Compliance Corner

Retirement Updates

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 »

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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 »

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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 »

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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 »

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Supreme Court Declines Review of ERISA Preemption Challenge to CalSavers

March 15, 2022

On February 28, 2022, the US Supreme Court declined to review the appeal of a challenge to California’s mandated payroll deduction IRA program, CalSavers. The plaintiff, the Howard Jarvis Taxpayers Association, requested the review. The plaintiff asserted that ERISA preempted the state law. The plaintiff also argued that the California law conflicted with ERISA’s structure and stripped employers of ERISA’s protections. The federal district court and the Ninth Circuit Court of Appeals had each dismissed the plaintiff’s claims.

CalSavers requires certain employers that do not offer a retirement plan to employees to automatically deduct 5% of pay for employees and pay it to CalSavers, which would invest those funds in Roth IRAs. However, employees can opt out or change the deduction amount or investment to a traditional IRA. It is one of several similar state-initiated retirement programs.

On May 6, 2021, the Ninth Circuit affirmed a lower court decision that ERISA does not preempt the CalSavers program. The Ninth Circuit found that California created and administered CalSavers. Since ERISA regulates plans established or maintained by an employer, the court held that CalSavers was not subject to ERISA. Additionally, in the court’s view, CalSavers does not regulate ERISA plans and does not require any employers to alter or provide ERISA benefits.

The Supreme Court’s denial effectively ends the ERISA preemption challenges to the CalSavers program (and likely similar state-initiated programs). Nevertheless, affected employers should be aware of this development and be prepared to satisfy the CalSavers program requirements.

Supreme Court Declines Review of ERISA Preemption Challenge to CalSavers »

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DOL Proposes Updates to Application Process for Prohibited Transaction Exemptions

March 15, 2022

On March 9, 2022, the DOL proposed rules to update the application process for prohibitive transaction exemptions under ERISA and the Code. According to the DOL, the changes are designed to create greater consistency and transparency in the exemption application process. The proposed rule amends the existing prohibited transaction exemption procedure, which was published back in 2011.

ERISA establishes an extensive framework of standards and rules that govern the conduct of ERISA plan fiduciaries and safeguard the integrity of employee benefit plans. As part of this structure, 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 administrative exemptions from the prohibited transaction rules upon a finding that relief is: (1) administratively feasible, (2) in the interests of the plan and its participants and beneficiaries and (3) protective of the rights of participants and beneficiaries of such plan. Such exemptions may be granted on a class or individual basis.

The regulators are also responsible for maintaining procedures for granting administrative exemptions, including the application and documentation requirements. Accordingly, the proposed rule clarifies the types of information and documentation required to complete an application to the DOL and the related timing requirements. It expands opportunities for applicants to submit information electronically. The proposed rule also explains which documents are included in the administrative record for an application and when the administrative record is available for public inspection.

The scope of the application procedures is also addressed. Specifically, the proposed rule indicates the DOL will grant administrative exemptions in its sole discretion and is not bound by prior exemptions based upon similar facts nor by DOL commentary provided in response to oral inquiries. If retroactive relief is requested for a prior prohibited transaction, the DOL will apply a high level of scrutiny and consider whether the plan participants and beneficiaries were harmed by the transaction.

The proposed rule also explains the types of exemption applications the DOL will not consider. The DOL would not review applications that fail to include current information, involve a transaction subject to an investigation under ERISA or federal or state law, or include confidential information.

Additionally, the proposed rule revises and adds certain definitions. For example, the definition of an affiliate is expanded to include all employees and officers (rather than only those who are highly compensated or have authority, responsibility, or control related to the custody, management or disposition of relevant plan assets).

Employers who sponsor ERISA plans, and particularly those considering filing an application for a prohibited transaction exemption, should be aware of the proposed rule. The DOL requests comments regarding the proposed rule and encourages electronic submission in accordance with the specified instructions. The proposed rule is scheduled to take effect 90 days after publication in the federal register.

Proposed Rule: Procedures Governing the Filing and Processing of Prohibited Transaction Exemption Applications »

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DOL Release Focuses on 401(k) Investment in Cryptocurrencies

March 15, 2022

On March 10, 2022, the DOL published Compliance Assistance Release No. 2022-01. The release announces that the DOL’s Employee Benefits Security Administration (EBSA) may investigate 401(k) plans that offer opportunities to invest in cryptocurrencies and related products.

The release reminds these plans of their fiduciary duties to their participants, to “act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.” In the context of 401(k) plans, these duties include an obligation to evaluate potential investment opportunities and make sure that those opportunities available to participants are prudent. To meet this obligation, the plan must remove imprudent opportunities from the plan, and the failure to do so is a breach of fiduciary duty.

The DOL believes that investments in cryptocurrencies and related products are at high risk of fraud, theft or loss. These investments are highly speculative and subject to price volatility. Cryptocurrencies are surrounded by hype and are so new that they are difficult to evaluate, since very few investors have the technical expertise necessary to make informed decisions about them. Since they are not recorded and tracked in traditional ways, being lines of code, they are vulnerable to manipulation and loss. They are difficult to appraise and do not conform to traditional regulatory frameworks. For these and other reasons, the agency is concerned that plans take steps to protect the interests of participants if they make these sorts of investments.

Plan fiduciaries should be aware of this release and expect the DOL to take further action regarding cryptocurrencies.

Compliance Assistance Release No. 2022-01 »

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March 01, 2022

On February 14, 2022, the DOL published a request for information (RFI) on possible actions the agency can take to protect retirement savings from threats of climate-related financial risk. This RFI comes after President Biden issued Executive Order 14030 on Climate-Related Financial Risk, directing the DOL to determine steps they can take to safeguard the financial security of America’s workers and businesses against the threat that climate changes pose to their life savings.

The RFI asks stakeholders to provide comments on several issues, including:

  • How the DOL should address and implement the action items in the executive order.
  • Identifying the most significant climate-related financial risks.
  • Whether the DOL should collect data on climate-related financial risks for plans and whether Form 5500 or other methods should be used for such collection.
  • Identifying the best sources of information for plan fiduciaries to use in evaluating climate-related risks to plan investments.
  • Whether annuities help individuals efficiently mitigate some of the losses from climate-related financial risk.
  • How the DOL should review the Federal Thrift Savings Plan to identify risk and vulnerabilities from climate change.
  • Several other miscellaneous issues pertaining to the risk to IRAs and need for education of participants.

Written comments may be submitted on or before May 16, 2022. Interested parties should consider commenting on DOL’s RFI.

Request for Information on Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk »
Executive Order on Climate-Related Financial Risk »

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IRS Issues Proposed Regulations Updating Required Minimum Distribution Rules

March 01, 2022

On February 24, the IRS published proposed regulations on required minimum distributions (RMDs). The changes to the existing RMD rules come on account of the amendments found in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. We discussed the SECURE Act in detail in the January 7, 2020, edition of Compliance Corner.

Specifically, the SECURE Act revised the beginning date of RMDs to April 1 of the calendar year following the later of the calendar year in which the employee either turns age 72 or retires. Prior to the SECURE Act, the triggering age was 70 ½. This change in the rules applies with respect to employees who have attained age 70 ½ after January 1, 2020. The proposed rules also clarify that the employee doesn’t have to survive until age 70 ½ to have the amended age apply; an employee’s beneficiaries can wait until the deceased would’ve turned 72 to begin distributions if the deceased would’ve turned 70 ½ after January 1, 2020.

The bulk of the proposed regulations addresses the elimination of “stretch” individual retirement accounts (IRAs) or plan distributions. The SECURE Act now requires that distributions to non-spouse beneficiaries be completed within 10 years of the plan participant or IRA owner’s death. Distributions may only be distributed over the course of the beneficiary’s life if the beneficiary is an “eligible designated beneficiary.” The definition of an eligible designated beneficiary is now clarified to be a designated beneficiary who, as of the date of the employee’s death, is either:

  1. The surviving spouse of the employee
  2. A child of the employee who has not yet reached the age of majority
  3. Disabled
  4. Chronically ill
  5. Not more than 10 years younger than the employee

The rules go on to clarify that the age of majority is the child’s 21st birthday. Likewise, whether the designated beneficiary is disabled or chronically ill will depend on the age of the person at the employee’s death and the nature of their impairment.

The proposed regulations are applicable for taxable years beginning on or after January 1, 2022. Interested stakeholders may submit comments until May 25, 2022. Employer plan sponsors should be mindful of the updates to the RMD rules and work with their service providers to implement them accordingly.

Required Minimum Distributions »

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IRS Issues 2022 Cumulative List of Changes for §403(b) Plans

February 15, 2022

On January 28, 2022, the IRS released Notice 2022-8, which sets forth the 2022 Cumulative List of Changes for § 403(b) Pre-approved Plans (2022 Cumulative List). The 2022 Cumulative List is designed to assist § 403(b) pre-approved plan providers applying to the IRS for opinion letters for the second remedial amendment cycle (Cycle 2) under the IRS 403(b) pre-approved plan program.

In Rev. Proc. 2021-37, the IRS outlined the procedures for issuing opinion letters for section 403(b) pre-approved plans for Cycle 2. The 2022 Cumulative List reflects requirements that the IRS will consider when reviewing a plan document submitted for Cycle 2. The Cycle 2 submission period begins on May 2, 2022, and ends on May 1, 2023. Notice 2022-8 does not extend the deadline by which a § 403(b) pre-approved plan must be amended to comply with any change in the requirements.

The 2022 Cumulative List identifies items that were enacted or issued after October 1, 2012. (The § 403(b) requirements reviewed during Cycle 1 included the final regulations under § 403(b) and any applicable requirements of the 2012 Cumulative List of Changes.) But if a plan was not reviewed during Cycle 1, the IRS will review the plan taking into account items on the 2022 Cumulative List, as well as the § 403(b) requirements reviewed during Cycle 1.

The 2022 Cumulative List includes, amongst other items:

  • Changes with respect to safe harbor plans, including permitted midyear suspensions of contributions under certain circumstances, elimination of certain notice requirements and an increase in the 10% cap for automatic enrollment safe harbor plans.
  • Amended definitions of qualified matching contributions and qualified nonelective contributions.
  • Changes regarding in-plan Roth rollovers.
  • Modifications to the hardship distribution rules, including expansion of the sources for distributions and removal of the six-month prohibition on contributions after a hardship distribution.
  • An exception to the 10% additional tax for qualified birth or adoption distributions.
  • Changes to required minimum distribution (RMD) provisions, including an increase in the RMD age from 70 ½ to 72 and new distribution rules for designated beneficiaries.
  • Modification of the definition of “spouse” following federal recognition of same sex marriages.
  • Changes resulting from numerous federal measures allowing certain participants impacted by the COVID-19 pandemic or natural disasters access to their retirement funds.

In addition to releasing the Cumulative List, the IRS intends to provide an Operational Compliance List periodically to notify plan sponsors and practitioners of changes in § 403(b) requirements that are effective during a calendar year. This list identifies matters that may involve either mandatory or discretionary plan amendments and guidance that affects daily plan operations. The current Operational Compliance list is available at Operational Compliance List | Internal Revenue Service.

Sponsors of § 403(b) retirement plans should be aware of the 2022 Cumulative List and the Operational Compliance List and work with their service providers to ensure their plan documents and operations are timely updated to reflect applicable plan changes and regulatory requirements.

2022 Cumulative List of Changes in Section 403(b) Requirements for Section 403(b) Pre-Approved Plans »

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