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 »
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 »
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 Pay.gov, 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 Pay.gov 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 »
IRS Extends Temporary Relief from Physical Presence Requirement Again
May 24, 2022
On May 13, 2022, the IRS released Notice 2022-27, which extends the COVID-19 temporary relief from the physical presence requirement for certain retirement plan elections.
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 Notices 2020-42, 2021-3 and 2021-40 providing relief 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. Those notices provided relief from 2020 to June 30, 2022. (For further details on IRS Notices 2020-42, 2021-3 and 2021-40, please see, respectively, our June 9, 2020, January 5, 2021 and July 7, 2021, Compliance Corner editions.)
Notice 2022-27 provides an additional six-month extension of this temporary assistance through December 31, 2022. The relief is optional, i.e., a participant can still have an election witnessed in the physical presence of a notary accepted by a plan.
Additionally, the IRS confirmed that they are reviewing comments from stakeholders that they received pursuant to the previous notices. That feedback was sought on whether relief from the physical presence requirement should be made permanent.
Sponsors of retirement plans should be aware of the further extension of temporary relief from the physical presence requirement for participant elections.
Notice 2022-27 »
Sixth Circuit Affirms Plan Consent Is Required for Arbitration of Fiduciary Breach Claims
May 24, 2022
On April 27, 2022, in Hawkins, et al. v. Cintas Corp., et al., the Sixth Circuit Court of Appeals affirmed that ERISA §502(a)(2) fiduciary breach claims belong to the plan and require the plan’s consent for arbitration. As a result, participants cannot be forced to arbitrate such claims without the plan’s consent.
In this case, two retirement plan participants brought a putative class action suit against their former employer, Cintas Corporation (Cintas), for breach of fiduciary duties owed to the company’s retirement plan. First, they alleged that Cintas only offered participants actively managed plan investment funds, rather than more cost-efficient passively managed funds. Second, they claimed that Cintas imprudently charged the plan expensive recordkeeping fees.
However, the participants had each signed employment agreements that contained arbitration provisions requiring arbitration of employment-related claims, including those arising under ERISA. Therefore, Cintas moved to compel arbitration and stay the class action lawsuit, asserting that the participants were bringing claims covered by the arbitration provisions.
The district court denied both of Cintas’ motions. The court determined that the action was brought on behalf of the plan, and the plan’s consent was necessary for arbitration. Thus, it was irrelevant that individual participants had consented to arbitration through their employment agreements.
On appeal, the Sixth Circuit agreed that the employment agreements did not force the case into arbitration. The court noted that the participants’ claim was not brought under ERISA §503(a)(1)(B) for benefits or rights due to them individually under the plan terms. Rather, the participants filed an ERISA §502(a)(2) suit seeking plan-wide relief that should be brought as a plan claim. Because the arbitration provisions only established the individual participants’ consent to arbitration, their employment agreements do not subject the plan claims to arbitration.
Additionally, the plan document did not contain an arbitration provision or other expression of the plan’s consent to arbitrate. The Sixth Circuit recognized that Cintas could amend the plan document to include an arbitration provision but did not decide whether such a provision would subject § 502(a)(2) claims to arbitration because this matter was not under review. However, the Sixth Circuit noted that all other circuit courts that have addressed the issue have held that ERISA claims are generally arbitrable.
The Sixth Circuit also rejected Cintas’ alternative argument that if plan consent to arbitrate is required, such consent was provided by their participation in the lawsuit to compel arbitration. In the Sixth Circuit’s view, this argument failed to recognize the distinction between Cintas as the plan sponsor and the plan as a legal entity.
Employers that sponsor ERISA plans should be aware that arbitration provisions in employment agreements do not automatically result in all ERISA claims being subject to arbitration. Employers who want ERISA claims, including those brought on the plan’s behalf under § 502(a)(2), to be arbitrated should ensure express consent to arbitrate is reflected in the plan documents.
Hawkins, et al. v. Cintas Corp., et al., Sixth Circuit Court of Appeals »
IRS Issues Proposed Regulations to Update Mortality Tables for Pension Plans
May 10, 2022
The IRS recently released proposed regulations to update the mortality tables under Code Section 430 that apply to single-employer defined benefit pension plans. The regulations are proposed to be effective for plan years beginning in 2023.
Amongst other purposes, the Section 430 mortality tables are used to determine a pension plan’s minimum funding requirements and minimum lump sum distribution amounts. These tables must be updated at least every 10 years to incorporate the actual mortality experience of pension plan participants and projected future trends. The existing base mortality rates were released in 2017, but the IRS has provided annual mortality improvement scales that reflect adjustments based on recent and projected mortality experience.
If finalized, the proposed regulations would make certain changes to the base mortality rates and mandated mortality tables. The mortality tables in the proposed regulations are based on actuarial reports that incorporate large-scale studies of pension plan mortality experience from 2010 through 2014. The mortality experience is adjusted for improvements since 2012 and expected future improvements. For 2023, the mortality improvement rates are based on actual mortality experience from 2013 through 2019 and assumptions for later improvements in mortality.
Accordingly, the 2023 mortality improvement rates do not consider actual mortality experience in 2020 and 2021, the first years affected by the COVID-19 pandemic. Nor do the long-term mortality improvement rates reflect any adjustment for COVID-19 effects, although any long-term impact may be reflected in future mortality improvement scales and related guidance.
The proposed regulations would also restrict the use of static mortality tables to plans with 500 or less participants, multiemployer plans and cooperative and small employer charity pension plans. Currently, plans can choose to use either static mortality tables with a single set of factors for all birth years or generational mortality tables with different factors for each birth year. The IRS considers the generational mortality tables to be more accurate and believes most plans now have the capability and actuarial software to use such tables.
Additionally, the IRS issued Notice 2022-22, which provides mortality tables in accordance with existing Section 430 regulations. If the proposed regulations are adopted for 2023 plan years, the tables in Notice 2022-22 would only apply to calculations of minimum required contributions for plan years beginning in 2022 with valuation dates in 2023. The notice also provides an amended version of the mortality table used to determine the minimum amount of a lump-sum distribution under Section 417(e). This table will apply for 2023 even if the new regulations are finalized with a 2023 effective date.
Employers that sponsor defined benefit pension plans should be aware of the updated guidance and consult with their plan actuaries and consultants regarding any potential impact on plan costs. The deadline for submitting comments to the IRS on the proposed regulations is June 9, 2022. Additionally, a public hearing has been scheduled for June 28, 2022.
Proposed Regulations: Mortality Tables for Determining Present Value Under Defined Benefit Pension Plans »
Notice 2022-22 »
IRS Issues Listing of Required Modifications and Information Package for 403(b) Pre-Approved Plans
April 26, 2022
On April 18, 2022, the IRS released a Listing of Required Modifications and Information Package (LRM) to provide practitioners with samples of plan provisions that satisfy IRC Section 403(b). Specifically, the LRM has been updated to reflect changes made in the IRS 2022 Cumulative List of Changes for §403(b) Pre-approved Plans (which we recently discussed in this article from the February 15, 2022, edition of Compliance Corner). Plans being submitted for opinion letters for the second remedial amendment cycle under the IRS’ §403(b) Pre-approved Plan Program must comply with the changes found on the 2022 Cumulative List.
The LRM is intended to assist §403(b) plan providers with drafting compliant plan documents, but insurance companies and custodians may also review this language in the sample provisions in drafting terms of annuity contracts and custodial accounts. The LRM does not provide sample language for plans that may be covered by Title I of ERISA.
Part I of the LRM contains general sample plan provisions applicable to all §403(b) pre-approved plans and provisions that are applicable to §403(b) plans that only accept elective deferrals. Part II of the LRM contains additional sample provisions for those §403(b) pre-approved plans that accept contributions other than elective deferrals. Parts III and IV contain sample provisions for Standardized and Nonstandardized §403(b) pre-approved plans, respectively. Part V contains a simple plan provision for a retirement income account.
403(b) plan sponsors and providers should familiarize themselves with this guidance as they prepare §403(b) pre-approved plan submissions.
Section 403(b) Pre-Approved Plans Listing of Required Modifications and Information Package Revised April 2022 »
House Passes the Securing a Strong Retirement Act of 2022
April 12, 2022
On March 29, 2022, the US House of Representatives (the “House”) passed the Securing a Strong Retirement Act of 2022, which is also known as the SECURE Act 2.0. This comprehensive bill includes many provisions which, if enacted into law, would impact employer-sponsored retirement plans.
In December 2019, Congress passed the SECURE Act, which significantly changed existing retirement plan regulations. The SECURE Act sought to increase participation in employer-sponsored retirement plans and the availability of in-plan lifetime income options. The legislation also modified required minimum distribution (RMD) regulations. The recently passed House bill largely expands on the SECURE Act provisions.
For example, to expand participation, the SECURE Act requires employers to allow part-time employees to make elective deferrals to a defined contribution plan upon reaching age 21 and being credited with at least 500 hours-of-service in three consecutive years. The new bill reduces the hours-of-service requirement to two consecutive years, which would allow part-timers to participate earlier (i.e., potentially in 2023 rather than 2024). Additionally, beginning in 2024, the bill would require most new plans to adopt an automatic enrollment feature with automatic increases in the default elective deferral percentage.
With respect to RMDS, the SECURE Act changed the required beginning date (RBD) to April 1 of the year following the later of the year a participant reaches age 72 (previously 70 ½) or retires (as permitted by the plan). The bill further postpones the RBD by replacing age 72 with age 73, 74 and 75, beginning in 2023, 2030 and 2033, respectively. The bill also allows participants to choose plan annuity options with certain accelerated payment features without violating the RMD rules.
Furthermore, the bill introduces a special catch-up contribution. Under current law, those who have reached age 50 and participate in a 401(k) plan can contribute up to an additional $6,500 in 2022. Under the bill, participants who are at least age 62 but less than age 65 at the end of the tax year could make larger catch-up contributions (up to $10,000 annually) beginning in 2024. However, under the House bill, beginning in 2023, all catch-up contributions must be made on an after-tax or Roth basis.
Amongst other items, the bill includes a provision to create an online database for workers and retirees to find "lost" retirement accounts left at former employers that may have gone out of business or merged with another organization. The bill also expands self-correction opportunities, such as those for participant loan errors.
Employers who sponsor retirement plans may want to be aware of these developments. However, it is important to emphasize that the Secure Act 2.0 has only passed the House. Throughout the upcoming months, the Senate will review the bill and negotiate with the House on potential final legislation. We will be monitoring these developments.
Securing a Strong Retirement Act of 2022: HR 2954 »
IRS Temporarily Suspends Prototype IRA Opinion Letter Program
March 29, 2022
On March 14, 2022, the IRS announced that, until further notice, they would not accept applications for opinion letters on prototype IRAs (traditional, Roth and SIMPLE IRAs), Small Employer Plans (SEPs) or SIMPLE IRA plans. The IRS will take this time to update the prototype IRA opinion letter program and issue revised model forms, Listings of Required Modifications and related published guidance to reflect recent legislation (such as the SECURE Act).
Until the IRS issues further guidance, previous adopters of prototype IRAs, SEPs and SIMPLE IRAs may rely on their previously received favorable opinion letter. Entities may also use existing model forms to maintain current plans and establish new plans. The pre-approved documents that can be used to establish an IRA, SEP or SIMPLE IRA include:
- Form 5305, Traditional Individual Retirement Trust Account
- Form 5305-A, Traditional Individual Retirement Custodial Account
- Form 5305-R, Roth Individual Retirement Trust Account
- Form 5305-RA, Roth Individual Retirement Custodial Account
- Form 5305-RB, Roth Individual Retirement Annuity Endorsement
- Form 5305-S, SIMPLE Individual Retirement Trust Account
- Form 5305-SA, SIMPLE Individual Retirement Custodial Account
- Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution
- Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – For Use With a Designated Financial Institution
- Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement; and
- Form 5305A-SEP, Salary Reduction Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement
The IRS intends to issue a new revenue procedure describing the new procedures for submitting a request for an opinion letter on a prototype IRA, SEP or SIMPLE IRA. The IRS will later announce when applications may be submitted under their revised prototype IRA opinion letter program and when revised model forms must be used.
Plan sponsors looking to establish these types of plans should consult with their service providers during the temporary suspension of the IRS prototype IRA opinion letter program.
IRS Announcement 2022-6 »
IRS Issues Proposed Regulations on Multiple Employer Plan “One Bad Apple” Exception
March 29, 2022
On March 25, 2022, the IRS proposed regulations regarding certain multiple employer plans (MEPs). The proposed regulations provide guidance on an exception to the unified plan rule for MEPs in the event of a failure by one or more participating employers to comply with applicable Code requirements. Additionally, the IRS withdrew 2019 proposed regulations that amended the application of the unified plan rule to MEPs.
Under the unified plan rule (also known as the “one bad apple” rule), the qualification of a MEP applies to all participating employers. Therefore, the failure of one employer to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all participating employers.
The Setting Every Community Up for Retirement Enhancement Act of 2019 created a statutory exception to the unified plan rule for certain types of MEPs. If specified conditions are met, the plan will not be treated as failing to meet the applicable Code requirements merely because one or more participating employers fail to take necessary compliance actions. The exception applies to defined contribution plans maintained by employers with a common interest (other than having adopted the plan) or a pooled plan provider (PPP). If a plan has a PPP during the year of a participating employer failure, the exception will not apply unless the PPP substantially performs all the administrative duties required of the PPP for the year.
Under the exception, the plan must provide that plan assets attributable to employees of an employer that fails to take necessary action to meet qualification requirements must be transferred to a single plan maintained only by that employer (unless the regulators determine it is in the best interest of the employees to retain the assets in the MEP). Generally, the employer failing to act (and not the plan or any other employer in the plan) will be liable for any liabilities concerning the plan attributable to employees of that employer.
The proposed regulations provide guidance on implementing this exception to the unified plan rule. Under this guidance, the MEP plan document language must describe the procedures to address participating employer failures. The procedures must explain the notices that the MEP plan administrator will send to an “unresponsive” employer by specified deadlines depending on the type of failure. The proposal outlines notice requirements for both employer failures to provide information (e.g., requested data or documents) and failures to take necessary action (e.g., to make corrective contributions). For a failure to act, delivery of three notices to the employer at 60-day intervals may be required, with the final notice also being sent to impacted participants and the DOL. The notified employer can either take appropriate action to address the failure or initiate a spinoff to a single employer plan within 60 days after the final notice is provided.
The plan terms must also describe actions the plan administrator will take if the unresponsive employer does not address the failure or initiate the spinoff transaction by this deadline. In such an event, the plan language must state that employees of the unresponsive participating employer have a nonforfeitable right to the amounts credited to their accounts, determined in the same manner as if the plan had terminated. The IRS expects to issue model language with the final rule. The MEP plan administrator must also stop accepting contributions from the participating employer and participants, provide notice to affected participants, and as applicable, provide participants with an election regarding the treatment of their accounts.
Employers who participate in MEPs should be aware of the proposed regulations and should consult with their advisors for further information. The DOL requests comments by May 27, 2022, and encourages electronic submission in accordance with the specified instructions. A public hearing on the proposed regulations has been scheduled for Wednesday, June 22, 2022.
IRS Proposed Regulation – Multiple Employer Plans »