Compliance Corner Archives

The Pension Benefit Guarantee Corporation (PBGC) recently released a list of the rules it plans on promulgating during the fall of 2021. These rules are part of the agency’s efforts to fulfill the mandate under the American Rescue Plan Act (ARPA) to provide special financial assistance in the form of make-up payments of suspended benefits for participants and beneficiaries who are in pay status because their retirement plans adopted a benefit suspension under the Multiemployer Pension Reform Act of 2014 (MPRA), as well as certain insolvent plans that suspended benefits upon insolvency. The agency is also tasked with providing prospective reinstatement of suspended benefits for all participants and beneficiaries. In addition, PBGC plans to publish rules that prescribe actuarial assumptions that a multiemployer plan actuary may use to determine an employer’s withdrawal liability and provide guidance on determining the monthly amount of multiemployer plan benefits guaranteed by the agency.

The rules are listed below:

Proposed Rules

• Valuation Assumptions and Methods: Interest and Mortality Assumptions for Asset Allocation in Single-Employer Plans and Mass Withdrawal Liability Determination in Multiemployer Plans
• Multiemployer Plan Guaranteed Benefits
• Improvements to Rules on Recoupment of Benefit Overpayments
• Penalties for Failure to Provide Certain Notices or Other Material Information
• Actuarial Assumptions for Determining an Employer's Withdrawal Liability

Final Rules

• Benefit Payments and Allocation of Assets
• Examination and Copying of PBGC Records
• Adjustment of Civil Penalties
• Special Financial Assistance by PBGC

Employers who provide single-employer defined benefit pension plans or are part of multiemployer defined benefit pension plans should be aware of these pending developments.

Agency Rule List - Fall 2021 »
Statement of Regulatory and Deregulatory Priorities »

On December 14, 2021, the PBGC issued a final rule that amends the regulation on the allocation of assets in single-employer plans. The guidance, which is effective January 1, 2022, provides interest assumptions for plans with valuation dates in the first quarter of 2022.

These interest assumptions are used for valuing benefits under terminating single-employer plans, amongst other purposes. Specifically, the PBGC uses the interest assumptions to determine the present value of annuities in an involuntary or distress termination of a single-employer plan under the asset allocation regulation. The assumptions are also used to determine the value of multiemployer plan benefits and certain assets when a plan terminates by mass withdrawal in accordance with PBGC’s regulation on Duties of Plan Sponsor Following Mass Withdrawal.

The first quarter 2022 interest assumptions will be 2.37 percent for the first 20 years following the valuation date (the initial period) and 2.03 percent (the final rate) thereafter. As compared to the interest assumptions in effect for the fourth quarter of 2021, these updated assumptions reflect a decrease of 0.03 percent in the initial rate and a decrease of 0.08 percent in the final rate.

Employers who sponsor defined benefit pension plans may want to be aware of the updated guidance.

Allocation of Assets in Single-Employer Plans; Interest Assumptions for Valuing Benefits »

On November 18, 2021, the IRS released Notice 2021-62, which updates interest rates for defined benefit pension plan minimum funding purposes. Specifically, the notice provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates and the 24-month average segment rates applicable to single-employer defined benefit pension plans. Additionally, the notice provides the 30-year Treasury weighted average rate used by multiemployer plans to determine current liability.

With respect to single-employer defined benefit pension plans, the Internal Revenue Code specifies the minimum funding requirements and interest rates that must be used to determine a plan’s target normal cost and funding target. The target normal cost is the present value of benefits earned (or expected to be earned) during the year. The funding target is the present value of benefits accrued on the first day of the plan year.

For this purpose, the present value is normally determined using three 24-month average corporate bond interest rates (known as “segment rates”), each of which is used to discount benefits payable during specified periods. These segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins. Alternatively, a plan can elect to use the monthly corporate bond yield curve in place of the segment rates.

The notice includes a table (Table 2021-10) with the monthly corporate bond yield curve based upon October 2021 data. It specifies the spot first, second, and third segment rates for the month of October 2021 as, respectively, 0.87, 2.74 and 3.16.

According to the notice, the 24-month average corporate bond segment rates applicable for November 2021 (without adjustment for the 25-year average segment rate limits) for the first, second and third segments are, respectively, 0.96, 2.64 and 3.32.

The notice further explains that the American Rescue Plan Act of 2021 (ARPA) provided interest rate relief by changing the 25-year average segment rates and the applicable minimum and maximum percentages used to adjust the 24-month average segment rates. The following are the adjusted 24-month average segment rates taking into account the ARPA amendments:

 
However, the ARPA permitted a plan sponsor to elect not to have these changes apply to any plan year beginning before January 1, 2022. For a plan year for which such an election applies, the adjusted 24-month average segment rates are as follows:

 
With respect to minimum funding requirements for multiemployer plans, the notice provides the interest rate for calculating the plan’s current liability. This interest rate must be no more than five percent above and no more than 10 percent below the weighted average interest rates on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. The notice provides that for plan years beginning in November 2021, the 30-year Treasury weighted average rate was 2.16%, which results in a permissible interest rate range of 1.94% to 2.26% to calculate a plan’s current liability.

Sponsors of defined benefit plans should be aware of the guidance and may want to consult with their counsel or actuaries for further information.

Notice 2021-61 »

On November 30, 2021, the IRS issued Notice 2021-64, which is the 2021 Required Amendments List (RA List) for qualified retirement plans. The yearly RA Lists provide changes in retirement plan qualification requirements that could result in disqualifying provisions and require a remedial amendment. A disqualifying provision is a required provision that isn’t listed in the plan document, a provision in the document that doesn’t comply with the qualification requirements or a provision that the IRS defines as such.

The RA List applies to both §401(a) and §403(b) plans and is divided into two parts: Part A and Part B. Part A lists changes in qualification requirements that generally will require affected plans to be amended. Part B lists changes that would likely not require amendments to most plans but might require an amendment because of an unusual plan provision in a particular plan.

This year, there is one Part A entry addressing the special financial assistance program for financially troubled multiemployer plans, which was provided through the American Rescue Plan Act of 2021. Notably, there are no Part B changes this year.

The remedial amendment deadline for disqualifying provisions resulting from items on the 2021 RA List is December 31, 2023 (or later, for certain governmental plans). Therefore, plan sponsors should determine whether amendments are necessary for their retirement plan and work with their service providers to adopt any such amendment.

IRS Notice 2021-64 »

On September 1, 2021, the IRS released a private letter ruling granting a waiver of the otherwise applicable 60-day timeframe to rollover Roth funds from a qualified plan to a Roth IRA.

The letter was issued in response to a request by a taxpayer who had contributed on both a pre-tax and post-tax basis (through a designated Roth account) to the defined contribution plan offered by his employer. When he terminated employment, he requested a direct rollover of his pre-tax elective deferrals and earnings to a traditional IRA and a direct rollover of his Roth contributions and earnings to a Roth IRA. Both IRAs had been previously established at the same financial institution.

The plan’s TPA issued two separate checks to the financial institution, one reflecting the amount of the designated Roth contributions and earnings and the other reflecting the amount of the pre-tax elective deferrals and earnings. Despite the taxpayer’s instructions for each amount to be deposited in the appropriate IRA, the financial institution deposited both checks in the traditional IRA.

The taxpayer did not become aware of the error until many months later. At such time, the financial institution suggested that he submit a request to the IRS for a waiver of the 60-day rollover requirement to correct the mistake.

In the letter, the IRS explains that the Internal Revenue Code allows a waiver of the 60-day requirement. Because if not providing one would be against equity or good conscience and events beyond the taxpayer’s control would make a refusal of the waiver unreasonable. In deciding whether to grant the waiver, the IRS will consider all relevant facts and circumstances, including mistakes by financial institutions; inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or a postal error; the use of the amount distributed; and the time elapsed since the distribution occurred.

The IRS concluded that the information and documentation presented by the taxpayer supported his position that the failure to satisfy the 60-day rollover deadline was due to an error by the financial institution and waived the 60-day rollover requirement. The taxpayer was given 60 days from issuance of the letter to roll the misdirected funds to the Roth IRA.

Although the ruling technically only applies to the requesting taxpayer and cannot be cited as precedent, it provides insights into how the IRS may view similar situations.

Private Letter Ruling 202147015 »

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 »

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 »

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 »

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 »

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 »

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 »

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.

Notification
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). 

Summary
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 »

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 »

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 »

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 »

In the August 6, 2021, edition of Employee Plan News, the IRS clarified a provision of the SECURE Act regarding plan adoption. Effective January 1, 2020, the SECURE Act permits an employer to adopt a retirement plan after the close of the employer’s tax year. The employer may treat the plan as having been adopted as of the last day of the taxable year as long as the adoption occurs by the tax return due date (including extensions).

The IRS has now clarified that if an employer adopted a plan in 2021 and treats the plan as having been adopted as of the last day of the employer’s 2020 tax year, the plan sponsor will not be required to file a Form 5500 for the plan year that begins in 2020. Instead, the first filing will be the 2021 Form 5500 on which the plan sponsor will indicate the retroactive adoption of the plan.

Employee Plan News, August 6, 2021 »

On July 28, 2021, the Court of Appeals for the Seventh Circuit held that ERISA did not preempt a claim for state-law breach of corporate fiduciary duties but did preempt a state-law claim for aiding and abetting. In Halperin v. Richards (7th Cir., No. 20-2793, July 28, 2021), the trustees of the Chapter 11 bankruptcy for Appvion filed suit alleging that Appvion’s directors and officers had inflated the company’s stock value to conceal the company’s financial decline and benefit themselves.

Specifically, Appvion was wholly owned by employees through the company’s employee stock ownership plan (ESOP), and the bankruptcy trustees accused the officers and directors of fraudulently inflating the ESOP’s valuations with assistance from the ESOP trustee and its independent appraiser. Accordingly, the bankruptcy trustees filed suit against the directors and officers for breaching their corporate fiduciary duties and against the ESOP trustee and appraiser for aiding and abetting those breaches.

The defendants in the case moved to dismiss all the claims on the theory that their roles in Appvion’s ESOP valuations were governed by ERISA, causing ERISA to preempt state law. The district court agreed with the defendants, dismissing all the claims. But on appeal, the Seventh Circuit reversed the district court as to the claims for corporate fiduciary breach (against the directors and officers) and affirmed the district court as to the claims for aiding and abetting (against the ESOP trustee and appraiser).

In coming to those opposite conclusions, the court analyzed precedence on ERISA preemption. The court decided that ERISA did not preempt state laws on corporate breach of fiduciary duties because the executives in question served in dual capacities. Although ERISA’s “exclusive benefit rule” is paramount and requires that fiduciaries act solely in the interest of ERISA beneficiaries, ERISA also allows for corporate insiders to serve as ERISA fiduciaries. As such, the court held that it was possible for parallel state-law liability against executives who serve in dual roles.

The court also reasoned that if they were to decide that ERISA preempts state law in regard to claims for breach of corporate fiduciary duty, it would leave parties like the plaintiffs without any recourse against the malfeasance of corporate actors serving in dual capacities.

On the other hand, the court found that the ESOP trustee and independent appraiser were involved in the case in a singular role under ERISA. Since they did not have a separate corporate obligation for which the plaintiffs could bring a claim, the court held that ERISA did preempt state aiding and abetting laws against the ESOP trustee and appraiser.

Ultimately, this case serves as a reminder to corporate officers that they could be subject to both ERISA and state laws designed to protect the interests of corporations and their stakeholders.

Halperin v. Richards »

On August 11, 2021, the IRS released an Issue Snapshot focusing upon the universal availability requirement applicable to 403(b) plans (excluding church plans). The analysis was designed to address a common error with respect to the exclusion of certain employees from plan participation.

Under the universal availability rule, all employees of the 403(b) plan sponsor must be eligible to make elective deferrals if any employee has the right to do so. There are limited exceptions to this rule, including one for certain part-time employees. However, part-time employees cannot be excluded as a general class, such as part-time, temporary or seasonal employees. Rather, such employees can only be excluded if they “normally work less than 20 hours per week.”

An employee is considered to normally work less than 20 hours per week if, during the 12-month period beginning on the employee’s hire date (the initial year), the employer reasonably expects the employee to work fewer than 1,000 hours, and for each plan year ending after the close of the initial year (or subsequent 12-month period), the employee actually works fewer than 1,000 hours. If an employee does not satisfy these requirements for any year (for example, by working more than 1,000 hours), the employee can no longer be excluded from making elective deferrals under the part-time exclusion in any future year (regardless of how few hours the employee works in such future year).

The Issue Snapshot also emphasizes that eligible employees must be given an effective opportunity to participate in the plan, which includes notice of eligibility and the period and conditions for elections. At least once during the plan year, the employee must be able to make or change deferral elections, including, as applicable, catch-up or Roth contributions, up to the dollar limits in effect.

Although the Issue Snapshot is not an official announcement of the law that can be cited as precedent, employers who sponsor 403(b) plans may find this internal analysis helpful. Employers may want to review their plan documents and operations to ensure that any exclusion of part-time employees is in accordance with this guidance. In the event of past exclusion failures, employers should consult counsel regarding possible transition relief under IRS Notice 2018-95.

Issue Snapshot – 403(b) Plan – The Universal Availability Requirement »

In July, the Pension Benefits Guarantee Corporation (PBGC) hosted a couple of webinars on the special financial assistance (SFA) for financially troubled multiemployer plans that was provided by the American Rescue Plan Act (ARPA). The ARPA authorized PBGC to provide SFA to multiemployer pension plans that are in critical and declining or critical status, were approved to suspend benefits under the Multiemployer Pension Reform Act of 2014, or became insolvent after December 16, 2014, but have not been terminated. (See the July 20, 2021, edition of Compliance Corner for more information on the SFA provided through the ARPA.)

The two webinars hosted by the PBGC provided detailed information on the SFA, including the application and review process for plans seeking to claim SFA. They also provided information on the filing process, specifically showing attendees how to complete a filing.

Multiemployer plan sponsors that will seek to apply for SFA funds should review these webinars for pertinent information.

SFA Briefing Webinar 1 »
SFA Briefing Webinar 2 »

On July 26, 2021, the DOL released temporary implementing FAQs regarding lifetime income illustrations for ERISA defined contribution plans, which include 401(k) and 403(b) plans. The FAQs largely address questions regarding the timing of the new disclosures to plan participants.

The SECURE Act of 2019 amended ERISA to require that, at least annually, defined contribution plan benefit statements reflect a participant’s account balance as an equivalent lifetime income stream. The income stream must be calculated as a monthly benefit, payable as both a single life annuity and a qualified joint and survivor annuity. On September 18, 2020, the DOL published an interim final rule (IFR) that provided calculations for these lifetime income streams and model language for incorporation in the benefit statements. (For our prior summaries on the IFR, see our previous Compliance Corner articles here and here.)

The FAQs clarify that for participant-directed account plans that provide quarterly statements, the lifetime income illustrations must be included on at least one statement in each 12-month period. The first disclosure must occur within a year of the IFR’s September 18, 2021 effective date. So, for example, a 401(k) plan would need to include the first illustration on any one quarterly statement through the quarter ending June 30, 2022.

For plans that do not allow participants to direct investment of their account assets, the illustrations must be provided on the statement for the first plan year ending on or after September 19, 2021. For most of these plans, the lifetime income information would be included on the statement for the 2021 calendar year, which must be provided to participants no later than the October 15, 2022 (the last date for timely filing the plan’s 2021 Form 5500, assuming the plan sponsor filed for an extension of the July 31 deadline).

Finally, the FAQs indicate that the DOL intends to issue a final rule soon based on comments received in response to the IFR. The DOL also recognized that if the final rule differs materially from the IFR, burdens would be placed on plan administrators if sufficient transition time is not provided to accommodate such changes.

Employers who sponsor defined contribution plans should be aware of this new guidance and work with their service providers to ensure the required illustrations will be timely incorporated in the benefit statements provided to plan participants.

Temporary Implementing FAQs »

The IRS recently released Rev. Proc. 2021-30, which modifies the Employee Plans Compliance Resolution System (EPCRS). Rev. Proc. 2021-30 supersedes the prior version of EPCRS under Rev. Proc. 2019-19, and generally became effective on July 16, 2021.

EPCRS permits sponsors of retirement plans to correct operational and plan document failures that may impact a plan’s tax qualified status. The EPCRS Self-Correction Program (SCP) allows for correction of insignificant errors or significant errors within specific timeframes without an IRS filing or fee payment.

Significant errors not eligible for SCP can generally be corrected by submitting a Voluntary Correction Program (VCP) application that describes the error and proposed correction, along with the applicable fee payment. The program provides specific safe harbor correction methods for common failures.

Rev. Proc. 2021-30 reflects several important changes to EPCRS, including an extension of the SCP correction period for significant failures by one year (from two to three years following the year in which the failure occurred). Accordingly, plan sponsors have extra time to identify and self-correct certain errors (such as employee elective deferral failures) and thus avoid the VCP process and related fee.

The updated guidance also reinstates the safe harbor correction method for automatic contribution arrangement failures through December 31, 2023. (The prior relief expired on December 31, 2020.)

Additionally, Rev. Proc. 2021-30 expands the ability of a plan sponsor to correct operational failures under SCP via retroactive plan amendment. Under certain conditions, a plan sponsor can now adopt an amendment that increases a plan benefit, right or feature even if the increase applies only to a subgroup of participants (as opposed to all eligible participants, which was previously required).

Notably, the new guidance replaces the prior VCP anonymous submission procedure with an anonymous, no-fee, VCP pre-submission conference procedure. This change is effective January 1, 2022. The conference, which is held at the discretion of the IRS, is designed to allow a representative of a plan sponsor to discuss a proposed correction for a complex failure with the IRS before submitting a VCP application and identifying the plan sponsor. The IRS will provide oral commentary on the error and proposed correction, but the advice will not be binding.

Rev. Proc. 2021-30 also expands the prior guidance regarding recoupment of plan overpayments in several ways. Under the updated procedures, the de minimis threshold for requiring repayment is increased from $100 to $250. If repayment is necessary, participants can be given the option of repayment through a lump sum, installments or by reducing future benefits. Furthermore, for defined benefit plans, no repayment or corrective contribution may be necessary, depending upon the plan’s funding level.

Sponsors of retirement plans should be aware of the updated EPCRS procedures. Comments regarding Rev. Proc 2021-30 can be submitted to the IRS no later than October 14, 2021.

Rev. Proc. 2021-30 »

On July 22, 2021, the IRS published a Voluntary Correction Program (VCP) Submission Kit for employers who sponsored a SIMPLE IRA but were ineligible to do so because they had more than 100 employees or sponsored another retirement plan. Employers are only eligible to sponsor a SIMPLE IRA if they have 100 or fewer employees and do not offer any other retirement plan. The VCP Submission Kit provides the steps employers can follow in correcting the mistake of sponsoring a SIMPLE IRA without being eligible.

Specifically, the kit provides a list of the documentation that will be required to apply for VCP relief, including descriptions of the information required to complete a VCP submission compliance statement. The guidance also provides steps on how to submit the VCP application and pay the VCP fee.

Employers who determine that they have incorrectly sponsored a SIMPLE IRA should work with their service provider or counsel to determine if this VCP submission kit is necessary.

VCP Submission Kit – Plan Sponsor Not Eligible for a SIMPLE IRA Plan Under 408(p) »

On July 23, 2021, the IRS issued a notice of proposed rulemaking, amending the rules for electronically filing certain partnership, corporate income tax, unrelated business income tax, withholding tax, and excise tax returns. The proposed rule requires entities that will file more than 100 forms to file electronically, lowering the threshold from 250 returns to 100 returns. Additionally, the proposed rule clarifies that an entity would aggregate all the required forms when determining if they meet the 100-return threshold. The 100-return threshold will also decrease to 10 returns for any form filed in calendar year 2022.

The employee benefit plan-related information returns that would be subject to this proposed rule include the following:

• Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
• Form 5498-QA, ABLE Account Contribution Information
• Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information
• Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits
• Form 5500, Annual Return/Report of Employee Benefit Plan
• Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan
• Form 5500-EZ, Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan
• Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

As with previous guidance, entities that are unable to file electronically may request a waiver from the IRS. Employer plan sponsors who complete any of the forms listed above should consult with their counsel or service providers to ascertain their obligation to file with the IRS electronically.

Electronic-Filing Requirements for Specified Returns and Other Documents »

On July 9, 2021, the Pension Benefit Guarantee Corporation (PBGC) issued interim final rules and assumptions on special financial assistance (SFA) for multiemployer pension plans, as provided by the American Rescue Plan Act (ARPA). The ARPA authorized PBGC to provide SFA to multiemployer pension plans that are in critical and declining or critical status, were approved to suspend benefits under the Multiemployer Pension Reform Act of 2014, or became insolvent after December 16, 2014, but have not been terminated.

The interim final rule discusses how the SFA amount will be calculated, the order in which plans will be permitted to file SFA applications, details on what must be included in applications, how the PBGC will go about reviewing SFA submissions, and the conditions that will apply to plans that receive the SFA.

In determining eligibility for and the amount of SFA, ERISA generally looks to the plan assumptions previously selected by the actuaries. However, the ARPA also allows plans to propose changes to those assumptions (except for the interest rate) if they are no longer reasonable. The PBGC provided guidance on acceptable assumption changes in PBGC SFA 21-02.

Simultaneously with the release of the interim final rules and assumptions guidance, the IRS released Notice 2021-38 to provide guidance to multiemployer plan sponsors that must reinstate certain previously suspended benefits as a condition of receiving SFA. The guidance also clarifies that make-up benefits paid to individuals as a result of the reinstatement of previously suspended benefits may be paid in a lump sum within three months of the receipt of SFA funds or in equal monthly installments over the five year period beginning three months after the receipt of SFA funds. Additionally, the SFA funds received are not taken into account if a multiemployer plan needs to make certain contributions to avoid funding deficiencies. Finally, the IRS guidance indicated that multiemployer plans with suspended benefits must submit an SFA application to the Department of the Treasury, but this requirement will be satisfied if they send the application to the PBGC.

Multiemployer plan sponsors that will seek to apply for SFA funds should familiarize themselves with this guidance and consult with their counsel and tax advisors in complying with the requirements.

Interim Final Rule »
Special Financial Assistance Assumptions »
IRS Notice 2021-38 »

On June 24, 2021, the IRS released Notice 2021-40, which extends the COVID-19 temporary relief from the physical presence requirement for certain retirement plan elections. The notice also requests comments regarding whether changes to the physical presence requirement should be adopted on a permanent basis.

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 Notice 2020-42, which provided relief in 2020 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. Subsequent Notice 2021-3 extended this relief through June 30, 2021. (For further details on IRS Notice 2020-42 and IRS Notice 2021-3, please see, respectively, our June 9, 2020, and January 5, 2021, Compliance Corner editions.)

Notice 2021-40 provides an additional 12-month extension of this temporary assistance, through June 30, 2022. The relief is optional; i.e., a participant is still able to have an election witnessed in the physical presence of a notary accepted by a plan.

Additionally, the IRS is seeking comments on whether relief from the physical presence requirement should be made permanent. Specifically, feedback is sought regarding whether such a change would impact costs and burdens for all parties (e.g., participants, spouses and plans) or result in fraud, spousal coercion or other abuse. The agency is also inquiring as to how participant elections are being witnessed, or are expected to be witnessed, as the COVID-19 pandemic abates. Furthermore, in the event of a permanent change, comments are requested regarding necessary procedures to safeguard participant elections and whether the procedures for witnessing by plan representatives should be different from those applicable to notaries.

Sponsors of retirement plans should be aware of the further extension of temporary relief from the physical presence requirement for participant elections. Those wishing to provide comments regarding potential permanent changes to the requirement must do so in writing by September 30, 2021.

Notice 2021-40 »

On June 11, 2021, the IRS updated the Funding Deficiencies Strategy section of their Employee Plans Compliance Unit (EPCU) webpage. Funding deficiencies generally occur when a defined benefit plan has failed to make the minimum required contributions to sustain the solvency of the plan. The EPCU conducts compliance checks and performs data analysis, focusing on areas of potential noncompliance (such as funding).

The Funding Deficiencies Strategy section of the webpage explains EPCU’s procedure when a funding deficiency is reported on a filed return, such as a Form 5500. When addressing that deficiency, the EPCU contacts fiduciaries to determine whether the funding deficiency was corrected, the required excise tax returns were filed, and appropriate taxes paid. If the minimum required contributions have actually been made, then the EPCU can also assist the fiduciary in identifying and correcting errors in their forms.

This guidance does not provide any new compliance requirements; the EPCU simply indicates their process for addressing issues so that plan fiduciaries are aware of the steps that may be taken to ensure compliance. Any employer who receives a letter from the EPCU should work with their service providers to fully cooperate with the request.

Employee Plans Compliance Unit »

On June 3, 2020, the IRS updated their operational compliance list (“OC List”) to recognize the final regulations relating to required minimum distributions and eligibility for long-time part-time workers, further reflecting all the changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The OC List is provided by the IRS to help plan sponsors and practitioners achieve operational compliance by identifying changes in qualification requirements effective during a calendar year.

Specifically, the updated list incorporated the final regulations relating to the updated life expectancy and distribution period tables used for determining required minimum distributions. It also incorporated Notice 2020-68, which provides a question and answer related to long-term part-time employees under the SECURE Act. (We discussed the SECURE Act at length in the January 7, 2020, edition of Compliance Corner.) Finally, the changes effective in 2021 include an extension of the temporary relief from the requirement for spousal consents to take place in person.

The IRS periodically updates the OC List to reflect new legislation and guidance. As such, it is a useful tool for plan sponsors. However, the list is not intended to be a comprehensive list of every item of IRS legislation or guidance. Plan sponsors should work with their advisors to ensure their continued compliance with the retirement plan regulations.

Operational Compliance List »

On May 6, 2021, the US Court of Appeals for the Ninth Circuit (appellate court) affirmed a lower court's ruling in Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Ret. Sav. Program, 2021 WL 1805758 (9th Cir. 2021) that the CalSavers Retirement Savings Program is not preempted by ERISA. Specifically, the appellate court does not consider the program to be an ERISA plan, nor does it place additional requirements on an employer. Under the program, only employers who have chosen not to adopt an ERISA plan would be required to participate.

Beginning June 30, 2020, California employers with more than 100 employees must offer employees a qualified retirement plan (such as a 401(k)) or participate in the state-run retirement savings program known as CalSavers. The requirement applies to employers with 51 to 100 employees on June 30, 2021, and to employers with five or more employees on June 30, 2022. For these purposes, employer size is based on the number of California-based employees reported on the Employment Development Department quarterly report.

Before the applicable deadline, employers must sponsor a qualified retirement plan or register with CalSavers. Under CalSavers, an employer must automatically enroll eligible employees in the retirement program with a contribution of at least 3% of earnings. New employees must be enrolled within 30 days of employment. Employees may choose to opt out of the program.

If an employer fails to comply for up to 90 days, a penalty of $250 per employee could be assessed against the employer. If noncompliance continues, the per-employee penalty could increase to $500.

Employers with five or more employees in California should continue compliance efforts in either maintaining an employer sponsored retirement plan or registering with CalSavers, based on size and applicable effective date.

The ruling will also be of interest to all employers as more than half of the states have either adopted similar programs or have established Task Forces to research the issue. The cities of New York and Seattle have also adopted a similar government-run autoenrollment savings program.

The appellate court’s decision indicates that such plans may not be preempted by ERISA, clearing the way for states to impose these requirements.

Howard Jarvis Taxpayers Ass’n v. Cal. Secure Choice Ret. Sav. Program »
CalSavers, Employer Registration and Resources »

On April 27, 2021, the IRS updated a set of questions and answers concerning coronavirus-related retirement plan relief by adding five questions clarifying the partial plan termination relief provided through the Consolidated Appropriations Act of 2021 (CAA).

The CAA provided relief from the requirement that employees be 100% vested in employer contributions should a partial plan termination occur. Under those rules, an employer terminating 20% or more of its workforce would trigger a partial plan termination (which would require the employer to vest their employees at 100%). The CAA stated that a company would not trigger a partial plan termination during the period beginning March 13, 2020, and ending March 31, 2021, if on the latter date the plan had at least 80% of the active participants that were enrolled on the former date.

The Q&As clarify a few concepts concerning this relief. Q&A two addresses how employers should determine who is an active participant in the plan by indicating that employers should apply a reasonable, good-faith interpretation of that term and apply it consistently.

Q&A three discusses how the CAA relief would apply when only a portion of the plan year falls between March 31, 2020, and March 31, 2021. When that occurs, the CAA relief applies to any partial termination determination for the entire plan year. The IRS then provided an example:

If a plan has a calendar year plan year, the 80% partial termination test in Section 209 of the Relief Act applies to both the January 1 to December 31, 2020, plan year and the January 1 to December 31, 2021, plan year, because both plan years include a part of the statutory determination period of March 13, 2020, to March 31, 2021.

Q&A four makes it clear that employers do not have to have the exact same employees covered by the plan by March 31, 2021, to benefit from this relief. Instead, for purposes of determining whether at least 80% of the active participants covered by the plan on March 13, 2020, were also covered by the plan on March 31, 2021, active participants include all individuals actively participating on March 31, 2021, regardless of whether those same individuals were participants in March 2020.

Finally, Q&A five indicates that the relief under the CAA does not solely apply to reductions in the number of participants that occurred due to the COVID-19 national emergency. The reductions could have occurred for any reason.

Employers who are seeking to receive relief under the CAA’s partial plan termination provision should familiarize themselves with these Q&As and work with their service providers to ensure compliance.

Partial Termination of a Qualified Retirement Plan Under Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 »

The IRS published a revised Publication 4484, Choose a Retirement Plan for Employees of Tax-Exempt and Government Entities. In this edition of the publication, the IRS reviews eight types of retirement plans available to employees of tax-exempt entities such as churches or charities. The publication provides the latest tax laws specific to each retirement plan and has been revised to reflect 2021 annual limitations.

The publication also provides basic information about each plan's benefits in the form of a summary table, which helps tax-exempt entities find the plans that best fit them and their employees. It allows users to click on the plan tabs to view and compare the complete details on each plan. It also provides a list of other IRS publications that may provide helpful information and resources for establishing retirement plans.

The publication's goal is to show tax exempt and government entities that offering a retirement plan helps employees save for the future and may also help an organization attract and retain qualified employees.

IRS Publication 4484 »

On April 22, 2021, the IRS released the final instructions for Form 5310, Application for Determination for Terminating Plan. The instructions are updated periodically to reflect any regulatory or reporting changes.

A plan sponsor of a terminating retirement plan has the option of filing Form 5310 to request an IRS determination on the plan’s qualification status at the time of termination. The issuance of a favorable letter provides assurance that eligible participant distributions can be rolled over to another qualified plan or individual retirement account.

The instructions delineate how the form should be completed and describe the necessary supporting documentation. The form and instructions were updated for completion on pay.gov. (As of August 1, 2021, the Form 5310 must be completed electronically on the government website. From April 16, 2021, through July 31, 2021, submissions may be made on paper or electronically.)

Employers that sponsor retirement plans may want to be aware of the updated form instructions.

Instructions for Form 5310 (Rev. April 2021) »

On April 13, 2021, the DOL issued guidance on fiduciary investment advice for retirement investors, employee benefit plans and investment advice providers. As a reminder, the DOL adopted prohibited transaction exemption (PTE) 2020-02, Improving Investment Advice for Workers & Retirees, in December of 2020. The DOL announced on February 12, 2021, that the prohibited transaction exemption for investment advice fiduciaries would go into effect as scheduled on February 16, 2021. (See our article in the February 17, 2021, edition of Compliance Corner for more information.)

The issued FAQs address PTE 2020-02 and provide information about the DOL’s next steps in its regulation of investment advice. The major sections of the FAQs address the PTE’s background, compliance dates, definition of fiduciary investment advice and compliance with the PTE generally. Importantly, Question #3 indicates that Field Assistance Bulletin 2018 (which outlined the DOL’s temporary enforcement policy) will remain in place until December 20, 2021. Question #5 also mentions that the DOL is reviewing issues of fact, law, and policy related to the PTE, and anticipates taking further regulatory action as appropriate. Questions 10 – 20 outline what investment advisors must do to comply with the PTE, specifically verifying the impartial conduct standards that must be met. Question #21 describes how the DOL will enforce compliance with the PTE.

The DOL also provided a set of FAQs that explains how individuals should go about selecting an investment adviser. The FAQs recommend that individuals ask if their financial advisers are fiduciaries and whether they are in compliance with PTE 2020-02. It also suggests questions concerning fees that will be charged and potential conflicts of interest.

Ultimately, employers should work with their service providers to ensure compliance with PTE 2020-02. They can also point participants to the FAQs concerning choosing an investment adviser.

News Release »
PTE 2020-02 FAQS »
Choosing the Right Person to Give You Investment Advice »

On April 14, 2021, the DOL’s Employee Benefits Security Administration provided guidance to plan sponsors, fiduciaries, record keepers and plan participants on cybersecurity best practices. This was done in an effort to protect American workers’ retirement benefits. This novel guidance was provided through three documents: 1) Tips for Hiring a Service Provider; 2) Cybersecurity Program Best Practices; and 3) Online Security Tips.

Tips for Hiring a Service Provider. This document assists plan sponsors and fiduciaries in selecting a service provider with strong cybersecurity practices. ERISA requires plan fiduciaries to monitor service providers to ensure that they are maintaining plan records and keeping participant data confidential and plan accounts secure. The DOL suggests several tips that plan sponsors can follow in ascertaining a service provider’s cybersecurity practices.

Cybersecurity Program Best Practices. This document provides a list of best practices for use by recordkeepers and other service providers responsible for plan-related IT systems and data. Plans’ service providers should:

• Have a formal, well documented cybersecurity program
• Conduct prudent annual risk assessments
• Have a reliable annual third-party audit of security controls
• Clearly define and assign information security roles and responsibilities
• Have strong access control procedures
• Ensure that any assets or data stored in a cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments
• Conduct periodic cybersecurity awareness training
• Implement and manage a secure system development life cycle program
• Have an effective business resiliency program addressing business continuity, disaster recovery and incident response
• Encrypt sensitive data, stored and in transit
• Implement strong technical controls in accordance with best security practices
• Appropriately respond to any past cybersecurity incidents

Online Security Tips. This document is geared towards plan participants and beneficiaries and provides tips on reducing the risk of fraud and loss when accessing their retirement accounts online. The document encourages individuals to:

• Register, set up and routinely monitor their online account
• Use strong and unique passwords
• Keep personal contact information current
• Close or delete unused accounts
• Be wary of free Wi-Fi
• Beware of phishing attacks
• Use antivirus software and keep apps and software current
• Know how to report identity theft and cybersecurity incident

Employers should familiarize themselves with the DOL’s suggestions pertaining to cybersecurity. The guidance indicates that the DOL considers this an element of plan sponsors’ fiduciary duties, so employers should work to minimize the risk of cybersecurity breaches.

News Release »
Tips for Hiring a Service Provider »
Cybersecurity Program Best Practices »
Online Security Tips »

The IRS has issued a summary of the top mistakes made by plan administrators utilizing the Voluntary Correction Program (VCP). As a reminder, the VCP is a way for retirement plans to receive IRS approval on corrections to plan documents or operational failures that would otherwise jeopardize the plan's tax-favored or qualified status. Thus, it is important the submission is free of errors to avoid denial of the submission or a delayed approval.

The top errors include:

• Failure to combine PDF documents into a single PDF file that does not exceed 15MB
• Failure to pay the correct VCP user fee, which is based on plan assets or listing an incorrect bank account/routing number
• Incorrect completion of Pay.gov Form 8950
  • The name of the plan sponsor doesn't match the name on the other documents in the submission
  • Incorrect EIN provided
  • An officer of the plan sponsor didn't sign the form
• Insufficient narrative provided
  • The descriptions of the failure(s) or corrective changes are not detailed enough
  • The submission does not identify a plan qualification failure under IRC Section 401(a)
• Failure to include a copy of the plan document

Please see the guidance for a complete discussion and for helpful resources including instructional videos and helpline numbers.

Top Mistakes in VCP Submissions »

On March 22, 2021, the IRS released the draft instructions for Form 5310, Application for Determination for Terminating Plan. The IRS updates the form instructions annually for clarification purposes and to incorporate any regulatory or reporting changes.

As background, the Form 5310 can be filed by a plan sponsor of a terminating pension, profit-sharing or other deferred compensation plan (other than a multi-employer plan covered under Pension Benefit Guaranty Corporation insurance) to request an IRS determination on the plan’s qualification status at the time of termination. The IRS does not require the form to be filed. However, the issuance of a favorable letter provides assurance that eligible participant distributions can be rolled over to another qualified plan or individual retirement account.

The instructions provide line-by-line specifications for the form’s completion and outline the required supporting documentation. The draft was updated for completion on pay.gov. (As of August 1, 2021, the Form 5310 must be completed electronically on the government website. From April 16, 2021, through July 31, 2021, submissions may be made on paper or electronically.)

Employers that sponsor retirement plans may want to be aware of the availability of the draft instructions. However, the instructions should not be relied upon until the final version is issued.

Form 5310 Instructions »

On March 10, 2021, the DOL’s EBSA issued a statement explaining that it will not enforce final rules concerning ESG investments and proxy voting. The rules, entitled Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, restricted fiduciaries’ use of nonfinancial factors (environmental, social and governance [ESG] criteria) when making certain retirement plan investment decisions and imposed certain requirements on fiduciaries concerning proxy voting and other shareholder rights, respectively. (See our prior Compliance Corner articles “DOL Finalizes Investment Duties Rules” from the November 10, 2020 edition and “DOL Finalizes Rule on Shareholder Rights, Including Proxy Voting” from the December 22, 2020 edition for more information about these rules).

The DOL intends to revisit both rules because the agency received feedback regarding the scope and impact of the rules, among other issues. Accordingly, the DOL will not enforce the final rules until the agency publishes further guidance. In addition, the agency will not pursue action due to a failure to comply with the investment duties rule with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights. However, this statement does not prevent the DOL from enforcing any statutory requirements under ERISA.

Employers should be aware of this development. NFP will continue to monitor the status of these rules and communicate any updates accordingly.

DOL Statements Regarding Enforcement of Its Final Rules on ESG Investments and Proxy Voting by Employee Benefit Plans »

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 »

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 »

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 »

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 »

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  »

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 »

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 »

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 »

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 »