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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Federal Register: Use of Forfeitures in Qualified Retirement Plans »

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

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

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

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

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

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

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

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

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

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

American Securities Association v. DOL »

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

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

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

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

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

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

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

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

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

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

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

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

Operational Compliance List »

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

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

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

Announcement 2023-6 »

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

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

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

Special Financial Assistance by PBGC – Withdrawal Liability Condition Exception »

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

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

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

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

Internal Revenue Bulletin: 2023-01 »

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

PBGC Revised Penalties »