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Retirement Updates

DOL Extends Temporary Enforcement Policy of Fiduciary Investment Advice Rules

November 09, 2021

On October 25, 2021, the DOL released Field Assistance Bulletin (FAB) No. 2021-02, announcing a temporary enforcement policy related to the prohibited transaction exemption (PTE) 2020-02. The DOL adopted PTE 2020-02 – Improving Investment Advice for Workers & Retirees – on December 18, 2020. The PTE accompanied the amended fiduciary conflict of interest rule that was finalized in June 2020. (We discussed the final conflict of interest rule and the PTE in the July 7, 2020 edition of Compliance Corner.)

PTE 2020-02 became effective on February 16, 2021, but the DOL provided temporary enforcement relief through December 20, 2021. Specifically, the DOL stated that it would not pursue prohibited transaction claims against investment advice fiduciaries who worked diligently and in good faith to comply with impartial conduct standards. Impartial conduct standards require financial institutions and investment professionals to:

  • Give advice that is in the best interest of retirement investors and meet the prudence and loyalty standards.
  • Charge no more than reasonable compensation and comply with federal securities laws regarding “best execution”; and
  • Make no misleading statements about investment transactions and other relevant matters.

FAB No. 2021-02 extends the DOL’s non-enforcement policy through January 31, 2022. The DOL acknowledged that the earlier December 20, 2021 expiration date posed practical difficulties on financial institutions that were in the process of complying with PTE 2020-02.

The DOL also announced that they will not enforce the specific documentation and disclosure requirements under PTE 2020-02 through June 30, 2022.

Although this FAB extends the non-enforcement policy, financial institutions and investment advisors should continue their good faith compliance with PTE 2020-02.

Field Assistance Bulleting No. 2021-02 »

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IRS Announces 2022 Limits on Benefits and Contributions for Qualified Retirement Plans

November 09, 2021

On October 26, 2020, the IRS issued Notice 2021-61, 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, 2022.

The elective deferral limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increases from $19,500 to $20,500 in 2022. Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of these plans remains $6,500. Accordingly, participants in these plans who have reached age 50 will be able to contribute up to $27,000 in 2022.

The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts is increased from $13,500 to $14,000.

The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $61,000 (from $58,000). The limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) also increases to $245,000 (from $230,000). Additionally, the annual limit on compensation that can be taken into account for allocations and accruals increases from $290,000 to $305,000.

The threshold for determining who is a highly compensated employee under Section 414(q)(1)(B) increases to $135,000 (from $130,000). The dollar limitation concerning the definition of a key employee in a top-heavy plan increases from $185,000 to $200,000.

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

Notice 2021-61 »

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IRS Releases Draft 2022 Instructions for Forms 1099-R and 5498

November 09, 2021

The IRS recently released the draft 2022 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.

The IRS updates the form instructions annually to incorporate any recent administrative, reporting or regulatory changes. The 2022 Form 1099-R draft instructions include a new reporting requirement for qualified plan payments to state unclaimed property funds under escheat laws.

Employers who sponsor retirement plans may want to be aware of the draft release but should understand that changes may be made prior to the issuance of the final instructions.

Draft Instructions for Forms 1099-R and 5498 »

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PBGC Extends Opinion Letter Pilot Program

October 26, 2021

The Pension Benefit Guaranty Corporation (PBGC) recently announced that the agency’s opinion letter pilot program has been extended to September 30, 2022. PBGC insures most private-sector defined benefit pension plans, and this pilot program is designed to allow employers to request a determination from the agency about whether a proposed defined benefit pension plan will be covered.

PBGC will address two questions when providing an opinion letter: whether the plan’s sponsoring employer is a professional service employer, and whether all participants in the plan are substantial owners. PBGC does not cover plans that cover 25 or fewer participants and are established and maintained by a professional service employer. PBGC also does not cover plans that are established and maintained exclusively for substantial owners of the plan sponsor.

Employers who are considering establishing a defined benefit pension plan should be aware of this pilot program.

PBGC Insurance Coverage »

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PBGC Releases Technical Update Regarding the Effect of ARPA on 4010 Reporting

October 26, 2021

On October 15, 2021, the Pension Benefit Guaranty Corporation (PBGC) issued Technical Update 21-1 explaining that the ERISA Section 4010 reporting obligation is waived in situations where the reporting requirement is triggered only due to a retroactive election permitted by the American Rescue Plan Act of 2021 (ARPA) and IRS Notice 2021-48, among other items.

As background, certain underfunded single-employer plans are required to report identifying, financial and actuarial information to PBGC per Section 4010 of ERISA. This requirement is triggered if one or more plans sponsored by a member of a controlled group had a funding target attainment percentage below 80%.

ARPA amended the rules for single-employer plans such that the amortization period for shortfall amortization bases was extended for plan years beginning after December 31, 2021 (or for plan years beginning after December 31 of 2018, 2019 or 2020 if the plan sponsor chooses). ARPA also modified the way stabilized discount rates are determined for plan years beginning after December 31, 2019 (or a later effective date if the plan sponsor chooses).

Due to these changes, it is now possible that a plan’s 4010 FTAP (interest rate stabilization rules) may retroactively drop below 80%, triggering a retroactive 4010 filing requirement. It is also possible that this could result in a change to already reported actuarial information.

As such, the requirement to submit a 4010 filing for an information year ending before December 31, 2021, is waived when such filing would not have been required absent the enactment of ARPA. Further, for 4010 filings that contain actuarial information that subsequently changed due to ARPA, no amendment is necessary. PBGC explains that it reserves the right to request a revised actuarial information reflecting any ARPA-related changes, should they need such information related to monitoring and enforcement activities.

Employers should be aware of these developments.

Technical Update 21-1 »
IRS Notice 2021-48 »

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DOL Proposed Rule Addresses Retirement Plan ESG Investments and Proxy Voting

October 26, 2021

On October 13, 2021, the DOL released a proposed rule entitled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” The proposed rule clarifies that retirement plan fiduciaries may consider environmental, social and governance (ESG) factors when making investment decisions and exercising shareholder voting rights. If finalized, the proposed rule will amend the current “Investment Duties” regulation under ERISA.

Historically, DOL guidance indicated that ERISA duties of loyalty and prudence do not prevent plan fiduciaries from making investment decisions that reflect ESG considerations, provided certain conditions are satisfied. Additionally, the DOL views ERISA fiduciary duties as encompassing the management of shareholder voting rights related to stock shares held by the plan. However, according to the DOL fact sheet accompanying the proposed rule, stakeholders expressed concerns that the existing 2020 rule created uncertainty regarding the integration of ESG factors into plan investment decisions.

Therefore, the proposed rule addresses stakeholder concerns by recommending several important changes to the investment selection process. First, the guidance recognizes that an evaluation of the economic effects of ESG factors on a particular investment may be required if material to the risk-return analysis. The proposed rule retains the basic principle that ERISA duties of prudence and loyalty require fiduciaries to focus primarily on material risk and return factors and no other objectives when making plan investment decisions. The proposed rule provides examples of ESG factors that may be material to the risk-return analysis, such as climate-change related factors (e.g., a corporation’s exposure to physical risks of climate change), governance factors (e.g., board composition) and workforce practices (e.g., equal employment opportunities).

Second, the rule proposes a change to the “tie-breaker” standard, which allows plan fiduciaries to consider collateral benefits (such as ESG considerations) when making investment selections under certain circumstances. Under the existing rule, competing investments must be “indistinguishable” before fiduciaries can consider collateral factors as tie-breakers. The proposed rule is more flexible, allowing fiduciaries to consider collateral benefits when there are two competing investment options that are equally appropriate additions to the plan (even if not indistinguishable). Additionally, the proposed rule removes special documentation requirements for applying the tie-breaker standard. However, if the tie-breaker is used in the selection of a designated investment alternative (such as a 401(k)-plan investment option), the plan must prominently display the collateral considerations to plan participants in fund disclosures.

Third, the proposed rule changes the existing rule by allowing for a fund to be chosen as a Qualified Default Investment Alternative (QDIA) despite its consideration of collateral ESG factors (provided the fund otherwise satisfies the QDIA regulation requirements). Accordingly, the proposed rule applies the same investment standards to QDIAs as to other plan investments.

The proposed rule also makes several notable changes regarding the current rule’s provisions with respect to shareholder rights and proxy voting. First, the proposed rule removes language stating that the fiduciary duty to manage shareholder stock rights does not require the voting of every proxy or the exercise of every shareholder right. The DOL view is that proxies should be voted unless the plan fiduciary decides the voting would not be in the plan’s interest (e.g., due to excessive costs).

Second, the proposed rule eliminates a provision in the current rule that sets out specific requirements when the authority to vote proxies or exercise shareholder rights has been delegated to an investment manager or involves proxy advisory services. The DOL believes that general ERISA prudence and loyalty duties already impose a monitoring requirement.

Third, the rule removes two existing safe harbors for proxy voting policies, due to concerns these do not adequately safeguard the interest of plans and participants. One safe harbor permits a policy to limit voting resources to particular types of proposals that the fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the investment. The other safe harbor permits a policy of refraining from voting on proposals or particular types of proposals when the plan’s holding in a single issuer relative to the plan’s total investment assets is below a quantitative threshold.

Fourth, the proposed rule eliminates the specific requirement that plan fiduciaries must maintain records on proxy voting activities and other exercises of shareholder rights. Again, the DOL view is that the general ERISA duties of prudence and loyalty should govern.

Employers that sponsor retirement plans should be aware of the proposed changes to the existing Investment Duties regulations. Comments can be submitted on or before December 13, 2021, in accordance with the directions specified in the proposed rule.

Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights »
Notice of Proposed Rulemaking on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights »

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IRS Provides Guidance on ARPA Funding Relief for Multiemployer DB Plans

October 26, 2021

On October 12, 2021, the IRS released Notice 2021-57, which provides guidance to multiemployer plan sponsors of defined benefit pension plans. The Internal Revenue Code (the Code) requires such plans to meet certain funding requirements. Under Section 432 of the Code, plans that have a funding deficiency may be certified by the plan actuary as endangered or critical status, which carries additional requirements including reporting and notification. The American Rescue Plan Act (ARPA) included relief related to these plans and requirements.

Freeze Election
A multiemployer plan sponsor may make an election under which the plan’s Section 432 certified status for a plan year is the same as the plan’s status for the preceding plan year. The plan sponsor may make a freeze election for the first plan year beginning on or after March 1, 2020, or the next succeeding plan year. Such election does not require an update to the plan’s funding improvement plan, rehabilitation plan, or schedules otherwise generally required. 

If a freeze election changes a plan’s Section 432 status for a plan year, the election must be made within 30 days after the plan actuary certifies the plan’s status (or, if earlier, 30 days after the due date for that certification). If a freeze election does not change a plan’s status for a plan year, the freeze election must be made by the last day of the election year. If a freeze election is made for a plan year before the annual certification of the plan’s status is submitted to the IRS, then the election must be included with the submission of the certification. If the election is made after the submission of the certification, then the election must be submitted to the IRS not later than 30 days after the due date for making the election.

Extended Election
The plan sponsor of a multiemployer plan in endangered or critical status for a plan year beginning in 2020 or 2021 may make an extension election under which the plan’s funding improvement period or rehabilitation period, whichever is applicable, is extended by five years.

An extension election must be submitted to the IRS under the same terms that apply for a freeze election, as described above. If the plan sponsor makes more than one election (for example, a freeze election and an extension election are both made for a plan year), the elections may be included in a single submission.

An extension election must be made by the last day of the election year. However, a freeze election or an extension election will be treated as timely if it is made by December 31, 2021.

A listing of items that must be included in the submission along with filing instructions are include in the Notice.

If a plan has been certified by the plan actuary as being in endangered or critical status for a plan year, but the plan is not considered to be in such status because of a freeze election, the plan sponsor must provide notification to the participants and beneficiaries, the bargaining parties, Pension Benefit Guaranty Corporation (PBGC), and the DOL.

Notice 2021-57 details the required elements of the notification as well as the filing procedures with the PBGC and DOL.

In regards to timing of the notification, if the freeze election is made before the date the annual certification of the plan’s Section 432 status is submitted to the IRS, then this notice must be furnished no later than 30 days after the date of the certification. If the election is made after the date the annual certification is submitted to the IRS, then this notice must be provided no later than 30 days after the date of the election.

Special Amortization Rules
Finally, the experience losses related to COVID-19 may be spread over a period of 30 plan years if certain conditions are met. COVID-19 losses include experience losses related to reductions in contributions, reductions in employment and deviations from anticipated retirement rates, as determined by the plan sponsor. Adoption of the special rules would impact the plan’s Form 5500 filing and Schedule MB (Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information). 

Multiemployer plan sponsors of defined benefit plans wishing to take advantage of the relief provided by ARPA will want to review the Notice for additional details and clarifications and work with outside counsel on completing the filing and notification requirements.

IRS Notice 2021-57 »

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IRS Releases Issue Snapshot on Deemed Distributions of Participant Loans

October 12, 2021

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.

Deemed Distributions – Participant Loans »

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Agencies Propose Changes to Form 5500 Annual Report Filed for Retirement Plans

September 28, 2021

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:

  • Modifying the Form 5500 instructions so that a single aggregated Form 5500 can be filed for a defined contribution group (DCG) reporting entity, and including a new Schedule DCG that would report plan-level information. In addition, an independent qualified public accountant must audit the single shared trust (with plan-level auditor’s report and financial statements attached to the Schedule DCG if a participating plan is also required to be audited). To file a single aggregated Form 5500, plans must verify that they meet the DCG eligibility requirements.
  • Adding a new Schedule MEP (Multiple Employer Plan) to the Form 5500 to be used to report the MEP and related participating employer and contribution information. There is also a new type of defined contribution pension plan permitted by the SECURE Act, a PEP, which is operated by a pooled plan provider (PPP) and allows unrelated employers to participate in the plan without a common interest. A PEP would also complete the newly proposed Schedule MEP. Part III of the Schedule MEP includes information specific to PEP compliance (with several additional proposed revisions to the Form 5500 related to PEPs). The proposed rules add a checkbox to Form 5500 to indicate that a Schedule MEP will also be included with the filing, and all MEPs (including PEPs) and all DCGs are required to file Form 5500 regardless of size (with no option to file Form 5500-SF).
  • Changing how defined contribution plan participants are counted, which expands the availability of simplified Form 5500 filing. The determination of a “small plan” would be based only on the number of participants with account balances (versus the number eligible to participate).
  • Adding questions regarding nondiscrimination testing.
  • Standardizing schedules for investment assets that include new questions regarding plans’ trusts and trustees.
  • Requiring MEWAs (Multiple Employer Welfare Arrangements) that offer coverage for medical benefits to include a list of participating employers in the Form M-1. (MEWAs providing other types of benefits would continue to utilize the Form 5500 to provide required information.) Certain MEWAs will also be required to include a good faith estimate of each participating employer’s percentage of the total contributions made by all participating employers during the plan year.

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.

Proposed Revision of Annual Information Return/Reports »
Press Release »

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IRS Updates Opinion Letter Procedures for Pre-approved § 403(b) Plans

September 14, 2021

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.

Revenue Procedure 2021-37 »

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