Compliance Corner Archives
Retirement Updates 2022 Archive
On December 8, 2022, the IRS released Revenue Ruling 2022-24, which provides covered compensation tables for the 2023 plan year. 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 nondiscrimination 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 purposes of determining covered compensation for the 2023 year, the taxable wage base is $160,200. To determine an employee’s covered compensation, a plan can use the IRS-provided tables listed in the Revenue Ruling, 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.
On December 7, 2022, the Pension Benefit Guarantee Corporation (PBGC) published a final rule amending the allocation of assets in single-employer plans. PBGC administers the pension plan termination insurance program that ERISA provides to defined benefit plans. The amended rule provides methods for valuing plan benefits when pension plans undergo distress or involuntary termination.
When PBGC involuntarily terminates an underfunded plan, the asset allocation rules determine the amount of the plan’s underfunding. As a part of that allocation, early retirement benefits are valued based on the annuity starting date or the expected retirement age. These final rules update the table that identifies expected early retirement ages for 2023.
Since this update is routine, PBGC has determined that public comment is unnecessary. Defined benefit plan sponsors should be aware of the changes.
On December 8, 2022, the DOL released informational copies of the 2022 Form 5500 Series Annual Return/Report. While the forms have not been finalized, they provide insight into the changes for plan year 2022.
Specifically, the informational copies of Form 5500 and its instructions reveal several changes to specific retirement filings. The Changes to Note section of the instructions mentions the following changes:
- New characteristics codes have been added to Form 5500, and technical changes have been made to the instructions for multiple-employer plans.
- Instructions now include the increased maximum civil penalties that can be imposed for failure to file.
- Schedule MB instructions have been revised to require an attachment and clarify and revise certain lines.
- Schedule R has been revised to require information to be reported on the plan’s highest contributors.
- Schedule SB has been updated to add a new line that requires an attachment of a projection of expected benefit payments.
The announcement also mentions that the DOL is modernizing the EFAST2 system by updating its website authentication process. Beginning January 1, 2023, new filers will have to use the unified login.gov single sign-on solution for US government websites. Existing filers will be able to use their existing login through August of 2023 but will have to use the new login.gov system beginning in September 2023.
Plan sponsors and administrators that are required to file Form 5500 should be aware of these changes.
Announcement »
Informational Form 5500 »
Informational Form 5500 Instructions »
On November 7, 2022, the IRS announced the expansion of one of their programs for approving retirement plans. As a result, §403(b) retirement plans, which are used by certain public schools, churches and charities, are now permitted to use the same individually designed retirement plan determination letter program that is currently used by qualified retirement plans, such as §401(k) plans. Revenue Procedure 2022-40 explains this expansion and other program changes.
Under the determination letter process, a plan sponsor can submit an application requesting the IRS to review and approve the form of its retirement plan document. If the IRS approves the plan's form, it will issue a favorable determination letter. Although a letter is not required, most sponsors of individually designed plans will request one to have written assurance that the plan’s provisions do not violate the Code. Additionally, a favorable determination letter also enables the plan sponsor to self-correct plan mistakes, including significant ones, that may later arise.
Previously, the determination letter process was not available to §403(b) individually designed plans. However, beginning June 1, 2023, §403(b) retirement plan sponsors may submit initial determination letter applications for individually designed retirement plans based on the last digit of the sponsor's Employer Identification Number. (The submission schedule is outlined in Section 12 of Revenue Procedure 2022-40.) Additionally, beginning June 1, 2023, §403(b) retirement plan sponsors may also request a determination letter upon plan termination using the Form 5310, Application for Determination for Terminating Plan.
Revenue Procedure 2022-40 includes other important changes to the procedures, which affect qualified plan and 403(b) submissions. For example, a determination letter issued to an adopter of a pre-approved retirement plan because of filing a Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans, will no longer be considered in determining whether a plan sponsor is eligible to submit that plan for a determination letter for an initial plan determination on a Form 5300, Application for Determination for Employee Benefit Plan. Furthermore, the IRS generally will consider in its review qualification requirements and section 403(b) requirements that are in effect, or that have been included on a Required Amendments List, on or before the last day of the second calendar year preceding the year in which the determination letter application is submitted, subject to any specified modifications on the annual Employee Plans revenue procedure for submitting determination letter applications.
The IRS indicated that additional guidance will be released soon that will reflect further changes to the procedural requirements, such as phasing-in mandatory e-submission of determination letter requests. Forms 5300 and 5310 will also be updated to reflect these changes.
Retirement plan sponsors, particularly those sponsoring individually designed 403(b) plans, should be aware of the updates to the determination letter process.
On November 21, 2022, the IRS issued Notice 2022-62, which is the 2022 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 will generally 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.
Unlike prior years, there are no Part A or Part B changes this year. The remedial amendment deadline for disqualifying provisions resulting from items on the 2022 RA List is December 31, 2024 (or later, for certain governmental plans). Therefore, plan sponsors should determine whether amendments are necessary for their retirement plan and work with service providers to adopt any such amendment.
On November 21, 2022, the Employee Benefits Security Administration (EBSA) of the DOL proposed changes to the Voluntary Fiduciary Correction Program (VFCP). The VFCP has been around since the early 2000s and allows plan sponsors to apply to the DOL to correct enumerated violations of ERISA. This allows the plan sponsor to avoid further enforcement by the DOL on the corrected issues. The proposed rule introduces a new self-correction feature and clarifies, expands and simplifies existing transactions.
The self-correction feature will allow plan officials to correct late participant contributions or loan repayments to the plan if lost earnings are no greater than $1,000 and they are remitted no later than 180 days from the date of the initial withholding. Self-correcting employers would be able to rely on the DOL’s online calculator to calculate lost earnings. Self-correction would be an option if the employer is not currently under investigation by the DOL. The employer would simply complete an online form to notify the DOL of their self-correction (versus an application that would’ve had to have been approved by the DOL under the existing VFCP), and the DOL would reply with an email acknowledging receipt.
Other minor changes to the VFCP are also proposed, including:
- Changing the sections on delinquent contributions and loans to reflect the existence of the self-correction program.
- Eliminating the requirement that an independent fiduciary validate the process used to determine the fair market interest rate determination for loans that are $10,000 or less.
- Allowing a cash settlement if an asset belonging to the plan has been sold and a plan official provides a statement that the sale was upon the advice of an independent fiduciary and not in anticipation of VFCP relief.
- Expanding the sale and leaseback of real property transactions to allow correction of leases to affiliates of the plan sponsor.
- Amending the definition of “principal amount” as it pertains to illiquid assets that are sold to parties in interest.
- Modifying the definition of “under investigation” to include a review by an EBSA benefits advisor.
- Changing a couple of the eligibility requirements, including deeming a plan sponsor ineligible when they are aware of criminal activity involving the corrected transactions.
- Making other miscellaneous modifications.
In addition to proposing the changes to the VFCP, the DOL also amended Prohibited Transaction Exemption (PTE) 2002-51. Specifically, the PTE was updated to allow for excise tax relief for transactions that are self-corrected under the new VFCP self-correction option. The exemption would apply if the employer received the DOL’s email acknowledging the self-correction. The DOL is also seeking to amend the PTE to allow employers to take advantage of the VFCP multiple times within a three-year period (which wasn’t allowed in the previous rules).
The DOL is accepting comments on the amended and restated VFCP program and the corresponding amendments to PTE 2002-51 until January 20, 2023. Employers should familiarize themselves with these changes if they need to avail themselves of the VFCP.
On December 1, 2022, the DOL published a final rule entitled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” The final rule clarifies that retirement plan fiduciaries may consider environmental, social and governance (ESG) factors when making investment decisions and exercising shareholder voting rights.
ERISA’s exclusive benefit rule requires a plan fiduciary to exercise duties, including the selection of plan investments, solely in the interest of participants and beneficiaries. Accordingly, the fiduciary must consider relevant risk-return factors when evaluating plan investments and courses of action. However, it has been unclear whether and to what extent the inclusion of ESG factors in an investment analysis is consistent with ERISA’s requirements. The Trump Administration released a rule in 2020 (the 2020 rule) that was viewed as limiting consideration of ESG factors in plan investment decisions. In 2021, the Biden Administration issued a non-enforcement policy with respect to the 2020 rule and proposed a new rule to address fiduciary obligations with respect to the investment selection and proxy voting processes. Please see our prior article on the proposed rule. The final rule adopts many of the provisions set forth in the proposed rule.
First, the final rule upholds the principle that ERISA duties of prudence and loyalty require plan fiduciaries to focus on relevant risk-return factors and not sacrifice investment returns or take on additional investment risk to achieve objectives unrelated to the provision of benefits under the plan. However, the economic effects of climate change and other ESG considerations (e.g., board composition and workforce practices) can be considered if material to the risk-return analysis.
Second, the final rule changes the “tie-breaker” standard, which allows plan fiduciaries to consider collateral benefits (i.e., benefits other than investment returns, such as ESG considerations) when making investment selections under certain circumstances. Under the 2020 rule, competing investments must be “indistinguishable” before fiduciaries can consider collateral factors as tiebreakers. The final rule replaces those provisions with a standard that instead requires the fiduciary to prudently conclude that competing investments or investment courses of action equally serve the financial interests of the plan over the appropriate time horizon. In such cases, the fiduciary is not prohibited from selecting an investment or investment course of action based on collateral benefits. The final rule also removes the special documentation requirement that previously applied to the tiebreaker provision.
Third, the final rule removes the 2020 rule’s special requirements for the selection of a Qualified Default Investment Alternative (QDIA). Under the final rule, the same investment standards apply to QDIAs that apply to other plan investments.
Fourth, the final rule clarifies that fiduciaries do not violate their duty of loyalty solely because they consider participants' non-financial preferences when determining the available investment options for participant-directed plans. Such consideration may further plan purposes by increasing participant deferral rates and retirement savings.
Finally, the final rule retains the core concept that when a plan's assets include shares of stock, the fiduciary duty to manage plan assets includes the management of shareholder rights related to those shares, such as the right to vote proxies. However, the final rule removes 2020 rule language indicating fiduciary obligations do not require the voting of every proxy or the exercise of every shareholder right. The final rule also removes two proxy voting safe harbors that were viewed as encouraging abstention from voting. Additionally, the final rule eliminates specific record maintenance and monitoring obligations related to proxy voting activities required under the 2020 rule. (The final rule instead emphasizes that proxy voting and other exercises of shareholder rights should not be viewed differently from other fiduciary activities.)
Retirement plan sponsors should be aware of the final rule and may want to consult with their plan investment advisors for further information. The final rule is effective January 1, 2023.
Final Rule: Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights »
On October 21, 2022, the IRS issued Notice 2022-55, 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, 2023.
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 $20,500 to $22,500 in 2023. Additionally, the catch-up contribution limit for employees aged 50 and over who participate in any of these plans increases from $6,500 to $7,500. Accordingly, participants in these plans who have reached age 50 will be able to contribute up to $30,000 in 2023.
The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts has increased from $14,000 to $15,500.
The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $66,000 (from $61,000). The limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) also increases to $265,000 (from $245,000). Additionally, the annual limit on compensation that can be considered for allocations and accruals increases from $305,000 to $330,000.
The threshold for determining who is a highly compensated employee under Section 414(q)(1)(B) increases to $150,000 (from $135,000). The dollar limitation concerning the definition of a key employee in a top-heavy plan increases from $200,000 to $215,000.
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.
On October 14, 2022, the Pension Benefit Guaranty Corporation (PBGC) proposed a rule to provide interest rate assumptions that may be used by a plan actuary to determine a withdrawing employer’s liability under a multiemployer defined benefit pension plan. Generally, a multiemployer plan is a collectively bargained plan involving two or more unrelated employers.
Under ERISA, an employer that withdraws from a multiemployer plan may be liable to the plan for withdrawal liability, which generally represents the employer’s share of any unfunded vested plan benefits (UVBs) at the end of the preceding plan year. UVBs are the amount by which the present value of vested plan benefits exceeds the value of plan assets as of the valuation date.
For plans terminated by mass withdrawal, under ERISA Section 4044, the PBGC has specified actuarial assumptions for valuing benefits, including interest rates used to discount future benefit payments to their present value. These interest rates (the 4044 rates) are based on the average market price of a life annuity, which the PBGC determines from a quarterly survey of insurance companies. The 4044 rates can be used to approximate the cost of purchasing annuities to cover benefits.
For ongoing (i.e., non-terminating plans), the PBGC had not previously issued regulations regarding assumptions for determining withdrawal liability. Accordingly, in these situations, present value determinations have been based on actuarial interest and mortality assumptions and methods that represent the plan actuary’s best estimate of anticipated experience under the plan. According to the PBGC, three common approaches actuaries use to determine the appropriate discount rate include:
- Use of interest rate assumptions for determining minimum funding requirements.
- Use of the 4044 rate assumptions for determining the present value of vested benefits in a terminating single-employer pension plan or in a multiemployer plan that has incurred a mass withdrawal.
- A blend of both the minimum funding and 4044 rate assumptions.
However, the actuarial estimates have often resulted in disputes between the plan and employers that are resolved through arbitration or litigation.
Therefore, the proposed rule makes clear that using the 4044 rates, either as a standalone assumption or combined with minimum funding interest assumptions, represents a valid approach to selecting an interest rate assumption to determine withdrawal liability in all circumstances. In the PBGC’s view, it is reasonable to base the amount needed to settle an employer’s share of the liability on the market price to purchase annuities from private insurers because this represents the amount necessary to fund the promised pension liability, considering investment risk, mortality risk and other asset and liability risks. The proposed rule specifically permits the use of the 4044 rates, the minimum funding rates, or an interest rate anywhere in the spectrum between the 4044 rates and minimum funding rates. Actuarial assumptions and methods (other than interest assumptions) would have to be reasonable and offer the actuary's best estimate of anticipated experience under the plan.
PBGC requests comments on various aspects of the proposed rule, including whether the final rule should restrict the allowable options to a narrower range of interest rates or to only specific methodologies for determining interest rates and whether the final rule should specify assumptions or methods other than interest assumptions. Comments must be received by November 14, 2022, to be assured of consideration.
The changes in this proposed rule would apply to the determination of withdrawal liability for employer withdrawals from multiemployer plans that occur on or after the effective date of the final rule. Employers who participate in multiemployer plans should be aware of the guidance and consult with counsel or plan actuaries for further information.
On October 7, 2022, the IRS issued Notice 2022-53 (the notice), which provided clarification and transitional relief regarding changes to Code section 401(a)(9) required minimum distributions (RMDs) under the SECURE Act. The notice addressed compliance with respect to 2021 and 2022 post-death RMDs under defined contribution plans and IRAs.
As reported in our March 1, 2022, Compliance Corner article, the SECURE Act made significant changes to the post-death required minimum distribution rules effective beginning in 2020. One notable change is that distributions may only be distributed over the course of a beneficiary’s life expectancy if the beneficiary is an “eligible designated beneficiary.” As a result, distributions to many non-spouse beneficiaries would generally need to be completed by the end of the 10th calendar year following the calendar year of the employee’s death.
Furthermore, if a participant died on or after their required beginning date for distributions, the proposed regulations required that the post-death RMDs to a non-eligible designated beneficiary be paid out for each of the 10 years following the death (i.e., payment of the balance could not be postponed until the end of the 10-year period). However, the proposed regulations were not issued until February 2022, which was after the time when the 2021 RMDs should have been made.
Accordingly, the notice provides needed relief by postponing the effective date of the RMD regulations to the 2023 distribution calendar year. Additionally, under the notice, a plan will not be treated as failing to comply with RMD requirements if it did not make a “specified RMD” for 2021 or 2022. A specified RMD is an RMD to a non-eligible designated beneficiary of a participant who died in 2020 or 2021 on or after their required beginning date and did not take distributions in 2021 or 2022.
A specified RMD also includes an RMD to a beneficiary of an eligible designated beneficiary who died in 2020 or 2021 and was receiving life expectancy payments. In such cases, the beneficiary must continue to take annual distributions with a full distribution made no later than the 10th year after the year of the eligible designated beneficiary’s death.
Importantly, under the notice, the failure to make such 2021 and 2022 specified RMDs will not be treated as a plan qualification failure, nor will the affected beneficiaries be subject to the otherwise applicable 50% excise tax. Additionally, those who already paid an excise tax for a missed RMD in 2021 may request a refund of such tax.
Employers that sponsor defined contribution plans should be aware of the relief and consult with their service providers for further information.
On September 26, 2022, the IRS issued Notice 2022-45, which extends amendment deadlines for retirement plans and IRAs to reflect Section 2202 of the CARES Act and Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Relief Act).
Specifically, the notice delays deadlines to adopt amendments under Section 2202 of the CARES Act regarding favorable tax treatment for coronavirus-related distributions, increases in permissible loan amounts, and suspensions of plan loan repayments. The notice also delays the deadline to adopt amendments under Section 302 of the Relief Act, which provides favorable tax treatment for qualified disaster distributions.
The extended amendment deadline for qualified retirement plans, nongovernmental 403(b) plans and IRAs is December 31, 2025. Generally, the extended deadline applicable to governmental retirement plans and section 403(b) plans maintained by public schools is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023. However, a special rule applies to governmental Section 457(b) plans.
According to the IRS, these deadline extensions were designed to align with those under Notice 2022-33 for amendments regarding the SECURE Act and other CARES Act provisions, so an employer could amend the plan for all these provisions by one date. For more information on the extensions provided under Notice 2022-33, please see our prior article.
The notice also provides anti-cutback relief for CARES Act amendments made by the extended deadline, provided the plan is operated as if the amendment applied as of its original effective date. (The anti-cutback rules generally prohibit decreasing accrued benefits of participants by an amendment to the plan.) However, the notice did not offer similar anti-cutback relief for the Relief Act amendments.
Employers that sponsor retirement plans should be aware of the extensions and consult with their document providers for further information.
On September 16, 2022, the DOL published an Initial Regulatory Flexibility Analysis (IRFA) on a proposed amendment to the qualified professional asset manager (QPAM) class prohibited transaction exemption, PTE 84-14. This exemption permits an investment fund managed by a QPAM to engage in certain party-in-interest transactions that would otherwise be prohibited by ERISA and the Code. As reported in our August 2, 2022, article, the DOL recently proposed to amend several aspects of the QPAM exemption qualifications to ensure the protection of retirement plan assets and participants.
Among other items, the proposed amendment increases the current asset management and equity thresholds for QPAM eligibility and provides for subsequent annual inflation adjustments to these thresholds. The thresholds are intended to ensure that eligible fiduciaries managing retirement funds are established institutions that are large enough to discourage the exercise of undue influence upon their decision-making processes by parties in interest.
The Regulatory Flexibility Act requires an agency to present an IRFA on a proposed amendment unless the DOL certifies the proposed amendment would not have a significant economic impact on a substantial number of small entities. The DOL acknowledges that the proposed increases to asset management and equity thresholds for QPAM eligibility could potentially result in some small entities no longer being able to rely upon the exemption. Additionally, to the extent retirement plans that are small entities are more likely to hire a QPAM that is a small entity, the proposed amendment could also impact such plans. For purposes of this IRFA, the DOL considers a plan with less than 100 participants to be a small entity. However, the DOL estimates the percentage of such plans to be small. The IRFA analyzes and seeks public comment on potential economic impacts of the proposed QPAM Amendment on small entities.
The IRFA also considers the possible cost impact of the proposed amendment’s various provisions on all QPAMs, including those who have engaged in certain types of misconduct. The tables summarize the estimated annual costs associated with the amendment for QPAMs in compliance with the exemption, QPAMs with prohibited misconduct and QPAMs with convictions.
The DOL requests comments on the IRFA by October 11, 2022, which is the same deadline as the extended comment period for the proposed QPAM amendment. However, the DOL will provide additional time for public input on all aspects of the proposed QPAM amendment (including the IRFA) following a public hearing scheduled for November 17, 2022.
On September 6, 2022, the DOL published an updated Interpretive Bulletin (the updated IB) setting forth guidelines for determining when a qualified public accountant is independent for purposes of auditing and providing an opinion on the financial statements required to be included in the Form 5500 filing for an ERISA employee benefit plan. According to the DOL, a primary purpose of the updated IB was to remove outdated and unnecessarily restrictive provisions from prior guidance, Interpretive Bulletin 75-9 (the 1975 IB), to ensure access of employee benefit plans to highly qualified auditors and audit firms.
Unless otherwise exempt, an ERISA plan administrator is generally required to retain an “independent” qualified public accountant to conduct an annual examination of the plan's financial statements and provide an opinion as to whether the statements conform to generally accepted accounting principles and whether the Form 5500 schedules present fairly, and in all material respects, the required information when considered with the financial statements. In 1975, the DOL issued the 1975 IB to determine when an accountant is independent for the Form 5500 audit requirement. The 1975 IB set forth three specific circumstances that would conclusively render the accountant not to be independent: the first based on certain roles and statuses, the second based on financial interests and the third based on engaging in management functions related to financial records subject to the audit. In each situation, a general facts and circumstances approach is applied.
The updated IB reorganizes and makes certain changes to the 1975 IB. First, the updated IB modifies the time period during which accountants are prohibited from holding financial interests in the plan or plan sponsor. Under the 1975 IB, a newly retained accountant cannot conduct the ERISA-required audit of a plan's financial statements if the accountant, the accountant's firm, or a member of the firm has a direct or material indirect financial interest in the plan or plan sponsor during the period covered by the financial statements (generally, the prior plan year) or during the period of professional engagement. The DOL illustrates the application of the 1975 IB with the example of a new accountant ineligible to audit a plan's 2020 financial statements in 2021 if one partner of the accountant’s firm held a single share of the publicly traded stock of the sponsor at any time during 2020. Upon review and consultation with accounting regulatory bodies, the DOL recognized this requirement was unnecessarily restrictive and not aligned with other accounting rules.
As a result, the updated IB provides an exception for new audit engagements from the prohibition on holding disqualifying financial interests during the period covered by the financial statements being audited. This exception is limited to publicly traded securities. Under the new rule, an accountant or firm is not disqualified from accepting a new audit engagement merely because of holding publicly traded securities of a plan sponsor during the period covered by the financial statements provided such securities are disposed of prior to the period of professional engagement. The exception provides accountants with a divestiture window between the time when there is an oral agreement or understanding that a new client has selected them to perform the plan audit and the time an initial engagement letter or other written agreement is signed or audit procedures commence, whichever is sooner.
Second, the updated IB also modifies the definition of “office” for the purpose of determining who is a “member” of an accounting firm. The 1975 IB defined member as “all partners or shareholder employees in the firm and all professional employees participating in the audit or located in an office of the firm participating in a significant portion of the audit.” However, the DOL recognized that the concept of an “office” for workplace purposes has since changed to focus more on workgroups, illustrated by expected regular personnel interactions and assigned reporting channels rather than physical locations. Accordingly, the updated IB defines the term “office” to mean a reasonably distinct subgroup within a firm, whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters regardless of the physical location of the individual.
Employers that sponsor ERISA employee benefit plans subject to the Form 5500 audit requirements should be aware of the updated guidance, which became effective on September 6, 2022.
The DOL recently announced it will hold a virtual public hearing regarding a proposed amendment to the prohibited transaction exemption filing and processing procedures. The DOL is also reopening the comment period for the proposed amendment.
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 individual or class administrative exemptions from the prohibited transaction rules under certain conditions.
The DOL is also responsible for maintaining procedures for granting exemptions, including the application and documentation requirements. On March 9, 2022, the DOL proposed rules to update the application process for prohibited transaction exemptions. The proposed rule clarified the types of information and documentation required to complete an application to the DOL and expanded opportunities for applicants to submit information electronically. Please see our prior article for further details on the proposed rule.
The public hearing will be held on September 15, 2022, and (if necessary) September 16, 2022, via WebEx, beginning at 9:00 a.m. EDT. The comment period for the proposed amendment will be reopened on September 15, 2022. Employers who sponsor ERISA plans, and particularly those considering filing an application for a prohibited transaction exemption, should be aware of the hearing and additional comment period on the proposed rule.
On August 3, 2022, the IRS issued Notice 2022-33, which extends deadlines for amending nongovernmental qualified retirement plans, 403(b) plans, and IRAs to reflect changes under the SECURE Act and certain provisions of the CARES Act. Absent this relief, the plan amendments would have been required by the last day of the first plan year ending on or after January 1, 2022.
Specifically, the notice extends plan amendment deadlines for changes made by the Secure Act until December 31, 2025. Additionally, the extension applies to optional provisions of the Miners Act that allow defined benefit pension plans to lower the minimum age for in-service distributions from age 62 to 59 1/2. The guidance also postpones the amendment deadlines to adopt CARES Act relief for 2020 required minimum distributions until December 31, 2025. However, plans that adopted CARES Act optional loan and/or withdrawal provisions still must be amended by the original deadline (i.e., December 31, 2022, for a calendar year plan).
The IRS also indicated that it intends to issue SECURE Act guidance with the 2023 Required Amendment list. This will enable plan sponsors to adopt necessary amendments simultaneously.
Employers that sponsor retirement plans should be aware of the extensions and consult with their document providers for further information.
On July 26, 2022, the DOL proposed an amendment to the Class Prohibited Transaction Exemption 84-14, also known as the Qualified Professional Asset Manager (QPAM) Exemption. According to the DOL, the amendments are designed to ensure the exemption continues to protect investment funds holding ERISA retirement plan assets and individual retirement accounts.
A registered investment advisor or a bank, savings and loan or insurance company meeting certain financial criteria can qualify as a QPAM. An ERISA plan investment manager that qualifies as a QPAM and satisfies the requirements of the QPAM Exemption can engage in transactions with parties related to the plan, such as sales, exchanges, leases and extensions of credit. Absent the exemption, these transactions would be prohibited by ERISA and the Code. Accordingly, the QPAM Exemption is widely relied upon by ERISA plan investment managers.
A primary purpose of the proposed amendment is to prevent QPAMs that have engaged in certain bad acts from being able to continue relying upon the exemption. To achieve this objective, the amendment expands the types of serious misconduct that could disqualify plan asset managers from using the exemption. For example, disqualifying conduct could include conduct forming the basis for a deferred or non-prosecution agreement that, if prosecuted, would have been a crime under the QPAM Exemption. In recognition of the globalization of the financial services industry, the amendment also clarifies that equivalent foreign misconduct (e.g., by a foreign affiliate) could also be disqualifying.
Additionally, the proposed changes include new document requirements. Under the amendment, a QPAM must provide a one-time email notification to the DOL with the operating names of the QPAM and the legal name of each business entity relying upon the QPAM exemption. More significantly, a QPAM planning to rely upon the exemption would be required to update its written management agreements with client plans to include specific protections in the event the QPAM is disqualified due to misconduct. Specifically, the agreements must provide each plan with unrestricted ability to terminate or withdraw from the arrangement free of any fees, penalties or charges. The agreements must provide indemnification to the plan against losses and costs due to the QPAM’s loss of eligibility to rely upon the exemption. The amendment also proposes a one-year period for a disqualified financial institution to conduct an orderly wind-down of its activities as a QPAM, so that a plan can terminate the relationship with an ineligible asset manager without undue disruption.
Furthermore, the amendment updates the asset management and equity thresholds for QPAM eligibility and clarifies the independence and control that a QPAM must maintain regarding investment decisions. Additionally, under a proposed new recordkeeping requirement, QPAMs would be required to keep records for at least six years to demonstrate compliance with the QPAM Exemption and be prepared to make these records available to regulators and plan participants.
Employers that sponsor retirement plans with investment funds that rely upon the QPAM exemption should be aware of the proposed amendments and consult with their counsel for further information. Comments to the DOL on the proposed amendment can be submitted through September 26, 2022.
On July 8, 2022, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule regarding special assistance to financially troubled multiemployer pension plans. In response to public comments, the final rule makes several changes to the prior interim final rule (IRF), which we summarized in our July 2021, Compliance Corner article.
The American Rescue Plan Act of 2021 established the Special Financial Assistance (SFA) Program to provide funding for severely underfunded multiemployer pension plans. The goal was to enable these plans to pay benefits and administrative expenses through the plan year ending in 2051. The program requires plans to demonstrate eligibility for SFA funds, which are not required to be repaid, and to calculate the amount of assistance. The SFA funds and related earnings are limited in how they can be invested and must be segregated from other plan assets.
The final rule makes changes to the methodology plans used to calculate the SFA amount by providing two separate interest assumptions, one for calculating expected investment returns on the plan’s non-SFA assets, and a separate rate for calculating investment returns expected to be earned on the plan’s SFA assets. This change is intended to align the interest rates used to calculate SFA with reasonable expectations of future investment returns on a plan’s SFA assets.
Additionally, the final rule allows plans to invest up to 33% of their SFA funds in return-seeking investments (e.g., publicly traded common stock and equity funds that invest primarily in public shares), with the remaining 67% restricted to high-quality (investment grade) fixed income investments. This change was meant to address concerns that the investment limitations in the prior guidance would make it difficult for an eligible plan to meet the investment return assumptions and stay solvent through 2051. (The IFR only allowed SFA assets to be invested in high-quality, investment-grade bonds and certain other investments expected to yield similar returns.)
The final rule also modifies certain conditions imposed on plans that receive SFA. For example, retroactive and prospective benefit improvements are permitted after 10 years with PBGC approval, if the plan can demonstrate it will avoid insolvency. The rule also clarifies the conditions that apply after a merger of an SFA plan with a non-SFA plan to encourage beneficial mergers. In determining underfunding for withdrawal liability purposes, the final rule adds a requirement that plans phase-in recognition of SFA assets over the projected SFA payout period. This requirement is designed to ensure that SFA funds do not subsidize employer withdrawals from participation in SFA plans. The rule includes several other changes, including aspects of the SFA application process.
Employers who participate in multiemployer plans should be aware of the guidance and consult with counsel for further information. The final rule is effective August 8, 2022.
On June 21, 2022, in Smith v. CommonSpirit Health, et. al, the Sixth Circuit affirmed the district court’s dismissal of ERISA imprudent investment claims against a 401(k)-plan sponsor. In the opinion, the Sixth Circuit emphasized that ERISA does not give federal courts broad authority to second-guess retirement plan investment decisions. Rather, the allegations must infer an ERISA fiduciary breach.
In this case, plaintiff Yosaun Smith was a 401(k) participant who brought a putative class action suit against the plan sponsor, CommonSpirit Health, and the plan’s administrative committee (collectively, CommonSpirit). She claimed that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when passive index funds offered higher returns and lower fees. To demonstrate this point, she highlighted the three-year and five-year performance of several of the plan’s actively managed funds, which trailed the performance of related index funds. She also alleged that the plan’s recordkeeping and management fees were excessive. The district court dismissed her complaint for failure to allege facts supporting an ERISA fiduciary breach by CommonSpirit.
On appellate review, the Sixth Circuit focused on the fiduciary decision-making process. First, the court explained that the inclusion of actively managed funds as plan options is not necessarily imprudent because these funds may be appropriate for certain participants based on their risk tolerance. Additionally, the CommonSpirit plan offered passive index funds.
Next, the court noted that Smith’s claim failed to satisfy the required pleading standard because it did not allege that a particular actively managed fund was imprudent when selected, became imprudent over time, or was otherwise clearly unsuitable based on ongoing performance. The court emphasized that comparatively poor historical fund performance does not conclusively point to deficient fiduciary decision-making, especially when funds have different goals and risk profiles.
The court disagreed with Smith’s assertion that “red flags”, such as fund outflows and outside analysts’ evaluations, should have alerted the plan fiduciaries that the chosen actively managed funds were imprudent. The court noted that the actively managed fund ratings were above average or better, and the assets still exceeded those of the passive index funds.
Finally, the court determined that Smith failed to allege that administrative and investment management fees were excessive relative to the services rendered or fund types. The decision explained that the pleading standard for an excessive fee claim requires a showing of context and equivalent services when comparing the plan’s administrative fees to those of another plan.
Employers that sponsor defined contribution plans should be aware of this opinion, which provides a framework for determining whether an imprudent investment or excessive fee claim will survive the pleading stage. The case follows the recent US Supreme Court decision in Hughes v. Northwestern University, which also addresses imprudent investment claims. Please see our article on the Hughes case: SCOTUS on Imprudent Fiduciary Decisions | NFP
On June 3, 2022, the IRS announced that they will begin a new pre-examination retirement plan compliance program in June of 2022. Plan sponsors who are selected for the program will receive a letter from the IRS indicating that they have 90 days to review their retirement plan’s documentation and operation to determine if they meet the IRS’ requirements. The IRS will potentially schedule a full exam for those employers who do not respond.
Upon completing the review, employers who find mistakes may be able to self-correct through the IRS Employee Plans Compliance Resolution System (EPCRS). If self-correction is not an option, employers can request a closing agreement from the IRS and pay the penalties outlined by the IRS’ Voluntary Correction Program.
The IRS intends to use this process to lessen the taxpayer burden of completing retirement plan investigations. Any employer plan sponsor who is contacted by the IRS as part of this program should work with their service providers and/or legal counsel to review their retirement plan compliance.
On May 20, 2022, the IRS, DOL and PBGC (the agencies) released a final rule announcing changes to the Form 5500 and Form 5500-SF and related instructions. These changes will go into effect for the 2022 annual reports. (Remember that Forms 5500 are due by the end of the seventh month after the end of the plan year.)
The changes to the forms and instructions mostly implement annual reporting changes for defined benefit plans. Specifically, the agencies are adding new questions and revising existing questions on Schedules MB (Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information), SB (Single-Employer Defined Benefit Plan Actuarial Information), and R (Retirement Plan Information). They are also modifying the contribution and benefit attachments required to accompany the filings.
The final rule also adds new characteristic code options to be reported on line 8 of Form 5500 and line 9 of Form 5500-SF, which report data on defined contribution multiple employer plans, including pooled employer plans. The instructions will also be amended to request additional plan sponsor and plan administrator information on Part II of Form 5500 and Form 5500-SF.
The notice provides illustrations of the changes to the forms and instructions. Advance copies of the 2022 forms will go out later this year after the agencies have published a third notice addressing other necessary revisions.
Sponsors of retirement plans should be aware of the upcoming changes to Form 5500.
On May 25, 2022, the IRS announced that it will revise Form 5300, Application for Determination for Employee Benefit Plan, and its instructions. The revisions will allow plans to submit the form electronically.
Form 5300 is used to request a determination letter from the IRS for the initial qualification of a defined benefit or a defined contribution plan and the exempt status of any related trust. Starting on June 1, 2022, the form can be submitted electronically via Pay.gov, along with a single PDF file (not exceeding 15MB). This PDF must contain the following:
- Form 2848, Power of Attorney and Declaration of Representative or Form 8821, Tax Information Authorization
- Prior Determination Letter
- Opinion/Advisory Letter
- Cover Letter
- Amendments (any prior plan documents being submitted along with any applicable amendments)
- Current Plan Document
- Adoption Agreement
- Trust Document
- Other applicable documents (any additional documents not listed above)
If the total number of documents causes the PDF to exceed the 15MB limit, then documents can be removed from the PDF and faxed separately to the agency. The agency will accept paper forms until June 30, 2022. The user fee for a Form 5300 submitted on or after January 3, 2022, is $2,700 (or $4,000 for multiple employer plans) if the plan does not qualify for the zero-dollar user fee in Notice 2017-1. Applicants must pay the user fee through Pay.gov for an electronic submission using a bank account, credit card or debit card.
Applicants can expect a response to applications within 145 days.
Employers or plans seeking qualification of a defined benefit or a defined contribution plan and the exempt status of any related trust should be aware of this development.
On May 13, 2022, the IRS released Notice 2022-27, which extends the COVID-19 temporary relief from the physical presence requirement for certain retirement plan elections.
Under IRS regulations, certain retirement plan participant elections (such as a spousal consent to a waiver of a qualified joint and survivor annuity) must be witnessed in the physical presence of a plan representative or a notary public. An electronic system can be used to satisfy the physical presence requirement if the system provides the same safeguards for the elections.
Previously, the IRS issued Notices 2020-42, 2021-3 and 2021-40 providing relief from the physical presence requirement for participant elections witnessed by a notary public of a state that permits remote electronic notarization or a plan representative if certain conditions were satisfied. Those notices provided relief from 2020 to June 30, 2022. (For further details on IRS Notices 2020-42, 2021-3 and 2021-40, please see, respectively, our July 7, 2021, Compliance Corner editions.)
Notice 2022-27 provides an additional six-month extension of this temporary assistance through December 31, 2022. The relief is optional, i.e., a participant can still have an election witnessed in the physical presence of a notary accepted by a plan.
Additionally, the IRS confirmed that they are reviewing comments from stakeholders that they received pursuant to the previous notices. That feedback was sought on whether relief from the physical presence requirement should be made permanent.
Sponsors of retirement plans should be aware of the further extension of temporary relief from the physical presence requirement for participant elections.
On April 27, 2022, in Hawkins, et al. v. Cintas Corp., et al., the Sixth Circuit Court of Appeals affirmed that ERISA §502(a)(2) fiduciary breach claims belong to the plan and require the plan’s consent for arbitration. As a result, participants cannot be forced to arbitrate such claims without the plan’s consent.
In this case, two retirement plan participants brought a putative class action suit against their former employer, Cintas Corporation (Cintas), for breach of fiduciary duties owed to the company’s retirement plan. First, they alleged that Cintas only offered participants actively managed plan investment funds, rather than more cost-efficient passively managed funds. Second, they claimed that Cintas imprudently charged the plan expensive recordkeeping fees.
However, the participants had each signed employment agreements that contained arbitration provisions requiring arbitration of employment-related claims, including those arising under ERISA. Therefore, Cintas moved to compel arbitration and stay the class action lawsuit, asserting that the participants were bringing claims covered by the arbitration provisions.
The district court denied both of Cintas’ motions. The court determined that the action was brought on behalf of the plan, and the plan’s consent was necessary for arbitration. Thus, it was irrelevant that individual participants had consented to arbitration through their employment agreements.
On appeal, the Sixth Circuit agreed that the employment agreements did not force the case into arbitration. The court noted that the participants’ claim was not brought under ERISA §503(a)(1)(B) for benefits or rights due to them individually under the plan terms. Rather, the participants filed an ERISA §502(a)(2) suit seeking plan-wide relief that should be brought as a plan claim. Because the arbitration provisions only established the individual participants’ consent to arbitration, their employment agreements do not subject the plan claims to arbitration.
Additionally, the plan document did not contain an arbitration provision or other expression of the plan’s consent to arbitrate. The Sixth Circuit recognized that Cintas could amend the plan document to include an arbitration provision but did not decide whether such a provision would subject § 502(a)(2) claims to arbitration because this matter was not under review. However, the Sixth Circuit noted that all other circuit courts that have addressed the issue have held that ERISA claims are generally arbitrable.
The Sixth Circuit also rejected Cintas’ alternative argument that if plan consent to arbitrate is required, such consent was provided by their participation in the lawsuit to compel arbitration. In the Sixth Circuit’s view, this argument failed to recognize the distinction between Cintas as the plan sponsor and the plan as a legal entity.
Employers that sponsor ERISA plans should be aware that arbitration provisions in employment agreements do not automatically result in all ERISA claims being subject to arbitration. Employers who want ERISA claims, including those brought on the plan’s behalf under § 502(a)(2), to be arbitrated should ensure express consent to arbitrate is reflected in the plan documents.
Hawkins, et al. v. Cintas Corp., et al., Sixth Circuit Court of Appeals »
The IRS recently released proposed regulations to update the mortality tables under Code Section 430 that apply to single-employer defined benefit pension plans. The regulations are proposed to be effective for plan years beginning in 2023.
Amongst other purposes, the Section 430 mortality tables are used to determine a pension plan’s minimum funding requirements and minimum lump sum distribution amounts. These tables must be updated at least every 10 years to incorporate the actual mortality experience of pension plan participants and projected future trends. The existing base mortality rates were released in 2017, but the IRS has provided annual mortality improvement scales that reflect adjustments based on recent and projected mortality experience.
If finalized, the proposed regulations would make certain changes to the base mortality rates and mandated mortality tables. The mortality tables in the proposed regulations are based on actuarial reports that incorporate large-scale studies of pension plan mortality experience from 2010 through 2014. The mortality experience is adjusted for improvements since 2012 and expected future improvements. For 2023, the mortality improvement rates are based on actual mortality experience from 2013 through 2019 and assumptions for later improvements in mortality.
Accordingly, the 2023 mortality improvement rates do not consider actual mortality experience in 2020 and 2021, the first years affected by the COVID-19 pandemic. Nor do the long-term mortality improvement rates reflect any adjustment for COVID-19 effects, although any long-term impact may be reflected in future mortality improvement scales and related guidance.
The proposed regulations would also restrict the use of static mortality tables to plans with 500 or less participants, multiemployer plans and cooperative and small employer charity pension plans. Currently, plans can choose to use either static mortality tables with a single set of factors for all birth years or generational mortality tables with different factors for each birth year. The IRS considers the generational mortality tables to be more accurate and believes most plans now have the capability and actuarial software to use such tables.
Additionally, the IRS issued Notice 2022-22, which provides mortality tables in accordance with existing Section 430 regulations. If the proposed regulations are adopted for 2023 plan years, the tables in Notice 2022-22 would only apply to calculations of minimum required contributions for plan years beginning in 2022 with valuation dates in 2023. The notice also provides an amended version of the mortality table used to determine the minimum amount of a lump-sum distribution under Section 417(e). This table will apply for 2023 even if the new regulations are finalized with a 2023 effective date.
Employers that sponsor defined benefit pension plans should be aware of the updated guidance and consult with their plan actuaries and consultants regarding any potential impact on plan costs. The deadline for submitting comments to the IRS on the proposed regulations is June 9, 2022. Additionally, a public hearing has been scheduled for June 28, 2022.
Proposed Regulations: Mortality Tables for Determining Present Value Under Defined Benefit Pension Plans »
Notice 2022-22 »
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.
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.
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.
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.
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 »
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.
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.
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 »
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:
- The surviving spouse of the employee
- A child of the employee who has not yet reached the age of majority
- Disabled
- Chronically ill
- 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.
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.
On January 13, 2022, the IRS released a draft of the 2022 Publication 15-A, the Employer’s Supplemental Tax Guide. This publication supplements Publication 15 and contains specialized and detailed employment tax information. The IRS updates Publication 15-A each year to incorporate any recent administrative, reporting or regulatory changes.
The 2022 updates include information on the redesigned Form W-4P and the new Form W-4R. Form W-4P will now be used to request withholding on periodic pension or annuity payments. The new Form W-4R will be used to report additional withholding on nonperiodic payments and eligible rollover distributions. Although the new versions of these forms are available in 2022, the IRS does not require their use until January 1, 2023.
The publication also announces that the rate of social security tax on taxable wages paid in 2022 for qualified sick and family leave taken after March 31, 2021, and before October 1, 2021, is 6.2% each for the employer and employee or 12.4% for both. Qualified sick and family leave wages paid in 2022 for leave taken after March 31, 2020, and before April 1, 2021, aren’t subject to the employer share of the social security tax; therefore, the tax rate on those wages is only 6.2%.
Although the IRS will finalize this form, employers should be aware of the availability of the updated publication and most recent modifications.
On January 18, 2022, the IRS released Notice 2022-6, which provides updated guidance regarding when payments from qualified retirement plans (including 401(k) plans) are considered substantially equal periodic payments that are not subject to the 10% premature withdrawal tax on early distributions. Notice 2022-6 modifies and supersedes Revenue Ruling 2002-62.
Substantially equal period payments are plan distributions based on the life expectancy of the account owner (or account owner and beneficiary) that must be taken at least annually. Three methods are available to calculate the payment amounts:
- The required minimum distribution (RMD) method
- The fixed amortization method
- The fixed annuitization method
Generally, the payments must continue unchanged until the later of five years or until the account owner reaches age 59½.
Notice 2022-6 does not substantially change these distribution methods but provides certain related clarifications and modifications. For example, the guidance explains that for an account owner using the RMD or fixed amortization method, the new life expectancy tables (issued in 2020) should be used for any series of payments beginning on or after January 1, 2023, and may be used for payments beginning in 2022. Additionally, an account owner that begins payments before 2023 using the RMD method may switch to an updated life expectancy table without such change being treated as a modification of payments.
The notice also updates the interest rate that may be used to apply the fixed amortization method or the fixed annuitization method. As modified, the maximum rate is the greater of 5% or 120% of the federal midterm rate.
Furthermore, the notice provides guidance on the determination of the account balance used to apply the fixed amortization and fixed annuitization method. Specifically, the account balance on any date within the period that begins on December 31 of the year prior to the date of the first distribution and ends on the date of the first distribution will be treated as determined in a reasonable manner.
Sponsors of qualified retirement plans that permit periodic payments after employment termination should be aware of this update and consult with their service providers regarding implementation.
On January 24, 2022, the Supreme Court of the United States held that the District Court and Seventh Circuit Court of Appeals erred in dismissing the petitioner’s case in Hughes v. Northwestern University. The Court rejected the notion that participants’ having the authority to choose their investments excuses allegedly imprudent fiduciary decisions.
The petitioners in this case were Northwestern University employees that participated in two defined contribution plans offered by the university. They alleged that the plan fiduciaries (1) failed to monitor and control recordkeeping fees, resulting in high plan costs to participants; (2) offered several mutual funds and annuities in retail share classes instead of otherwise identical institutional shares that generally come with lower fees; and (3) offered too many investment options, causing confusion among participants that led to poor investment decisions.
The District Court and Seventh Circuit focused on the fiduciaries’ duty to provide participants with a diverse menu of investment options. They specifically determined that the respondents had provided several low-cost index fund options, which meant that plan participants were not forced to pick the higher-cost investments.
However, the Court stated that the District Court and Seventh Circuit erred in indicating that the participants’ choice over their investments excused the respondents’ alleged violation of the duty of prudence. Instead, the Court reasoned that the courts should’ve considered the precedence set by Tibble vs. Edison Int’l. In Tibble, the Court explained that plan fiduciaries have an ongoing requirement to monitor investments and to remove any imprudent investment from the plan, even when the participants can choose between investment options.
As such, the Court vacated the lower courts’ decision and remanded the case to the Seventh Circuit for it to reevaluate the allegations considering the precedence set by Tibble.
Retirement plan sponsors should take this holding as confirmation that the requirement to monitor and even reconsider plan investments remains. They should work with plan advisors to ensure that they are meeting their fiduciary obligations regarding investment options.
On January 3, 2022, the IRS released Revenue Procedure (Rev. Proc.) 2022-4, which outlines the procedures for requesting determination letters and private letter rulings from the IRS for qualified retirement plans. Rev. Proc. 2022-4 is a general update of the information provided in Rev. Proc. 2021-4. Determination letters indicate whether the IRS finds an employer’s employee benefit plan to meet the requirements necessary for the plan to be a qualified plan. Private letter rulings interpret and apply the Internal Revenue Code to a set of facts presented by a taxpayer.
This update includes some minor non-substantive changes, including changes to dates, cross references and citations to other revenue procedures. There are also several changes from the guidance that was provided in Rev. Proc. 2021-4, including:
- The procedures for obtaining an opinion letter for Section 403(b) pre-approved plans with six-year remedial amendment cycles beginning July 1, 2021 are provided in Rev. Proc. 2021-37.
- Procedures have been updated for submitting Form 5300, Application for Determination for Employee Benefit Plan and Form 5310, Application for Determination for Terminating Plan, including payment of the user fee. Form 5300 can be submitted electronically beginning June 1, 2022, and must be submitted electronically beginning July 1, 2022.
- Trust documents are no longer a part of the list of documents that must be included as part of a determination letter submission.
- Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans, should be used for determination letter requests for standardized plans that are not multiple employer plans if the employer requests a determination solely on overriding plan language added to satisfy benefit and contribution limitations and the special rules for top-heavy plans.
- Employers adopting standardized plans do not have to file a Form 5300 to request a determination related to overriding language necessary to satisfy benefit and contribution limitations or the special rules for top-heavy plans, even if they maintain multiple plans.
- This guidance clarifies the scope of reliance for a determination letter issued for a multiple employer plan.
- Plan sponsors of dual-qualified plans must submit a restatement showing compliance with the Code and applicable lists when submitting a determination letter application.
- Appendix A of the Rev. Proc. has been amended to update the user fees relating to letter ruling requests and opinions on pre-approved plans.
Retirement plan sponsors who may need to apply for a determination letter or request a private letter ruling should familiarize themselves with this updated guidance and work with their service providers to comply with the IRS’ requests.
The IRS recently published the final version of the instructions for the 2021 Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits. 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 assist employers with the preparation of the 2021 Forms 8955-SSA filing. The instructions explain that the IRS does not permit form attachments. They also clarify which entry codes filers should use in Part III, line 9, column (a) for the following participant scenarios:
- Entry Code A: Separated from service covered by the plan, but vested retirement benefits are not paid and were not previously reported.
- Entry Code B: Were previously reported under the plan but whose information is being corrected.
- Entry Code C: Were previously reported as deferred vested participants on another plan's filing if their benefits were transferred (other than in a rollover) to the plan of a new employer during the covered period.
- Entry Code D: Were previously reported under the plan but have been paid out or no longer entitled to those deferred vested benefits.
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.
On January 14, 2022, the Pension Benefit Guaranty Corporation published revised civil penalty amounts for failure to provide certain notices or other material information, as required by ERISA. The amounts apply to penalties assessed on or after the publication date. The adjusted maximum amounts are $2,400 (up from $2,259) for Section 4071 penalties and $320 (up from $301) for Section 4302 penalties, which are related to multiemployer plan notices.
On December 21, 2021, the DOL provided a supplemental statement on the use of private equity (PE) investments in designated investment alternatives made available to participants and beneficiaries in individual retirement account plans. The statement supplements the June 3, 2020 DOL Information Letter that addressed the role of PE investments in defined contribution plans. (See our June 3, 2020 edition of Compliance Corner for more information about that letter.)
The DOL reiterated that fiduciaries could offer a professionally managed asset allocation fund with a PE component as a designated investment alternative as long as the investment is prudent and made solely in the interest of the plan’s participants and beneficiaries. Although the letter allowed PE investments, the DOL clarified that the Information Letter did not endorse or recommend such investments due to their complexity.
After the DOL came out with the Information Letter in 2020, the Securities and Exchange Commission issued a “risk alert” highlighting compliance issues in examinations of registered investment advisers that manage PE funds. Additionally, the DOL received questions and reactions from a variety of stakeholders regarding the letter. As such, the DOL chose to issue this supplemental statement to clarify a few things.
First, the DOL admitted that the PE investment advantages that were touted by the entity that requested the information letter reflected the perspective of the PE industry and didn’t necessarily include counter-arguments. Second, the DOL chose to emphasize the expertise that plan fiduciaries would need to possess in order to satisfy ERISA duties to be prudent and monitor investments. Finally, the DOL cautioned against application of the Information Letter outside of the context of fiduciaries who offer PE investments in their defined benefit and contribution plans and are suited to analyze these investments for participant-directed accounts with the assistance of qualified fiduciary investment advisers. The DOL took it a step further and mentioned that plan-level fiduciaries of small, individual account plans are likely not suited to evaluate PE investments in designated investment alternatives in individual account plans.
Employers considering offering PE funds as an investment option in their plans should be mindful of their fiduciary duties and consult with their investment advisers for assistance.
On December 10, 2021, the IRS released the 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. (We previously reported on the draft of these instructions in the November 9, 2021 edition of Compliance Corner.)
The IRS updates the form instructions annually to incorporate any recent administrative, reporting or regulatory changes. The 2022 Form 1099-R instructions include a new reporting requirement for qualified plan payments to state unclaimed property funds under escheat laws. It also announces the new Form W-4R, which will be used to report nonperiodic payments and eligible rollover distributions.
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.
On December 29, 2021, the DOL, IRS and PBGC (the “agencies”) published advance copies of the 2021 Form 5500 Annual Return/Report (including Form 5500-SF for small plans) and related instructions in the Federal Register. The 2021 Form 5500-EZ and instructions were also released and are available on the DOL website.
Certain updates to the form instructions were necessary to implement annual reporting changes related to SECURE Act amendments to ERISA and the code that apply to multiple-employer defined contribution pension plans, including the new pooled employer plans (PEPs). Provided certain conditions are met, PEPs allow multiple unrelated employers to participate in one plan that files one Form 5500.
The notable Form 5500 and Form 5500-SF changes include the following:
- The instructions have been revised to require multiple-employer defined contribution pension plans to report aggregate account balance information by employer on the existing Form 5500/Form 5500-SF attachment for reporting participating employer information. (Prior to SECURE Act changes, employers were only required to report estimates of the percentage of total contributions made by participating employers during the plan year.)
- As a result of the SECURE Act authorization for PEPs to begin operating in 2021, the Form 5500 instructions have been amended to make clear that a PEP is a multiple-employer plan that files a single Form 5500 Annual Return/Report. PEPs are required to check the multiple-employer plan box in Part A of Form 5500 and include the attachment for reporting participating employer information. These plans must also indicate whether the pooled plan provider (PPP) administering the plan has complied with the Form PR (Pooled Plan Provider Registration) filing requirements. If so, the AckID acknowledgement code number for the PPP’s latest Form PR filing must be referenced. Form 5500-SF was also updated to indicate that PEPs must file Form 5500 and cannot file Form 5500-SF.
- A new checkbox is added to Part I of Form 5500 and Form 5500-SF for a plan sponsor who adopted the pension benefit plan in the 2021 plan year and treated the plan as being adopted and effective in the 2020 plan year pursuant to SECURE Act Section 201. For defined benefit plans in this category, the 2021 instructions provide information about how to report data regarding 2020 funding requirements (i.e., Schedule SB data).
- The form instructions were updated to reflect an increase in the maximum civil penalty amount assessable under ERISA section 502(c)(2), which applies to a failure to file a Form 5500.
- A new line 3(d) was added to Schedule MB to require a multiemployer defined benefit plan to report the amount of withdrawal liability payments included in line 3(b) employer contributions. Line 6c, mortality table, was revised to add new mortality tables released by the Society of Actuaries and to simplify reporting of older mortality tables. Line 7, New Amortization Bases Established, has been revised, reflecting changes made by the ARPA for Code 8 to be used for net investment losses and other losses related to COVID-19 incurred in either or both of the first two plan years ending after February 29, 2020.
- Schedule SB, Line 6, target normal cost, was broken down into new lines 6a, 6b and 6c. Line 6a requires the plan to report the present value of current plan year accruals decreased by any mandatory employee contributions. Line 6b requires the plan to report expected plan-related expenses included in the target normal cost, and line 6c requires it to report the total target normal cost (i.e., the sum of lines 6a and 6b). The table in the instructions for line 27 contains an additional code (Code 9) for community newspapers as described in the SECURE Act.
These advance copies are for informational purposes only and cannot be used to file a 2021 Form 5500 or schedule. Employers must wait until the agencies publish the final versions. However, employers may want to familiarize themselves with the updated forms and instructions.