Compliance Corner

Retirement Updates

DOL Publishes Initial Regulatory Flexibility Analysis on Proposed Amendment to QPAM Exemption

September 27, 2022

On September 16, 2022, the DOL published an Initial Regulatory Flexibility Analysis (IRFA) on a proposed amendment to the qualified professional asset manager (QPAM) class prohibited transaction exemption, PTE 84-14. This exemption permits an investment fund managed by a QPAM to engage in certain party-in-interest transactions that would otherwise be prohibited by ERISA and the Code. As reported in our August 2, 2022, article, the DOL recently proposed to amend several aspects of the QPAM exemption qualifications to ensure the protection of retirement plan assets and participants.

Among other items, the proposed amendment increases the current asset management and equity thresholds for QPAM eligibility and provides for subsequent annual inflation adjustments to these thresholds. The thresholds are intended to ensure that eligible fiduciaries managing retirement funds are established institutions that are large enough to discourage the exercise of undue influence upon their decision-making processes by parties in interest.

The Regulatory Flexibility Act requires an agency to present an IRFA on a proposed amendment unless the DOL certifies the proposed amendment would not have a significant economic impact on a substantial number of small entities. The DOL acknowledges that the proposed increases to asset management and equity thresholds for QPAM eligibility could potentially result in some small entities no longer being able to rely upon the exemption. Additionally, to the extent retirement plans that are small entities are more likely to hire a QPAM that is a small entity, the proposed amendment could also impact such plans. For purposes of this IRFA, the DOL considers a plan with less than 100 participants to be a small entity. However, the DOL estimates the percentage of such plans to be small. The IRFA analyzes and seeks public comment on potential economic impacts of the proposed QPAM Amendment on small entities.

The IRFA also considers the possible cost impact of the proposed amendment’s various provisions on all QPAMs, including those who have engaged in certain types of misconduct. The tables summarize the estimated annual costs associated with the amendment for QPAMs in compliance with the exemption, QPAMs with prohibited misconduct and QPAMs with convictions.

The DOL requests comments on the IRFA by October 11, 2022, which is the same deadline as the extended comment period for the proposed QPAM amendment. However, the DOL will provide additional time for public input on all aspects of the proposed QPAM amendment (including the IRFA) following a public hearing scheduled for November 17, 2022.

Federal Register: Initial Regulatory Flexibility Analysis for Proposed Amendment to Prohibited Transaction Class Exemption 84-14 (the QPAM Exemption) »

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DOL Releases Updated Guidance on Independence of Employee Benefit Plan Accountants

September 13, 2022

On September 6, 2022, the DOL published an updated Interpretive Bulletin (the updated IB) setting forth guidelines for determining when a qualified public accountant is independent for purposes of auditing and providing an opinion on the financial statements required to be included in the Form 5500 filing for an ERISA employee benefit plan. According to the DOL, a primary purpose of the updated IB was to remove outdated and unnecessarily restrictive provisions from prior guidance, Interpretive Bulletin 75-9 (the 1975 IB), to ensure access of employee benefit plans to highly qualified auditors and audit firms.

Unless otherwise exempt, an ERISA plan administrator is generally required to retain an “independent” qualified public accountant to conduct an annual examination of the plan's financial statements and provide an opinion as to whether the statements conform to generally accepted accounting principles and whether the Form 5500 schedules present fairly, and in all material respects, the required information when considered with the financial statements. In 1975, the DOL issued the 1975 IB to determine when an accountant is independent for the Form 5500 audit requirement. The 1975 IB set forth three specific circumstances that would conclusively render the accountant not to be independent: the first based on certain roles and statuses, the second based on financial interests and the third based on engaging in management functions related to financial records subject to the audit. In each situation, a general facts and circumstances approach is applied.

The updated IB reorganizes and makes certain changes to the 1975 IB. First, the updated IB modifies the time period during which accountants are prohibited from holding financial interests in the plan or plan sponsor. Under the 1975 IB, a newly retained accountant cannot conduct the ERISA-required audit of a plan's financial statements if the accountant, the accountant's firm, or a member of the firm has a direct or material indirect financial interest in the plan or plan sponsor during the period covered by the financial statements (generally, the prior plan year) or during the period of professional engagement. The DOL illustrates the application of the 1975 IB with the example of a new accountant ineligible to audit a plan's 2020 financial statements in 2021 if one partner of the accountant’s firm held a single share of the publicly traded stock of the sponsor at any time during 2020. Upon review and consultation with accounting regulatory bodies, the DOL recognized this requirement was unnecessarily restrictive and not aligned with other accounting rules.

As a result, the updated IB provides an exception for new audit engagements from the prohibition on holding disqualifying financial interests during the period covered by the financial statements being audited. This exception is limited to publicly traded securities. Under the new rule, an accountant or firm is not disqualified from accepting a new audit engagement merely because of holding publicly traded securities of a plan sponsor during the period covered by the financial statements provided such securities are disposed of prior to the period of professional engagement. The exception provides accountants with a divestiture window between the time when there is an oral agreement or understanding that a new client has selected them to perform the plan audit and the time an initial engagement letter or other written agreement is signed or audit procedures commence, whichever is sooner.

Second, the updated IB also modifies the definition of “office” for the purpose of determining who is a “member” of an accounting firm. The 1975 IB defined member as “all partners or shareholder employees in the firm and all professional employees participating in the audit or located in an office of the firm participating in a significant portion of the audit.” However, the DOL recognized that the concept of an “office” for workplace purposes has since changed to focus more on workgroups, illustrated by expected regular personnel interactions and assigned reporting channels rather than physical locations. Accordingly, the updated IB defines the term “office” to mean a reasonably distinct subgroup within a firm, whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters regardless of the physical location of the individual.

Employers that sponsor ERISA employee benefit plans subject to the Form 5500 audit requirements should be aware of the updated guidance, which became effective on September 6, 2022.

Federal Register: Interpretive Bulletin Relating to the Independence of Employee Benefit Plan Accountants »

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DOL Announces Hearing on Proposed Amendment to Prohibited Transaction Exemption Application Process

August 30, 2022

The DOL recently announced it will hold a virtual public hearing regarding a proposed amendment to the prohibited transaction exemption filing and processing procedures. The DOL is also reopening the comment period for the proposed amendment.

ERISA and the Code generally prohibit a plan fiduciary from causing the plan to engage in a variety of transactions with certain related parties (including sponsoring employers, affiliates and service providers) unless a statutory or administrative exemption applies. However, the DOL and IRS have the authority to grant individual or class administrative exemptions from the prohibited transaction rules under certain conditions.

The DOL is also responsible for maintaining procedures for granting exemptions, including the application and documentation requirements. On March 9, 2022, the DOL proposed rules to update the application process for prohibited transaction exemptions. The proposed rule clarified the types of information and documentation required to complete an application to the DOL and expanded opportunities for applicants to submit information electronically. Please see our prior article for further details on the proposed rule.

The public hearing will be held on September 15, 2022, and (if necessary) September 16, 2022, via WebEx, beginning at 9:00 a.m. EDT. The comment period for the proposed amendment will be reopened on September 15, 2022. Employers who sponsor ERISA plans, and particularly those considering filing an application for a prohibited transaction exemption, should be aware of the hearing and additional comment period on the proposed rule.

Announcement »

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IRS Extends SECURE Act and CARES Act Retirement Plan Amendment Deadlines

August 16, 2022

On August 3, 2022, the IRS issued Notice 2022-33, which extends deadlines for amending nongovernmental qualified retirement plans, 403(b) plans, and IRAs to reflect changes under the SECURE Act and certain provisions of the CARES Act. Absent this relief, the plan amendments would have been required by the last day of the first plan year ending on or after January 1, 2022.

Specifically, the notice extends plan amendment deadlines for changes made by the Secure Act until December 31, 2025. Additionally, the extension applies to optional provisions of the Miners Act that allow defined benefit pension plans to lower the minimum age for in-service distributions from age 62 to 59 1/2. The guidance also postpones the amendment deadlines to adopt CARES Act relief for 2020 required minimum distributions until December 31, 2025. However, plans that adopted CARES Act optional loan and/or withdrawal provisions still must be amended by the original deadline (i.e., December 31, 2022, for a calendar year plan).

The IRS also indicated that it intends to issue SECURE Act guidance with the 2023 Required Amendment list. This will enable plan sponsors to adopt necessary amendments simultaneously.

Employers that sponsor retirement plans should be aware of the extensions and consult with their document providers for further information.

IRS Notice 2022-33 »

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DOL Proposes Amendment to the Qualified Professional Asset Manager Exemption

August 02, 2022

On July 26, 2022, the DOL proposed an amendment to the Class Prohibited Transaction Exemption 84-14, also known as the Qualified Professional Asset Manager (QPAM) Exemption. According to the DOL, the amendments are designed to ensure the exemption continues to protect investment funds holding ERISA retirement plan assets and individual retirement accounts.

A registered investment advisor or a bank, savings and loan or insurance company meeting certain financial criteria can qualify as a QPAM. An ERISA plan investment manager that qualifies as a QPAM and satisfies the requirements of the QPAM Exemption can engage in transactions with parties related to the plan, such as sales, exchanges, leases and extensions of credit. Absent the exemption, these transactions would be prohibited by ERISA and the Code. Accordingly, the QPAM Exemption is widely relied upon by ERISA plan investment managers.

A primary purpose of the proposed amendment is to prevent QPAMs that have engaged in certain bad acts from being able to continue relying upon the exemption. To achieve this objective, the amendment expands the types of serious misconduct that could disqualify plan asset managers from using the exemption. For example, disqualifying conduct could include conduct forming the basis for a deferred or non-prosecution agreement that, if prosecuted, would have been a crime under the QPAM Exemption. In recognition of the globalization of the financial services industry, the amendment also clarifies that equivalent foreign misconduct (e.g., by a foreign affiliate) could also be disqualifying.

Additionally, the proposed changes include new document requirements. Under the amendment, a QPAM must provide a one-time email notification to the DOL with the operating names of the QPAM and the legal name of each business entity relying upon the QPAM exemption. More significantly, a QPAM planning to rely upon the exemption would be required to update its written management agreements with client plans to include specific protections in the event the QPAM is disqualified due to misconduct. Specifically, the agreements must provide each plan with unrestricted ability to terminate or withdraw from the arrangement free of any fees, penalties or charges. The agreements must provide indemnification to the plan against losses and costs due to the QPAM’s loss of eligibility to rely upon the exemption. The amendment also proposes a one-year period for a disqualified financial institution to conduct an orderly wind-down of its activities as a QPAM, so that a plan can terminate the relationship with an ineligible asset manager without undue disruption.

Furthermore, the amendment updates the asset management and equity thresholds for QPAM eligibility and clarifies the independence and control that a QPAM must maintain regarding investment decisions. Additionally, under a proposed new recordkeeping requirement, QPAMs would be required to keep records for at least six years to demonstrate compliance with the QPAM Exemption and be prepared to make these records available to regulators and plan participants.

Employers that sponsor retirement plans with investment funds that rely upon the QPAM exemption should be aware of the proposed amendments and consult with their counsel for further information. Comments to the DOL on the proposed amendment can be submitted through September 26, 2022.

Proposed Amendment to the QPAM Exemption »

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PBGC Issues Final Rule on Special Assistance for Financially Troubled Multiemployer Plans

July 19, 2022

On July 8, 2022, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule regarding special assistance to financially troubled multiemployer pension plans. In response to public comments, the final rule makes several changes to the prior interim final rule (IRF), which we summarized in our July 2021, Compliance Corner article.

The American Rescue Plan Act of 2021 established the Special Financial Assistance (SFA) Program to provide funding for severely underfunded multiemployer pension plans. The goal was to enable these plans to pay benefits and administrative expenses through the plan year ending in 2051. The program requires plans to demonstrate eligibility for SFA funds, which are not required to be repaid, and to calculate the amount of assistance. The SFA funds and related earnings are limited in how they can be invested and must be segregated from other plan assets.

The final rule makes changes to the methodology plans used to calculate the SFA amount by providing two separate interest assumptions, one for calculating expected investment returns on the plan’s non-SFA assets, and a separate rate for calculating investment returns expected to be earned on the plan’s SFA assets. This change is intended to align the interest rates used to calculate SFA with reasonable expectations of future investment returns on a plan’s SFA assets.

Additionally, the final rule allows plans to invest up to 33% of their SFA funds in return-seeking investments (e.g., publicly traded common stock and equity funds that invest primarily in public shares), with the remaining 67% restricted to high-quality (investment grade) fixed income investments. This change was meant to address concerns that the investment limitations in the prior guidance would make it difficult for an eligible plan to meet the investment return assumptions and stay solvent through 2051. (The IFR only allowed SFA assets to be invested in high-quality, investment-grade bonds and certain other investments expected to yield similar returns.)

The final rule also modifies certain conditions imposed on plans that receive SFA. For example, retroactive and prospective benefit improvements are permitted after 10 years with PBGC approval, if the plan can demonstrate it will avoid insolvency. The rule also clarifies the conditions that apply after a merger of an SFA plan with a non-SFA plan to encourage beneficial mergers. In determining underfunding for withdrawal liability purposes, the final rule adds a requirement that plans phase-in recognition of SFA assets over the projected SFA payout period. This requirement is designed to ensure that SFA funds do not subsidize employer withdrawals from participation in SFA plans. The rule includes several other changes, including aspects of the SFA application process.

Employers who participate in multiemployer plans should be aware of the guidance and consult with counsel for further information. The final rule is effective August 8, 2022.

Federal Register: Special Financial Assistance by PBGC »

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Sixth Circuit Addresses Imprudent Investment and Excessive Fee Claims

July 06, 2022

On June 21, 2022, in Smith v. CommonSpirit Health, et. al, the Sixth Circuit affirmed the district court’s dismissal of ERISA imprudent investment claims against a 401(k)-plan sponsor. In the opinion, the Sixth Circuit emphasized that ERISA does not give federal courts broad authority to second-guess retirement plan investment decisions. Rather, the allegations must infer an ERISA fiduciary breach.

In this case, plaintiff Yosaun Smith was a 401(k) participant who brought a putative class action suit against the plan sponsor, CommonSpirit Health, and the plan’s administrative committee (collectively, CommonSpirit). She claimed that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when passive index funds offered higher returns and lower fees. To demonstrate this point, she highlighted the three-year and five-year performance of several of the plan’s actively managed funds, which trailed the performance of related index funds. She also alleged that the plan’s recordkeeping and management fees were excessive. The district court dismissed her complaint for failure to allege facts supporting an ERISA fiduciary breach by CommonSpirit.

On appellate review, the Sixth Circuit focused on the fiduciary decision-making process. First, the court explained that the inclusion of actively managed funds as plan options is not necessarily imprudent because these funds may be appropriate for certain participants based on their risk tolerance. Additionally, the CommonSpirit plan offered passive index funds.

Next, the court noted that Smith’s claim failed to satisfy the required pleading standard because it did not allege that a particular actively managed fund was imprudent when selected, became imprudent over time, or was otherwise clearly unsuitable based on ongoing performance. The court emphasized that comparatively poor historical fund performance does not conclusively point to deficient fiduciary decision-making, especially when funds have different goals and risk profiles.

The court disagreed with Smith’s assertion that “red flags”, such as fund outflows and outside analysts’ evaluations, should have alerted the plan fiduciaries that the chosen actively managed funds were imprudent. The court noted that the actively managed fund ratings were above average or better, and the assets still exceeded those of the passive index funds.

Finally, the court determined that Smith failed to allege that administrative and investment management fees were excessive relative to the services rendered or fund types. The decision explained that the pleading standard for an excessive fee claim requires a showing of context and equivalent services when comparing the plan’s administrative fees to those of another plan.

Employers that sponsor defined contribution plans should be aware of this opinion, which provides a framework for determining whether an imprudent investment or excessive fee claim will survive the pleading stage. The case follows the recent US Supreme Court decision in Hughes v. Northwestern University, which also addresses imprudent investment claims. Please see our article on the Hughes case: SCOTUS on Imprudent Fiduciary Decisions | NFP

Smith v. CommonSpirit Health, et. al »

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IRS Announces Pre-Examination Retirement Plan Compliance Pilot

June 22, 2022

On June 3, 2022, the IRS announced that they will begin a new pre-examination retirement plan compliance program in June of 2022. Plan sponsors who are selected for the program will receive a letter from the IRS indicating that they have 90 days to review their retirement plan’s documentation and operation to determine if they meet the IRS’ requirements. The IRS will potentially schedule a full exam for those employers who do not respond.

Upon completing the review, employers who find mistakes may be able to self-correct through the IRS Employee Plans Compliance Resolution System (EPCRS). If self-correction is not an option, employers can request a closing agreement from the IRS and pay the penalties outlined by the IRS’ Voluntary Correction Program.

The IRS intends to use this process to lessen the taxpayer burden of completing retirement plan investigations. Any employer plan sponsor who is contacted by the IRS as part of this program should work with their service providers and/or legal counsel to review their retirement plan compliance.

Employee Plans Newsletter, June 3, 2022 »

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Agencies Release Final Rule on Changes to the 2022 Forms 5500 and 5500-SF

June 07, 2022

On May 20, 2022, the IRS, DOL and PBGC (the 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 2022 annual reports. (Remember that Forms 5500 are due by the end of the seventh month after the end of the plan year.)

The changes to the forms and instructions mostly implement annual reporting changes for defined benefit plans. Specifically, the agencies are adding new questions and revising existing questions on Schedules MB (Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information), SB (Single-Employer Defined Benefit Plan Actuarial Information), and R (Retirement Plan Information). They are also modifying the contribution and benefit attachments required to accompany the filings.

The final rule also adds new characteristic code options to be reported on line 8 of Form 5500 and line 9 of Form 5500-SF, which report data on defined contribution multiple employer plans, including pooled employer plans. The instructions will also be amended to request additional plan sponsor and plan administrator information on Part II of Form 5500 and Form 5500-SF.

The notice provides illustrations of the changes to the forms and instructions. Advance copies of the 2022 forms will go out later this year after the agencies have published a third notice addressing other necessary revisions.

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

Annual Information Return/Reports »

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IRS Announces Revisions to Form 5300

June 07, 2022

On May 25, 2022, the IRS announced that it will revise Form 5300, Application for Determination for Employee Benefit Plan, and its instructions. The revisions will allow plans to submit the form electronically.

Form 5300 is used to request a determination letter from the IRS for the initial qualification of a defined benefit or a defined contribution plan and the exempt status of any related trust. Starting on June 1, 2022, the form can be submitted electronically via, along with a single PDF file (not exceeding 15MB). This PDF must contain the following:

  • Form 2848, Power of Attorney and Declaration of Representative or Form 8821, Tax Information Authorization
  • Prior Determination Letter
  • Opinion/Advisory Letter
  • Cover Letter
  • Amendments (any prior plan documents being submitted along with any applicable amendments)
  • Current Plan Document
  • Adoption Agreement
  • Trust Document
  • Other applicable documents (any additional documents not listed above)

If the total number of documents causes the PDF to exceed the 15MB limit, then documents can be removed from the PDF and faxed separately to the agency. The agency will accept paper forms until June 30, 2022. The user fee for a Form 5300 submitted on or after January 3, 2022, is $2,700 (or $4,000 for multiple employer plans) if the plan does not qualify for the zero-dollar user fee in Notice 2017-1. Applicants must pay the user fee through for an electronic submission using a bank account, credit card or debit card.

Applicants can expect a response to applications within 145 days.

Employers or plans seeking qualification of a defined benefit or a defined contribution plan and the exempt status of any related trust should be aware of this development.

IRS: Employee Plan News, May 25, 2022 »

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