DOL Announces They Will Proceed with Investment Advice Exemption
February 17, 2021
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.
DOL News Release »
IRS Releases Covered Compensation Tables for 2021 Plan Years
February 02, 2021
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.
Revenue Ruling 2021-3 »
IRS Finalizes 2020 Form 8955-SSA Instructions
January 20, 2021
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.
Instructions for 2020 Form 8955-SSA »
IRS Releases 2021 Instructions for Forms 1099-R and 5498
January 20, 2021
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.
Instructions for 2021 Forms 1099-R and 5498 »
DOL Provides Guidance on Missing Participants
January 20, 2021
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:
- Maintaining accurate census information for the plan’s participant population
- Implementing effective communication strategies
- Conducting missing participant searches
- Documenting procedures and actions
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.
Compliance Assistance Release No. 2021-01 »
Missing Participants – Best Practices for Pension Plans »
Field Assistance Bulletin No. 2021-01 »
IRS Updates Procedure for Determination Letter Requests
January 20, 2021
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.
Rev. Proc. 2021-4 »
IRS Publishes Instructions for 2020 Form 5500-EZ
January 20, 2021
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.
Instructions for 2020 Form 5500-EZ »
IRS Extends Temporary Relief from the Requirement to Obtain Physical Spousal Consent
January 05, 2021
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.
IRS Notice 2021-03 »
IRS Releases Instructions for 2020 Form 5330
January 05, 2021
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.
2020 Form 5330 Instructions »
DOL Finalizes Prohibited Transaction Exemption for Investment Advice
December 22, 2020
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 investment advice is in the best interest of the retirement investor at the time it is made;
- The compensation received is reasonable under ERISA 408(b)(2); and
- The advice does not place the financial or other interests of the advising fiduciary before the interests of the investor.
The final exemption makes a number of changes to the proposed version. Specifically, the final exemption:
- Narrows the recordkeeping requirements to allow only the DOL and the Department of the Treasury to obtain access to a financial institution’s records;
- Revises the disclosure requirements to require a written disclosure to retirement investors on the specific reasons that a rollover recommendation was in their best interest;
- Revises the retrospective review provision to provide that certification can be made by any senior executive officer, and not just the chief executive officer (as proposed); and
- Adds a self-correction provision; and
- Sets forth the DOL’s final interpretation of the five-part test used for determining investment advice fiduciary status.
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.
Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees »