relating to required minimum distributions and eligibility for long-time part-time workers, further reflecting all the changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The OC List is provided by the IRS to help plan sponsors and practitioners achieve operational compliance by identifying changes in qualification requirements effective during a calendar year.
Specifically, the updated list incorporated the final regulations relating to the updated life expectancy and distribution period tables used for determining required minimum distributions. It also incorporated Notice 2020-68, which provides a question and answer related to long-term part-time employees under the SECURE Act. (We discussed the SECURE Act at length in the January 7, 2020, edition of Compliance Corner.) Finally, the changes effective in 2021 include an extension of the temporary relief from the requirement for spousal consents to take place in person.
The IRS periodically updates the OC List to reflect new legislation and guidance. As such, it is a useful tool for plan sponsors. However, the list is not intended to be a comprehensive list of every item of IRS legislation or guidance. Plan sponsors should work with their advisors to ensure their continued compliance with the retirement plan regulations.
On May 6, 2021, the US Court of Appeals for the Ninth Circuit (appellate court) affirmed a lower court's ruling in Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Ret. Sav. Program, 2021 WL 1805758 (9th Cir. 2021) that the CalSavers Retirement Savings Program is not preempted by ERISA. Specifically, the appellate court does not consider the program to be an ERISA plan, nor does it place additional requirements on an employer. Under the program, only employers who have chosen not to adopt an ERISA plan would be required to participate.
Beginning June 30, 2020, California employers with more than 100 employees must offer employees a qualified retirement plan (such as a 401(k)) or participate in the state-run retirement savings program known as CalSavers. The requirement applies to employers with 51 to 100 employees on June 30, 2021, and to employers with five or more employees on June 30, 2022. For these purposes, employer size is based on the number of California-based employees reported on the Employment Development Department quarterly report.
Before the applicable deadline, employers must sponsor a qualified retirement plan or register with CalSavers. Under CalSavers, an employer must automatically enroll eligible employees in the retirement program with a contribution of at least 3% of earnings. New employees must be enrolled within 30 days of employment. Employees may choose to opt out of the program.
If an employer fails to comply for up to 90 days, a penalty of $250 per employee could be assessed against the employer. If noncompliance continues, the per-employee penalty could increase to $500.
Employers with five or more employees in California should continue compliance efforts in either maintaining an employer sponsored retirement plan or registering with CalSavers, based on size and applicable effective date.
The ruling will also be of interest to all employers as more than half of the states have either adopted similar programs or have established Task Forces to research the issue. The cities of New York and Seattle have also adopted a similar government-run autoenrollment savings program.
The appellate court’s decision indicates that such plans may not be preempted by ERISA, clearing the way for states to impose these requirements.
On April 27, 2021, the IRS updated a set of questions and answers concerning coronavirus-related retirement plan relief by adding five questions clarifying the partial plan termination relief provided through the Consolidated Appropriations Act of 2021 (CAA).
The CAA provided relief from the requirement that employees be 100% vested in employer contributions should a partial plan termination occur. Under those rules, an employer terminating 20% or more of its workforce would trigger a partial plan termination (which would require the employer to vest their employees at 100%). The CAA stated that a company would not trigger a partial plan termination during the period beginning March 13, 2020, and ending March 31, 2021, if on the latter date the plan had at least 80% of the active participants that were enrolled on the former date.
The Q&As clarify a few concepts concerning this relief. Q&A two addresses how employers should determine who is an active participant in the plan by indicating that employers should apply a reasonable, good-faith interpretation of that term and apply it consistently.
Q&A three discusses how the CAA relief would apply when only a portion of the plan year falls between March 31, 2020, and March 31, 2021. When that occurs, the CAA relief applies to any partial termination determination for the entire plan year. The IRS then provided an example:
If a plan has a calendar year plan year, the 80% partial termination test in Section 209 of the Relief Act applies to both the January 1 to December 31, 2020, plan year and the January 1 to December 31, 2021, plan year, because both plan years include a part of the statutory determination period of March 13, 2020, to March 31, 2021.
Q&A four makes it clear that employers do not have to have the exact same employees covered by the plan by March 31, 2021, to benefit from this relief. Instead, for purposes of determining whether at least 80% of the active participants covered by the plan on March 13, 2020, were also covered by the plan on March 31, 2021, active participants include all individuals actively participating on March 31, 2021, regardless of whether those same individuals were participants in March 2020.
Finally, Q&A five indicates that the relief under the CAA does not solely apply to reductions in the number of participants that occurred due to the COVID-19 national emergency. The reductions could have occurred for any reason.
Employers who are seeking to receive relief under the CAA’s partial plan termination provision should familiarize themselves with these Q&As and work with their service providers to ensure compliance.
The IRS published a revised Publication 4484, Choose a Retirement Plan for Employees of Tax-Exempt and Government Entities. In this edition of the publication, the IRS reviews eight types of retirement plans available to employees of tax-exempt entities such as churches or charities. The publication provides the latest tax laws specific to each retirement plan and has been revised to reflect 2021 annual limitations.
The publication also provides basic information about each plan's benefits in the form of a summary table, which helps tax-exempt entities find the plans that best fit them and their employees. It allows users to click on the plan tabs to view and compare the complete details on each plan. It also provides a list of other IRS publications that may provide helpful information and resources for establishing retirement plans.
The publication's goal is to show tax exempt and government entities that offering a retirement plan helps employees save for the future and may also help an organization attract and retain qualified employees.
On April 22, 2021, the IRS released the final instructions for Form 5310, Application for Determination for Terminating Plan. The instructions are updated periodically to reflect any regulatory or reporting changes.
A plan sponsor of a terminating retirement plan has the option of filing Form 5310 to request an IRS determination on the plan’s qualification status at the time of termination. The issuance of a favorable letter provides assurance that eligible participant distributions can be rolled over to another qualified plan or individual retirement account.
The instructions delineate how the form should be completed and describe the necessary supporting documentation. The form and instructions were updated for completion on pay.gov. (As of August 1, 2021, the Form 5310 must be completed electronically on the government website. From April 16, 2021, through July 31, 2021, submissions may be made on paper or electronically.)
Employers that sponsor retirement plans may want to be aware of the updated form instructions.
On April 13, 2021, the DOL issued guidance on fiduciary investment advice for retirement investors, employee benefit plans and investment advice providers. As a reminder, the DOL adopted prohibited transaction exemption (PTE) 2020-02, Improving Investment Advice for Workers & Retirees, in December of 2020. The DOL announced on February 12, 2021, that the prohibited transaction exemption for investment advice fiduciaries would go into effect as scheduled on February 16, 2021. (See our article in the February 17, 2021, edition of Compliance Corner for more information.)
The issued FAQs address PTE 2020-02 and provide information about the DOL’s next steps in its regulation of investment advice. The major sections of the FAQs address the PTE’s background, compliance dates, definition of fiduciary investment advice and compliance with the PTE generally. Importantly, Question #3 indicates that Field Assistance Bulletin 2018 (which outlined the DOL’s temporary enforcement policy) will remain in place until December 20, 2021. Question #5 also mentions that the DOL is reviewing issues of fact, law, and policy related to the PTE, and anticipates taking further regulatory action as appropriate. Questions 10 – 20 outline what investment advisors must do to comply with the PTE, specifically verifying the impartial conduct standards that must be met. Question #21 describes how the DOL will enforce compliance with the PTE.
The DOL also provided a set of FAQs that explains how individuals should go about selecting an investment adviser. The FAQs recommend that individuals ask if their financial advisers are fiduciaries and whether they are in compliance with PTE 2020-02. It also suggests questions concerning fees that will be charged and potential conflicts of interest.
Ultimately, employers should work with their service providers to ensure compliance with PTE 2020-02. They can also point participants to the FAQs concerning choosing an investment adviser.
On April 14, 2021, the DOL’s Employee Benefits Security Administration provided guidance to plan sponsors, fiduciaries, record keepers and plan participants on cybersecurity best practices. This was done in an effort to protect American workers’ retirement benefits. This novel guidance was provided through three documents: 1) Tips for Hiring a Service Provider; 2) Cybersecurity Program Best Practices; and 3) Online Security Tips.
Tips for Hiring a Service Provider. This document assists plan sponsors and fiduciaries in selecting a service provider with strong cybersecurity practices. ERISA requires plan fiduciaries to monitor service providers to ensure that they are maintaining plan records and keeping participant data confidential and plan accounts secure. The DOL suggests several tips that plan sponsors can follow in ascertaining a service provider’s cybersecurity practices.
Cybersecurity Program Best Practices. This document provides a list of best practices for use by recordkeepers and other service providers responsible for plan-related IT systems and data. Plans’ service providers should:
Online Security Tips. This document is geared towards plan participants and beneficiaries and provides tips on reducing the risk of fraud and loss when accessing their retirement accounts online. The document encourages individuals to:
Employers should familiarize themselves with the DOL’s suggestions pertaining to cybersecurity. The guidance indicates that the DOL considers this an element of plan sponsors’ fiduciary duties, so employers should work to minimize the risk of cybersecurity breaches.
The IRS has issued a summary of the top mistakes made by plan administrators utilizing the Voluntary Correction Program (VCP). As a reminder, the VCP is a way for retirement plans to receive IRS approval on corrections to plan documents or operational failures that would otherwise jeopardize the plan's tax-favored or qualified status. Thus, it is important the submission is free of errors to avoid denial of the submission or a delayed approval.
The top errors include:
Please see the guidance for a complete discussion and for helpful resources including instructional videos and helpline numbers.
On March 22, 2021, the IRS released the draft instructions for Form 5310, Application for Determination for Terminating Plan. The IRS updates the form instructions annually for clarification purposes and to incorporate any regulatory or reporting changes.
As background, the Form 5310 can be filed by a plan sponsor of a terminating pension, profit-sharing or other deferred compensation plan (other than a multi-employer plan covered under Pension Benefit Guaranty Corporation insurance) to request an IRS determination on the plan’s qualification status at the time of termination. The IRS does not require the form to be filed. However, the issuance of a favorable letter provides assurance that eligible participant distributions can be rolled over to another qualified plan or individual retirement account.
The instructions provide line-by-line specifications for the form’s completion and outline the required supporting documentation. The draft was updated for completion on pay.gov. (As of August 1, 2021, the Form 5310 must be completed electronically on the government website. From April 16, 2021, through July 31, 2021, submissions may be made on paper or electronically.)
Employers that sponsor retirement plans may want to be aware of the availability of the draft instructions. However, the instructions should not be relied upon until the final version is issued.
On March 10, 2021, the DOL’s EBSA issued a statement explaining that it will not enforce final rules concerning ESG investments and proxy voting. The rules, entitled Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, restricted fiduciaries’ use of nonfinancial factors (environmental, social and governance [ESG] criteria) when making certain retirement plan investment decisions and imposed certain requirements on fiduciaries concerning proxy voting and other shareholder rights, respectively. (See our prior Compliance Corner articles “DOL Finalizes Investment Duties Rules” from the November 10, 2020 edition and “DOL Finalizes Rule on Shareholder Rights, Including Proxy Voting” from the December 22, 2020 edition for more information about these rules).
The DOL intends to revisit both rules because the agency received feedback regarding the scope and impact of the rules, among other issues. Accordingly, the DOL will not enforce the final rules until the agency publishes further guidance. In addition, the agency will not pursue action due to a failure to comply with the investment duties rule with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights. However, this statement does not prevent the DOL from enforcing any statutory requirements under ERISA.
Employers should be aware of this development. NFP will continue to monitor the status of these rules and communicate any updates accordingly.
On February 12, 2021, the Employee Benefits Security Administration (EBSA) announced that an exemption for investment advice fiduciaries, “Improving Investment Advice for Worker & Retirees,” would go into effect, as scheduled, on February 16, 2021. This rule was finalized under the Trump administration in December 2020. However, the Biden administration announced that they would review certain finalized and pending rules. They have seemingly completed their review of this rule and have allowed it to go into effect.
Among other protections, the exemption includes a best interest standard of care for fiduciary recommendations regarding rollovers from retirement accounts subject to ERISA. (We discussed this rule in the December 22, 2020, edition of Compliance Corner.)
The EBSA anticipates publishing related guidance in the coming days. Importantly, EBSA states that the temporary enforcement policy stated in Field Assistance Bulletin 2018-02 remains in place through December 31, 2021. (See Compliance Corner article “DOL Releases Field Assistance Bulletin Following Fiduciary Rule Revocation” from May 15, 2018, for additional information on FAB 2018-02.)
Plan sponsors should be aware of these developments. We will continue to monitor and communicate additional guidance once issued.
On January 15, 2021, the IRS released Revenue Ruling 2021-3, which provides tables of covered compensation for 2021 plan years. The tables can be used in determining benefits for qualified plans that use a permitted disparity formula for employer-provided contributions or benefits.
A permitted disparity contribution formula allows an employer to provide additional benefits to employees whose compensation exceeds certain levels, such as the social security wage base, without violating applicable non-discrimination requirements. All employees receive employer-provided social security benefits based on their compensation up to the taxable wage base, but not on compensation beyond that level. Under the permitted disparity rules, an employer’s contribution formula can be integrated with social security to take this difference into account, within certain limits.
The regulations define covered compensation as the average of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the employee reaches the social security retirement age. For the 2021 year, the taxable wage base is $142,800. To determine an employee’s covered compensation, a plan can use the IRS tables, which are developed by rounding the actual amounts of covered compensation for different years of birth.
Employers who sponsor retirement plans that use a permitted disparity formula for employer contributions should be aware of the ruling and availability of the updated tables.
The IRS recently issued instructions for Form 5500-EZ, a form used by one-participant plans that are not subject to the requirements of IRC section 104(a) of ERISA.
Effective for plan years beginning after 2019, a one-participant plan or a foreign plan required to file an annual return can file Form 5500-EZ electronically using the EFAST2 filing system or file Form 5500-EZ on paper with the IRS. Form 5500-SF is no longer used by a one-participant plan or a foreign plan in place of Form 5500-EZ.
As a reminder, if a plan fails to file a return, then the penalties are now $250 per day, up to a maximum of $150,000 per plan year. Returns required to be filed after December 31, 2019, are subject to these increased penalties.
Business owners covered by these plans should be aware of the increased penalties that could be imposed if they fail to file.
On January 4, 2021, the IRS released Revenue Procedure (Rev. Proc.) 2021-4, which explains the IRS procedures for issuing determination letters for employee benefit plans and transactions.
Rev. Proc. 2021-4 supersedes Rev. Proc. 2020-4 and updates those procedures by deleting procedures for submitting pre-approved plans for remedial amendment cycles prior to the third cycle and requiring requests for determination letters for plans that result from a plan merger to include the most recent determination letter for each predecessor plan. The update also increases the user fee for determination letter requests filed on Form 5300 to $2,700, the fee for determination requests filed on Form 5307 by adopters of modified volume submitter plans to $1,000, and the fee for requests on Form 5310 for terminating plans to $3,500. The update also requires that requests for determination as to whether leased employees are deemed employees include a cover letter requesting the determination and the additional information described in the procedure.
Employers that may need to request a determination letter should review this guidance and work with their service providers to submit any necessary applications.
On January 12, 2021, the DOL released three documents addressing their policy on missing participants. The first two pieces – “Compliance Assistance Release No. 2021-01” and “Missing Participants – Best Practices for Pension Plans” – identify the steps that defined benefit plan sponsors should take when they are unable to find certain vested participants or beneficiaries. The third piece – “Field Assistance Bulletin No. 2021-01” – outlines the DOL’s temporary enforcement policy regarding the participation of terminated defined contribution plans in the Pension Benefit Guarantee Corporation (PBGC) missing participant program.
As background, employers must often deal with terminated employees they are unable to find. This potentially leads to individuals who do not receive their pension or defined contribution distributions, which is a problem for both the employer and the DOL.
Compliance Assistance Release No. 2021-01 is a document that outlines the DOL’s practices under the Terminated Vested Participants Project (TVPP). Pursuant to the TVPP, the DOL directs defined benefit plans to maintain adequate census and other records necessary to identify participants and beneficiaries that are due benefits under the plan, the amount of benefits due, and when such participants and beneficiaries are eligible to receive the benefits. The release goes on to highlight the circumstances under which TVPP investigations are opened, the information the DOL asks for in such an investigation, the errors they look for and how cases are closed.
In “Missing Participants – Best Practices for Pension Plans” the DOL gives employers examples of the practices they should undertake to ensure that missing participants are found to the best of the employer’s ability. The DOL specifically lays out how employers can go about:
Finally, in Field Assistance Bulletin No. 2021-01, the DOL announces a temporary enforcement policy on employers’ use of the PBGC’s Missing Participants Program when terminating defined contribution plans. As background, the PBGC’s defined contribution missing participants program will hold retirement benefits for missing participants and beneficiaries of terminated defined contribution plans. This bulletin states that the DOL will not pursue any employers who use that program to transfer funds to the PBGC instead of transferring them to an IRA, bank or savings account, or state unclaimed property fund. For an employer to rely upon this temporary enforcement policy, they must follow the program’s rules (including conducting a diligent search for the missing participants). They must also send notices to the participants and beneficiaries that state that the funds are being transferred to the program and include the PBGC’s website address and customer contact number. This temporary enforcement policy will remain in place until the DOL issues regulatory guidance.
Employers should look to these three pieces of guidance for insight into how they should handle terminated and/or missing employees.
The IRS recently released the 2021 Instructions for Forms 1099-R and 5498. Form 1099-R reports distributions from retirement plans, pensions, annuities and IRAs. Form 5498 reports contributions to IRAs. The instructions provide specific guidelines for completing the forms.
As background, the IRS updates the form instructions annually to incorporate any recent administrative, reporting or regulatory changes. The 2021 Form 1099-R updates include an explanation of safe harbor notice requirements for eligible rollover distributions, in consideration of changes resulting from the SECURE Act of 2019.
Employers who sponsor retirement plans should be aware of the availability of the updated publication.
The IRS recently published the final version of the instructions for the 2020 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about retirement plan participants who separated from service with the employer and are entitled to deferred vested benefits.
The instructions are intended to assist employers with preparation of the 2020 Form 8955-SSA filings. The 2020 publication includes a revision to clarify the correct coding in the event of a transfer of a participant’s benefit to a new employer’s plan. The instructions also explain that no form attachments are permitted.
Although many employers outsource the preparation and filing of Form 8955-SSA, employers should familiarize themselves with the form’s requirements and work closely with service providers to collect the applicable information.
On December 23, 2020, the IRS issued Notice 2021-03 which extends the temporary relief of the physical presence requirement of spousal consent provided by Notice 2020-42 due to the continued COVID-19 public health emergency. Previously, the IRS released Notice 2020-42 (as reported in the June 9, 2020, edition of Compliance Corner), providing temporary relief for participant elections required to be witnessed by a plan representative or a notary public, including a required spousal consent. This relief was in response to the social distancing prompted by the COVID-19 public health emergency and applied from January 1, 2020, through December 31, 2020. Now, this relief is extended through June 30, 2021.
As background, when spousal consent is required for distribution payments or a plan loan, it is required that such consent be physically witnessed by a notary public or plan representative. However, IRS guidance provides that if certain rules are satisfied, there is temporary relief from the physical presence requirement for any participant election witnessed by a notary public or plan representative. See our previous article “IRS Gives Relief for the Requirement to Obtain Physical Spousal Consent” for details on the rules to satisfy the physical presence requirement remotely via live audio-video technology.
Although intended to assist in providing distribution payments and plan loans related to COVID-19 (as expanded by the CARES Act), this temporary relief applies to any participant election requiring an individual’s signature to be witnessed in the physical presence of a plan representative or notary.
Employers should be aware that the temporary relief provided by Notice 2020-42 is now extended through June 30, 2021, and confirm that any procedures are administered in accordance with this new guidance.
On December 23, 2020, the IRS released the 2020 Instructions for Form 5330, Return of Excise Taxes Related to Employee Benefit Plans. The IRS updates the form instructions annually for clarification purposes and to incorporate any regulatory or reporting changes.
As background, the Form 5330 is used to report and pay a wide range of excise taxes related to employee benefit plan failures. These errors include, but are not limited to, prohibited transactions (e.g., the late deposit of employee contributions), excess contributions to 401(k) plans and pension plan minimum funding deficiencies.
The instructions outline the filing due dates and provide specific directions for completing the form and applicable schedules, as well as calculating the excise tax for the various types of failures. The 2020 updates include guidance on reporting the tax on multiemployer plans in endangered or critical status.
Additionally, the instructions for Schedule C clarify that a section 403(b) tax sheltered annuity plan is not subject to the prohibited transactions excise tax.
Employers should be aware of the availability of the updated publication.
On December 9, 2020, the IRS issued Notice 2020-86, which provides guidance regarding safe harbor provisions under Sections 102 and 103 of the SECURE Act. The questions and answers are intended to assist employers that sponsor safe harbor plans with compliance until comprehensive regulations are developed.
As background, qualified retirement plans are prohibited from providing contributions or benefits that discriminate in favor of highly compensated employees. Instead of satisfying the annual nondiscrimination tests with respect to elective deferrals and matching contributions, an employer can choose to make safe harbor non-elective and/or matching contributions. Additionally, as an alternative to a traditional safe harbor plan design, an employer can adopt a qualified automatic contribution arrangement (QACA), which combines safe harbor contributions with an automatic enrollment feature.
Section 102 of the SECURE Act increased the QACA elective deferral maximum percentage from 10% to 15%. The guidance explains that a QACA is not required to adopt this increase. Rather, the qualified percentage under a QACA safe harbor 401(k) plan may be any percentage of compensation specified under the plan, provided it is applied uniformly and does not exceed 10% during the initial period of participation and 15% thereafter.
However, the plan document may need to be amended if the language incorporates the 15% rate by reference (e.g., by referring to the maximum permitted rate under the Code) and the plan sponsor wishes to continue to apply the prior 10% maximum rate. In such case, the plan would need to be amended retroactive to the first day of the plan year beginning after December 31, 2019, in accordance with the timeframes referenced in IRS Notice 2020-68.
Section 103 of the SECURE Act removed the safe harbor notice requirements for traditional and QACA 401(k) plans that satisfy the automatic deferral percentage safe harbor through safe harbor non-elective contributions. The guidance confirms that safe harbor notices must still be provided for traditional safe harbor 401(m) plans in order for matching contributions not to be subject to automatic contribution percentage testing.
Additionally, plans wanting the ability to reduce or suspend safe harbor contributions mid-year and maintain safe harbor status must still provide notice before the beginning of the plan year. However, one-time relief is provided for plans that elected safe harbor status for 2021 without providing such advance notice (as allowed under Section 103). Specifically, these plans can issue a notice to eligible participants describing the potential mid-year reduction or suspension of safe harbor non-elective contributions by January 31, 2021.
The notice also addresses questions related to retroactive adoption of safe harbor status. The SECURE Act allows traditional and safe harbor 401(k) plans to attain safe harbor status by adoption of an amendment no later than 30 days before the plan year end (if providing 3% non-elective employer contributions) or by the end of the following plan year (if providing a 4% non-elective contribution). The notice explains that a 4% non-elective contribution would not be deductible for the prior year if contributed to the plan after the tax filing deadline for such year (including extensions). Additionally, guidance is provided with respect to the applicable amendment deadlines to adopt safe harbor status under the new SECURE Act provisions.
Employers who sponsor safe harbor 401(k) plans may find this guidance instructive.
On December 16, 2020, the DOL finalized a rule instituting standards for situations where fiduciaries exercise shareholder rights, such as voting proxies. As background, ERISA’s investment duties regulation generally requires a fiduciary to act prudently when making decisions on investments. Sometimes, that duty involves the fiduciary having to vote on matters on behalf of plan shareholders (i.e., by proxy). The proposed rule provides guidance on the factors that fiduciaries should consider when exercising shareholder rights. (We discussed the proposed rule in the September 15, 2020, edition of Compliance Corner.)
The final rules substantially alter the proposed rules in a number of ways. First, in response to the many comments they received, the DOL takes a more principles-based approach in the final rules. In the proposed rule, the DOL required fiduciaries to act solely based on the economic interests of the plan and participants, only considering factors that will affect the economic value of the plan’s investments. However, the DOL removed that requirement due to being persuaded that the complexity involved in a determination of economic versus non-economic impact could be costly. Instead, the final rule focuses on whether the fiduciary has a prudent and loyal process for proxy voting and other exercises of shareholder rights.
The final rule again confirms that fiduciaries do not always have to vote proxies or exercise every shareholder right. The rule does, however, provide a safe harbor provision that fiduciaries can use to satisfy their fiduciary obligations with respect to decisions on whether to vote proxies. Importantly, the DOL clarifies that these regulations do not apply to voting, tender and other rights that are passed through to participants in individual account plans.
As part of the final rule, the DOL removed Interpretive Bulletin 2016-01 and invalidated Field Assistance Bulletin 2018-01. The rule will become effective 30 days after the rule was published in the federal register (January 15, 2021), and it involves compliance dates in 2022. Plan fiduciaries should discuss this rule with their plan advisers to ensure that they are meeting their fiduciary obligations related to exercising shareholder rights.
On December 15, 2020, the DOL issued the finalized prohibited transaction exemption 2020-02 for investment advice. As background, the DOL issued a final rule providing an amended fiduciary conflict of interest rule back in June 2020. At that time, the DOL also proposed this class exemption to go along with that final rule. (We discussed the final conflict of interest rule and the proposed class exemption in the July 7, 2020, edition of Compliance Corner.)
Under the class exemption, those that provide fiduciary investment advice (including rollover advice) can receive compensation for conflicted advice as long as they meet certain impartial conduct standards. This rule aligns the DOL’s rule with the SEC’s rule and provides the exemption if:
The final exemption makes a number of changes to the proposed version. Specifically, the final exemption:
The final prohibited transaction exemption will be effective beginning 60 days after the date of publication in the Federal Register. Plan sponsors should discuss this rule with their plan advisers.
On December 8, 2020, the DOL finalized the rollover rules for qualified plan loan offset amounts. As background, when a plan loan must be paid immediately (usually due to default or termination of employment) and goes unpaid, the loan is treated as a deemed distribution or a loan offset. The deemed distribution would occur if the participant is able to take a distribution under the plan terms. An offset, or a reduction of the account balance by the unpaid portion of the loan, would occur if the participant is not yet able to take a distribution. Offsets are treated like an actual distribution for rollover purposes, meaning that the offset must generally be rolled over to a qualified retirement plan within 60 days to avoid taxation of the offset amount. (See our Compliance Corner article on the proposed rule for more information.)
The finalized rule essentially adopted the proposed rule, with one major modification. Specifically, the final rule changes the applicability date of the rule to apply to plan loan offset amounts treated as distributed on or after January 1, 2021. The proposed rule would’ve allowed for applicability immediately following the publication of the final rule. This gives employers additional time to come into compliance with the new regulations since they would first apply when employers file the 2021 Forms 1099-R in early 2022.
Employers should work with their accountant or other service providers to adequately address plan loan offsets for the 2021 year.
On November 12, 2020, the DOL issued the final rule on pooled plan provider registration requirements. As background, the SECURE Act allows for pooled employer plans (PEPs), which are multiple employer retirement plans that are administered by pooled plan providers (PPPs). PPPs are fiduciaries and are therefore subject to ERISA’s prohibited transaction provisions. (We discussed the proposed rule in the September 1, 2020, edition of Compliance Corner.)
Like the proposed rule, the final rule establishes a registration process for entities that want to offer PEPs. Specifically, entities that are seeking to become PPPs would have to register through an initial registration, supplemental filings in the event of specific events and a final filing after the provider’s PEP has terminated. The final rules clarify a number of requirements, including the following:
The final rules also highlight the newly provided Form PR and instructions, which PPPs will use for filings. The DOL provided the Form PR and Instructions on November 19, 2020.
The rule took effect on November 16, 2020, upon being published in the federal register. The electronic filing system for pooled plan providers to register became available on November 25, 2020.
Although this rule will not directly affect employer plan sponsors’ responsibilities, they should know PEPs will begin soon. Entities that are looking to operate PEPs should review this finalized rule in preparation of filing. Employers that may be interested in joining a PEP should consult their advisor for more information.
On November 20, 2020, the IRS issued Notice 2020-83, which is the 2020 Required Amendments List (RA List) for qualified retirement plans. The yearly RA Lists provide changes in retirement plan qualification requirements that could result in disqualifying provisions and require a remedial amendment. A disqualifying provision is a required provision that isn’t listed in the plan document, a provision in the document that does not comply with the qualification requirements, or a provision that the IRS defines as such.
The RA List applies to both §401(a) and §403(b) plans and is divided into two parts: Part A and Part B. Part A lists changes in qualification requirements that will require affected plans to be amended under most circumstances. Part B lists changes that would not require amendments to most plans but might require an amendment because of an unusual plan provision in a particular plan.
Notably, there are no Part A changes this year. There are two Part B entries addressing the SECURE Act’s treatment of difficulty of care payments as compensation and the CARES Act’s expansion of the definition of “cooperative and small employer charity pension plan.”
The remedial amendment deadline for disqualifying provisions resulting from items on the 2020 RA List is December 31, 2022 (or later, for certain governmental plans). Therefore, plan sponsors should determine whether amendments are necessary for their retirement plan and work with their service providers to adopt any such amendment.
On October 30, 2020, the DOL finalized their “Financial Factors in Selecting Plan Investments” rule. The finalized rule comes after the DOL proposed this rule in June of 2020. (See our July 7, 2020, edition of Compliance Corner for the article on the proposed rule.) The finalized rule essentially adopts the proposed rule with some modifications that were made in response to public comments.
The finalized rule makes the following modifications to ERISA’s current investment duties rules:
Notably, in response to comments received by the DOL, the final rule did not contain any specific references to environmental, social and governance (ESG) investments. Based on those comments, the DOL concluded that the lack of precise or generally accepted definitions of ESG made the use of the term inappropriate for this rule. Instead, the final rule focuses on pecuniary and non-pecuniary factors.
The final rule is effective 60 days after publication in the Federal Register. Plan fiduciaries have until April 30, 2022, to amend their plan documents and operation to reflect the rule’s requirements.
Plan sponsors should consult with their adviser on the implications of the final rules.
On October 30, 2020, the IRS published a draft version of the instructions for 2020 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan.
The draft instructions clarify that no attachments are permitted to be filed with the form. There is also clarification regarding which Entry Codes should be used in Part III, line 9, column (a) for the following participant scenarios:
This draft of the instructions is only for informational purposes and may not be used for 2020 Form 8955-SSA filings, but employers should familiarize themselves with the instructions in preparation for 2020 plan year filings. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
On October 26, 2020, the IRS issued Notice 2020-79, 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, 2021.
The elective deferral limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains at $19,500 in 2021. Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of these plans remains at $6,500. Accordingly, participants in these plans who have attained age 50 will still be able to contribute up to $26,000 in 2021.
The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts remains at $13,500.
The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $58,000 (from $57,000). The limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) also remains $230,000. Additionally, the annual limit on compensation that can be taken into account for allocations and accruals increases from $285,000 to $290,000.
The threshold for determining who is a highly compensated employee under Section 414(q)(1)(B) remains at $130,000. The dollar limitation concerning the definition of a key employee in a top-heavy plan increases also remains $185,000.
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.
On October 16, 2020, the IRS released Revenue Ruling 2020-24, addressing the tax treatment and reporting of qualified retirement plan funds that are transferred to state unclaimed property funds. As background, when a designated distribution is made from a qualified retirement plan, the plan administrator must withhold the appropriate federal income taxes.
This guidance indicates that retirement funds that are transferred or escheated to state unclaimed property funds are, indeed, designated distributions. As such, the plan administrator must withhold taxes from those funds and report on the payment using Form 1099-R. Employers must comply with this guidance as soon as they are able, but in no case later than January 1, 2022.
The IRS also released Revenue Procedure 2020-46 on October 16, 2020. The revenue procedure adds distributions to a state unclaimed property fund as a reason that individuals can certify that they missed the 60-day deadline to roll over their retirement funds to an eligible retirement account.
As background, distributed retirement funds can generally be excluded from an individual’s gross income if they are transferred to another retirement account within 60 days of the distribution. The IRS can waive that 60-day rollover limitation where the individual’s failure to roll the funds over was beyond their control. An individual is able to self-certify to the IRS that they missed the 60-day deadline for a number of reasons. Rev. Proc. 2020-46 adds the fact that the distribution was transferred to a state unclaimed property fund to the list of reasons that an individual may request a waiver from the 60-day requirement.
Once the distribution to the state unclaimed property fund no longer prevents the individual from rolling the funds over (i.e. once the individual is given access to those funds), they have 30 days to roll the funds over to a qualified retirement account or IRA. If these steps are taken, the individual’s self-certification is valid unless the IRS indicates otherwise. Rev. Proc. 2020-46 also provides a sample “Certification for Late Rollover Contribution” that individuals may use to self-certify.
Employer plan sponsors who send unclaimed retirement amounts to state unclaimed property funds should be mindful of this guidance and ensure that they appropriately tax and report on these funds. They can also advise employees who may return looking for their funds to consult with an accountant or tax advisor on how to go about claiming the funds and facilitating a rollover to another retirement account.
The IRS has published the 2020 version of Form 4972, which is used by participants born before January 2, 1936, and who received a lump-sum distribution from a qualified plan in 2020. The form assists participants in calculating the tax owed on a distribution using the 20% capital gain election, the 10-year tax option or both. These are special formulas used to determine a separate tax on the distribution that may result in a smaller tax than if the amount is reported as ordinary income.
Participants should consult with their accountant for guidance.
On September 18, 2020, the DOL published an interim final regulation regarding lifetime income illustrations for defined contributions plans, which include 401(k) plans. The income stream information must be provided at least annually on participant benefit statements.
As explained in our prior September 1, 2020, Compliance Corner article, this new requirement was a component of the SECURE Act. The annual income disclosure is designed to show the monthly retirement income that would be generated from a participant’s defined contribution plan account balance. The participant could then evaluate whether current contribution levels were adequate to reach desired retirement income goals.
Specifically, the disclosures must display the projected monthly amounts that the account balance would provide as a single life annuity for the life of the participant with no death benefit. The illustrations also must reflect the monthly amount in the form of a qualified joint and 100% survivor annuity that provides an equal benefit for a surviving spouse. The rule outlines the assumptions upon which these annuity benefits are to be based.
Additionally, the disclosures must include language that explains the annuity payment calculations and emphasizes that the projected amounts are illustrations and not guarantees. Appendix A and B to Subpart F of the regulation provide model language for this purpose. Appendix A is designed for plans that do not offer an annuity form of payment and Appendix B is intended for plans that currently provide an annuity option.
The rule is effective on September 18, 2021, and shall apply to benefit statements furnished after such date. Written comments are being accepted through November 17, 2020.
Employers should be aware of the publication and work with their service providers to ensure the rule’s requirements are implemented accurately.
On August 31, 2020, the DOL issued a proposed rule instituting standards for situations where fiduciaries exercise shareholder rights, such as voting proxies. As background, ERISA’s investment duties regulation generally requires a fiduciary to act prudently when making decisions on investments. Sometimes, that duty involves the fiduciary having to vote on matters on behalf of plan shareholders (i.e., by proxy). The proposed rule provides guidance on the factors that fiduciaries should consider when exercising shareholder rights.
Specifically, the proposed rule requires fiduciaries who are exercising shareholder rights to carry out their duties prudently, solely in the interests of plan participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. When making decisions on behalf of shareholders, fiduciaries must:
Additionally, the guidance clarifies that fiduciaries do not always have to vote proxies; instead, the fiduciary must only vote proxies when they determine that the matter being voted upon would have an economic impact on the plan. There is also a provision outlining permitted practices which would allow fiduciaries to adopt policies on proxy voting.
The DOL will operate a comment period for 30 days after the proposed rule is published in the Federal Register. Plan fiduciaries should discuss this rule with their plan advisers to ensure that they are meeting their fiduciary obligations related to exercising shareholder rights.
On September 2, 2020, the IRS issued Notice 2020-68 to provide guidance regarding certain provisions of the SECURE Act affecting qualified retirement plans, 403(b) plans and IRAs. The guidance, which is in the form of questions and answers (Q&As), is intended to assist plan sponsors and IRA custodians with the implementation of this legislation.
The SECURE Act, which was enacted on December 20, 2019, introduced significant changes with respect to retirement plan eligibility, contributions and distributions, among other items. (See our January 7, 2020, edition of Compliance Corner for an article detailing the provisions of the act.) Notice 2020-68 provides needed clarification regarding specific sections of this law and the deadlines for adopting related plan amendments.
First, the notice addresses a new $500 tax credit under Section 105 of the SECURE Act that is available to small businesses (with up to 100 employees who were paid at least $5,000 a year) that newly establish an eligible automatic enrollment arrangement (EACA) to increase qualified plan participation. This one-time credit applies to the three-year period that begins when the EACA feature is first adopted. The $500 credit is available on an employer (as opposed to plan) basis; therefore, each employer participating in a multiple employer plan could be eligible to claim this amount.
Second, clarification is provided regarding Section 107 of the SECURE Act, which permitted certain changes with respect to IRA contributions and distributions beginning in 2020. Specifically, IRA owners are now allowed to make contributions after attainment of age 70.5, which was previously restricted. However, financial institutions that serve as custodian or trustee are not required to accept such post-age 70.5 contributions. Those that elect to do so must amend their IRA contracts by December 31, 2022, and notify accountholders within 30 days of the amendment adoption or effective date.
Additionally, Section 107 of the SECURE Act allows post-age 70.5 IRA owners to exclude from their gross income up to $100,000 of IRA distributions made directly to charities. The excludable amount must be reduced by any post-age 70.5 contributions, and the notice provides specific examples as to how the contribution offset would apply.
Third, the notice clarifies Section 112 of the SECURE Act, which modified 401(k) eligibility requirements to enable participation by long-term part time workers. Specifically, part-timers who have attained age 21 and completed three consecutive years each with 500 hours of service must be eligible to participate. This change is effective for plan years beginning on or after January 1, 2021. The Q&As explain that 12-month periods beginning prior to this date would not count in determining a part-time employee’s eligibility to participate, but would count towards the employee’s vesting in any employer contributions.
Fourth, significant guidance is provided with respect to qualified birth or adoption distributions, which are distributions of up to $5,000 from eligible retirement plans made within one year of the birth to or legal adoption of a child by the distributee. Under Section 113 of the SECURE Act, these distributions are taxable, but not subject to the 10% early withdrawal penalty that would normally apply to distributions prior to the age of 59.5. Additionally, the amounts are not subject to the mandatory withholding and notice requirements applicable to eligible rollover distributions, and can be recontributed to an eligible retirement plan or IRA. The Q&As explain that each parent can receive a distribution with respect to the same child and that the $5,000 maximum applies per child in the event of multiple births.
However, eligible retirement plans are not required to offer qualified birth or adoption distributions. Plans that elect to do so must be amended accordingly and must also accept recontributions of distributed amounts. The recontribution is treated by the receiving plan as if a direct trustee-to-trustee transfer of the funds; future IRS guidance will address the timing aspects. Furthermore, if a plan does not offer qualified birth or adoption distributions, an eligible participant can treat an in-service withdrawal as such and recontribute the amount to an IRA.
Other issues addressed by the notice include the optional inclusion of difficulty of care payments, which are a type of qualified foster care payment, in the determination of certain retirement contribution limitations. Guidance regarding retirement plan provisions in the Bipartisan American Miners Act of 2019 were also incorporated.
Finally, the IRS outlines the deadlines for SECURE Act plan amendments. Generally, qualified plans and 403(b) plans must adopt required amendments by the last day of the plan year beginning on or after January 1, 2022. The deadline for governmental plans and collectively bargained plans is the last day of the plan year beginning on or after January 1, 2024. The amendments must be retroactive to the effective date and the plan must operate in accordance with the amendment from such date.
Employers who sponsor retirement plans should be aware of this supplementary SECURE Act guidance. Comments can be submitted (preferably in electronic form) to the IRS through November 1, 2020, regarding the matters discussed in the notice.
On September 2, 2020, the IRS released Revenue Procedure (Rev. Proc.) 2020-40, which revises the timeframe for when qualified pre-approved plans and 403(b) pre-approved plans must adopt discretionary plan amendments. Under Rev. Proc. 2016-37 for qualified pre-approved plans and Rev. Proc. 2019-39, the plan amendment deadline is the end of the plan year in which the plan amendment was operationally effective unless the IRS requires an earlier deadline under statutory provision or guidance.
Under Rev. Proc. 2020-40, the previous procedures are revised so that the timeline for discretionary amendments under pre-approved plans and 403(b) pre-approved plans is the end of the plan year following the effective date of the amendment unless the IRS provides a deadline that is either earlier or later.
The modification of the procedures is effective immediately.
On August 20, 2020, the DOL issued a notice of proposed rulemaking on pooled plan provider registration requirements. As background, the Setting Every Community Up for Retirement Enhancement (SECURE) Act allows for pooled employer plans (PEPs), which are multiple employer retirement plans that are administered by pooled plan providers. PEPs are fiduciaries, and are therefore subject to ERISA’s prohibited transaction provisions.
This proposed rule establishes a registration process for entities that want to offer PEPs. Specifically, entities that are seeking to become PEP providers would have to complete an initial registration, supplemental filings in the event of specific events, and a final filing after the provider’s PEP has terminated. The initial filing registration would be due before the PEP begins operations, and would provide identifying information about the PEP and the PEP provider. Supplemental filings would need to be made within 30 days of any change in information in the initial registration or in the event of any significant changes in the corporate structure of the PEP. A final filing would be due within 30 days of the PEP filing the final Form 5500 for the plan.
The proposed rule also requires that these filings be made electronically through EFAST2 using the Form PR. The rule also provides a mock-up of the form.
Interested stakeholders will have 30 days to comment on the proposed rule. Entities that are looking to operate PEPs should review this proposed rule to gain an understanding of the filing requirements that will likely be imposed on PEPs.
On August 18, 2020, the DOL announced an interim final rule regarding lifetime income illustrations for participant benefit statements. The rule’s requirements are applicable to defined contribution plans, which would include 401(k) plans.
As background, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) amended ERISA Section 105 to require an annual income disclosure to be included as part of a participant’s benefit statement. The disclosure is intended to help a participant understand how their account balance translates into monthly income at retirement. As a result, a participant may be better able to prepare for retirement and assess whether current contributions should be increased to achieve retirement income goals.
Accordingly, the disclosure would reflect the monthly payment amounts the participant would receive if their total account balance were used to provide a single life annuity (SLA) for the participant or a qualified joint and survivor annuity (QJSA) that would also provide a benefit for a surviving spouse. As prescribed by the SECURE Act, the interim final rule sets forth the specific assumptions upon which these lifetime income payments would be based.
The first assumption is the annuity commencement date, which is the last day of the statement period. For example, if the annual disclosure was included with the fourth quarter statement, the annuity starting date would be December 31. Second, the assumed age on the annuity starting date is 67, which was chosen because it is the Social Security full retirement age of most workers. However, for participants older than age 67, their actual age must be used instead.
The third assumption focuses upon the specific characteristics of the SLA and QJSA benefits for purposes of the illustrations. The SLA benefit must reflect a single life annuity, which will pay a fixed monthly amount for the life of the participant, with no survivor benefit upon the participant’s death. The QJSA benefit assumes that all participants have a spouse of equal age and provides a 100% survivor annuity, so the same fixed monthly amount would continue for the life of the participant or surviving spouse upon the participant’s death.
Fourth, the assumed interest rate is the 10 year constant maturity Treasury rate, which was selected because it approximates the rates used by insurers for immediate annuities. Finally, the assumed life expectancies are to be based upon gender neutral mortality tables that are currently used by defined benefit pension plans to determine lump sum payments.
Explanations must also be provided to participants that describe how the illustrative payments were calculated and that emphasize the portrayed estimates are not guarantees. Model language is provided for this purpose. Plan administrators can either insert the eleven model provisions into their existing statement formats or attach one of the Model Benefit Statement Supplements as an addendum.
Significantly, the rule provides ERISA liability relief to plan sponsors and fiduciaries for providing lifetime income illustrations that conform to the specified requirements. This relief was intended to address sponsor concerns of potential participant lawsuits if their actual monthly payments at retirement were less than the statement projections.
Defined contribution plan sponsors should be aware of the interim final rule’s requirements and consult with their service providers regarding incorporation of the disclosures in participant benefit statements. The rule is effective one year from publication in the federal register and applies to benefit statements provided after such date.
On August 20, 2020, the DOL issued a proposed rule on qualified plan loan offset rollovers. As background, when a plan loan must be paid immediately (usually due to default or termination of employment) and goes unpaid, the loan is treated as a deemed distribution or a loan offset. The deemed distribution would occur if the participant is able to take a distribution under the plan terms. An offset, or a reduction of the account balance by the unpaid portion of the loan, would occur if the participant is not yet able to take a distribution. Offsets are treated like an actual distribution for rollover purposes, meaning that the offset must generally be rolled over to a qualified retirement plan within 60 days to avoid taxation of the offset amount.
However, an offset that is deemed a qualified plan loan offset (QPLO) can be rolled over at any time up to the individual’s tax filing deadline for the year in which the offset occurred. QPLOs were introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. In order for the offset to be a QPLO, the offset loan has to meet all the IRC requirements for rollovers, and the distribution of the loan offset must occur “solely” because the person failed to repay the loan due to termination of employment or plan participation. Unfortunately, though, the TCJA did not actually define what it means for the loan offset to occur “solely” because of the termination of the participant.
This proposed rule answers that question by indicating that an offset occurs “solely” due to the termination of employment if the plan loan offset occurs because of the failure to repay the loan and it occurs during the first year following employment termination. This can be the case even where the participant is able to make some loan payments following termination.
QPLOs will be reported using Box 7 of the Form 1099-R. The rules also indicate that plan sponsors and recordkeepers can rely on this guidance until the final rule is published.
On August 6, 2020, the IRS released Notice 2020-62, providing updates to the safe harbor explanations that are provided when a participant is eligible to take a rollover distribution from their retirement plan. As background, the IRC requires plan administrators to provide terminating participants with a written explanation discussing their options for rolling over account balances to another account and the related tax consequences of doing so. Participants must receive this type of explanation within a reasonable period of time before making an eligible rollover distribution.
The notice updates the safe harbor explanations to reflect a number of changes that have been made to retirement regulations under the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act. Specifically, the explanations were updated to add the increased age for required minimum distributions and the tax treatment of birth or adoption distributions, and to clarify that a CARES Act distribution is not an eligible rollover for certain purposes.
Two updated safe harbor explanations are included as appendixes in the notice — one for payments that are from a designated Roth account and one for payments that are not from a designated Roth account. As always, plan administrators can update the samples to indicate their specific plan terms.
The IRS, in consultation with the DOL and the Pension Benefit Guarantee Corporation (PBGC), recently released Publication 5411, a guide to the Retirement Plans Reporting and Disclosure Requirements under the IRC and ERISA. The guide was designed as a quick reference tool for retirement plan sponsors regarding their obligations under the IRC and provisions of ERISA administered by the IRS. This handbook was intended for use in conjunction with the DOL Reporting and Disclosure Guide for Employee Benefit Plans.
As background, retirement plan sponsors are generally required to report certain information to the IRS, DOL and/or PBGC, and provide disclosures to plan participants and other affected parties. These reporting and disclosure obligations vary based upon a plan’s type, size and particular circumstances.
Accordingly, the guide outlines the annual reports that must be provided to the regulatory agencies, the annual notices that must be furnished to participants, and other notices required due to specific plan or participant events. The information is presented in chart format. For each necessary document, the IRS provides a brief explanation of the content, purpose, required recipients and due date. As applicable, statutory references and links to other available regulatory instructions or resources are included.
For example, the annual report section explains the Form 5500 filing requirement to report on the plan’s qualification, the due date seven months after the plan year end, and the extension option. Links are provided to the Form 5500 electronic filing system, instructions and other guidance.
The annual notice section includes common notices for both defined benefit pension plans and defined contribution plans, including the various 401(k) safe harbor contribution plan notices.
Retirement plan sponsors may find the guide to be a helpful and user friendly resource. However, the guide is not meant to provide a complete overview of all possible reporting and disclosure requirements or penalties for violations.
On July 8, 2020, the IRS updated their operational compliance list (OC List) to recognize the final regulations relating to hardship distributions and to reflect all the changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. As background, the OC List is provided by the IRS to help plan sponsors and practitioners achieve operational compliance by identifying changes in qualification requirements effective during a calendar year.
The updated list incorporated the most recent changes to the hardship distribution rules and describes the necessary plan amendments relating to hardship distributions. The list also highlights the plan amendments necessary to reflect the changes that were brought on by the SECURE Act. (We discussed the SECURE Act at length in the January 7, 2020 edition of Compliance Corner.)
The IRS periodically updates the OC List to reflect new legislation and guidance. As such, it is a useful tool for plan sponsors. However, the list is not intended to be a comprehensive list of every item of IRS legislation or guidance. Plan sponsors should work with their advisers to ensure their continued compliance with the retirement plan regulations.
On June 29, 2020, the DOL released a final rule that provides an amended fiduciary conflict of interest rule on investment advice. The DOL also released a proposed prohibited transaction class exemption. As background, the DOL finalized a fiduciary rule in 2016, and that rule broadened ERISA’s definition of the term “fiduciary” by considering more communications to be investment advice that renders the person providing that advice a fiduciary. However, in 2018, the United States Court of Appeals for the Fifth Circuit issued an order officially vacating the DOL’s fiduciary rule. After that happened, ERISA’s original fiduciary rule was reinstated, and the DOL issued a temporary enforcement policy for investment advice fiduciaries who complied with the impartial standards set out in the fiduciary rule. Additionally, the Securities and Exchange Commission (SEC), adopted the Regulation Best Interest in 2019 to provide additional conduct standards for investment advisers.
This final rule implements the Fifth Circuit’s vacatur of the 2016 fiduciary rule. This means that the prior five-part test that was used to determine if an investment adviser was a fiduciary is back in place. Specifically, the original regulations identified investment fiduciaries using a test in which the fiduciary 1) renders advice as to the value of securities, 2) does so on a regular basis, 3) renders advice pursuant to a mutual agreement, 4) gives advice that serves as the primary basis for investment decisions and 5) provides individualized advice. It also sets aside the prohibited transaction exemptions that were created by the 2016 fiduciary rule — the Best Interest Contract Exemption and the Principal Transactions Exemption.
The DOL also introduced a proposed class exemption to go along with the finalized rule. Under the class exemption, those that provide fiduciary investment advice (including rollover advice) can receive compensation for conflicted advice as long as they meet certain impartial conduct standards. This rule aligns the DOL’s rule with the SEC’s rule and provides the exemption if the following three requirements are fulfilled:
The exemption also requires that certain disclosures be made to the investor, that the fiduciaries create and follow written procedures to ensure compliance, and that the fiduciary conducts an annual review to determine compliance and maintains records for six years. Additionally, for rollovers, the fiduciary will need to document the specific reason that the rollover is in the best interest of the investor.
This final rule and proposed class exemption finally provide updated guidance after the Fifth Circuit’s 2018 decision. Retirement plan sponsors should discuss this rule with their advisers to determine any next steps to remain in compliance.
On June 30, 2020, the DOL proposed a new rule – “Financial Factors in Selecting Plan Investments” – that provides guidance for fiduciaries considering environmental, social and governance (ESG) investments or other economically targeted investments (ETIs). As background, ERISA requires fiduciaries to meet duties of prudence and loyalty, which require that fiduciary decisions are made for the exclusive benefit of plan participants and beneficiaries. For years, industry insiders have asked for guidance on how those ERISA duties apply as it pertains to ESG investments. The DOL did provide some guidance on ETIs, holding that they could be offered in a way that complied with ERISA as long as the expected rate of return was commensurate with the rates of return of other investments with similar risk characteristics and the investment was appropriate for the plan.
This proposed rule builds upon that prior guidance by codifying it as an investment duties rules. The rule would essentially impose three new fiduciary requirements as it pertains to investments. The rule would require fiduciaries:
The rule also specifically requires that ESG investments be evaluated in terms of generally accepted investment theories on economic risks and opportunities. So even if the factors by which a fiduciary chooses ESG investments are pecuniary factors, the fiduciary will still need to weigh the ESG investments against other alternative investments. Additionally, defined contribution plans can only allow for ESG investments if the fiduciary uses an objective risk-return criteria in selecting and monitoring the investments and as long as the ESG is not the qualified default investment alternative.
The DOL is inviting comments on this proposed rule, and they are due by July 30, 2020. Plan sponsors that are considering allowing ESGs or other ETIs as investment options should consult with their adviser on the implications of these rules.
On June 19, 2020, the IRS released Notice 2020-50, which provides guidance regarding the CARES Act retirement plan loan and distribution provisions. The notice addresses the expanded eligibility requirements, administrative aspects and tax reporting for these special loans and distributions. Practical illustrative examples are also included.
As background, the CARES Act provided enhanced access and favorable tax treatment with respect to retirement plan loans and distributions for certain participants (termed “qualified individuals”), who had been negatively affected by the COVID-19 pandemic. This relief impacted IRAs, §401(a) qualified plans (such as 401(k) plans), §403(a) annuity plans, §403(b) plans and governmental §457(b) plans.
A qualified individual includes any participant who has been diagnosed with or whose spouse or dependent has been diagnosed with COVID-19. As expanded by Notice 2020-50, a qualified individual also includes a participant who has experienced adverse financial consequences as a result of the participant, the participant's spouse or a member of the participant's household being quarantined, furloughed or laid off, having work hours or pay reduced, a business closed, or a job offer rescinded or postponed due to COVID-19.
The CARES Act allows these qualified individuals to treat up to $100,000 in retirement plan distributions made between January 1 and December 30, 2020, as COVID-19-related distributions. As a result, these distributions would not be subject to the 10% additional tax that otherwise generally applies to distributions made before age 59.5. The qualified individual would also have the option to include the distribution in income in equal installments over a three-year period, as well as to repay all or a portion of the amount within such period to undo the tax consequences. (Normally, the distribution amounts are taxable in the year of receipt and rollover transactions must be completed within 60 days.)
In addition, the CARES Act permits retirement plans to increase the normally permitted maximum loan amount for qualified individuals. Specifically, the dollar limit on loans made between March 27 and September 22, 2020, can be raised from $50,000 to $100,000. Furthermore, plans can suspend loan repayments that would normally be due for this period for up to one year. The loan repayments would then need to be re-amortized (taking into account interest) for the period following the suspension. The guidance provides a safe harbor for implementing the loan suspension provisions.
The notice explains that employers may, but are not required to, offer these enhanced distribution and loan options. If a retirement plan chooses to treat distributions as COVID-19 related, the employer is not required to provide a rollover notice or direct rollover option and mandatory federal withholding would not apply. Even if an employer does not elect to apply the CARES Act relief, a qualified individual can still benefit from the favorable tax treatment afforded to plan distributions through their individual income tax filings.
For administrative purposes, an employer choosing to adopt the special distribution or loan can rely on an individual's certification of eligibility as a qualified individual, absent the employer’s actual knowledge to the contrary. The notice includes a sample certification for this purpose.
Retirement plan sponsors and participants interested in taking advantage of the CARES Act relief provisions may find this guidance, including the practical examples, to be very helpful.
On July 23, 2020, the IRS released Notice 2020-51, which provides guidance regarding the CARES Act waiver of 2020 required minimum distributions (RMDs). The notice allows for an extended rollover period for waived RMDs, addresses related questions and provides sample retirement plan waiver amendments. Transitional relief is also provided to plan administrators with respect to the implementation of the updated required beginning date for RMDs following the passage of the SECURE Act in December 2019.
As background, the CARES Act permitted taxpayers to forego a 2020 RMD that would otherwise be required from a defined contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA. The waiver extends to 2020 RMDs (including first-time RMDs distributed in 2021 for 2020) and 2019 first-time RMDs distributed in 2020.
As modified by the SECURE Act, an individual is currently required to commence RMDs by April 1 of the year following the year in which they attain age 72. Under prior regulations, the required beginning date for RMDS was April 1 of the year following the year in which the individual attained age 70.5. This previous rule remains in effect for any individual who attained age 70.5 in 2019 or prior.
Prior to the passage of the CARES Act on March 27, 2020, some individuals had already received distributions in 2020. In certain cases, the payments were made to individuals who would be attaining age 70.5 in 2020 and had scheduled the payment prior to the SECURE Act change in the required beginning date. As a result, these distributions were no longer required. The notice addresses these situations by providing transitional relief to plan administrators who improperly characterized the amounts as RMDs.
To enable these and other affected individuals to take advantage of the CARES Act RMD waiver, the notice permits the distributed amounts originally intended as RMDs to be returned (rolled over) to a retirement account. For this purpose, the standard 60-day rollover period is extended to August 31, 2020.
Under the CARES Act, plans must be amended to reflect the RMD waiver and rollover provisions no later than the last day of the first plan year beginning in 2022 (or in the case of a governmental plan, 2024). To assist with this requirement, the guidance provides a sample plan amendment with two default options for an employer to select in the absence of a participant or beneficiary’s actual 2020 RMD election. The first option requires the plan to pay out distributions that include 2020 RMDS and the second option requires the plan to suspend such distributions. Additionally, the model amendment provides three options with respect to the availability of direct rollovers (custodian to custodian transfers) of eligible distributions. Plans are not required to amend their standard direct rollover provisions, but are permitted to do so in accordance with this guidance.
The notice also addresses a variety of practical questions regarding the RMD waiver. For example, the guidance clarifies that 2020 RMDS are permitted to be rolled back to the distributing plan, provided such plan accepts rollovers. Additionally, 2020, RMD amounts would not be subject to the mandatory 20% withholding tax normally applicable to eligible rollover distributions.
Employers who sponsor defined contribution plans may find the notice instructive in addressing the administrative aspects of the 2020 RMD waivers.
On June 29, 2020, the IRS issued Notice 2020-52, which provides guidance regarding midyear changes to safe harbor 401(k) or 401(m) plans. The notice includes temporary COVID-19-related relief from certain requirements that would otherwise apply to midyear amendments that reduce or suspend safe harbor contributions.
As background, qualified retirement plans are prohibited from providing contributions or benefits that discriminate in favor of highly compensated employees. As an alternative to satisfying the annual nondiscrimination tests with respect to elective deferrals and matching contributions, an employer can instead choose to make safe harbor nonelective or matching contributions.
IRS regulations generally require a plan’s safe harbor provisions to be adopted before the first day of the plan year and to remain in effect for the entire 12-month plan year. Midyear amendments, including those to reduce or suspend the safe harbor contributions, are normally restricted. However, exceptions exist if the employer is operating at an economic loss or if the plan’s safe harbor notice explained that the plan may be amended midyear to suspend or reduce safe harbor contributions upon 30 days’ notice to participants.
Notice 2020-52 recognizes that many plan sponsors are having unexpected financial difficulties as a result of the COVID-19 pandemic, and may need to reduce or suspend safe harbor contributions in order to cover operating costs. Accordingly, the guidance explains that an employer could reduce contributions made only on behalf of highly compensated employees without violating the safe harbor provisions; however, an updated safe harbor notice must be provided to such employees.
Additionally, the notice provides that an amendment to reduce or suspend safe harbor nonelective or matching contributions will be deemed to have satisfied the threshold for “operating at an economic loss” or the safe harbor notice midyear suspension content requirements, provided it is adopted between March 13, 2020, and August 31, 2020.
Furthermore, plans may be amended during this specified period to reduce or suspend safe harbor nonelective contributions without providing a supplemental notice to participants at least 30 days prior, so long as notice is provided by August 31, 2020, and the amendment is not retroactive. Delayed notices are not permitted for plans reducing or suspending safe harbor matching contributions, because those contributions affect employees’ contribution decisions.
Employers who sponsor safe harbor defined contribution plans and have been financially impacted by the COVID-19 pandemic should be aware of the additional temporary amendment flexibility provided by this notice.
On June 18, 2020, the DOL published a request for information (RFI) on pooled employer plans (PEPs). As background, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019. (See our January 7, 2020, edition of Compliance Corner for more information on the SECURE Act.) The SECURE Act allows for PEPs, which are multiple employer retirement plans that are administered by pooled plan providers. PEP providers are fiduciaries, and are therefore subject to ERISA’s prohibited transaction provisions.
The DOL is requesting information on possible parties, business models and conflicts of interest that parties anticipate will be involved in the formation and operation of PEPs (including those sponsored by employer groups, associations or PEOs). The comment period ends on July 20, 2020.
Interested parties should consider filing a response. Consult with your adviser on any questions pertaining to the SECURE Act.
On June 3, 2020, the IRS released Notice 2020-42, providing temporary relief for participant elections required to be witnessed by a plan representative or a notary public, including a required spousal consent. This relief is in response to the social distancing prompted by the COVID-19 public health emergency and applies from January 1, 2020, through December 31, 2020.
As background, when spousal consent is required for distribution payments or a plan loan, it is required that such consent be physically witnessed by a notary public or plan representative. However, Notice 2020-42 now provides that if certain rules are satisfied, there is temporary relief from the physical presence requirement for any participant election witnessed by a notary public or plan representative.
More specifically, the physical presence requirement for a participant election witnessed by a notary public is satisfied for an electronic system that uses remote notarization if executed via live audio-video technology (that otherwise satisfies the requirements of participant elections and adheres with state laws applicable to the notary public). Further, the physical presence requirement for a participant election witnessed by a plan representative is satisfied for an electronic system if executed via live audio-video technology that meets the following criteria:
Although intended to assist in providing distribution payments and plan loans related to COVID-19 (as expanded by the CARES Act), this temporary relief applies to any participant election requiring an individual’s signature to be witnessed in the physical presence of a plan representative or notary.
Employers should be aware of the temporary relief provided by Notice 2020-42 and confirm that any procedures are administered in accordance with this new guidance.
On May 28, 2020, the IRS issued Notice 2020-35, which extends even more tax deadlines due to the COVID-19 emergency. The extensions apply to deadlines falling within the time period starting on March 30, 2020, and ending on July 15, 2020, which the notice calls “the relief period.” The following requirements and related rules are disregarded during the relief period:
Employers should work with their benefit plan providers and tax advisors to understand and comply with the new extensions.
On June 3, 2020, the DOL issued an information letter concerning the role of private equity funds in defined contribution plans governed by ERISA, such as 401(k) plans. Specifically, the letter addresses the use of private equity investments as designated investment alternatives made available to participants and beneficiaries in individual account plans.
The DOL writes that plan fiduciaries of an individual account plan may offer an asset allocation to private equity as an option under the plan without violating the fiduciary duties under Section 403 and 404 of ERISA. However, due to private equity’s complexity, long-term nature and generally higher fees, the fiduciary must engage in a careful and thorough analysis of the allocation fund with a private equity component in order to make a prudent decision concerning whether to offer it. In order to determine that the option is a prudent one, the DOL suggests that fiduciaries should consider:
Plan administrators who would like to offer private equity in their defined contribution lineup should familiarize themselves with this guidance and consult with their advisor concerning any potential investments.
On June 1, 2020, the Supreme Court of the United States (SCOTUS) held that the plaintiffs in Thole v. U.S. Bank, N.A. lacked standing to bring a case for fiduciary breach. As background, the plaintiffs in the case alleged that the plan fiduciaries of the U.S. Bank defined benefit plan had violated ERISA’s duties of loyalty and prudence. Specifically, they alleged that the fiduciaries had mismanaged the plan’s assets, resulting in the loss of roughly $750 million dollars in potential plan gains. As the case proceeded through the lower courts, U.S. Bank contributed roughly $300 million dollars to overfund the defined benefit plan. As such, the district court dismissed the case, and the Court of Appeals for the Eighth Circuit affirmed that decision.
SCOTUS agreed with the lower courts, finding that the plaintiffs did not have standing to sue under ERISA because they were essentially unharmed. Because the plan is a defined benefit plan, the plaintiffs stood to be paid their specific benefit during their retirement, regardless of whether the plan fiduciaries made prudent investments. So since they had received all of their benefits to date and would do so in the future, they would be in the same position whether they won or lost this case. In holding this way, the court specifically rejected arguments implicating trust law and found that the plaintiffs could not represent the plan without having a concrete stake in the outcome of the case.
While this case was based on a complaint against a defined benefit plan, it is possible that this decision will have implications for defined contribution plan fiduciaries. Specifically, it could mean that any participant who seeks to bring a suit claiming that a fiduciary chose to invest plan assets in a particular fund would have to prove that they were actually harmed by that investment. In other words, they could not bring a case on behalf of other plan participants; they would have to show that their funds were actually contributed to the alleged imprudent investment. This could result in fewer fee and expense cases being brought.
Plan sponsors should always seek to act prudently with plan assets, but this case does provide some relief to plans that are properly funding their defined benefit plan. It could have some implications for defined contribution plan sponsors, too. It remains to be seen how this case will be relied upon as precedent in future fiduciary breach claims. Plan sponsors should consult with their adviser on any questions concerning plan investments.
On June 1, 2020, the US Court of Appeals for the Sixth Circuit ruled that a debtor in Chapter 13 bankruptcy proceedings may exclude 401(k) plan contributions from disposable income payable to creditors. The decision involved the statutory interpretation of specific provisions of the Bankruptcy Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
As background, a debtor's Chapter 13 bankruptcy plan must provide for payment of all projected disposable income to unsecured creditors. Disposable income is the debtor’s current monthly income minus amounts reasonably necessary for the debtor’s maintenance or support. In certain situations, the current monthly income may be adjusted for known changes that will occur during the commitment period (i.e., payment period to creditors of typically five years). After the passage of the BAPCPA, it was unclear whether employee salary deferrals to a 401(k) plan could be considered part of the debtor’s maintenance or alternatively, whether such amounts were required to be included in disposable income payable to creditors.
In this case, the debtor filed for Chapter 13 bankruptcy and submitted a payment plan to the bankruptcy court for approval. Under the proposal, she claimed her monthly contributions of $220.66 to her employer sponsored 401(k) plan as an allowable maintenance expense. Her intention was to continue these deferrals, which had commenced prior to the bankruptcy filing, during the commitment period.
However, the bankruptcy trustee objected to the debtor’s proposed plan on the grounds that the future 401(k) deferrals were disposable income payable to creditors. The debtor then filed an amended bankruptcy plan that included her monthly 401(k) contributions in her disposable income, objected to the amended plan (which was confirmed by the bankruptcy court) and appealed to the Sixth Circuit.
Accordingly, the question before the Sixth Circuit was whether the Bankruptcy Code and BAPCPA permitted the exclusion of a debtor’s prospective 401(k) deferrals from disposable income payable to creditors. The Sixth Circuit reviewed the historical legal landscape, the statutory language and context, and legislative intent. The majority also observed that the debtor had made the monthly 401(k) deferrals for at least six months prior to her bankruptcy filing.
In a narrow ruling, the Sixth Circuit held that the debtor, and one in like circumstances, may deduct monthly 401(k) plan contributions from disposable income payable to creditors. However, the opinion notes that the decision is not intended to limit the good faith analysis applied by a bankruptcy court to any proposed payment plan in order to minimize abuse by debtors.
The case involves an interesting intersection of employee benefit plans and the federal bankruptcy laws. The ruling primarily impacts employees making 401(k) deferrals who file for Chapter 13 bankruptcy within the Sixth Circuit. (The Sixth Circuit handles federal appeals arising from Kentucky, Ohio, Michigan and Tennessee.) Employers may also want to be aware of this development.
On May 21, 2020, the DOL finalized the electronic distribution safe harbor rule, which expands the options for electronic delivery of required retirement plan disclosures. As background, on October 23, 2019, the DOL proposed this rule, following Executive Order 13847, which instructed the DOL to determine whether regulatory actions could be taken to improve the effectiveness of participant disclosures and reduce their cost to employers. After review and consultation with other regulatory agencies, the DOL set forth a new “notice and access” safe harbor under which ERISA retirement plan disclosures could be made available on a website following specified notice. We wrote about the proposed rule in the October 29, 2019 edition of Compliance Corner.
As proposed, the new safe harbor permits required disclosures for retirement plans (including multi-employer plans) to be posted online following notice to covered individuals, who can then access the documents continuously using an internet-connected device. Covered individuals are participants, beneficiaries and any other individuals entitled to documents who have provided the plan administrator (or designee) with an electronic address, such as email address or smartphone number.
The DOL received many comments on the proposed rule. However, the finalized rule mainly adopts the provisions of the proposed rule, with minor changes. Among other changes, those minor changes include the following:
Notably, the DOL still declined to extend the final rule to welfare benefit plans. However, they did indicate an intention to review whether a similar rule should be provided for welfare benefit plans.
Employers who are seeking an alternative electronic delivery method for retirement plan disclosures may choose to adopt this safe harbor. Although it is officially effective as of 60 days after the publishing of this final rule in the Federal Register, the rule made it clear that the DOL will not seek enforcement against any employer that adopts the rule before the effective date.
On May 4, 2020, the IRS released a set of questions and answers discussing the retirement plan provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). As background, the CARES Act was enacted on March 27, 2020, and included a number of provisions affecting retirement plan and IRA rules. We discussed those provisions in an article in the March 31, 2020, edition of Compliance Corner.
The questions and answers simply confirm the availability of expanded hardship distribution and loan options available to individuals that are effected by the COVID-19 crisis. Notably, the IRS indicates that they anticipate releasing guidance on the CARES Act retirement provisions. But until that guidance is issued, they acknowledge that it will be similar to the guidance that was applied to victims of Hurricane Katrina (via IRS Notice 2005-92).
The questions and answers go on to address the tax treatment of COVID-19-related hardship distributions, confirming that individuals will be able to pay the taxes on any such distribution ratably over a three-year period. Individuals can also choose to repay their COVID-19-related distribution within three years of receiving the distribution. If this is done, the distribution will be treated as if it were a trustee-to-trustee transfer and the individual will not owe federal income tax on the distribution. Depending on when the distribution is repaid, this could require the individual to amend previous tax returns (if for example the individual repays the distribution in 2022, but previously paid taxes for the 2020 and 2021 year). Further, the guidance points out that retirement plans are encouraged but not required to accept repayment of distributions.
The IRS also reiterates the provisions affecting plan loans. Specifically, certain loan repayments can be delayed for up to one year. Additionally, the CARES Act increased the maximum loan amount.
The questions and answers also address a number of administration and reporting issues. Namely, plan sponsors are not required to adopt the hardship distribution and loan rules found in the CARES Act. If they do, plan administrators may rely on an individual’s certification that they are eligible to receive the COVID-19-related distribution or loan. Individuals that take a COVID-19-related distribution will report this on their federal income tax return, and plan administrators will also provide Forms 1099-R (as they do with any other hardship distribution).
Employers that will amend their plans to allow for these COVID-19-related changes will want to familiarize themselves with this guidance. We will continue to monitor this issue and share additional guidance as the IRS provides it.
On April 30, 2020, the IRS released Revenue Procedure 2020-29. The notice allows for the electronic submission of requests for letter rulings, closing agreements, determination letters and information letters. As background, taxpayers can request advice from the IRS on a number of issues. Additionally, the IRS provides determination letters that indicate whether a company’s employee benefits plan meets the requirements to be a qualified plan.
This revenue procedure allows for taxpayers to make these requests electronically by facsimile or compressed and encrypted email. It also allows for electronic signatures as long as the prescribed procedures are followed.
The revenue procedure is effective as of April 30, 2020, and continues until it is modified or superseded. Plan sponsors that are seeking letter rulings or determination letters should consider whether they would like to file the requests electronically.
On March 6, 2020, the IRS and the Treasury Department released a second quarter update to the 2019-2020 priority guidance plan (Plan). As background, the IRS and Treasury Department use this Plan to prioritize certain tax issues, some of which impact retirement benefits. Important to maintaining compliance, this guidance helps to clarify ambiguous areas of the tax law.
The 2019-2020 Plan introduced guidance projects for the fiscal year (July 1, 2019, through June 30, 2019). This update provides that 40 (of the 203) projects have been published or released during the second quarter – October 1, 2019, through December 31, 2019 – and includes employee retirement benefit items.
Some of the completed projects during the second quarter impacting employee retirement benefits include final regulations updating life expectancy and distribution period tables for required minimum distributions, as well as guidance on the timing of amendments to §403(b) plans, among other additional projects.
Employers should reference the Plan’s updates as it relates to administering retirement benefits.
On February 26, 2020, the Supreme Court of the United States clarified the meaning of "actual knowledge" in Intel Corp. Inv. Policy Comm. V. Sulyma (U.S., No. 18-1116). As background, Sulyma brought the case against Intel’s investment committee, alleging that the committee had breached their fiduciary duty by failing to make participants aware of the risks, fees and expenses associated with the plan’s investment in various hedge fund and private equity investments.
Intel moved for summary judgment based on the fact that Sulyma’s claim came more than three years after the company had provided various disclosures to Sulyma about the investment. ERISA imposes a three year statute of limitations based on when the individual had "actual knowledge" of a claim’s underlying facts. As such, Intel reasoned that the statute of limitations had passed because Sulyma had access to numerous disclosures about the investments more than three years before the filing. However, Sulyma alleged that although he had access to the disclosures, he never actually read or remembered reading them.
The District Court ruled in favor of Intel, arguing that having access to the disclosures was enough to meet the "actual knowledge" standard. The Court of Appeals for the Ninth Circuit disagreed and remanded the case, finding that if Sulyma never looked at the documents, then he didn’t have actual knowledge. Looking to the plain meaning of the words "actual knowledge", the Supreme Court agreed with the Ninth Circuit and remanded the case.
Specifically, the Court made it clear that simply having access to the disclosures did not actually mean that Sulyma viewed the disclosures. Instead, having actual knowledge of information means that the person did, in fact, become aware of that information. Further, the court argued that accepting the idea that simply having access to disclosures is enough to be considered actual knowledge is more of a "constructive knowledge" standard — and that’s not what ERISA requires. The Court ultimately found that ERISA’s language was not ambiguous or unclear; "actual knowledge" means just that.
While this ruling makes it more difficult for employers to prove that they provided effective notice to participants, it is possible for employers to take steps to prove that their disclosures were actually viewed by employees. They may just want to have employees indicate, in writing, that they read the disclosures. Likewise, employers should work with their adviser to analyze their investment strategy and fund line-up.
On February 14, 2020, the IRS released the 2020 Instructions for Forms 1099-R and 5498. The Form 1099-R reports distributions from pensions, annuities, IRAs and other retirement vehicles. The Form 5498 reports contributions to IRAs. The instructions provide specific guidelines for completing the forms.
As background, the IRS updates the form instructions annually to incorporate any recent administrative, reporting or regulatory changes. The 2020 updates to the Form 1099-R include a new section for qualified birth and adoption distributions. This addition was necessitated by a provision of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which permits such a retirement plan distribution of up to $5,000 that is exempt from the 10% early distribution tax and can be repaid.
Correspondingly, the Form 5498 updates include a new code to report the repayment of a qualified birth and adoption distribution. Additionally, this form reflects the SECURE Act increase in the required minimum distribution age from 70.5 to 72 for taxpayers turning 70.5 after December 31, 2019.
Employers should be aware of the availability of the updated publication and most recent updates to encompass the SECURE Act provisions. For further details, employers can access the 2020 Instructions for Forms 1099-R and 5498 at the following link:
On January 17, 2020, the IRS published the finalized version of the instructions for 2019 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan. The finalized version of the form may be used for 2019 Form 8955-SSA filings, and employers should familiarize themselves with the instructions in preparation for 2019 plan year filings.
The IRS does not appear to have made any changes to this year’s instructions. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
On January 16, 2020, the IRS issued instructions for FORM 5500-EZ, a form used by one-participant plans that are not subject to the requirements of IRC section 104(a) of ERISA.
The IRS updated the instructions with penalty changes. If a plan fails to file a return, then the penalties are now $250 per day, up to a maximum of $150,000 per plan year. Returns required to be filed after December 31, 2019, are subject to these increased penalties.
Business owners covered by these plans should be aware of the increased penalties that could be imposed if they fail to file.
On January 2, 2020, the IRS released Revenue Procedure (Rev. Proc.) 2020-04, which explains the IRS procedures for issuing determination letters for employee benefit plans and transactions.
Among other changes, Rev. Proc. 2020-04 supersedes Rev. Proc. 2019-4 and updates those procedures by adding a list of those documents that should be included in applications for determination letters, updating mailing addresses, and including recent changes to the Voluntary Correction Program. It adds a category of determination requests submitted by an adopting employer (or a controlling member of a multiple employer plan, if applicable) of a pre-approved plan regarding the third (and subsequent) remedial amendment cycles; provides that the IRS will accept determination letter applications for certain individually designed merged plans on an ongoing basis; sets forth procedures for an adopting employer of a pre-approved plan (or the controlling member, in the case of a multiple employer plan) to submit an application for a determination letter; and provides procedures for an adopting employer of a pre-approved plan to submit a Form 5307 to request a determination letter with respect to the second and the third six-year remedial amendment cycles.
Employers that may need to request a determination letter should review this guidance and work with their service providers to submit any necessary applications.
The IRS recently released the 2019 Form 5500-EZ. As background, Form 5500-EZ is an annual filing requirement for retirement plans that are either a one-participant plan or a foreign plan. Specifically, Form 5500-EZ is used by one-participant plans that are not subject to the requirements of IRC Section 104(a) and that are not eligible or choose not to electronically file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, to satisfy certain annual reporting and filing obligations imposed by the Code.
The IRS does not appear to have made any significant changes to this year’s form or instructions. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the necessary information.
Applicable plan sponsors must file a Form 5500-EZ on or before the last day of the seventh month after their plan year ends. As a result, calendar-year plans generally must file by July 31 of this year (reporting for the 2019 plan year). Plans may request a two-and-a-half month filing extension by submitting a Form 5558, Application for Extension of Time to File Certain Employee Plan Returns, by the plan’s original due date.
On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act of 2020 (HR 1865) into law. The main purpose of this legislation is to continue funding certain government operations. However, the bill also adopts the Setting Every Community Up for Retirement Enhancement (SECURE) Act relating to retirement plans.
The SECURE Act is the most comprehensive retirement legislation passed since the Pension Protection Act of 2006. The law includes sweeping changes that will affect how retirement plans are offered.
As background, the SECURE Act comes after multiple bills attempted to include similar provisions. Specifically, the Retirement Enhancement and Savings Act (RESA) was approved by the Senate Finance Committee and the Family Savings Act was passed by the House in 2018, respectively. The SECURE Act was passed by the House of Representatives in May 2019 and included provisions found in both of those previous bills and added some new provisions.
The SECURE Act (as passed in the appropriations bill) is broken up into four titles, and some of the major provisions are summarized as such:
As noted, this legislation will result in an overhaul of many of the retirement regulations that have been in place for decades. Some provisions of the bill are effective immediately, some effective beginning in the plan year after December 31, 2019, while others will become effective at later dates. Retirement plan sponsors should work with their plan advisors, recordkeepers, and other service providers to amend their plan as necessary.
On December 9, 2019, the IRS published a Generic Legal Advice Memorandum that reiterates the requirement to timely adopt plans (and plan amendments). In other words, a plan sponsor must retain a validly executed plan document, as an unexecuted copy does not meet the IRC’s requirements. As background, legal advice memorandums are provided by the IRS Office of Chief Counsel to IRS personnel.
The memorandum is a result of an issue raised in Val Lanes Recreation Center v. Commissioner, T.C. Memo 2018-92, and that is whether a plan sponsor must retain a validly executed plan document. The Tax Court in Val Lanes confirmed that in order for a qualified plan to be validly adopted, the plan document needs to be signed by the employer – or someone authorized by the employer. Further, should an employer fail to retain an executed plan, the employer has the burden to prove that such executed plan document existed. In the case referenced, the employer was not able to produce an executed plan document. However, the employer met its burden of proof by providing creditable explanation regarding the lack of an executed copy.
Importantly, the IRS clarifies that the facts in Val Lanes are unusual, and reiterates that a plan is only considered adopted if proof of adoption of the plan is provided. The IRS further stresses that it is unlikely for a plan sponsor to meet its burden of proof without providing an actual signed plan document.
Per the memorandum, it is appropriate for an IRS exam agent to disqualify the plan upon failure to produce a signed plan document. This memorandum serves as an important reminder to employers that a signed copy of the plan document needs to be maintained, as an unexecuted copy is not considered validly adopted.
On December 4, 2019, the IRS issued Notice 2019-64, which is the 2019 Required Amendments List (RA List) for qualified retirement plans. The yearly RA Lists provide changes in retirement plan qualification requirements that could result in disqualifying provisions and require a remedial amendment. A disqualifying provision is a required provision that isn’t listed in the plan document, a provision in the document that doesn’t comply with the qualification requirements, or a provision that the IRS defines as such.
The RA List is divided into two parts: Part A and Part B. Part A gives changes in qualification requirements that generally will require affected plans to be amended. Part B gives changes that would likely not require amendments to most plans, but might require an amendment because of an unusual plan provision in a particular plan.
This year, Part A includes two changes in requirements that would require plan document amendments. The first requires plan sponsors to amend their plan documents to reflect the recently adopted changes to the hardship distribution rules. Specifically, those changes no longer require employers to suspend employees’ elective deferrals after they’ve taken a hardship distribution or to require that employees represent that they do not have sufficient cash or liquid assets to use for the hardship. The second change requires plan sponsors to amend their plan document to reflect the final rules on cash balance and hybrid defined benefit plans. There are no Part B entries. Notably, this RA list also applies to 403(b) plans.
The remedial amendment deadline for disqualifying provisions resulting from items on the 2019 RA List is December 31, 2021 (or later, for certain governmental plans). Therefore, plan sponsors should determine whether amendments are necessary for their particular retirement plans.
On November 29, 2019, the IRS provided a new mailing address for employee plan submissions regarding determination letters, letter rulings, and IRA opinion letters. This update provides an additional address for regular United States Postal Service delivery.
The address for regular USPS delivery is:
Internal Revenue Service
P.O. Box 12192
TE/GE Stop 31A Team 105
Covington, KY 41012-0192
The address for deliveries by private delivery services is:
Internal Revenue Service
7940 Kentucky Drive
TE/GE Stop 31A Team 105
Florence, KY 41042
This address change will affect the place to which a number of different forms must be mailed. However, many employers will not utilize this new address, as it applies to very specific forms. Plan sponsors should familiarize themselves with the announcement to ensure that they are sending their plan submissions to the correct address.
On November 6, 2019, the IRS issued Notice 2019-59, 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, 2020.
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 to $19,500 in 2020 (from $19,000 in 2019). Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of these plans increases from $6,000 to $6,500. Accordingly, participants in these plans who have attained age 50 will be able to contribute up to $26,000 in 2020. The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts will increase from $13,000 to $13,500.
The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $57,000 (from $56,000). The limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) increases from $225,000 to $230,000. Additionally, the annual limit on compensation that can be taken into account for allocations and accruals increases from $280,000 to $285,000.
The threshold for determining who is a highly compensated employee under Section 414(q)(1)(B) increases to $130,000 (from $125,000). The dollar limitation concerning the definition of a key employee in a top-heavy plan increases from $180,000 to $185,000.
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.
On November 8, 2019, the IRS released a proposed rule that would update the life expectancy and distribution period tables that are used to calculate required minimum distributions (RMDs). As background, in August 2018, President Trump issued an Executive Order on Strengthening Retirement Security in America. As part of that order, President Trump directed the treasury to review the life expectancy and distribution period tables to determine if they should be updated.
Subsequently, the IRS has proposed this rule, which will update the Single Life, Uniform Lifetime, and Joint and Last Survivor Tables to recognize longer life expectancies. This will ultimately reduce annual RMDs.
The updated life expectancy distribution tables would apply for any distribution calendar year beginning on or after January 1, 2021. The IRS is also requesting comments on how often they should update these tables. Retirement plan sponsors should keep this update in mind for future RMDs.
On October 23, 2019, the DOL proposed a new rule to expand the options available to retirement plan sponsors for electronic delivery of required disclosures. The proposal followed Executive Order 13847, which instructed the DOL to determine whether regulatory actions could be taken to improve the effectiveness of participant disclosures and reduce their cost to employers. After review and consultation with other regulatory agencies, the DOL set forth a new "notice and access" safe harbor under which ERISA retirement plan disclosures could be made available on a website following specified notice.
As background, in 2002, the DOL issued a safe harbor that permitted electronic delivery of disclosures provided that the method was reasonably calculated to ensure actual receipt, notice and content requirements were satisfied, and participants maintained the right to request paper copies. Under this prior safe harbor, employees with "integral access" to the employer’s computer system at work could be defaulted to electronic delivery; all others were required to affirmatively consent to the electronic method. In recognition of technological advances and increased participant internet access, the notice and access option is offered as a new alternative to (rather than a replacement of) the existing 2002 safe harbor.
The proposed alternative permits required disclosures for retirement plans (including multi-employer plans) to be posted online following notice to covered individuals, who can then access the documents continuously using an internet connected device. Covered individuals are participants, beneficiaries, and any other individuals entitled to documents, who have provided the plan administrator (or designee) with an electronic address, such as email address or smartphone number. Alternatively, if an electronic address is assigned by an employer for this purpose, the employee is treated as if they provided the electronic address. Covered documents include all disclosures required under Title 1 of ERISA, with the exception of documents that must be furnished upon request (such as the plan document).
The new safe harbor requires plan administrators to send a notice of internet availability to each covered individual’s electronic address whenever a covered document is made available on the website. Administrators are permitted to combine certain annual disclosures, for which the notice of availability would be considered timely if furnished not later than 14 months following the date of the prior plan year’s notice.
The new safe harbor lays out specific content that must be included in the notice. The referenced website address must be "sufficiently specific" to provide ready access to the covered document, either by leading the covered individual directly to the covered document or to a login page that provides a prominent link to the covered document. Generally, the notice must not contain additional information or be accompanied by other documents and it must be written in a manner calculated to be understood by the average plan participant.
The proposed rule includes two significant protections for individuals who prefer to receive paper versions of covered documents. First, any covered individual has the right to request and receive a paper copy free of charge. Second, a covered individual who prefers to receive all covered documents in paper may opt out of receiving covered documents electronically. If a plan administrator becomes aware of an invalid address (for example, if an email is returned as undeliverable), the individual must be treated as if they opted out of electronic delivery.
Plan administrators who choose to use the new safe harbor must send an initial paper notification to apprise covered individuals of the new electronic delivery method and the opportunity to opt out.
The DOL has requested public comments and information regarding the proposed alternative electronic delivery method on or before November 22, 2019. The new safe harbor option will be effective 60 days following publication of a final rule. In response to the executive order's directive, the DOL is also seeking information and ideas regarding measures (in addition to the notice and access framework) that would enhance the effectiveness of ERISA disclosures for participants and beneficiaries. This second request focuses upon the design and content of the disclosures and includes specific questions upon which feedback is sought.
Employers who are seeking an alternative electronic delivery method for retirement plan disclosures may want to review the proposed rule. It is important to note that the proposed notice and access delivery method does not currently incorporate welfare benefit plan disclosures. (The DOL declined to extend the proposal to welfare benefit plans, pending review and consultation with other regulatory authorities.)
Please stay tuned to Compliance Corner for further updates on these initiatives.
On September 30, 2019, the IRS released Revenue Procedure 2019-39, which sets up recurring remedial amendment periods for 403(b) plans. As background, remedial amendment periods allow plan sponsors to retroactively correct form defects in their plan document. This guidance comes after the IRS established a pre-approved plan program for 403(b) back in 2013. The last day of the remedial amendment period established under that previous guidance is March 31, 2020.
Rev. Proc. 2019-39 establishes recurring remedial amendment periods for form defects occurring after March 31, 2020. It also gives plan sponsors deadlines by which they must adopt 403(b) plan documents or plan amendments.
403(b) plan sponsors should work with their advisers to correct any form defects. The IRS indicated that they will provide additional guidance at a later date. We will continue to report on any developments in Compliance Corner.
On October 3, 2019, the IRS published a draft version of the 2019 Form 5500-EZ instructions. As background, IRS Form 5500-EZ is an annual filing requirement for retirement plans that are either a one-participant plan or a foreign plan. The draft instructions are only for informational purposes and may not be used for 2019 Form 5500-EZ filings, but employers should familiarize themselves with the instructions in preparation for 2019 plan year filings. They should be reviewed in connection with the draft form discussed in the October 1, 2019 edition of Compliance Corner.
The IRS does not appear to have made any significant changes to this year’s form or instructions. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
On September 23, 2019, the IRS published the final rule changing the requirements that must be met for a participant to take a hardship distribution. As background, the IRS proposed new rules for hardship distributions back in November 2018 (as discussed in our November 28, 2018, Retirement Update for Compliance Corner).
The final rules are very similar to the proposed rules. As such, participants will be able to take a hardship distribution even if they have not exhausted all plan loans. They will also be allowed to continue contributing to their 401(k) after they take a hardship distribution. Likewise, the proposed rule would allow participants to draw hardship distributions from qualified matching contributions and qualified nonelective contributions (if their employer plan sponsor chooses to allow it).
There were a few clarifying changes to note:
With some exceptions, the final regulations apply to distributions made after January 1, 2020. However, parts of the rule have been in effect since January 1, 2018.
Employers offering hardship distributions should determine how this rule will affect their plan and discuss these final rules with their advisor.
On September 13, 2019, the U.S. Department of Justice (DOJ) filed a Statement of Interest in Jarvis Taxpayers Association et al. v. CA Secure Choice Retirement Savings Program, asserting that California’s mandatory payroll deduction retirement program (CalSavers) is preempted by ERISA. The submission follows a DOJ request to the California district court to delay ruling on a pending dismissal motion. According to the DOJ, the purpose of the filing was to advance a correct and consistent interpretation of the scope of ERISA preemption and to promote the voluntary establishment of employer-sponsored retirement plans.
As background, Congress enacted ERISA in 1974 to ensure that employees would receive the benefits to which they were entitled under employer-sponsored plans. Significantly, ERISA did not require that employers establish benefit plans, but instead provided incentives for employers to do so. ERISA also established a uniform set of plan administrative rules and procedures, so employers operating in more than one state did not have to navigate various state laws. As federal law, ERISA was designed to supersede or “preempt” any conflicting state laws.
The Secure Choice Act was enacted by the California legislature and applies to California employers that have five or more employees and do not already sponsor an ERISA retirement savings plan. These employers are required to automatically enroll employees in individual retirement accounts (IRAs) managed by a state board, and to fulfill ongoing responsibilities with respect to their employees covered by the CalSavers program. The DOJ indicated that it had a heightened interest in a preemption ruling in this case because the Secure Choice Act was the first amongst similar state auto-IRA laws to be challenged.
In the brief, the DOJ asserts that the California law is preempted by ERISA because ERISA plans are vital to its framework: an employer is compelled to either establish an ERISA plan or participate in the California equivalent. So, an employer who elects not to sponsor an ERISA plan must now enroll employees in CalSavers and follow the state’s administrative structure. Accordingly, the Secure Choice Act obstructs ERISA’s voluntary plan sponsorship and uniform national administrative scheme.
Additionally, the DOJ emphasizes that CalSavers is a plan as defined by ERISA and Ninth Circuit precedent because the benefits, beneficiaries, funding source, and procedures for receiving benefits can be reasonably ascertained from the Secure Choice Act’s terms. The state law also requires an employer to determine and monitor eligibility, payroll deductions, and contribution rates for employees, thus assuming obligations analogous to those of maintaining an ERISA plan. As a result, the Department alternatively argues, the CalSavers program as maintained by an employer is actually an ERISA plan.
The brief further notes that the existing 1975 IRA Safe Harbor, which provides an exception from ERISA coverage for payroll deduction IRAs, is not applicable to CalSavers because the program is not “completely voluntary.” Past precedents have established that “completely voluntary” for purposes of the exception requires an employee’s affirmative election to participate (as opposed to automatic enrollment and the opportunity to opt out, as is the case under the CalSavers regime).
The DOJ’s filing is significant because it reinforces the federal government’s role as primary regulator of employer sponsored retirement plans. The core issue is one of federal preemption and the scope of ERISA’s application. Clearly, the DOJ views the obligations imposed by the CalSavers program as conflicting with and preempted by ERISA.
It is not yet known to what extent the DOJ’s opinion will influence the district court’s ruling on the pending dismissal motion. However, employers in California to which the CalSavers program applies will likely want to follow this litigation. Although not directly affected by the immediate ruling, employers in other states with similar IRA programs may also wish to monitor this development.
On September 23, 2019, the IRS published a draft version of the 2019 Form 5500-EZ return/report. As background, IRS Form 5500-EZ is an annual filing requirement for retirement plans that are either a one-participant plan or a foreign plan. This draft is only for informational purposes and may not be used for 2019 Form 5500-EZ filings, but employers should familiarize themselves with the form in preparation for 2019 plan year filings.
The IRS does not appear to have made any changes to this year’s form. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
On September 13, 2019, the IRS published a draft version of the instructions for 2019 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan. This draft of the instructions is only for informational purposes and may not be used for 2019 Form 8955-SSA filings, but employers should familiarize themselves with the instructions in preparation for 2019 plan year filings.
The IRS does not appear to have made any changes to this year’s instructions. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
On September 12, 2019, the IRS provided a new mailing address for employee plan submissions regarding determination letters, letter rulings, and IRA opinion letters.
The new address is:
Internal Revenue Service
7940 Kentucky Drive
Florence, KY 41042
This address change will affect the place to which a number of different forms must be mailed. However, many employers will not utilize this new address, as it applies to very specific forms. Plan sponsors should familiarize themselves with the announcement to ensure that they are sending their plan submissions to the correct address.
On September 1, 2019, the IRS’ determination letter program expansion took effect. As background, back in 2016, the IRS changed the determination letter program to only require individually designed retirement plans to seek determination letters upon plan creation/qualification and termination (instead of at certain intervals, as in the past). However, on May 1, 2019, the IRS released Revenue Procedure 2019-20, which expanded the determination letter program to allow statutory hybrid plans and merged plans to request a determination letter outside of initial qualification and plan termination. (See our May 14, 2019, Compliance Corner article for more information.)
As of September 1, 2019, employers that sponsor statutory hybrid plans (which are plans that have a feature that pays out a lump sum, like a cash-balance plan) can apply for a determination letter even if the plan sponsor has already received one. Employers merging plans may also request a determination letter as long as the application is completed no later than the end of the plan year that includes the date of the transaction.
Pursuant to this guidance, employers sponsoring these types of plans (hybrid or merged) should consider whether they should avail themselves of the opportunity to confirm the compliance of their plan documents. Most defined contribution plans that have not merged will not need to take advantage of this guidance; plan sponsors to which this guidance could apply should consult with their advisors.
On August 9, 2019, the DOL published a fact sheet that discusses retirement plan sponsors’ obligations under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). The guidance applies to any retirement plan that provides retirement income to employees or defers payment of income to employees until after employment has ended.
As background, USERRA provides certain protections for employees who must be absent from work due to uniformed service. These protections include reemployment rights, protection from discrimination, and the right to the continuation of group health coverage. As it pertains to retirement plan benefits, USERRA generally requires employers to credit employees with the time they spent on military leave (since many retirement plan contributions are based on employee compensation or time in service).
The fact sheet provides practical guidance on how employers should administer their retirement plans when an employee takes USERRA leave. Since USERRA requires employers to provide returning service members with the same benefits that they would have been entitled to had they remained continuously employed, employers must determine the employee’s eligibility, vesting, and accrual of benefits as if the service member had not left for military service.
Employer contributions to the retirement plan must be made no later than 90 days following the service member’s reemployment. The service member must also be given the chance to make up any missed employee deferrals, although they are not required to do so. The fact sheet also describes how the employer should determine the rate of compensation used to calculate contributions by taking into account the service member’s hours worked prior to the military leave.
Employers should familiarize themselves with this guidance and work with their advisers to provide service members the appropriate retirement benefits upon reemployment.
On August 20, 2019, the U.S. Court of Appeals for the Ninth Circuit, in Dorman v. Charles Schwab Corp., held that claims relating to a breach of ERISA’s fiduciary duties may be arbitrated. As background, previously, the Ninth Circuit (in Amaro v. Continental Can Co.) held that ERISA lawsuits cannot be arbitrated. The Ninth Circuit found that as a result of post-Amaro U.S. Supreme Court decisions, Amaro is no longer applicable law; so, the Dorman decision overturns Amaro.
In Dorman, the plaintiff (Dorman) – a former Charles Schwab employee – had, as an employee, participated in the company’s 401(k) plan. In 2014, an amendment was added to the 401(k) plan that stated any claim, dispute, or breach arising out of or connected to the 401(k) plan “shall be settled by binding arbitration.” The amendment also provided a waiver of class or collective action — meaning that employees waive their right to be part of any class action. In 2014, Dorman was promoted to a consultant role, and he enrolled in a consultant compensation plan. That compensation plan also included an arbitration clause, and also stated that benefit claims would be resolved pursuant to the terms of the 401(k) plan. In 2015, Dorman terminated employment with Charles Schwab, and two months later ceased participation in both the 401(k) and the compensation plan, and received a full distribution of his benefits.
Then, in 2017, Dorman filed a class action complaint against Charles Schwab, the 401(k) plan, fiduciaries of the 401(k) plan, and company executives, claiming that those defendants had breached their ERISA fiduciary duties of loyalty and prudence by selecting 401(k) plan investments that were affiliated with Charles Schwab. Dorman also claimed that the board of directors had breached their ERISA fiduciary duty to monitor plan fiduciaries. In response, Charles Schwab and the other defendants filed a motion to compel arbitration (instead of resolving the case in court); their motion was based on the 401(k) and compensation plan terms relating to arbitration as the medium for resolving plan-related disputes, as outlined in the 2014 401(k) plan amendment.
In January 2018, the district court denied the defendants’ arbitration motion, holding that – despite the plans’ terms – neither the 401(k) nor the compensation plan required arbitration. The court reasoned that the 401(k) arbitration provision didn’t apply because it took effect after Dorman’s 401(k) participation ended, and that because Dorman’s claims were benefit claims, they were not included in the compensation plan’s arbitration provision. The court also concluded that even if Dorman’s claims were within the plans’ arbitration scope, because Dorman’s claims were brought on behalf of the plan (as a class action) and not on Dorman’s own behalf, he could not waive 401(k) plan rights without the plan’s consent.
On appeal, the Ninth Circuit found several reasons to disagree with the district court’s findings and reasoning, and ultimately overturned its own precedent (the Amaro case). The court relied on several U.S. Supreme Court rulings that arbitrators are competent to interpret and apply laws (one argument in denying arbitration was that arbitrators are incompetent). The Ninth Circuit (in an unpublished memorandum), reasoned that the district court’s reasoning was flawed in several ways.
First, the record showed that Dorman was actually a 401(k) plan participant for almost a year while the arbitration provision was in effect. Second, Dorman was actually bound by the 401(k) arbitration provision because the plan had agreed to arbitrate benefit claims. Third, arbitration was not a subterfuge for fiduciaries to avoid ERISA liability, but rather a quicker and cheaper form of resolution for benefit claim disputes. As a result, the Ninth Circuit sent the case back to the district court with instructions to order arbitration with regard to Dorman’s claims.
For employers, the case signals a bit of a shift in how courts might treat ERISA fiduciary claims where arbitration is outlined in the related plan documents. The court’s holding means that arbitration agreements and class and collective action waivers in ERISA fiduciary duty breach claims can be enforced, at least where the plan documents explicitly include those provisions and waivers. Generally speaking, ERISA fiduciary breach claims are not commonly arbitrated; rather, they are usually put before courts. As a takeaway, employers’ plan sponsors will want to discuss the issue with outside counsel. In some situations, adding arbitration provisions and class/collective action waivers to plan documents may help employers avoid costly court appearances; in other situations, court proceedings may be the best process to an equitable resolution.
On August 14, 2019, the IRS published Revenue Ruling 2019-19, clarifying the tax treatment of retirement plan distribution checks that are not cashed by the participant to which they are distributed. Specifically, the ruling discusses a fact pattern in which a participant receives a required distribution in 2019, but fails to cash that check by the end of the year.
In this situation, the IRS confirms that
So even if an employee fails to cash a distribution check in the year that the distribution was made, the distribution is still deemed to be made in that year (for tax purposes). Employers should consider this guidance to ensure that they are following the correct protocol in distributing retirement plan funds and taxing those distributions.
On July 31, 2019, the DOL issued final rules expanding access to multiple employer plans (MEPs). As background, in October 2018, the DOL issued proposed rules that redefined the term “employer” under ERISA to allow certain employer groups and associations or PEOs to sponsor defined contribution retirement plans. That proposed rule was the DOL’s response to an executive order directing them to propose rules that would make it easier for small employers to band together to offer retirement plans. (We discussed the proposed rules in the October 30, 2018 edition of Compliance Corner, found here.)
The final rules do not vary much from the proposed rules. “Bona fide groups or associations of employers” and “bona fide professional employer organizations” can establish MEPs. Working owners with no employees can also participate in the MEPs under certain circumstances. The final rules still require the following for a MEP that wants to form under the new rules:
One difference between the proposed rules and the final rules is that the final rules do not contain a safe harbor for “certified PEOs.” Instead, a PEO must show that they bear responsibility for employees’ wages, tax withholding and reporting, job offer and terminations, and employee benefits. Additionally, the final rules require that PEOs continue in their obligations as plan sponsor to participants even after the PEO ends its relationship with the client-employer.
The IRS simultaneously published a Request for Information (ROI) on “Open MEPs.” Open MEPs are MEPs that would potentially cover employers that have no relationship. The ROI also asks for comments on “corporate MEPs,” which would cover related employers that are not related enough to be considered a controlled group. This would allow even more employers the chance to band together to provide retirement plans. Comments must be submitted by October 29, 2019. Interestingly, Congress is also considering providing open MEPs through legislation.
The final rule will go into effect on September 30, 2019. Any plan sponsor that is considering joining a MEP should work with their adviser.
On July 24, 2019, the DOL issued Field Assistance Bulletin No. 2019-01, which provides temporary penalty relief from certain Form 5500 filing requirements for multiple employer plans (MEPs) subject to Title 1 of ERISA. Generally, MEPs file one Form 5500 that aggregates the data of the underlying participating employers.
However, in 2014, Congress added Section 103(g) to ERISA, which requires MEPS to include a list of names and EINs of participating employers and a good faith estimate of the percentage of total contributions made by each employer for the plan year. Unfunded or insured welfare plans must also specify the participating employers, but do not need to include the contribution information.
The DOL initiated enforcement action in 2019, upon recognition that a significant number of MEP filings in recent years had failed to fully comply with the ERISA Section 103(g) requirements. Following a dialogue with MEP plan sponsors, some of whom objected to the release of the employer-specific data, the DOL reiterated its position that such data is public information and must be open for public inspection.
Before proceeding with further civil penalty enforcement actions, the DOL is offering transition relief to MEPs who voluntarily comply with ERISA Section 103(g) by providing complete and accurate employer information for the 2017 plan year or any prior plan year. Specifically, the DOL will not reject such filings or assess civil penalties solely for the failure to include the ERISA Section 103(g) employer details, provided the plan’s 2018 Form 5500 complies with the requirements.
Additionally, for 2018 calendar year plans, which have a July 31, 2019 Form 5500 filing deadline, the DOL granted a special two and a half month extension to comply with ERISA Section 103(g). The special extension requires only the selection of a designated box on the Form 5500; however, the filer can also complete the standard Form 5558 to request an extension. The relief is also available to MEPs that already filed the 2018 Form 5500, provided the filing is amended by October 15, 2019.
Affected MEP sponsors should review previous Form 5500 filings (beginning with the 2014 plan year) to determine if the ERISA Section 103(g) required information was provided. Sponsors who failed to specify the necessary employer details on past filings can voluntarily provide such information and take advantage of the available penalty relief.
For the 2018 plan year, MEPs on extension (either through the special extension option or the Form 5558) should ensure the required employer data is attached. If the 2018 Form 5500 was already filed without the complete ERISA Section 103(g) data, relief under this guidance is still available to sponsors who amend the form to include the missing employer specifics prior to October 15, 2019.
On July 3, 2019, the IRS proposed rules that modify how employer qualification failures are treated if the employer provides retirement benefits through a multiple employer plan (MEP). As background, a MEP is a defined contribution plan in which multiple employers participate. For IRC and ERISA purposes, MEPs are considered a single plan. In the previous IRS rules on MEPs, there was a “unified plan rule” that meant that the whole MEP could be disqualified if one participating employer failed to satisfy a plan qualification requirement. This was known as the “one-bad-apple rule.”
This proposed rule does away with the one-bad-apple rule if certain conditions are met. This change comes in response to President Trump’s executive order on Strengthening Retirement Security in America. You can find more information on that executive order in our Compliance Corner article here.
Under the proposed rule, MEPs can avoid the disqualification of one participating employer causing the disqualification of the entire plan if the following requirements are met:
This proposed rule will be welcome news to MEP sponsors. The rule would become effective on or after the date the final rule is published in the federal register. The IRS will accept comments on the rule until October 1, 2019. MEP sponsors and their participating employers should consider the requirements set in place by this rule.
The IRS has updated their web page related to hardship distributions from a 401(k) based on changes made by the Bipartisan Budget Act of 2018.
Beginning in 2019, hardship distributions may be made from elective deferrals, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings attributable to any of those.
Also effective in 2019, a participant is no longer prohibited from making elective deferrals in the six month period following the receipt of a hardship distribution. Additionally, the participant is not required to take all available plan loans prior to requesting the hardship distribution.
These changes are already in effect. Thus, plan sponsors should already be in compliance. Please contact your NFP advisor with any questions.
On May 23, 2019, the US House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) by a vote of 417-3. While the Benefits Compliance team doesn’t normally report on bills that haven’t yet been written into law, we chose to provide this information as the SECURE Act. If passed, the SECURE Act would result in major changes to retirement regulations. In fact, the act would provide the most sweeping changes to retirement legislation that we’ve seen in over a decade. We provided more detail on this act in an article in our April 16, 2019 edition of Compliance Corner.
The act is now expected to be voted on in the Senate, where the Senate could vote on it as-is or could reconcile the act with the Retirement Enhancement and Savings Act (RESA), which is currently in the Senate Finance Committee. Either way, given the bipartisan support for the legislation, it seems very likely that some version of the act will be passed in the Senate and sent on to the president.
We will continue to report on any developments with this act.
On May 16, 2019, in Reed v. KRON/IBEW Local 45 Pension Plan, the U.S. Court of Appeals for the Ninth Circuit reversed a district court decision to deny a domestic partner from receiving the pension benefits upon an employee’s death. The court ruled that the pension plan committee abused its discretion in the denial and remanded with instructions to determine the payments owed to the plaintiff.
In this case, the plaintiff (Reed) registered as a domestic partner with the (now deceased) Gardner in 2004. At that time, Gardner worked for a television station and was a participant in the company’s pension benefit plan. Gardner retired in April 2009 and began receiving pension benefits. Gardner and Reed married in May, 2014, and Gardner passed away five days later. The pension payments ceased upon Gardner’s death.
Reed submitted a claim for a survivor-spousal benefit, but it was denied, because the plan terms had “consistently interpreted the term spouse to exclude domestic partners.” Reed sued the plan committee that made the decision. The plan argued that the Defense of Marriage Act (DOMA), which was in place at the time of Gardner’s retirement, prohibited the plan from recognizing Reed as Gardner’s spouse. The district court found in favor of the plan committee stating that it did not abuse its discretion in denying Reed’s claim for benefits.
In considering the appeal, the ninth circuit focused on the plan document’s choice-of-law provision that stated the plan was to be “administered and its provisions interpreted in accordance with California law.” The ninth circuit determined that the plan committee should have awarded spousal benefits to Reed, because in either time the committee reviewed the case, in 2009 (at the time of Gardner’s retirement) and 2016 (at the time of Gardner’s death), California law afforded domestic partners the same rights, protections, and benefits as those granted to spouses. The fact that DOMA was law at the time of Gardner’s retirement did not supersede the plan’s terms.
This case serves as a good reminder of the protections extended to domestic partners in certain states, including CA. Plan administrators should know and understand the implications of applicable state laws when interpreting a plan’s terms.
On May 1, 2019, the IRS released Revenue Procedure 2019-20, which expands the determination letter program to allow statutory hybrid plans and merged plans to request a determination letter outside of initial qualification and plan termination. As background, back in 2016, the IRS changed the determination letter program to only require individually designed retirement plans to seek determination letters upon plan creation/qualification and termination (instead of at certain intervals, as in the past). (See our July 12, 2016, Compliance Corner article for more information on that change.) When that change occurred, the IRS also contemplated leaving the determination letter program open for certain specified circumstances.
Rev. Proc. 2019-20 comes after the IRS solicited and received comments on those “specified circumstances.” The guidance allows for employers that sponsor statutory hybrid plans (which are plans that have a feature which pays out a lump sum, like a cash-balance plan) to apply for a determination letter even if the plan sponsor has already received one. The guidance also allows for employers merging plans to request a determination letter. Specifically, a plan sponsor can submit a determination letter application if a plan merger is completed no later than the end of the plan year that includes the date of the transaction.
The IRS is also providing sanction relief to any entities that apply for a determination letter pursuant to this guidance. If the IRS discovers any plan document failures while reviewing the determination letter application for these plans, they will apply a reduced sanction equal to the user fee under the Employee Plans Compliance Resolution System (EPCRS).
Pursuant to this guidance, employers sponsoring these types of plans (hybrid or merged) should consider whether they should avail themselves of the opportunity to confirm the compliance of their plan documents. Most defined contribution plans that have not merged will not need to take advantage of this guidance; plan sponsors to which this guidance could apply should consult with their advisers.
On May 8, 2019, the IRS published a request for information, titled “Comment Request for the Annual Return/Report of Employee Benefit Plan,” in the federal register. The request for comments relates to the method in which Form 5500-EZ is filed; the IRS is proposing to make Form 5500-EZ available on the EFAST2 system for direct electronic filing rather than using Form 5500-SF. Either way, Form 5500-EZ could still be filed via paper copy.
As background, Form 5500-EZ is an annual return filed by a one-participant (owners/partners and their spouses) retirement plan or a foreign plan to satisfy the Form 5500 filing requirement. While Forms 5500 and 5500-SF are generally filed electronically through the web-based EFAST 2 system, Form 5500-EZ is generally filed by paper with the IRS or through answering questions on Form 5500-SF itself (also filed electronically via EFAST2).
According to the request, the IRS is seeking comments on a few things. Specifically, they are soliciting comments on:
Employers are not required to respond — this is merely the IRS requesting comments relating to Form 5500-EZ. Comments should be submitted to the IRS on or before July 8, 2019.
Effective April 19, 2019, the IRS expanded the system of correction programs for plan sponsors of retirement plans with the release of Rev. Proc. 2019-19. As background, plan sponsors are permitted to correct certain failures through the Employee Plans Compliance Resolution System (EPCRS) and in some circumstances avoid paying any fees or sanctions. There are three programs in the system: the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP).
This revenue procedure allows plan sponsors of a qualified plan, a 403(b) Plan, a Simplified Employee Pension Plan (SEP), or a SIMPLE IRA Plan that satisfy the eligibility requirements to correct certain operational failures or plan document failures under SCP. A plan sponsor may correct an operational failure by plan amendment to conform the terms of the plan to the plan’s prior operations if three conditions are satisfied: 1) the plan amendment would result in an increase of a benefit, right, or feature, 2) the increase in the benefit, right, or feature is available to all eligible employees, and 3) providing the increase in the benefit, right, or feature is permitted under the Code and satisfies the correction principles.
Also, this revenue procedure provides a new correction method for failure to obtain spousal consent for a plan loan. The sponsor must notify the affected participant and spouse so that the spouse can provide consent. If consent is not obtained, the failure must be corrected using either VCP or Audit CAP. Plan loans that are made in excess of loan limits may be corrected only under VCP or Audit CAP.
Finally, the EPCRS may not be used to correct the initial failure to adopt a qualified plan or failure to timely adopt a written 403(b) plan document.
The Treasury Department and the IRS invite comments on how to improve EPCRS and expect to update the system in the future based on those comments.
If a plan is currently out of compliance with requirements based on an operational or plan document failure, the plan sponsor should work with their retirement plan consultant to see if they are eligible to use EPCRS to get the plan into compliance.
On April 23, 2019, in Acosta v. City National Corporation, a panel of the U.S. Court of Appeals for the Ninth Circuit held that City National Corporation and other defendants (City National) violated ERISA by engaging in prohibited self-dealing. As background, City National Corporation sponsors a defined contribution plan and its subsidiary, City National Bank (CNB), serves as the plan’s trustee and record-keeper. As the plan’s record-keeper, CNB received compensation through revenue sharing. CNB also served over 200 other ERISA plans in this capacity.
The DOL brought this case against City National, alleging that they had violated ERISA’s prohibition against self-dealing. Specifically, they argued that CNB had set and approved their own compensation and had failed to maintain a system for tracking how much time its employees actually spent servicing City National’s plan versus other plans. The District Court granted summary judgment in favor of the DOL and the Ninth Circuit affirmed that decision.
In their ruling, the Ninth Circuit affirmed the idea that self-dealing cannot be overcome by claiming the reasonable compensation exemption provided in ERISA. In other words, where a fiduciary engages in self-dealing, it is not enough that the fees that are paid under the arrangement are for reasonable compensation for services. Instead, in this case, the fees paid to CNB were self-dealing, and they needed to be able to prove that the fees were paid in direct compensation for services actually rendered to this plan. This would allow them to offset those amounts against the damages assessed for the self-dealing.
Unfortunately, in this case, the court found that CNB had not actually met their burden of proof in showing that the fees paid directly correlated to the services offered to the plan. They could not prove that CNB employees had directly spent certain time completing tasks for this plan. Instead, all they could provide was a generalized report based on an average of all fees paid to CNB by all the plans they serviced. As such, the court found that they were liable for damages for their self-dealing.
While the case was remanded to the District Court to determine the exact amount of damages, this case presents a warning to plan sponsors. Where fiduciaries of the plan are also offering services to the plan for a fee, it’s important that they keep accurate records of the services that are offered so that they can accurately offset any damages that could be imposed because of self-dealing. Importantly, plans should also consider whether other arrangements need to be made to avoid self-dealing, or whether an independent fiduciary should be called upon to determine fees paid to a fiduciary.
On April, 2019, the US House of Representatives’ Ways and Means Committee unanimously approved the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). While the Benefits Compliance team doesn’t normally report on bills that haven’t yet passed, we chose to provide this information as the SECURE Act, if passed, would result in major changes to retirement regulations. Additionally, the unanimous vote from the Ways and Means Committee reflects bipartisan support for the Act, which means that there are good chances that some version of it will be signed in to law.
As background, the SECURE Act comes after multiple bills attempted to include similar provisions. Specifically, the Retirement Enhancement and Savings Act (RESA) was approved by the Senate Finance Committee and the Family Savings Act was passed by the House in 2018, respectively. The SECURE Act includes provisions found in both of those bills and adds some new provisions.
The SECURE Act is broken up into four titles, and some of the major provisions are summarized as such:Title I: Expanding and Preserving Retirement Savings
As noted, this legislation would result in an overhaul of many of the retirement regulations that have been in place for decades. If passed, it will likely require employers to amend their plans and adjust their plan operations. We will continue to monitor any developments.
On March 26, 2019, the IRS updated their operational compliance list (“OC List”) to include changes to the hardship distribution rules. As background, the OC List is provided by the IRS to help plan sponsors and practitioners achieve operational compliance by identifying changes in qualification requirements effective during a calendar year.
The updated list incorporated the most recent changes to the hardship distribution rules. (We discussed those changes in the November 28, 2018, edition of Compliance Corner.) The list also highlights the relief available to victims of the hurricanes that occurred in 2018.
The IRS periodically updates the OC List to reflect new legislation and guidance. As such, it is a useful tool for plan sponsors. However, the list is not intended to be a comprehensive list of every item of IRS legislation or guidance. Plan sponsors should work with their advisers to ensure their continued compliance with the retirement plan regulations.
On Feb. 21, 2019, the IRS released a set of FAQs providing guidance for employers adopting pre-approved retirement plans. As background, employers may adopt a pre-approved retirement plan offered by document providers instead of individually designing a plan. The FAQs describe how an employer can adopt such a pre-approved plan, including the timeline by which to adopt the plan and how to request a determination letter for the pre-approved plan. The FAQs also address the steps an employer needs to take when amending the pre-approved plan.
Employers looking to adopt a pre-approved retirement plan should familiarize themselves with this guidance.
The IRS has published the 2018 version of Instructions for Form 8915B: Qualified 2017 Disaster Retirement Plan Distribution and Repayments. As background, Form 8915B must be filed by participants who received a qualified disaster distribution from a SEP, SIMPLE, Roth IRA, 457 deferred compensation, qualified 401(k), pension, profit sharing, stock bonus or annuity plan in 2017. Specifically, any of the following must file: those who received a qualified 2017 disaster distribution in 2018, those who received such distribution in 2017 that is being included in their income over three years, and those who made a repayment of such distribution in 2018.
As a reminder, the 2017 disasters covered by the favorable tax treatment are Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria and the California wildfires. Distributions associated with these disasters are included in taxable income in the year in which the distribution was received or spread over three years, at the individual’s choice. The distributions are not subject to the additional tax for early distributions, which is generally 10 percent (25 percent for certain SIMPLE IRA distributions).
Form 8915B must be filed with an impacted individual’s tax return. Any plan participant seeking guidance should be directed to their accountant for assistance.
In January, the IRS published the final 2018 Form 8955-SSA: Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan.
The information in this form is given to the Social Security Administration (SSA), and the SSA provides that information to separated participants when they file for Social Security benefits.
Additionally, the IRS also released the final 2018 instructions for the Form 8955-SSA. They don’t highlight any substantive changes in the updated forms. Minor changes to the instructions include the addition of a reference to affiliated service groups in the definition of a single employer plan and the ability for certain filers to submit paper filings because they qualify for the DOL’s Delinquent Filer Voluntary Compliance Program. Finally, there were also updates in the instructions to the address for private deliveries.
Employers should review this form in preparation for filing the 2018 Forms 8955-SSA.
On Jan. 24, 2019, the IRS issued Publication 560 to help employers prepare the 2018 returns for certain small business retirement plans, including SEP (simplified employee pension plans), SIMPLE (savings incentive match plan for employees), and qualified plans (including 401(k) plans). This publication contains information for employers to understand what types of plans may be best for them to set up, how to set up such a plan, the allowable contributions under each plan, how much of the contribution is deductible, and how to report information about the plan to the IRS and to employees.
For 2018, there are several notable changes to the hardship distribution rules for 401(k) plans. Most significantly, the Bipartisan Budget Act of 2018 changed the hardship distribution rules to:
These updates apply to plan years beginning after Dec. 31, 2018.
The publication also highlights the following updates:
Certain retirement plans may also extend certain tax relief to employees and their family members who live or work in disaster areas affected by Hurricane Michael or Florence, if made by March 15, 2019.
Please note that this document does not contain all of the details necessary to create and maintain these plans. Employers should consult with their advisers or legal counsel to ensure they are set up and administered properly.
The IRS recently released 401(k) Plan Fix-It-Guides for situations where hardship distributions weren’t made properly or where plan loans didn’t conform to the IRC’s requirements. As background, IRS Fix-It-Guides provide information on how to identify, fix and avoid common 401(k) plan compliance failures.
Specifically, the guide on hardship distribution failures identifies the circumstances that will allow for a hardship distribution and identifies the steps to take if a hardship distribution was provided that did not comply with the plan document terms. Likewise, the guide on participant loan failures identifies the IRC requirements for plan loans and how to fix a failure.
Although this guide does not impose any specific employer requirements, it does provide valuable information to plan sponsors who are looking to keep their 401(k) plan compliant. Employers should consult with their adviser if they have committed any of these operational failures.
On Jan. 31, 2019, the IRS released a Voluntary Compliance Program (VCP) Submission Kit for plan sponsors that failed to adopt an updated pre-approved defined contribution (DC) plan. As background, DC plan sponsors were generally required to update their plan document by April 30, 2016, to reflect the changes imposed by the Pension Protection Act. If plan sponsors failed to do so, their plan is no longer entitled to tax-favored treatment.
However, plan sponsors that failed to adopt an updated plan can restore their plan’s tax-favored status by adopting an updated plan document and filing a VCP submission. The submission kit describes the process by which plan sponsors can file their submission. Specifically, it details the steps to take, lists the required documentation and forms, and discusses fees. Additionally, the guidance outlines what will happen after the submission is filed.
DC plan sponsors that have not filed an updated pre-approved plan document should consult with their advisers about whether they should file for the VCP relief.
The IRS recently released the 2019 Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), to be used to prepare 2018 returns. This publication details rules for receiving distributions (withdrawals) from a traditional or Roth IRA. The instructions summarize the changes for 2018 which include:
In addition, the publication reminds individuals that there is still qualified disaster tax relief for IRAs related to Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria and the California wildfires. There is also relief for economic losses suffered as a result of disasters declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016.
Employers that offer Roth or traditional IRAs should familiarize themselves with this guidance.
On Jan. 2, 2019, the IRS issued Revenue Procedures 2019-01 and 2019-04. Rev. Proc. 2019-01 contains revised procedures for letter rulings and information letters issued by the various IRS departments, including the Associate Chief Counsel (Employee Benefits, Exempt Organizations and Employment Taxes). The guidance also identifies the different departments from which taxpayers can request advice. Other than updating some fees and making certain technical changes, Rev. Proc. 2019-01 is not that different from the guidance found in the preceding version (Rev. 2018-01).
Rev. Proc 2019-04 contains revised procedures for determination letters and letter rulings issued by the Commissioner, Tax Exempt Agreements Office (Employee Plans). This guidance reflects the 2017 changes made to the IRS determination letter process (discussed in the July 11, 2017, article found here). This guidance also updates the fees required to submit pre-approved plans, participate in the Voluntary Correction Program (VCP) or request determinations for plan terminations. Other changes have been made that will affect how plans must engage with the IRS if they are requesting relief from retroactive disqualification.
Employers that hope to obtain determination letters or letter rulings from the IRS should consult these revenue procedures so that they understand how the new procedures differ from the 2018 procedures.
The IRS recently released the final 2018 IRS Form 5500-EZ. Though not much has changed, the 2018 form has an updated name to match the purpose of the form to include both a one-participant retirement plan and a foreign plan. The form name is now the “Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan.” There was also an update to the plan characteristics codes for Line 8 (Part IV) to reflect the IRS changes for the pre-approved plans.
As background, IRS Form 5500-EZ is an annual filing requirement for retirement plans that are either a one-participant plan or a foreign plan. Form 5500-EZ is used by one-participant plans that are not subject to the requirements of IRC Section 104(a) and that are not eligible or choose not to file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, electronically to satisfy certain annual reporting and filing obligations imposed by the Code.
Applicable plan sponsors must file a Form 5500-EZ on or before the last day of the seventh month after their plan year ends. As a result, calendar-year plans generally must file by July 31 of this year (reporting for the 2018 plan year). Plans may request a two-and-a-half month filing extension by submitting a Form 5558, “Application for Extension of Time to File Certain Employee Plan Returns,” by the plan’s original due date.
Need help filing? We have vendors available to assist. Please ask your advisor for assistance.
The IRS recently released the 2019 Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), to be used in preparing 2018 returns. The instructions summarize the changes for 2018 including:
The publication also details the modified AGI limits for 2019 contributions, which vary by marital status and type of IRA. Lastly, the publication reminds individuals that there is still qualified disaster tax relief for IRAs related to Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria and the California wildfires. There is also relief for economic losses suffered as a result of disasters declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016.
Employers that offer Roth IRAs should familiarize themselves with this guidance.
In January 2019, the IRS updated Publication 571, entitled “Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.” This publication is designed to help tax filers better understand 403(b) plans and the related tax rules.
Specifically, Publication 571 provides information that will help individuals determine the amounts that can be contributed to their 403(b) plans (in 2018 and 2019), identify excess contributions, understand the basic rules for claiming the retirement savings contribution credits and understand the basic distribution rules.
Although the updates to the publication mainly describe the increased contribution and tax credit limits, this publication would be helpful to any employer that sponsors a 403(b) plan.
On Dec. 4, 2018, the IRS released Notice 2018-95, clarifying 403(b) plan eligibility requirements. As background, 403(b) plans are subject to a universal availability rule which requires employers to offer the 403(b) plan to all their employees. There is an exception that allows employers to exclude part-time employees who are expected to work less than 20 hours per week if they work less than 1,000 in their first year and in any year that the person worked less than 1,000 hours per week in the immediately preceding plan year.
Many employers read those rules to allow for an employer to potentially stop 403(b) plan deferrals for a part-time employee that might have been in the plan before, but later had a year where they worked less than 1,000 hours. However, the IRS released model 403(b) plan language in 2013 and 2015 that made it clear that they don’t acknowledge that reading of the rule. Instead, the IRS recognizes a “once in, always in” rule that mandates that a part-time employee that gains eligibility cannot lose it later, even if they work less than 1,000 hours in a subsequent year.
Notice 2018-95 provides relief to employers that subscribe to the incorrect reading of the rule. Specifically, as long as those employers correct their practice by Jan. 1, 2019, they will not be held accountable for failing to comply with the universal availability rule for the years preceding 2018. Keep in mind, though, that they will need to offer any part-time employees that were improperly excluded the opportunity to contribute to the plan in 2019.
403(b) plan sponsors that have improperly excluded part-time employees should work with their TPA or other service provider to come into compliance, including amending plan documents if necessary.
On Nov. 20, 2018, the IRS released the Instructions for the 2018 Form 5500-EZ. The instructions came after the Form 5500-EZ was released on Sept. 25, 2018. As a reminder, Form 5500-EZ is used by a one-participant retirement plan or a foreign retirement plan that does not file electronically on Form 5500-SF.
One of the changes to this year’s forms is that the title of the form has been changed to indicate that the form may be used for foreign plans. Additionally, the codes for plan characteristics on line 8 have been updated to reflect the IRS changes for pre-approved plans.
While many employers outsource the preparation and filing of these forms, employers should also familiarize themselves with the new requirements and work closely with vendors to collect the applicable information.
On Nov. 14, 2018, the IRS published a proposed rule that changes the requirements that must be met for a participant to take a hardship distribution. The proposed rule incorporates some of the changes to hardship distributions that were made through congressional action (such as through the Tax Cuts and Jobs Act).
As background, the current 401(k) rules impose a number of limitations on participants seeking a hardship distribution. Namely, participants that take a hardship distribution can’t make elective deferrals to that 401(k) for a period of six months after receiving the distribution. They also must exhaust all available plan loans before taking a hardship distribution. Additionally, hardship distributions currently can’t be taken from earnings on elective deferrals, qualified matching contributions (QMACs) or qualified nonelective contributions (QNECs).
Among other things, this proposed rule modifies those requirements. Specifically, participants will be able to take a hardship distribution even if they have not exhausted all plan loans. They will also be allowed to continue contributing to their 401(k) after they take a hardship distribution. Likewise, the proposed rule would allow participants to draw hardship distributions from QMACs and QNECs (if their employer plan sponsor chooses to allow it).
In addressing the necessity of a given hardship distribution, the proposed rule would require participants to certify in writing or electronically that the participant has no other liquid assets available to satisfy the need for the hardship distribution.
Similar to other guidance, the proposed rule also extends the hardship relief necessary for participants that are victims of Hurricane Florence or Michael.
The rule would mostly become effective in plan years beginning after 2018. The elimination of the six month ban on elective deferrals must take place by 2020.
In summary, these rules encapsulate the recent congressional changes to 401(k) and 403(b) plans hardship distributions. Employers should familiarize themselves with these rules for hardship distributions.
On Nov. 1, 2018, the IRS issued Notice 2018-83, which relates to certain cost-of-living adjustments for a wide variety of tax-related items, including retirement plan contribution maximums and other limitations for tax year 2019.
For 2019, 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 to $19,000 (up from $18,500 in 2018).
Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of those plans remains at $6,000. The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts will increase from $12,500 to $13,000.
The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $56,000 (from $55,000), and the annual limit on compensation that can be taken into account for contributions and deductions increased from $275,000 to $280,000. The threshold for determining who is a “highly compensated employee” (HCE) increases to $125,000 (from $120,000).
The annual benefit for a defined benefit plan under Section 415(b)(1)(A) increased from $220,000 to $225,000, and the dollar limitation concerning the definition of key employee in a top-heavy plan and the limitation on IRA contributions increased from $175,000 to $180,000.
Cost-of-living adjustments are effective Jan. 1, 2019. Sponsors and administrators of benefits with limits that are changing will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees.
On Oct. 23, 2018, the DOL released a proposed rule that expands access to multiple employer plans (MEPs). As background, in Aug. 2018 Pres. Trump issued an executive order directing the DOL to propose rules that would make it easier for small employers to band together to offer retirement plans. (We discussed this executive order in the Sept. 5, 2018 edition of Compliance Corner.) This proposed rule does that by redefining the term “employer” under ERISA to allow certain employer groups and associations or PEOs to sponsor defined contribution retirement plans.
Specifically, if the group/association or PEO met the requirements laid out in the proposed rule, then ERISA would apply to the multiple employer plan on the plan level. This means that the individual employers would not be responsible for complying with the different ERISA requirements, such as the Form 5500 filing requirement and the fidelity bonding requirement. Instead, the plan would be responsible for meeting the bulk of ERISA’s requirements.
In order to meet the proposed rules’ requirements to offer a MEP, a group or association of employers has to meet multiple requirements. Interestingly, those requirements are quite similar to the requirements laid out in the new rules for association health plans. (See our article in the June 26, 2018 edition of Compliance Corner.) The proposed rules require the following for a MEP that wants to form under the new rules:
PEOs will also be able to avail themselves of this rule if they meet certain requirements. Specifically, PEOs could sponsor a MEP if they perform “substantial employment functions” for their members. The rule lists nine different criteria for determining if a PEO performs substantial employment functions. The DOL will automatically recognize Certified PEOs (as defined by the IRS) and any PEO that meets five of the nine criteria as performing substantial employment functions for the employer members.
The rules also clarify when working owners can participate in these MEPs. Working owners, such as sole proprietors and other self-employed individuals, can participate as long as they provide enough services to their company to have wages at least equal to the cost of group health plan coverage offered by the group or association.
The DOL will accept comments on the proposed rules through Dec. 24, 2018.
While this rule is intended to offer small employers more and less burdensome options for offering retirement plans to their employees, any size of employer may join one of these groups or PEOs. For more information on how this proposed rule might affect your company’s benefit options, please contact your advisor.
On Sept. 26, 2018, the IRS published the 2018 draft form related to Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan.
The information in this form is given to the Social Security Administration (SSA), and the SSA provides that information to separated participants when they file for Social Security benefits.
On Oct. 4, 2018, the IRS also released the 2018 draft instructions for the Form 8955-SSA. They don’t highlight any changes in the updated forms.
Employers should review this draft form in preparation for filing the 2018 Forms 8955-SSA.
On Sept. 28, 2018, the IRS released Revenue Procedure 2018-52, which incorporates changes to the Employee Plans Compliance Resolution System (EPCRS). As background, EPCRS allows retirement plan sponsors to take IRS-sanctioned steps to correct administrative and operational failures in plans. This Rev. Proc. modifies and supersedes Rev. Proc. 2016-51.
This Rev. Proc. mainly updates guidance to include the changes made to the EPCRS procedures over the last few years. Most notably, the IRS will now require employers submitting voluntary correction program (VCP) applications to do so electronically via www.pay.gov. In transitioning to this policy, the IRS will begin to accept the electronic applications on Jan. 1, 2019. However, employers will be allowed to file electronically or file a paper submission until March 31, 2019.
This Rev. Proc. is effective Jan. 1, 2019. Employers seeking to take advantage of the EPCRS should familiarize themselves with this guidance to ensure they understand the changes in the process.
On Sept. 18, 2018, the IRS released Notice 2018-74, which provides guidance on updating the safe harbor notice required to be sent to plan participants receiving eligible rollover distributions. As background, the IRC requires certain qualified retirement plans (namely 401(a), 403(a), 403(b) and 457 plans) to provide participants with a notice in advance of the participants receiving eligible rollover distributions. Among other things, the safe harbor notice does the following:
Notice 2018-74 modifies prior Notice 2017-74 to include changes to the retirement plan tax rules that occurred as a result of last year’s tax reform and other regulatory changes. Specifically, the guidance provides two appendices employers can utilize to provide updated notices. Appendix A includes appropriately updated model notices in case the employer would simply like to replace their previous safe harbor notice. Appendix B provides instructions on how an employer can amend their current notice to reflect the changes in the law and regulations.
While the notice does not give a specific date by which employers should implement the change, it’s best for employers to replace or update the notice accordingly so they can provide employees with the most current information.
On Sept. 7, 2018, the IRS released a draft of the 2019 Form 1099-R for distributions from pensions, annuities, retirement or profit-sharing plans, IRAs and insurance contracts. This form is sent to participants who withdraw or transfer funds from a number of sources related to retirement and other qualified plans. It reports the gross amount of the distribution, the taxable amount reportable as income and the federal and state withholding amounts. So, each person who withdraws at least $10 from a retirement account, such as a traditional IRA, must receive a Form 1099-R.
The 2019 draft forms are virtually unchanged from the 2018 Form 1099-R. Keep in mind that the draft forms should not be filed for 2019; instead, the IRS will publish final forms at a later date. Even though Forms 1099-R are routinely prepared by the fund custodian of the retirement and qualified plans, employees may have general questions involving the employer’s retirement plans or about the purpose of the form. Employers should familiarize themselves with these forms.
On Aug. 31, 2018, Pres. Trump issued the Executive Order on Strengthening Retirement Security in America (“the Order”). The Order seeks to expand access to workplace retirement plans for American workers and reduce the regulatory burdens and complexity associated with sponsoring a retirement plan.
Specifically, the Order directs the DOL to examine policies which would allow more small employers to band together to provide retirement plans through the use of multiple employer plans (MEPs). It further directs the DOL to promulgate rules that would redefine ‘employer’ under ERISA, in an effort to allow more employers to participate in MEPs. Currently, unrelated employer groups that wish to band together to offer retirement plans must meet stringent requirements concerning their relation to each other. The Order makes it clear that the Administration would like to amend those rules to allow for more small and mid-sized businesses to have access to MEPs. (Any subsequent changes in this regard would likely be very similar to the changes made to allow for more employers to participate in association health plans for health and welfare benefits.)
The Order also directs the DOL to review actions that could be taken to make notices and distribution requirements less costly and burdensome. There are a number of disclosures that are required for retirement plans, and while the Order doesn’t specify which disclosures could potentially be changed or altered, it does seem to be aimed at reducing the number of disclosures or making them less complex. Additionally, the Order explicitly mentions that the DOL’s review should explore the potential for broader use of electronic delivery as a way to distribute the necessary disclosures.
Finally, the Order instructs the Treasury to review the life expectancy and required minimum distribution tables to determine if they should be changed to reflect current mortality data. As background, retirees must withdraw minimum amounts of money from their retirement account beginning at age 70 ½. In essence, the Order directs the Treasury to review updated information to determine if the age of 70 ½ is still appropriate or should be increased.
Although the Order ultimately signals the administration’s policy on these topics, it’s likely that the DOL and IRS will promulgate the rules requested by the President. Until those rules are finalized, the current rules remain in place and employers should continue to follow them. We will provide updated information as the rules are published in their proposed and finalized forms.
On Aug. 17, 2018, the IRS issued private letter ruling 201833012 (the “PLR”). The PLR addressed an individual plan sponsor’s desire to amend their 401(k) plan to include a program that allows matching contributions to be made for employees that are repaying student loans. The design endorsed in the PLR is meant to allow employees who cannot afford to both repay their student loans and defer into the 401(k) at the same time the ability to avoid missing out on the “free money” being offered by their employer in the 401(k) plan.
Specifically, the plan sponsor requesting the PLR sought IRS permission to implement a design in which a nonelective employer contribution equal to 5 percent of an employee’s compensation could be made for every 2 percent the employee paid to student loans. Additionally, the PLR states that the program could allow a participant to both defer into the 401(k) and make a student loan repayment at the same time, but they would only receive either the match or the nonelective employer contribution — not both for the same pay period. However, if an employee enrolled in the student loan repayment program and later opted out without hitting the 2 percent threshold necessary for a nonelective employer contribution, they would be eligible for matching contributions for the period in which they opted out and made deferrals into the 401(k) plan.
The IRS also confirmed that such a design wouldn’t violate the contingent benefit prohibition under the IRC. As background, the contingent benefit prohibition essentially states that the only benefit that can be conditioned upon an employee’s elective deferrals is a matching contribution. In response to the plan sponsor’s request, the IRS ruled that the proposed design doesn’t violate the contingent benefit prohibition, therefore allowing nonelective employer contributions to be made when employees pay student loans. While the IRS gave their opinion regarding the contingent benefit prohibition, they stated definitively that all other qualification rules (such as testing and coverage) would remain operative.
Keep in mind, though, that a PLR is directed to a specific taxpayer requesting the ruling, and it’s applicable only to the specific set of facts and circumstances included in the request. That means other retirement plan sponsors cannot rely on the PLR as precedent. It’s not a regulation or even formal guidance. However, it provides insight into how the IRS views certain arrangements. While any plan sponsor that wants to replicate this design could likely assume that they would not run afoul of the contingent benefit prohibition, they would be most protected by seeking the assistance of outside counsel in designing their program.
Any employer plan sponsor considering adding a student loan repayment program to their benefits package should contact their plan advisor for additional information.
On Aug. 3, 2018, in Meiners v. Wells Fargo & Company, et al. No. 17-2397 (8th Cir., Aug. 3, 2018), the U.S. Court of Appeals for the Eighth Circuit (the Court) ruled in favor of retirement plan fiduciaries, requiring plaintiffs to meet a high bar in order to prove imprudent selection of investment funds (which is a violation of ERISA’s rules for fiduciaries).
As background, the plaintiffs in this class action case alleged that their plan sponsor had breached their ERISA fiduciary duties of loyalty and prudence by offering twelve of Wells Fargo’s Target Date Funds (TDFs) for investment in the plan. The plaintiffs alleged that these funds were more expensive (due to higher fees) and underperformed compared to other funds available to the plan. Specifically, they pointed to other funds offered by Vanguard and Fidelity which were less expensive, and identified one of the Vanguard funds that performed higher than the Wells Fargo TDFs.
Before the case came before the Court, the Federal District court had granted Wells Fargo’s motion to dismiss the case. On review, the Court agreed with the District court, and upheld the dismissal of the plaintiffs’ claim of imprudence on Wells Fargo’s part. Essentially, the Court concluded that the plaintiffs failed to sufficiently plead facts indicating that Wells Fargo’s TDFs were underperforming.
In fact, the court noted that it was not enough that the plaintiffs pointed to the one Vanguard fund that outperformed the Wells Fargo TDFs, especially when the District Court found that the Vanguard fund in question had a different investment strategy. Additionally, the Court reasoned that the mere existence of cheaper funds was not proof of imprudence. Ultimately, the Court held that the plaintiffs failed to offer a meaningful benchmark of funds that would prove the offering of the Wells Fargo TDFs to be imprudent.
This case makes it clear that plaintiffs who want to claim imprudence based on investment fund offerings that are proprietary, more expensive or underperforming must meet the burden of providing a meaningful benchmark by which to measure the funds in question. While this case was adjudicated in favor of the employer, retirement plan sponsors should also consider their own fiduciary responsibilities and whether or not their choices of investment funds would be considered prudent.
The IRS emphasizes the importance of annually reviewing the operating requirements for a company’s retirement plan. They have designed checklists specifically for this purpose: Publication 4284 for Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs and Publication 4285 for Simplified Employee Pensions (SEPs). Both checklists have recently been revised to reflect 2018 indexed limits.
A SIMPLE IRA is a retirement plan available to small employers. SIMPLE IRAs require an employer contribution, and both employer and employee contributions are made to an individual retirement account (IRA) or annuity set up for each employee. The checklist reminds employers of the relevant operating requirements including:
A SEP is a plan in which all eligible employees are permitted to participate, including part-time employees. Contributions are deposited to IRAs for each employee. The checklist reminds employers of the relevant operating requirements including:
On July 13, 2018, the IRS released the 2018 Form 1099-R for distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc. This form is sent to participants who withdraw or transfer funds from a number of sources related to retirement and other qualified plans. It reports the gross amount of the distribution, the taxable amount reportable as income and the federal and state withholding amounts. So, each person that withdraws at least $10 from a retirement account, such as a traditional IRA, must receive a Form 1099-R.
The 2018 final forms are generally unchanged from the draft Form 1099-R updated in June 2018. Highlights of the changes include:
There are also two notable changes to the underlying law that impacts the form. One change is that re-characterizations of conversions cannot be made in 2018 or later. Specifically, a conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made after Dec. 31, 2017, cannot be re-characterized as having been made to a traditional IRA. The second change relates to disaster distributions that were made to employees affected by certain natural disasters that occurred in 2016 and 2017.
Employers should become familiar with the changes made to the 2018 forms. Even though 1099-R forms are routinely prepared by the fund custodian of the retirement and qualified plans, employees may have general questions involving the employer’s retirement plans or about the purpose of the form.
On July 20, 2018, the IRS issued final regulations amending the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) relating to certain qualified retirement plans that contain cash or deferred arrangements or that provide for matching contributions or employee contributions.
The final regulations are virtually unchanged in comparison to the proposed regulations (which were proposed in January 2017). Under these regulations, employer contributions to a plan would be able to qualify as QMACs or QNECs if they satisfy applicable nonforfeitability and distribution requirements at the time they’re allocated to participants’ accounts, but they need not meet these requirements when they’re contributed to the plan. This change allows amounts held as forfeitures in a 401(k) plan to be used to fund QNECs and QMACs.
The final regulations are effective on July 20, 2018, and apply to plan years beginning on or after that date. However, the IRS will allow taxpayers to rely upon these rules in earlier periods.
Employers maintaining tax-qualified plans that contain cash or deferred arrangements or provide for matching contributions or employee contributions should take note of these proposed changes.
The IRS has released an updated version of Form 4419, dated June 2018. The form is used to request authorization from the IRS to transmit certain information returns electronically through the Filing Information Returns Electronically (FIRE) system. FIRE is used to file the following forms electronically with the IRS: Forms 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), 1097 (Bond Tax Credit), 1098 (Mortgage Interest Statement), 1099 (Miscellaneous Income), 3921 (Exercise of an Incentive Stock Option Under Section 422(b), 3922 (Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), 5498 (IRA Contribution Information), 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips), 8955-SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits) and W-2G (Certain Gambling Winnings).
Importantly, FIRE is not used to file Forms 1094-C, 1095-C, 1094-B or 1095-B, which are filed through the Affordable Care Act Information Return (AIR) system.
In order to transmit files electronically through FIRE, the filer must have appropriate software, a capable service provider or an in-house programmer that will create the file in the proper ASCII format. The Form 4419 must be submitted at least 45 days before the due date of the return to allow time for approval and a Transmitter Control Code to be assigned.
The updated version is substantially the same as the previous version, but filers must take care to use the most recent version of the form.
On June 21, 2018, the United States Court of Appeals for the Fifth Circuit issued an order officially vacating the DOL's Fiduciary Rule. This action comes after the government failed to file an appeal (with the Fifth Circuit or the US Supreme Court) in the U.S. Chamber of Commerce v. DOL case. As a reminder, we discussed this case in the March 20, 2018 edition of Compliance Corner.
The fact that the Rule has been vacated means that the prior five-part test that was used to determine if an investment adviser was a fiduciary is back in place. Specifically, the original regulations identified investment fiduciaries using a test in which the fiduciary:
It's also possible that the DOL could choose to promulgate new rules. While they have issued a non-enforcement policy for any financial institutions that have relied on the Best Interest Contract (BIC) Exemption and other Rule-related prohibited transaction exemptions (PTEs), the DOL has acknowledged that the Rule being vacated has resulted in a compliance gap that might need to be overcome by new regulations. In other words, investment advisers that are making conflicted investment advice will still need a way to comply with ERISA, even though the Rule and its PTEs have gone away. Until the DOL proposes new rules, advisers who rely on the BIC or other PTEs will be safe from DOL enforcement.
Keep in mind, also, that the SEC has now presented its own rule and some states have even proposed regulations that would mirror the Rule. So it seems clear that the Rule will still affect the retirement industry in some ways.
Although this order seems to end a years-long journey that saw the creation and ultimate demise of this Rule, we will continue to follow any developments concerning the fiduciary status of investment advisers and employer plan sponsors who provide retirement plans.
On July 3, 2018, the IRS released updated model submission forms for its Voluntary Correction Program (VCP). The updated model forms (now dated June 2018) include: Form 14568-B (Other Nonamender Failures and Failure to Adopt a 403(b) Plan Timely), Form 14568-E (Plan Loan Failures including Qualified Plans and 403(b) Plans), and Form 14568- H (Failure to Pay Required Minimum Distributions Timely).
As background, the VCP is a self-correction program that allows an employer to apply to correct mistakes in either the plan document language or plan operations. The updated forms are used in conjunction with Form 1568 –The Model VCP Compliance Statement.
When needed, employers should use the updated model forms going forward. Please note that not all of the VCP model forms have been updated. Those that weren’t, seem to have been last updated in either August 2016 or September 2017.
For additional information about the VCP and the related forms, visit: https://www.irs.gov/retirement-plans/voluntary-correction-program-general-description
On May 18 and 30, 2018, the IRS released eight new Issue Snapshots (with six released on the earlier date and two released on the later date). As background, Issue Snapshots represent the IRS’s periodic research summaries on tax-related issues.
Here are the issues presented and a summary of their content:
Plan sponsors should review these snapshots for a better understanding of the IRS guidance on these issues.
On May 7, 2018, the DOL released Field Assistance Bulletin (FAB) No. 2018-02. This FAB addresses the DOL’s non-enforcement policy now that the Fiduciary Rule (the Rule) has been vacated by the U.S. Court of Appeals for the Fifth Circuit. As background, the Fifth Circuit vacated the Rule in a 2-1 decision in U.S. Chamber of Commerce v. DOL. We discussed that opinion in the March 20, 2018, edition of Compliance Corner.
The revocation of the Rule took place after the DOL failed to appeal the Fifth Circuit’s decision by May 7, 2018. In this FAB, the DOL acknowledges that the revocation of the Rule left many institutions uncertain about how advisors would avoid engaging in prohibited transactions when the Best Interest Contract Exemption (BICE) and other prohibited transaction exemptions (PTEs) that were created along with the Rule became null and void.
The FAB announces that the DOL will continue its non-enforcement policy related to the Rule. Specifically, the DOL won’t pursue any prohibited transaction claims against investment advisor fiduciaries who are “working diligently and in good faith to comply with the impartial conduct standards” set by the BICE and other PTEs. Those investment advisors can also choose to rely on any other available exemptions for relief. Interestingly, though, the FAB doesn’t address the rights or obligations of other parties; so there might still be private rights of action that can be pursued against advisors who offer conflicted advice.
This FAB makes it seem quite unlikely that the DOL is going to continue to pursue the Rule in its current form. Although they’d have until June 13, 2018 to appeal the Fifth Circuit’s decision to the U.S. Supreme Court, the DOL’s non-enforcement policy makes it seem that they won’t do so. Instead, the DOL has expressed that it will evaluate the need for additional prohibited transaction relief.
It’s also important to note that, in April, the SEC came out with its own proposed best interest rule, which incorporates a number of aspects of the Rule and the BICE. In fact, their rule requires registered investment advisers and broker-dealers to act in the best interest of their customers and to mitigate certain conflicts of interest.
Employer plan sponsors won’t see much change in anything now that the Rule has been revoked and the DOL has announced a non-enforcement policy. Many advisers and broker-dealers have already taken steps to comply with the Rule and likely won’t switch back to the processes in place before the Rule. We’ll continue to follow this issue, though, and we’ll share any additional information that might affect plan sponsors.
On March 30, 3018, the IRS published Informational Letter 2018-0001, which responds to an inquiry as to why a 401(k) hardship distribution could not be made to pay off a child’s college student loan.
In the letter, which is a response to a Congressional inquiry, the IRS explains that 401(k) plans are intended for employees to contribute part of their pay toward retirement. To help ensure that funds in the plan are available at retirement, early withdrawals from a 401(k) plan are allowed only in cases of hardship.
As background, a 401(k) retirement plan may, but is not required to, provide for hardship distributions. The 401(k) regulations provide that a hardship distribution can only be made if the employee (or spouse or dependent) has an immediate and heavy financial need and the distribution is necessary to satisfy the financial need. If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. For example, a plan may provide that a hardship distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and educational expenses.
In the response, the IRS highlights that the “payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education” is a permissible hardship under the 401(k) regulations. However, paying off student loans would not qualify, because it’s not payment for the next 12 months of post-secondary education. The letter concludes with the possible alternative of getting a loan from the plan. A loan, unlike the hardship distribution, would be tax-free, and the participant could have up to five years to repay it.
Please note: IRS Information Letters are generally advisory and have no binding effect on the IRS. For employers, the IRS letter serves as a good reminder that the intent of a 401(k) plan is to help an employee make payments toward retirement. If a 401(k) plans allows for hardship distributions, the plan operations should strictly align with the plan terms so that the intent of the 401(k) plan may be preserved.
On March 14, 2018, the IRS published Rev. Prov. 2018-19, which decreases the fee imposed on terminating plans that request a determination letter. As background, upon plan termination, plan sponsors can request a determination letter from the IRS, which will identify whether the plan is qualified at the time of termination.
Earlier this year, the IRS set the fee for this determination letter at $3,000 (as reflected in Rev. Proc. 2018-4). However, pursuant to Rev. Proc. 2018-19, the fee is now being lowered to $2,300, effective Jan. 2, 2018. Notably, employers who have already paid the $3,000 fee will be refunded $700 by the IRS.
Employers should keep this change in mind if they’re looking to request a determination letter upon plan termination.
On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit (the Court) vacated the fiduciary rule (the Rule) in a 2-1 decision in U.S. Chamber of Commerce v. DOL, 5th Circ., No. 17-10238. As background, the Rule amended ERISA's definition of "fiduciary" by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary.
The plaintiffs in U.S. Chamber of Commerce v. DOL, which were all financial service industry groups, were the first to file suit against the DOL. They challenged the Rule on multiple grounds, including allegations that the Rule is inconsistent with ERISA, that the DOL is overreaching by using the Rule to regulate services and providers that aren't covered under ERISA, and that the DOL imposed legally unauthorized contract terms to enforce the Rule. Although the district court disagreed with the allegations and held in favor of the DOL, the Fifth Circuit agreed with many of the plaintiff's allegations and vacated the Rule in its entirety.
In launching into a background of the Rule, the Court pointed out that the Rule was fundamentally transforming "over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries." The Court went on to discuss the congressional history of ERISA and highlight the definition of "fiduciary" that was in place before the Rule.
Ultimately, the Court found that the DOL was expanding the scope of the regulations in "vast and novel ways" and, in doing so, the DOL was overstepping its authority by seeking to "rewrite the law that is the sole source of its authority." They essentially held that it wasn't Congress's intent to render any person who renders any investment advice for a fee a fiduciary; instead, the DOL's 1975 regulations reflect the idea that "investment advice for a fee" reflects an intimate relationship of trust between advisor and client.
Additionally, the Court argued that the DOL's imposition of the Rule failed the Chevron doctrine. As background, the Chevron doctrine draws upon the U.S. Supreme Court precedence in the Chevron U.S.A. v. Natural Resources Defense Council, Inc., which essentially provided a two-part test in determining if the courts must defer to federal agencies in their application of the law. The first part of the test determines whether Congress was clear on the issue in question. If Congress was clear, then the agency must defer to Congress's intent. If the Congressional statute was unclear or ambiguous, then the second part of the test is to determine if the agency's interpretation is based on a permissible construction of the statute.
Considering the Chevron doctrine, the Court found the DOL's imposition of the Rule to be unreasonable, even if there was an assumption that Congress was unclear. Further, the Court held that the DOL's creation of the Best Interest Contract Exemption (BICE) was an abuse of power that was only necessary to "blunt the overinclusiveness of the new definition" of fiduciary. Not only did they find the BICE to be proof of the unreasonableness of the Rule, but they also held that in promulgating the BICE, the DOL was creating a private right of action against advisors where Congress had not allowed one.
Since the Court found it impossible to separate the Rule from the BICE, they deemed the whole rule unreasonable and vacated it in toto.
Although this ruling seems to represent the demise of the Rule, it's important to note that there's now a split in the circuit courts. As we've reported on in this edition of Compliance Corner, the U.S. Court of Appeals for the Tenth Circuit ruled in favor of the Rule a few days before this ruling was published (in Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor).
Furthermore, although the court vacated the Rule in its entirety, there are still procedural limitations that give time for additional action by the DOL. The DOL has the following choices. They could:
It's hard to know how they'll proceed. On one hand, the Trump administration seems opposed to the Rule as written (as evidenced by their attempts to review it and delay it). On the other hand, many in the industry have already begun to comply with the rule and accept its standards. Only time will tell how the DOL chooses to proceed.
On March 13, 2018, the U.S. Court of Appeals for the Tenth Circuit issued a ruling upholding the DOL's fiduciary rule (the Rule). As background, the Rule was adopted by the DOL in April of 2016, and it amended ERISA's definition of "fiduciary" by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary. Additionally, the DOL introduced new prohibited transaction exemptions (PTEs) and amended others in order to permit common compensation structures and to cover certain types of transactions. The PTEs that were central to this case are the new Best Interest Contract Exemption (BICE) and PTE 84-24, which allows an exemption for commissions paid to insurance brokers in connection with a plan's purchase of insurance or annuity contracts.
In this case, Market Synergy Group (MSG) alleged that the DOL didn't follow the Administrative Procedure Act (APA) in promulgating the Rule. Specifically, they claimed that the DOL had arbitrarily excluded fixed indexed annuities (FIAs) from being covered under PTE 84-24 (opting instead to cover them through the BICE). They also claimed that the DOL didn't provide adequate notice of that decision and that the DOL's actions would cost MSG roughly 80 percent of their revenue (as their business revolved around working with independent marketing organizations to distribute FIAs). MSG asked the district court for a preliminary injunction, which the district court denied.
On appeal to the Tenth Circuit, MSG again asserted that the DOL had violated the APA. However, the Tenth Circuit found that the DOL provided adequate notice and didn't arbitrarily treat FIAs differently from fixed annuities or fail to consider the economic impact of the Rule on the FIA industry. As such, the Tenth Circuit affirmed the district court's ruling in favor of the Rule.
Although the Tenth Circuit joined other circuit courts in upholding the Rule, the Rule was vacated by the Fifth Circuit less than a week after this ruling. As such, it's hard to know what impact these circuit decisions have on the Rule. We'll continue to follow the developments and report on them in future editions of Compliance Corner.
On Feb. 23, 2018, the IRS issued a memorandum to employee plans auditors that discusses the steps an employer should take in attempting to locate missing plan participants. As background, the memo specifically addresses how to locate missing participants who may be due required minimum distributions from their 403(b) plan. However, the IRS guidance is also helpful for any situation where an employer must locate participants for purposes of distributing benefits.
Keep in mind, though, that this guidance is virtually identical to the guidance provided to auditors examining 401(k) plans and any issues with required minimum distributions. (We reported on that guidance in the Nov. 14, 2017 edition of Compliance Corner.)
The memo specifies that IRS auditors won't challenge employers for a failure to make certain employee distributions if they did all of the following:
These requirements line up with prior DOL guidance on the subject of locating missing participants, and so 403(b) employer plan sponsors who take such steps to locate employees would likely be considered to have met their search obligations as imposed by both the DOL and IRS. The guidance became applicable after Feb. 23, 2018.
On Feb. 6, 2018, the IRS announced in a news release (IR 2018-19) that the Tax Cuts and Jobs Act (i.e., the 2017 Tax Reform Law reported on in the Jan. 9, 2018, edition of Compliance Corner, or the TCJA) doesn’t affect the tax year 2018 dollar limitations for retirement plans announced in IR 2017-177 and detailed in Notice 2017-64 (reported on in the Oct. 31, 2017, edition of Compliance Corner).
As background, the tax law provides dollar limitations on benefits and contributions under qualified retirement plans, and it requires the Treasury Department to annually adjust these limits for cost-of-living increases. Those adjustments are made using procedures that are similar to those used to adjust benefit amounts under the Social Security Act.
Since the TCJA made no changes to the section of the tax law limiting benefits and contributions for retirement plans, the qualified retirement plan limitations for tax year 2018 previously announced in IR 2017-177 and detailed in Notice 2017-64 remain unchanged.
The 2017 Tax Reform Law also specifies that contribution limits for IRAs, as well as the income thresholds related to IRAs and the saver’s credit, are to be adjusted for changes in the cost of living using procedures that are used to make cost-of-living adjustments that apply to many of the basic income tax parameters.
Although the new law made changes to how these cost-of-living adjustments are made, after taking the applicable rounding rules into account, the amounts for 2018 remain unchanged.
On Feb. 9, 2018, Congress passed and Pres. Trump signed H.R. 1892, the Bipartisan Budget Act of 2018 (The Budget Act), creating Public Law No. 115-123. Several provisions affect qualified retirement plans, including 401(k) plans. Here are some highlights:
Hardship Distribution Rules. The Budget Act eases the requirements for taking a hardship distribution from a 401(k) plan. As background, plan participants may request distributions when faced with certain financial hardships. Under current rules, hardship distributions aren’t available from certain contributions or from earnings on elective deferrals, because participants must first exhaust available plan loans prior to taking a hardship distribution. Moreover, the safe harbor rules require plan participants to forgo new contributions for six months following the distribution.
Effective for plan years beginning in 2019, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings will be available for hardship distributions. So, in the future, participants don’t have to take a loan before requesting a hardship distribution. Additionally, the IRS has been directed to provide new regulations eliminating the six-month prohibition on new contributions.
Relief for California Wildfires. The Budget Act provides relief for victims of the 2017 California wildfires (must be within the declared disaster area) that’s similar to that provided to victims of Hurricanes Harvey, Irma and Maria in 2017 (see our Oct. 17, 2017, edition of Compliance Corner on the Disaster Tax Relief and Airport and Airway Extension Act of 2017).
On distributions, the 10 percent penalty tax wouldn’t apply to qualified distributions taken by individuals whose principal residence is in a declared disaster area and who sustained an economic loss due to the hurricane. These non-penalized distributions must be taken between the California wildfire start date and Jan. 1, 2019, and are limited to an aggregate of $100,000 (whether received in one or more taxable years). Such distributions can be repaid (in whole or in part) through contributions to the retirement plan. Repayments would be treated as timely rollover contributions, which has the effect of deferring taxation. Instead of repayments, individuals can elect to spread the applicable distribution taxation over a three-year period.
The legislation also provides a special rule relating to hardship withdrawals taken within certain specified dates to build or buy a house in the California wildfire disaster area (but only if the withdrawals weren’t used to build or buy the house because of the wildfires). Specifically, all or a part of the hardship withdrawal amount may be repaid or contributed to an eligible retirement plan.
For loans taken between the passage of this law and Dec. 31, 2018, the legislation increases the plan loan limit to $100,000, or 100 percent of an individual’s vested account balance. To take advantage of the increased plan loan limit, the individual must have a principal residence in the disaster area and must have suffered an economic loss. Also, such individuals may delay for one year the due date for outstanding loan payments.
Retirement plan sponsors should review their plan designs and work with employees who may have been impacted by the California Wildfires. Ultimately, employers may need to work with outside counsel to ensure the relief described above is properly administered.
In January 2018, the IRS updated Publication 571, entitled “Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.” This publication is designed to help tax filers better understand 403(b) plans and the related tax rules.
Specifically, the publication provides information that will help individuals determine the amounts that can be contributed to their 403(b) plans (in 2017 and 2018), identify excess contributions, understand the basic rules for claiming the retirement savings contribution credits and understand the basic distribution rules.
Although the updates to the Publication mainly describe the increased contribution and tax credit limits, this publication would be helpful to any employer that sponsors a 403(b) plan.
On Dec. 28, 2017, the IRS published 2017 instructions related to Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. As background, Form 8955-SSA is used to report information about participants who separated from service during the plan year and are entitled to deferred vested benefits under the retirement plan.
The information in this form is given to the Social Security Administration (SSA), and the SSA provides that information to separated participants when they file for Social Security benefits.
Employers should review these instructions in preparation for filing the 2017 Forms 8955-SSA.
On Jan. 9, 2018, in an unpublished opinion, the U.S. Court of Appeals for the Ninth Circuit dismissed a class action suit filed against Hewlett-Packard (HP). As background, the plaintiffs in Laffen v. Hewlett-Packard Co. alleged that HP fiduciaries had breached their fiduciary duties by allowing plan participants to buy and hold HP stock that was artificially inflated. The plaintiffs specifically alleged that HP should have discontinued offering HP stock in the plan or should have at least warned participants of the risks associated with investing in HP stock. After the case was dismissed by the district court, the plaintiffs appealed that decision to the Ninth Circuit.
The Ninth Circuit followed suit and dismissed the case, holding that the plaintiffs failed to prove their argument that HP stock was artificially inflated. Additionally, the Ninth Circuit relied upon the precedent set by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer in finding that a prudent fiduciary in the same circumstances as HP could have viewed the discontinuance of offering HP stock as likely to cause more harm than good.
So ultimately, the Ninth Circuit dismissed the case because the plaintiffs failed to allege an alternative action that HP could have taken (other than discontinuing HP stock as an investment option).
Although this case was unpublished (and, therefore, cannot serve as precedent), employers can take solace in the fact that the bar for plaintiffs to succeed in these stock drop cases is still high.
On Jan. 2, 2018, the IRS released Bulletin 2018-1 which contains Revenue Procedures 2018-1 and 2018-4, both of which provide guidance related to employee benefit plans.
First, Rev. Proc. 2018-1 updates the procedures to determine employment status on Form SS-8 electronically. As background, employers file Form SS-8 to request a determination of the status of a worker under the common law rules for purposes of federal employment taxes and income tax withholding. Rev. Proc. 2018-1 also clarifies the rules regarding user fee refunds and amounts that must be paid when eligibility for a reduced fee depends on the result of the ruling. Further, the procedure says that www.pay.gov has become the exclusive means for paying fees that are required by this revenue procedure.
Second, Rev. Proc. 2018-4 applies to determination letters for different types of employee benefits plans (including 401(k) plans) and transactions, and for private letter rulings on various issues. This procedure has been updated to include changes made to the pre-approved plan program. Also, it provides guidance for pre-approved plans that are still subject to the procedures in previous Rev. Proc. 2015-36 since they are being submitted for cycles before their third six-year remedial amendment cycle. The procedure gives the user fees for submissions under the revised pre-approved plan program, adjusts the user fee structure for the IRS’s Voluntary Correction Program (VCP) and increases the fee for determinations as it relates to terminating plans. Changes have been made which affect requests for relief from retroactive disqualification, including a requirement that requests be submitted to the agent or specialist assigned to the case, as well as the removal of some procedural protections.
In addition, retirement plan sponsors should be aware that Rev. Proc. 2018-4 changes the way VCP user fees are calculated. Previously, these fees were based on the number of plan participants. Now they will be based on plan assets.
Therefore, plan sponsors should familiarize themselves with these IRS Revenue Procedures and make any necessary changes to applicable plans. Due to the complex nature of these procedures, outside counsel is recommended for employers with specific questions.
In the December 2017 issue of Employee Plans News, the IRS addressed several topics related to 401(k) plans.
First, the IRS now has a webpage that summarizes recent national disaster legislation, making it easier for plan participants to access retirement plan funds to recover from Hurricanes Harvey, Irma and Maria. The webpage describes relief available for early distributions, plan loan and repayment options, and retroactive plan term amendments.
Second, IRS Form 5300 underwent major revisions that became effective back on Jan. 1, 2017. Form 5300 is used to request a determination letter for an individually designed plan, which includes a 401(k) plan. The IRS warns that any applications submitted after Dec. 31, 2017 will be returned if the previous version of the form is used. Further, plan sponsors are reminded that requests for partial termination determinations may be submitted without regard to their ability to request a determination letter on plan documents.
Third, the IRS has updated the listing of required modifications (LRMs) for cash or deferred arrangements (CODAs) and defined contribution plans. The LRM is a collection of information that helps plan sponsors draft plans that comply with applicable laws and regulations. The updated defined contribution LRM makes adjustments in plan qualification requirements, regulations and guidance provided in the 2017 Cumulative List of Changes.
Lastly, other items in the newsletter include the release of advanced copies of Form 5500 for 2017, instructions for field agents regarding missing participants and beneficiaries, and updated instructions for electronically filing Form 8955-SSA (Publication 4810).
Plan sponsors of retirement plans should familiarize themselves with the information contained in the IRS newsletter (especially the various types of disaster-related relief affecting employee benefit plans) and make any necessary changes.
On Dec. 22, 2017, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that expand its Missing Participants Program (the Program) to defined contribution plans (such as 401(k) and other plans). As background, ERISA requires plan sponsors to distribute plan assets to participants upon termination. The problem with completing that process is often that the employer cannot find certain prior employees. The Program allowed defined benefit plan sponsors who had undertaken a diligent search for these missing employees to transfer the missing employees’ account balances to PBGC. PBGC would then provide those benefits to employees when they were found.
This new regulation broadens the Program to offer it to defined contribution plans, multiemployer plans, professional service plans with 25 or fewer participants, and other defined benefit plans that weren’t previously covered. So, beginning on Jan. 1, 2018, defined contribution plan sponsors that are terminating their plans have the option of transferring missing participants’ benefits to PBGC. PBGC will then provide a centralized benefits directory through which the missing participants can determine if benefits are being held for them.
The new regulations also streamline the program by changing the way that employers determine the amount of money that should be sent to PBGC, increasing protection of participants’ benefits and easing the transfer of benefits to PBGC.
Any employers considering whether they would like to access the PBGC Program should familiarize themselves with the Program to determine if doing so is appropriate.