Compliance Corner Archives

On November 1, 2024, the IRS issued Notice 2024-80, which provides certain cost-of-living adjustments for a wide variety of tax-related items, including retirement plan contribution maximums and other limitations, effective January 1, 2025. Several key figures are highlighted below. 

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 $23,000 to $23,500 in 2025. Additionally, the catch-up contribution limit for employees age 50 and over who participate in any of these plans remains at $7,500, so participants who have reached age 50 will be able to contribute up to $31,000 in 2025. Furthermore, pursuant to SECURE 2.0, the catch-up contribution limit for participants who reach age 60, 61, 62, or 63 in 2025 is $11,250 for 2025 for a total contribution limit of $34,750. 

The annual limit for Savings Incentive Match Plan for Employees (SIMPLE) retirement accounts has increased from $16,000 to $16,500. The catch-up contribution limit for employees 50 and over who participate in SIMPLE plans remains $3,500 for 2025. A higher catch-up contribution limit, $5,250 for 2025, applies to SIMPLE plan participants who reach age 60, 61, 62, or 63 in 2025.

The annual limit for defined contribution plans under Section 415(c)(1)(A) increases to $70,000 (from $69,000). The limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) also increases to $280,000 (from $275,000). Additionally, the annual limit on compensation that can be considered for allocations and accruals increases from $345,000 to $350,000. 

The threshold for determining who is a highly compensated employee under Section 414(q)(1)(B) increases to $160,000 (from $155,000). The threshold concerning the definition of a key employee in a top-heavy plan increases from $220,000 to $230,000. 

Employers should review the notice for additional information. Sponsors of benefits with limits that are changing will need to determine whether their plan documents automatically apply the latest limits or must be amended to recognize the adjusted limits. Any applicable changes in limits should also be communicated to employees.

Notice 2024-80, 2025 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living 

Recently, the IRS issued an Issue Snapshot addressing participant consequences when excess 401(k) deferrals are made. Elective deferrals include both pre-tax salary reduction contributions and any designated after-tax Roth contributions. 

As a refresher, IRC Section 402(g) limits the amount of elective deferrals a participant may exclude from taxable income each year. Excess deferrals can cause a tax liability unless corrected. A participant can generally correct an excess deferral by distributing the excess amount, plus any amounts earned on that excess (for the calendar year during which the deferral is made), no later than April 15 following the close of the calendar year in which the deferral is made. If the correction is not made by April 15, the excess can only be distributed during a time prescribed in the plan document. If not timely distributed, the excess amount is included in the participant’s taxable income for the year in which it was contributed and would be taxed a second time when the deferral is eventually distributed from the plan. 

It is important to note that catch-up contributions can affect the limits under Section 402(g). Catch-up contributions must be permitted by the plan and the participant must otherwise be eligible to make these catch-up contributions (e.g., at least 50 years old by the end of the calendar year in which the contribution is made and elective deferrals have been made up to the applicable limit). If the requirements for catch-up contributions are met, amounts that exceed the deferral limit will not be treated as excess deferrals and, thus, no corrective action may be needed. 

Employers sponsoring 401(k) plans should work closely with their plan administrators or vendors to ensure it has procedures in place to identify potential excess deferrals and implement corrective actions as needed.

IRS, Issue snapshot — Consequences to a participant who makes excess deferrals to a 401(k) plan

On October 1, 2024, the IRS announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina, and South Carolina and parts of Florida, Tennessee, and Virginia.

The relief includes the postponement of filing until May 1, 2025, for any Form 5500 series returns that were or are required to be filed by “affected taxpayers” on or after September 24, 2024, and before May 1, 2025, and applies to both retirement and health and welfare plan filings. By regulation, permitted postponements by the IRS under these circumstances are also deemed permitted by the DOL and Pension Benefit Guaranty Corporation for similarly situated plan administrators and direct filing entities.

For these purposes, “affected taxpayers” are generally plan sponsors located in covered disaster areas as well as plan sponsors unable to obtain information necessary for completing the forms from a bank, insurance company, or any other service provider on a timely basis because such service provider’s operations are in a covered disaster area.

Per Form 5500 instructions, plan sponsors relying on this special extension should check the appropriate box on Form 5500, Part I, line D, and enter a description of the announced authority for the extension. For these purposes, one or more of the below IRS announcements should be referenced as applicable:

• AL-2024-05
• FL-2024-08
• GA-2024-08
• NC-2024-08
• SC-2024-08
• TN-2024-01
• VA-2024-01

On August 20, 2024, the Sixth Circuit ruled in Parker v. Tenneco, Inc., that 401(k) plan provisions mandating individual arbitration are invalid as a prospective waiver of rights and remedies guaranteed under ERISA.

Tanika Parker and Andrew Farrier (the plaintiffs) were employees of and participants in 401(k) plans sponsored by subsidiaries of Tenneco Inc. Together, they sued in federal court on behalf of the plans, themselves, and other similarly situated participants through a putative class action, alleging breaches of fiduciary duties owed pursuant to ERISA. Specifically, the plaintiffs claimed that the plans’ fiduciaries breached their duties by failing to employ a prudent process for selecting, monitoring, and removing investment options from the plans’ menus. This resulted in investment options that were nearly identical to other available options but were more expensive. Furthermore, the plaintiffs alleged that the fees charged for services, recordkeeping, and account administration were higher than other comparable fees and services.

In terms of relief for these breaches, the plaintiffs requested “all losses caused by their breaches of fiduciary duties,” restoration of “any profits resulting from such breaches,” and “equitable relief and other appropriate relief.” The plan fiduciaries moved to compel individual arbitration, arguing that the plans’ individual arbitration provision compelled arbitration of Parker and Farrier’s claims on an individual basis and barred them from suing on behalf of the plans or in a representative capacity. The district court denied the motion, stating that the individual arbitration provision limited participants’ rights under ERISA because it eliminated their substantive statutory right to bring suit on behalf of a plan and pursue plan-wide remedies.

The Sixth Circuit affirmed the district court under the “effective vindication doctrine,” which holds that provisions within an arbitration agreement may not prevent a party from effectively vindicating statutory rights. As such, the plans’ individual arbitration provision was unenforceable. In support of its decision, the court cited similar reasoning used by the Third, Seventh, and Tenth circuit courts in past cases as well as the Second Circuit’s decision in Cedeno v. Sasson earlier this year.

While this decision adds to what appears to be a growing consensus in favor of the effective vindication doctrine, the effect of mandatory arbitration provisions in benefit plans subject to ERISA remains a developing area of the law. Plan sponsors that already include such language in their plans or are considering including such language in their plans should consult closely with counsel before making any ultimate determinations in that regard.

Parker v. Tenneco, Inc.

On September 6, 2024, the DOL issued Compliance Assistance Release No. 2024-01, which provides updated cybersecurity guidance for employee benefit plans. The DOL also clarified that the cybersecurity guidance applies to all employee benefit plans, including retirement plans and health and welfare plans.

In recent years, the DOL has increasingly focused on cybersecurity measures for ERISA plans. Release No. 2024-01 enhances the DOL’s 2021 cybersecurity guidance and is intended to help plan sponsors, fiduciaries, service providers, and participants safeguard plan data, personal information, and plan assets. The latest updates are reflected in three publications, which address service provider selection, cybersecurity program best practices, and online security tips.

The first publication, “Tips for Hiring a Service Provider,” helps plan sponsors and other fiduciaries prudently select service providers with strong cybersecurity practices and monitor their activities. Among other tips, the DOL advises fiduciaries to ask about the service provider's information security standards, practices and policies, and audit results, and compare these to the industry standards adopted by other financial or health institutions. Fiduciaries should also verify if the service provider maintains insurance to cover losses caused by cybersecurity and identity theft breaches. When contracting with service providers, fiduciaries should seek terms that provide cybersecurity protections for the plan and participants (e.g., regarding the use and sharing of confidential information) and require compliance with applicable privacy and security laws.

The second publication, “Cybersecurity Program Best Practices,” focuses on assisting plan fiduciaries in their responsibilities to manage cybersecurity risks by hiring service providers that follow certain best practices. These practices include having a formal, well-documented cybersecurity program, conducting prudent annual risk assessments, and having a reliable annual third-party audit of security controls. Additionally, sensitive data should be encrypted, whether stored or in transit, and periodic cybersecurity awareness training should be conducted.

Finally, the “Online Security Tips” publication is directed at plan participants and beneficiaries who check their retirement accounts or other employee benefit plan information online and is designed to reduce their risk of fraud and loss. The tips advise participants to routinely monitor their online accounts, create strong and unique passwords, and use multifactor authentication, which requires a second credential to verify identity (e.g., entering a code sent in real-time by text message or email).

Plan sponsors and fiduciaries should clearly recognize their fiduciary obligations with respect to the protection of plan and participant confidential data from cybersecurity threats. They should carefully review and incorporate the DOL’s updated and practical cybersecurity guidance into their policies and procedures for selecting, contracting with, and monitoring service providers. Additionally, sponsors should educate participants regarding measures they can take to protect their own retirement account or other employee benefit plan data and inform participants about the availability of the DOL Online Security Tips.

DOL Compliance Assistance Release No. 2024-01

On August 19, 2024, the IRS released Notice 2024-63, which provides interim guidance pursuant to the SECURE 2.0 Act for employers that want to provide matching contributions based on eligible student loan payments made by participating employees.

In brief, among many other changes to retirement plan rules, SECURE 2.0 permits employers to amend their 401(k), 403(b), 457(b), and SIMPLE IRA plans to make matching contributions with respect to qualified student loan payments (QSLPs) for plan years beginning after December 31, 2023.

The notice addresses various plan administration issues related to matching contributions and QSLPs, such as:

• What qualifies as a QSLP: Generally, a payment made by an employee – who must also be a loan signer or cosigner – during a plan year to repay qualified education loans used for the higher education expenses of the employee, their spouse, or their dependent.
• Dollar and timing limitations: The total amount to take into account for matching contributions may not exceed the lesser of 1) the annual deferral limit in effect for the year (e.g., $23,000 for 2024) or 2) the employee’s compensation. Furthermore, matching contributions must be based on qualified education loan payments made within the same plan year.
• Certification requirements: Plans can require separate certifications for each or allow for a single annual certification. Certifications must specify payment amounts, payment dates, proof of payment, that the loan is for qualified education expenses, and that the employee incurred the loan.
• Reasonable matching contribution procedures: Plans may establish reasonable administrative procedures to implement QSLP match features, including but not necessarily limited to having a single claim deadline for a plan year or multiple deadlines for claim submissions, provided that each deadline is reasonable under all relevant facts and circumstances. The guidance indicates that an annual deadline that is three months after the end of a plan year will be deemed reasonable.
• Special nondiscrimination testing relief: Plans may choose to apply separate Actual Deferral Percentage tests for employees who receive QSLP matches and those who do not receive QSLP matches. The guidance also provides several methods that plan sponsors can use to apply these tests.

While the notice applies for plan years beginning after December 31, 2024, employers can rely on it for plan years beginning in 2024 as an example of a good faith, reasonable interpretation of these changes made by the SECURE 2.0 Act.

IRS Notice 2024-63

On July 24, 2024, in Kruchten v. Ricoh USA, Inc., et al., the US Court of Appeals for the Third Circuit (Third Circuit) reversed the dismissal of an ERISA excessive fee claim by the US District Court for the Eastern District of Pennsylvania (district court). During the appeal process, the Third Circuit reversed the opinion of the case on which the district court relied (Mator v. Wesco Distrib. Inc.) and clarified the pleading standards for excessive fee claims under ERISA, rejecting the narrow, more stringent standard suggested by the district court. As a result, the Third Circuit reversed the motion to dismiss and remanded the matter to the district court for further proceedings.

As background, the lawsuit alleges that Ricoh USA, Inc., et al. (the defendants), in their roles as plan sponsor and fiduciary of the Ricoh USA defined contribution retirement plan (the plan), allowed excessive recordkeeping and administrative (RK&A) services fees to be charged. The plaintiffs, who are former employees who participated in the plan, contend that the defendants breached their fiduciary duty by not controlling plan costs and not using their substantial bargaining power due to the plan’s size to negotiate lower plan fees. Due to the costs of the recordkeeping services, the defendants imposed administration fees on all investment options in the plan. Two of these options charged additional revenue-sharing fees that further raised the total recordkeeping fees paid by participants.

On appeal, the Third Circuit referred to the recent Mator ruling, noting that RK&A fees can be considered excessive based on factual comparisons to other similar plans. Applying that concept here, the Third Circuit observed that the plaintiffs established a meaningful benchmark to allege that plan fees were excessive by compiling a list of retirement plans and the RK&A fees they charged and explaining why those other plans were comparable. They also alleged that all plans above 10,000 participants cited as comparators received the same services, measured by Form 5500 service codes, and that larger plans have greater bargaining power to reduce fees. The Third Circuit concluded the plaintiffs had established that the comparisons they provided were appropriate and sufficient to plead a plausible claim.

Plan sponsors have fiduciary duties under ERISA to act in the best interest of plan participants and beneficiaries, which includes the duty of prudence and maintaining reasonable plan administration fees. Although the case is still at an early stage in the legal process, it serves as another reminder to employers of their ERISA fiduciary obligations to prudently select and monitor vendor relationships and to carefully document their processes. As with other cases we have discussed recently in our Compliance Corner on June 18, 2024, the ruling also provides insights as to a court’s considerations when considering an excessive fee claim and how the law in this area is evolving.

Kruchten v. Ricoh USA, Inc., et al. (PDF)

On July 18, 2024, the US Court of Appeals for the Fifth Circuit (Fifth Circuit) vacated a trial court’s determination that DOL’s final rule, on retirement plan ESG investments, enabling retirement plan fiduciaries to consider the potential financial benefits of investing in funds that take environmental, social and corporate governance (ESG) factors into account was not “manifestly contrary” to ERISA.

The Fifth Circuit rendered its decision in light of the US Supreme Court’s decision to discard “Chevron deference” in Loper Bright v. Raimondo. “Chevron deference” had been a longstanding principle established by the Supreme Court in 1984 that required federal courts to defer to an agency’s interpretation of ambiguous statutory language so long as the agency applied a reasonable or permissible construction of the statute.

Because the trial court applied the now-obsolete Chevron deference doctrine to the DOL’s ESG rule, the Fifth Circuit remanded the case to the trial court for further review. Notably, the Fifth Circuit acknowledged that it could have chosen to review the ESG rule itself in the interest of expediting a resolution to the issue, but the court deemed it more appropriate for the trial court to first conduct its own review of the rule unencumbered by Chevron deference, after which it would consider the matter in turn on appeal.

In just a few weeks, the demise of the Chevron doctrine has already affected agency rulemaking pursuant to the ACA, as reported previously; agency rulemaking pursuant to the No Surprises Act, as discussed in an adjacent article; and agency rulemaking pursuant to ERISA, as discussed above. Employers should expect continued developments in this area as agencies and courts contend with administrative rulemaking in the post-Chevron era.

State of Utah et al. v. Su

On July 18, 2024, the IRS released final regulations updating the required minimum distribution (RMD) rules for retirement plans. The final regulations, which reflect certain changes made by the SECURE Act and the SECURE 2.0 Act, largely follow proposed regulations issued in 2022 (the 2022 proposed regulations). Simultaneously, the IRS issued new proposed regulations (the 2024 proposed regulations), addressing additional RMD issues under the SECURE 2.0 Act (SECURE 2.0).

The SECURE Act and SECURE 2.0 made significant changes to the RMD rules applicable to retirement plan participants during their lifetimes and to beneficiaries after their deaths. For participants, a key change was the applicable required beginning date (RBD) for commencing plan distributions. Prior to the SECURE Act, the RBD was defined as the later of April 1 of the calendar year following the year in which the participant attained age 70½ or the year the participant retired from employment with the employer maintaining the plan. The RBD age was increased by the SECURE Act from 70½ to 72, and then to 73 or 75 by SECURE 2.0. Accordingly, as implemented under the final regulations, the applicable RBD age for a participant is:

• Age 70½, if born before July 1, 1949.
• Age 72 if born on/after July 1, 1949, and before January 1, 1951.
• Age 73, if born on/after January 1, 1951, but before January 1, 1959.
• Age 75, if born on/after January 1, 1960.

Although not addressed by the final regulations, the 2024 proposed regulations clarify that the applicable age for a participant born in 1959 would be 73.

Notwithstanding the foregoing, the preamble to the final regulations notes that a plan is permitted to use age 70½ as the required commencement date for all participants, regardless of their birthdates. This option may be of particular interest to sponsors of defined benefits plans, which are generally required to actuarially increase the benefits of participants who commence benefits after attainment of age 70½. Additionally, in-plan Roth accounts are exempt from the lifetime RMD requirements, effective in 2024.

As expected, under the final regulations, distributions to a beneficiary after the participant’s death can no longer be spread over the lifetime of the beneficiary but must be paid out within 10 years unless the beneficiary is an “eligible designated beneficiary” (i.e., a spouse, minor child, disabled or chronically ill, or not more than 10 years younger than the participant). Furthermore, the final regulations confirm that if the participant’s death occurs after their distributions have begun, the benefits to the beneficiary must continue “at least as rapidly” as required by Code section 401(a)(9) and comply with the 10-year rule. As with the 2022 proposed regulations, the final regulations interpret the Code language to require the beneficiary to continue annual distributions after the participant’s death rather than allowing the beneficiary to delay receipt of the remaining benefit, provided the full amount is distributed within 10 years of the death.

Additionally, the final regulations reflect a SECURE 2.0 Act rule that allows a surviving spouse who is the sole eligible designated beneficiary to elect to have the post-death RMDs calculated using the actuarial table applicable to a participant’s lifetime distributions, which would generally allow for smaller annual distributions than under the single life table normally applicable to beneficiaries. The final regulations and 2024 proposed regulations discuss the application of this rule and default rules applicable where the plan terms are silent.

Overall, the final regulations are very comprehensive and address many other aspects of RMDs, including distributions to minor children upon attainment of age 21 and to beneficiaries under certain types of trusts.

Sponsors of retirement plans should be aware of the issuance of the final regulations and work with their service providers to bring their plans into compliance by January 1, 2025. For prior years, a good faith reasonable interpretation of the SECURE Act and SECURE 2.0 Act amendments applies. Importantly, plan sponsors will need to update their plan documents to address the new RMD rules. However, plan amendments are generally not required until December 31, 2026.

The 2024 proposed regulations provide further details about many SECURE 2.0 Act RMD changes, including certain corrective distributions, and are proposed to apply beginning January 1, 2025. Plan sponsors wishing to submit comments on the 2024 proposed regulations can do so by September 17, 2024, in accordance with the instructions. Additionally, a public hearing is scheduled for September 25, 2024.

• RMD Final Regulations
• RMD Proposed Regulations

On June 20, 2024, the IRS issued Notice 2024-55, which provides guidance on two exceptions to the 10% tax under Code section 72(t)(2) on early retirement plan distributions that were included in the SECURE 2.0 Act. The two exceptions are for emergency personal expense distributions and domestic abuse victim distributions. 

The Code defines an emergency personal expense distribution as any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. A domestic abuse victim distribution is defined as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. 

Notice 2024-55 provides additional guidance on the application of these two exceptions to the 10% tax, including: 

• The administrator may rely on an employee’s written certification that the employee is eligible for these distributions.
• The distribution for an emergency personal expense is limited to the lesser of $1000 or the individual’s total nonforfeitable accrued benefit over $1000 per calendar year, and the aggregate distribution for a domestic abuse victim is limited to the lesser of $10,000 (indexed for inflation) or 50% of the vested balance.
• An individual may, at any time during the three-year period beginning on the day after the date on which the distribution was received, repay all or any portion of an emergency personal expense or domestic abuse victim distribution.
• It is optional for an applicable eligible retirement plan to permit emergency personal expense distributions and domestic abuse victim distributions. 

The IRS indicates that they intend to issue regulations under the tax exception section of the Code and invite comments in the meantime, so these will likely not be the final say on these exceptions. If a plan sponsor wants to include these exceptions to the 10% tax on early distributions in its plan, it should discuss the process with its plan service providers and amend the plan accordingly. 

Notice 2024-55: Certain Exceptions to the 10% Additional Tax Under Code Section 72(t) » 

On June 24, 2024, the DOL released a report to Congress regarding Interpretive Bulletin 95-1 (the bulletin), which addresses ERISA fiduciary obligations of defined benefit (pension) plan sponsors when they select an annuity provider. The report was issued pursuant to Section 321 of the SECURE 2.0 Act, which directed the DOL to determine whether the bulletin’s guidance required amendment and to assess any risks to plan participants associated with an annuity provider selection. 

Pension plans promise participants a specific benefit (e.g., monthly payment) at retirement based upon a formula set forth in the plan. Plan sponsors are generally responsible for ensuring their plan contributions and related investment income are sufficient to pay the promised benefits. However, a sponsor can purchase an annuity contract to transfer liability for all or some of the plan’s payment obligations to the insurer issuing the annuity. The annuity purchase in this context is referred to as a “pension risk transfer” or a “de-risking” transaction. 

In 1995, the DOL issued the bulletin to provide guidance to plan sponsors regarding their ERISA fiduciary duties as applied to the selection of an annuity provider in a pension risk transfer or de-risking transaction. The bulletin provides that plan fiduciaries must take steps calculated to obtain the safest annuity available unless, under the circumstances, it would be in the interest of the participants and beneficiaries to do otherwise. Fiduciaries must conduct an objective, thorough, and analytical search to identify and select annuity providers. 

The bulletin emphasizes that fiduciaries should not rely solely on insurance ratings to assess an annuity provider’s claims-paying ability and creditworthiness; rather, fiduciaries should consider the following six factors, among others: 

1. The quality and diversification of the annuity provider’s investment portfolio.
2. The size of the insurer relative to the proposed contract.
3. The level of the insurer’s capital and surplus.
4. The lines of business of the annuity provider and other indications of an insurer’s exposure to liability.
5. The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts.
6. The availability of additional protection through state guaranty associations and the extent of their guarantees. 

Furthermore, plan fiduciaries who lack the necessary expertise to evaluate these factors should obtain the advice of a qualified, independent expert. 

The DOL conducted a broad review of the bulletin, which included a study of historical and legal developments and current market trends. The DOL’s report observes that in 2022, pension risk transfer annuity purchases reached an all-time high with transactions totaling $52 billion in premiums. The report also notes the increase in private equity involvement with life and annuity insurers, including with respect to pension risk transfers, and questions whether this trend presents increased risk to participants (i.e., the annuitants). 

Additionally, the DOL conducted more than 40 stakeholder meetings with representatives of organized labor, employer groups, and insurance companies, among others. The attendees expressed a range of opinions as to whether amendments to the bulletin were warranted. Although some believed the guidance remained appropriate, others indicated that significant changes are necessary to protect participants’ interests. Stakeholders advocating for changes believed the bulletin should focus plan fiduciaries’ attention on risks related to an insurance company’s ownership structure, including private equity interests, and the extent to which an insurer relies upon non-traditional and potentially riskier investments and liabilities as well as offshore and/or captive reinsurance, among other items. 

Based on its review, which included consultation with the ERISA Advisory Council, the DOL concluded that the bulletin continues to identify broad factors that are relevant to a fiduciary’s prudent and loyal selection of an annuity provider. However, the DOL indicated they intend to explore the issues raised in their review further to determine whether some of the bulletin’s factors need revision or supplementation and whether additional guidance should be developed. 

Employers that sponsor pension plans, particularly those considering a pension risk transfer, should be aware of the report and their fiduciary obligations with respect to the selection of an annuity provider. They should also monitor for further updates on this issue. 

DOL Report to Congress on Employee Benefits Security Administration’s Interpretive Bulletin 95-1 »

On May 23, 2024, in Moore et al v. Humana Inc. et al., the US District Court for the Western District of Kentucky (the court) granted summary judgment in favor of defendants Humana Inc. and the Humana Retirement Plans Committee (the defendants) in their roles as plan sponsor and fiduciary of the Humana Retirement Savings Plan (the plan). The class action case, filed in 2021, alleged a breach of the ERISA fiduciary duty of prudence in administering the plan due to excessive recordkeeping fees. The plaintiffs also claimed Humana failed to adequately monitor other fiduciaries.  

The defendants retained Charles Schwab (Schwab) as their plan recordkeeper after issuing requests for proposals (RFPs) and evaluating the responses thereto. They also performed annual benchmarking using reports from third-party consultants. Nonetheless, the plaintiffs contended that the defendants used an “imprudent process” to administer the plan and that Schwab’s recordkeeping fees were unreasonably high. 

Both parties motioned for summary judgment and to exclude the other party’s expert witness testimony. The court denied the plaintiffs’ motion to exclude the testimony of the defendants’ expert, Pete Swisher. Swisher’s opinion, based on his experience and industry knowledge, was that reliance on RFPs and benchmarking reports resulted in a prudent process.  

However, the court granted the defendants’ motion to exclude the testimony of the plaintiffs’ expert, Veronica Bray. Bray attempted to compare Humana’s recordkeeping fees to those of other retirement plans but did not provide a reasonable explanation for the choice of the specific plans used for the comparison. Therefore, the court determined that Bray’s opinion did not provide any reliable methodology to address whether the defendants’ process was prudent and whether their plan’s recordkeeping fees were excessive relative to the services rendered.  

The court then turned to the motions for summary judgment and explained that for the plaintiffs to prevail on their claims, they must show both that the defendants breached their fiduciary duty of prudence and that Schwab’s recordkeeping fees were ultimately unreasonable. The defendants argued that a prudent fiduciary would recognize that the fees were excessive and negotiate reasonable fees but significantly, could not cite a defect in the plan’s process for monitoring recordkeeping fees.  

Upon review, the court found the plaintiffs’ argument that the plan’s failure to have a fee policy statement amounted to an imprudent process unpersuasive. Second, the court noted that ERISA imposed no explicit duty on the defendants to attempt to negotiate a lower fee. Rather, the defendants maintained that their method for ensuring the fee remained reasonable (i.e., using RFPs and annual benchmarking) was a responsible method and consistent with industry practices. Additionally, the defendants pointed out that their RFP process accounted for a broad set of factors beyond price alone, including the plan’s size, relationship with Schwab, Schwab’s compensation, and Schwab’s services and offerings. Furthermore, the court observed that ERISA does not require fiduciaries to scour the market for the cheapest available option.  

As a result, the court found that the plaintiffs failed to prove that the defendants’ vendor selection process was not prudent and the fees were excessive. Because the defendants were entitled to summary judgment on their breach of fiduciary duty claim, their derivative failure to monitor claims also failed. 

This ruling is instructive in highlighting a court’s considerations when determining if a retirement plan fiduciary’s exercise of discretion in selecting a service provider is reasonable. The case serves as an important reminder to employers of their ERISA fiduciary obligations to prudently select and monitor vendor relationships and to carefully document their processes.  

Moore v. Humana Opinion and Order »

On May 19, 2024, the IRS issued FAQs regarding special rules for distributions from retirement plans, IRAs, and retirement plan loans for certain individuals impacted by federally declared major disasters. The SECURE 2.0 Act provided the framework for ongoing disaster relief for these distributions for affected individuals, and the FAQs are intended to provide information on disaster relief options that may be available. It is important to note that the FAQs are only intended to provide general guidance and cannot be relied upon by the IRS to resolve a case.

The FAQs are divided into four sections:

1. General information: These FAQs provide basic information to identify qualified individuals, to identify qualified disasters, and to provide a basic understanding of the expanded distribution rules which are optional for employers.
2. Taxation and reporting of qualified disaster recovery distributions: These FAQs provide details including information on the application of income tax and how both qualified individuals and plans should report the distributions.
3. Repayments of qualified distributions for purchasing or constructing a principal residence in a qualified disaster area: These FAQs describe the criteria for purchasing or constructing a principal residence in a qualified disaster area and provide details on repayment options.
4. Loans from certain qualified plans: This FAQ clarifies both the allowable loan repayment delay and the increased loan limits under the SECURE 2.0 Act.

Employers who sponsor retirement plans should be aware of the new guidance and work with service providers as needed if they allow these special distributions.

IRS Disaster Relief FAQs »

On May 17, 2024, the DOL published an interim final rule amending their Abandoned Plan Program regulations, which provide procedures for the termination of individual account retirement plans (such as 401(k) plans) that have been abandoned by their sponsoring employers. Among other items, the 2024 interim final rule makes the Abandoned Plan Program available to Chapter 7 bankruptcy trustees who administer a bankrupt company’s retirement plan.

Significant business events, including bankruptcies, can result in abandoned plans (i.e., plans without a responsible plan sponsor or administrator). In 2006, the DOL adopted the Abandoned Plan Program regulations to allow plan custodians, such as banks and insurers, to wind up an abandoned plan’s affairs and distribute plan benefits to participants and beneficiaries. Under the regulations, eligible custodians accepting such plan termination obligations are called Qualified Termination Administrators (QTAs). QTAs must notify the DOL before and after winding up an abandoned plan, locate and update plan records, calculate benefits payable, notify participants and beneficiaries, distribute benefits, and file a final Form 5500. Under Prohibited Transaction Exemption (PTE) 2006-06, QTAs are provided conditional relief from ERISA’s prohibited transaction rules for their services and related compensation.

However, the 2006 regulations did not extend the Abandoned Plan Program to Chapter 7 bankruptcy trustees who oversee and manage a bankrupt company’s plan. Under federal bankruptcy law, if a company in liquidation administered an individual account retirement plan, the company's Chapter 7 bankruptcy trustee must continue to perform plan administration functions.

The 2024 interim final rule and related amendment to PTE 2006-06 update the Abandoned Plan Program to allow a Chapter 7 bankruptcy trustee or an “eligible designee” to be a QTA and wind up the bankrupt company’s retirement plan. An eligible designee can be either a custodian QTA (as explained above) or an independent bankruptcy trustee practitioner meeting certain requirements. In addition to following the general Abandoned Plan Program procedures, the bankruptcy trustee must follow special rules to address any delinquent contributions owed to the plan. Additionally, the trustee is responsible for selecting and monitoring any eligible designee in accordance with ERISA’s fiduciary requirements and reporting to the DOL any suspected breaches involving plan assets by a prior plan fiduciary.

ERISA retirement plan sponsors should be mindful of their fiduciary obligations to a terminating retirement plan, including in situations in which the plan termination results from a significant business event or reorganization. These fiduciary obligations include updating the plan documents, notifying plan participants and beneficiaries, distributing plan assets, and filing a final Form 5500. In the event of the plan sponsor’s Chapter 7 bankruptcy, the DOL’s new amendments to the Abandoned Plan Program regulations and PTE 2006-06 will allow Chapter 7 bankruptcy trustees to effect the termination of an abandoned individual account retirement plan and distribute the benefits to participants and beneficiaries.

The 2024 interim final rule and amendment to PTE 2006-06 are effective July 16, 2024, so bankruptcy trustees can rely on this guidance on or after that date. The DOL is also seeking public comments on the amendments, which can be submitted through July 16, 2024.

• Interim Final Rules »
• Amendment to PTE 2006-06 »
• Fact Sheet »

On April 23, 2024, the DOL released the final Retirement Security Rule (the 2024 final rule) defining who is an investment advice fiduciary for purposes of ERISA and the Code. The DOL also issued final amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. The 2024 final rule follows and largely resembles a proposed rule issued on November 7, 2023. Please see our November 7, 2023, edition of Compliance Corner regarding the proposed rule.

The 2024 final rule represents the DOL’s most recent effort to significantly expand the definition of an investment advice fiduciary with respect to retirement investors. (A prior and similar 2016 DOL fiduciary rule was set aside as arbitrary and capricious by the Fifth Circuit Court of Appeals (Fifth Circuit) in litigation.) Under the 2024 final rule, retirement investors include not only ERISA retirement plan participants but also IRA owners, HSA accountholders, and fiduciaries with authority or control with respect to an ERISA plan or IRA. The DOL maintains the updates are necessary to protect retirement investors by addressing gaps in their relationships with financial professionals whose investment recommendations (e.g., regarding IRA rollover assets) are not currently treated as fiduciary advice under ERISA or other federal or state laws.

The 2024 final rule’s new investment advice fiduciary definition replaces the current five-part test that was adopted by the DOL in 1975. The DOL now views the 1975 rule as insufficient and underinclusive, given changes in retirement savings vehicles and the investment advice marketplace.

Under the 2024 final rule, a person is an investment advice fiduciary if they directly or indirectly (e.g., through or together with any affiliate) make professional investment recommendations to investors on a regular basis as part of their business and the facts and circumstances objectively indicate that the recommendation:

• Is based on review of the retirement investor’s particular needs or individual circumstances.
• Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances.
• May be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.

The recommendation must be provided for a fee or other compensation, direct or indirect, as defined in the final rule.

Additionally, an investment advice fiduciary includes a person who represents or acknowledges that they are acting as an ERISA fiduciary with respect to the recommendation.

Under the 2024 final rule, the determination of whether a recommendation has been made is aligned with the SEC’s “best interest” framework, which considers factors such as whether the communication could reasonably be viewed as a “call to action” that would influence an investor to trade a particular security. The more individually tailored the communication to a specific customer or targeted group about an investment, the greater the likelihood that the communication may be viewed as a recommendation. Conversely, offering general investment information or educational materials to investors would generally not be considered a recommendation and investment advice.

Unlike the 1975 rule, the 2024 final rule does not require that advice be provided pursuant to a mutual agreement or as the primary basis for investment decisions to be deemed fiduciary advice. As a result, the 2024 final rule has raised concerns among some industry stakeholders that certain financial professionals, such as insurance agents and brokers, will potentially be deemed fiduciaries by a transaction in which a retirement investor accepts their recommendation of a particular investment.

In fact, on May 2, 2024, a lawsuit, Federation of Americans for Consumer Choice, Inc. v. DOL, was filed against the DOL by a trade organization whose members include insurance agents. The lawsuit challenges, among other items, the DOL’s authority to issue the 2024 final rule under ERISA and the Code. The complaint asserts that the DOL’s fiduciary definition in the 2024 final rule is inconsistent with Congress’s intent as expressed in the text of ERISA and the Code, the historical and common law understanding of the term (based on a special relationship of trust and confidence), and the standards previously articulated by the Fifth Circuit. The lawsuit requests that the 2024 final rule and related amendments to PTE 84-24 (which provides protection for ERISA/IRA transactions when commissions are collected in connection with an annuity purchase) be vacated and that the DOL be enjoined from enforcing the new guidance.

Generally, the 2024 final rule and PTE amendments are scheduled to take effect on September 23, 2024, although there is a one-year transition period after the effective date for certain conditions in the PTEs. However, the legal challenges could potentially affect the implementation of the 2024 final rule.

ERISA retirement plan sponsors should be aware of the issuance of the 2024 final rule, which may impact the role of financial professionals interacting with plan fiduciaries or participants. They should also continue to ensure that ERISA plan investment decisions are made in the best interest of participants and beneficiaries and that the investment decision-making process is clearly documented. Sponsors should also monitor for further developments, which we will report on in future Compliance Corner editions.

• Retirement Security Rule: Definition of an Investment Advice Fiduciary (dol.gov) »
• Defining Investment Advice Fiduciary | U.S. Department of Labor (dol.gov) »
• Federation of Americans for Consumer Choice Inc. v. DOL »

On April 16, 2024, the DOL issued a request for public comment on its proposal to create a database to allow individuals to locate former retirement plan information. This searchable database would help implement the requirement under the SECURE 2.0 Act to more easily allow individuals to obtain plan administrator contact information.

Prior DOL initiatives under the existing Terminated Vested Participants Project (TVPP) for defined benefit pension plans indicate retirement plan administrators often lose track of participants and beneficiaries. Similarly, participants and beneficiaries often lose track of their own past accounts. In some cases, recordkeeping challenges, business closures, or mergers and acquisitions activity may result in accounts becoming “lost.” The proposed Retirement Savings Lost and Found database aims to facilitate the reunification of participants and beneficiaries and their prior accounts.

The DOL’s request asks for voluntary participation from plan administrators and indicates administrators can attach the information to their 2023 Form 5500 filing. Interested parties may submit comments through June 17, 2024.

DOL Federal Register 2024-07968 »

The IRS recently issued Notice 2024-35, which updates and extends the transition relief provided in Notice 2023-54, which addressed changes made by the SECURE Act and the SECURE 2.0 Act in required minimum distribution (RMD) requirements for qualified plans such as 401(k) plans, IRAs, Roth IRAs, 403(b) plans, and 457(d) eligible deferred compensation plans. (For further information on prior Notice 2023-54, please see our August 1, 2023, Compliance Corner article.)

The SECURE Act originally increased the age for determining an individual’s required beginning distribution date from 70 1/2 to age 72. The SECURE 2.0 Act then increased that to age 73 beginning January 1, 2023. Periodically, the IRS has issued transition relief to help plan administrators and others implement these changes to the RMDs. For example, Notice 2023-54 updated previous relief relating to otherwise required RMDs to beneficiaries after the deaths of participants (otherwise known as “specified RMDs”) in 2020 and 2021 to include the same for otherwise required RMDs related to participant deaths in 2022.

Notice 2024-35 essentially extends this relief for another year, meaning that plans will not be treated as failing to satisfy the RMD rules for the failure to make a specified RMD in 2024 related to a participant’s death in 2023, nor will a taxpayer be subject to an excise tax for having failed to take a specified RMD.

Employers should be aware of this extension of the previous transition relief and consult with their advisors for further information.

Notice 2024-35, Certain Required Minimum Distributions for 2024 »

On April 2, 2024, the DOL announced that it amended a rule that provides an exemption for qualified professional asset managers (QPAMs). A QPAM is defined as a bank, savings and loan association, insurance company, or registered investment adviser that assists retirement plans in making financial investments. QPAMS are particularly useful in that they can facilitate transactions that would otherwise not be allowed under ERISA, through the exemption granted by the DOL. The amendment clarifies language in the original rule, including what misconduct can render a QPAM ineligible for the exemption. The amendment:

• Requires a QPAM to provide a one-time notice to the DOL that it is relying upon the exemption.
• Updates the list of crimes enumerated in the original rule to explicitly include foreign crimes that are substantially equivalent to the listed crimes.
• Expands the circumstances that may lead to ineligibility.
• Provides a one-year winding down (transition) period to help plans and IRAs avoid or minimize possible negative impacts of terminating or switching QPAMs or adjusting asset management arrangements when a QPAM becomes ineligible pursuant to the original and gives QPAMs a reasonable period to seek an individual exemption, if appropriate.
• Updates asset management and equity thresholds in the QPAM definition.
• Clarifies the requisite independence and control a QPAM must have with respect to investment decisions and transactions.
• Adds a standard recordkeeping requirement.

Sponsors of ERISA retirement plans should be aware of these new clarifications and procedures for evaluating whether a QPAM is eligible for the exemption.

Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption) »
DOL Amendment to QPAM Exemption Announcement »

On February 28, 2024, Chairperson Bernard Sanders (I-VT) and the majority staff of the Senate Health, Education, Labor, and Pensions (HELP) Committee released its report “A Secure Retirement for All” in coordination with that day’s full committee hearing on the potential for the expansion of defined benefit pension plans.

The report takes a dim view of the state of retirement in America, highlighting a 2019 report by the US Government Accountability Office showing nearly half of Americans 55 and older did not have any retirement savings, as well as a 2021 academic research study that found nearly half of all Americans – regardless of age – are at risk of financially insecure retirements.

The steep decline in defined benefit pension plan participation is the primary theme of the report, which shows that while almost 30% of American workers had a defined benefit plan in 1975, only 13.5% do now. Although the contrast between defined benefit plan participation and defined contribution plan participation over the past 50 years is well-known, the numbers are still striking: More than 27.2 million workers participated in defined benefit plans in 1975 versus just 11.2 million workers participating in defined contribution plans. But, in 2019, over 85.5 million workers participated in defined contribution plans versus just over 12.6 million workers who participated in defined benefit plans.

For the committee’s consideration, the report concludes with two possible means of addressing the decline in defined benefit plans:

First, the report recommends expanding Social Security through various means such as removing the earnings cap ($168,600 a year in 2024) on the Social Security portion of the federal payroll, increasing benefit amounts across the board, and using the Consumer Price Index for the Elderly to determine annual cost-of-living-adjustments to benefit payments.

Second, the report recommends establishing a federally facilitated pension program modeled on similar programs in states such as California, Illinois, Oregon, Connecticut, Maryland, and Colorado, which would require businesses that have operated for two years or more to offer a defined benefit pension plan or defined contribution retirement plan meeting minimum requirements to its workforce, or, alternatively, offer its employees access to a state or the federally facilitated plan.

Speaking on behalf of the committee’s minority membership at the hearing, ranking member Sen. Bill Cassidy (R-LA) broadly opposed these recommendations, observing that the relative popularity of defined contribution plans compared to defined benefit plans was not necessarily a negative outcome overall, and that more time should be given for the provisions of SECURE Act 2.0 to take effect before implementing major changes such as those proposed by the majority staff in the report.

While the HELP report provides useful information regarding the present role of defined benefit plan participation in the retirement space, its policy recommendations do not have the force of law, nor are they likely to be taken up for consideration by the full Senate this year. They do, however, provide valuable insight as to the current retirement policy priorities of HELP’s Democratic majority membership, which are often leading indicators of future retirement policy initiatives.

Report: A Secure Retirement for All »

On February 13, 2024, the Employee Benefits Security Administration (EBSA), the DOL agency responsible for enforcement of ERISA, reported monetary recoveries totaling over $1.434 billion in its report on enforcement activities for fiscal year (FY) 2023. EBSA oversees approximately 2.8 million health plans, 619,000 other welfare benefit plans, and 765,000 private pension plans. These ERISA-covered plans cover 153 million workers, retirees, and dependents who participate in private-sector pension and welfare plans that hold an estimated $12.8 trillion in assets.

Total recoveries for terminated vested participants (e.g., individuals no longer working for an employer but entitled to benefits) accounted for more than half of the $844.7 million in benefits recovered and obtained through enforcement actions, with $429.2 million in benefits recovered for 5,690 terminated vested participants in defined benefit pension plans.

Informal resolutions of individual complaints resulted in another $444.1 million in recoveries, and the Voluntary Fiduciary Correction Program (VFCP) and Abandoned Plan Program recovered $84.5 million and $61.2 million, respectively. The VFCP allows plan officials who have identified certain ERISA violations to remedy the breaches and voluntarily report the violations to EBSA without becoming the subject of an enforcement action. EBSA received 1,192 VFCP applications for FY 2023.

The Delinquent Filer Voluntary Compliance Program (DFVCP) encourages plan administrators to bring their plans into compliance with ERISA's filing requirements by providing significant incentives for fiduciaries and others to self-correct. 18, 955 Form 5500s were filed through the DFVCP for FY 2023.

EBSA also reported that it closed 731 civil investigations in FY 2023, with 505 of those closed “with results” (such as nonmonetary corrections or injunctive relief) and 50 referred for litigation. EBSA’s criminal investigations resulted in 60 indictments and 77 guilty pleas or convictions.

Other reported actions include nonmonetary corrective actions and interventions regarding the denial of coverage for a life-saving heart transplant and access to COBRA coverage for mental health benefits. Additionally, the opening paragraph of the report puts “increased access to mental health benefits” on par with eliminating illegal plan provisions and improving fiduciary governance in terms of how the agency’s enforcement activities have “made a difference for current and future participants,” indicating an intention to make access to mental health coverage an ongoing priority.

Sponsors of ERISA retirement and/or health and welfare plans should be aware of these enforcement activities and take note that almost a third of the total reported recovery amounts for FY 2023 are the results of complaints submitted to EBSA by individuals (usually plan participants) rather than investigative activities initiated by the agency.

Fact Sheet »
DOL News Release »

On January 24, 2024, the DOL finalized rules to amend the individual application procedure for prohibited transaction exemptions under ERISA and the Code. The final rules (termed the “Final Amendments”) follow the proposed rules published on March 15, 2022, but reflect certain changes in response to public comments received. Please see our prior article for further information regarding the proposed rules.

ERISA sets forth standards and rules that govern the conduct of ERISA plan fiduciaries and safeguard the integrity of employee benefit plans. ERISA and the Code generally prohibit a plan fiduciary from causing a 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. The DOL and IRS have the authority to grant class or individual administrative exemptions from the prohibited transaction rules if the relief sought is administratively feasible, in the interest of the plan and its participants and beneficiaries, and protective of the rights of participants and beneficiaries.

The DOL is responsible for maintaining procedures for granting individual administrative exemptions, including the application process. According to the DOL, the March 2022 proposed rules were designed to, among other items, clarify the necessary reports and documentation for a complete exemption application, the information made available as part of the public record, the related timing aspects, and the options for submitting information electronically.

In the Final Amendments, the DOL addresses public comments received regarding the proposed rules. For example, many commenters expressed that the application process was longer than necessary and overly prescriptive. The DOL acknowledged the process can be lengthy but asserted that the Final Amendments make the exemption application process more efficient by reducing or eliminating delays caused when information is missing or incomplete.

Like the proposed rules, the Final Amendments largely retain language providing the DOL with sole discretionary authority to issue administrative exemptions (based on ERISA’s criteria). Commenters expressed concern that such discretionary authority could result in arbitrary decisions and that the DOL should be bound by previously issued exemptions to foster predictability and consistent treatment of applicants. The DOL did not agree to be bound by prior exemptions but modified the Final Amendments to indicate that previously issued exemptions may inform their determination of whether to allow future exemptions based on the unique facts and circumstances of each application.

Under the Final Amendments, conferences with the DOL prior to submission of an exemption application, and any related documents, will be part of the public record if a formal exemption application is submitted. Additionally, the prior conferences would need to be identified in the formal application. However, unlike the proposed rules, the Final Amendments allow potential applicants to seek a pre-submission conference anonymously without a public record created unless a formal application follows.

The Final Amendments also include provisions that affect those retained as independent fiduciaries or appraisers to represent the plan or establish the fair market value of an asset in a transaction, respectively. For example, the Final Amendments change the definition of an independent fiduciary or appraiser with modifications from the proposed rules. Additionally, the exemption application requires significantly more information regarding independent fiduciaries, appraisers, accountants, and auditors. An independent fiduciary’s liability insurance must be included, although specific levels of coverage are not required, as had been proposed. The Final Amendments also affect the contract terms between plans and independent fiduciaries and appraisers, among other parties (e.g., by prohibiting indemnification for contract breaches or violations of laws).

The Final Amendments reflect numerous other significant changes to the prohibited transaction exemption application process. Employers who sponsor ERISA plans and are considering filing an application for an individual administrative exemption should carefully review the Final Amendments and consult with legal counsel for further guidance. The Final Amendments are effective on April 8, 2024.

Final Amendments

On January 17, 2024, the DOL released guidance regarding pension-linked emergency savings accounts (PLESAs) as part of the implementation of the SECURE 2.0 Act. The guidance, which is in the form of 20 frequently asked questions (FAQs), provides general compliance information. The FAQs were developed in consultation with the IRS and follow a recent IRS notice concerning PLESA anti-abuse rules. (Please see our January 17, 2024, Compliance Corner article.)

As explained by the first five FAQs, PLESAs are individual accounts in defined contribution plans (such as 401(k) and 403(b) plans) that allow eligible non-highly compensated employees to save for financial emergencies via Roth contributions. Participants can make withdrawals from the PLESAs at least monthly at their discretion and without being assessed the penalty tax normally applicable to early retirement plan distributions. The FAQs explain that the plan cannot set eligibility criteria beyond that required for participation in the retirement plan nor set minimum balance or contribution amounts (subject to reasonable administrative restrictions, such as requiring contributions in whole dollars or percentages). Automatic enrollment in PLESAs is permissible, provided employees are provided advance notice and the opportunity to opt out and withdraw their funds without charge. 

FAQs six through 10 address contributions, which must be Roth contributions. The portion of a PLESA balance attributable to participant contributions may not exceed the $2,500 maximum (as periodically indexed for inflation). The guidance clarifies that a plan has flexibility to either include or exclude earnings when applying the limit. However, a plan cannot set an annual limit on participant contributions. If a plan provides matching contributions, an employee's PLESA contributions must be matched at the same rate as for non-PLESA elective deferrals. Plans must maintain separate recordkeeping for each PLESA.

FAQs 11 through 13 discuss distributions and withdrawals. FAQ 11 clarifies that a participant does not need to demonstrate or certify the existence of an emergency or other need or event to make a PLESA withdrawal. FAQ 12 explains that PLESAs cannot be subject to any fees for the first four withdrawals in a plan year. However, PLESAs may be subject to reasonable fees or charges in connection with any subsequent withdrawals.

Finally, FAQs 14 to 20 address investment and administration. PLESA contributions must be held as cash in an interest-bearing deposit account or in an investment product designed to preserve principal while providing liquidity. Accordingly, a plan’s qualified default investment alternative would normally not qualify. Reasonable administrative fees (separate from fees assessed solely for withdrawals) may be imposed directly on PLESAs or against the retirement plan account of which a PLESA is a part.

The plan administrator must provide notice at least 30 days prior to the first contribution and annually thereafter, explaining the PLESA contribution limit, tax treatment, and election procedures, among numerous other items. The notice can be furnished with other required ERISA disclosures. The guidance clarifies that the PLESA account balance does not need to be included in individual periodic pension benefit statements under ERISA Section 105 or investment disclosures under 29 CFR § 2550.404a-5. The last FAQ explains that the DOL is updating the 2024 Form 5500 to reflect the PLESA feature.

Plan sponsors who are considering offering PLESAs may find this guidance helpful and should review the FAQs for further details. They may also want to consult with their retirement plan service providers regarding the practical and administrative aspects of PLESA implementation.

FAQs: Pension-Linked Emergency Savings Accounts | U.S. Department of Labor (dol.gov) »

On January 18, 2024, the DOL released proposed regulations on automatic portability transactions for retirement plans when employees change jobs. This proposed change could make it easier for employees to keep track of existing retirement plan accounts with a benefit valued at $7,000 or less upon job termination. Currently, the rules allow those account balances to automatically roll over into a Safe Harbor IRA if the employee does not take certain actions upon job termination. The proposed rule would allow the employee to transfer the money from the Safe Harbor IRA into the requirement plan sponsored by their new employer and avoid fees or taxes associated with plan cash-outs or transfers.

The proposed rule would allow an automatic portability provider to receive a fee in connection with the transfer if certain conditions are met. The hope is that this would then lead to employees being able to more seamlessly rollover retirement accounts instead of needing to cash out accounts. The proposed regulations outline specific requirements that must be satisfied by the automatic portability provider including, but not limited to, required disclosures, permitted investments, record retention requirements, and annual audit and correction procedures.

While this proposed change is generally viewed as positive, retirement plan fiduciaries should be aware of this proposed ruling and the impact it may have on the plan. Those wishing to submit comments to the DOL must do so by March 18, 2024.

News Release »

On January 12, 2024, the IRS released Notice 2024-22, which provides preliminary guidance to assist plan sponsors with implementing Pension-Linked Emergency Savings Accounts (PLESAs). Specifically, the notice addresses anti-abuse measures to discourage potential manipulation of the PLESA matching contribution rules.

Created by Section 127 of the SECURE 2.0 Act, PLESAs are individual accounts in defined contribution plans (such as 401(k) and 403(b) plans) that are designed to allow eligible non-highly compensated employees to save for financial emergencies. PLESAs are treated as designated Roth accounts.

Generally, the maximum permitted balance in a participant's PLESA (attributable to contributions) is $2,500 (as indexed annually), unless the plan sponsor sets a lower limit. Subject to certain restrictions, the plan must match PLESA contributions at the same rate as other elective contributions to the defined contribution plan. PLESAs also must permit participants to withdraw their balance in whole or in part, at their discretion, at least monthly. Such withdrawals are not subject to the additional tax otherwise applicable to early plan withdrawals.

The SECURE 2.0 Act allows plan sponsors to adopt reasonable procedures to prevent manipulation of the PLESA matching contribution rule and directs the IRS to issue related guidance. The notice, which reflects the IRS’s initial effort to provide such guidance, highlights statutory provisions that a plan may consider in establishing anti-abuse procedures and provides examples of measures that are prohibited.

First, the notice reminds plan sponsors that matching contributions under the plan are treated first as attributable to a participant’s elective deferrals other than PLESA contributions. As a result, any elective deferrals a participant makes to the underlying defined contribution plan will be matched first and will lower the availability of matching contributions that will be made on account of participant PLESA contributions. Additionally, matching contributions due to PLESA contributions cannot exceed the maximum account balance limit for the plan year. As noted above, a plan sponsor can set a lower PLESA balance limit than $2,500, which would result in a correspondingly lower cap on annual matching contributions that could be subject to abuse. The sponsor could also limit the number of withdrawals to a maximum of one per month. The guidance clarifies that a plan sponsor could decide these statutory limitations were adequate and not impose other anti-abuse restrictions, even if a participant made and withdrew their PLESA contributions annually after receiving the corresponding match.

Second, the notice explains that reasonable additional restrictions imposed by the plan sponsor must be “solely to the extent necessary to prevent manipulation of the plan rules to cause matching contributions to exceed the intended amounts or frequency.” According to the guidance, requiring the forfeiture of matching contributions attributable to the PLESA, suspending participant PLESA contributions, or suspending matching contributions to the underlying defined contribution plan are not reasonable restrictions.

Plan sponsors considering offering PLESAs but concerned about the accounts being used only to gain matching contributions and not for the intended purposes should review this initial guidance. The IRS is also seeking comments regarding other reasonable anti-abuse procedures (and examples thereof) that effectively balance the policy of incentivizing emergency savings while discouraging potentially abusive practices. Sponsors interested in submitting comments must do so in writing on or before April 5, 2024, in accordance with the instructions in the notice.

Notice 2024-22 »

On December 20, 2023, the IRS released Notice 2024-2, which provides guidance in the form of questions and answers regarding certain mandatory and discretionary SECURE 2.0 Act provisions. The notice is not intended to provide comprehensive guidance but to address specific implementation issues. 

Notice 2024-2 focuses on twelve SECURE 2.0 Act provisions that either are effective or will be soon. As explained further below, the notice provides clarity with respect to several important SECURE 2.0 provisions (referenced by section number), including mandatory automatic enrollment, de minimis incentives, terminal illness withdrawals, self-correction of eligibility failures, and employer Roth contributions. 

Under Section 101 of the SECURE 2.0 Act, effective January 1, 2025, cash or deferral arrangements (CODAs), such as Section 401(k) plans, established after the law’s December 29, 2022 enactment date must have automatic enrollment and escalation features satisfying certain conditions. The notice clarifies that a plan is generally considered “established” for this purpose when the initial plan document is adopted, even if the plan’s effective date is later. Additionally, several questions address how mergers and acquisitions can affect whether a plan is subject to Section 101. Generally, if a plan subject to Section 101 is merged with a plan established prior to December 29, 2022 (i.e., a “grandfathered” plan), mandatory automatic enrollment applies to the ongoing plan. However, an exception applies for mergers occurring within the 410(b)(6)(C) transition period, which normally extends from the transaction date to the end of the following plan year. 

Section 113 allows plan sponsors to provide “de minimis” financial incentives (not paid from plan assets) to employees to encourage participation in CODAs without violating the otherwise applicable contingent benefit rule. The notice indicates that the value of such incentives cannot exceed $250 and could be in the form of cash or gift cards (but not a matching contribution), which would be considered taxable income. Furthermore, the incentives can only be offered to those not already participating but could be structured as installments, so a portion of the incentive is paid upon the initial deferral election and an additional amount conditioned upon continued plan participation for a period. 

Under Section 326, an eligible terminally ill individual is permitted to take an in-service distribution without being subject to a 10% early withdrawal penalty. The notice clarifies that on or before the distribution date, a terminally ill individual must be certified by a physician as having an illness or physical condition that can reasonably be expected to result in death 84 months or less after the date of the certification. The individual must be otherwise eligible for a plan in-service withdrawal (e.g., a hardship or disability distribution). Plan sponsors are not required to offer this option but should update their plan documents and procedures if they elect to do so. 

Section 350 allows plans to correct administrative failures to implement automatic enrollment and escalation features or offer an eligible employee an affirmative election opportunity. The notice indicates the corrections will generally follow the previous safe harbor methods and can be applied to both active and terminated participants. The notice also addresses the required timing for corrective contributions. 

Under Section 604, plans can allow employees to elect to receive employer contributions, such as matching and non-elective contributions, as designated Roth contributions. The notice confirms the election only applies to fully vested employer contributions. The questions and answers include detailed guidance regarding the applicable tax, reporting, and rollover treatment of such contributions. 

Notice 2024-2 also addresses aspects of numerous other SECURE 2.0 provisions related to cash balance plans, small employer start-up costs and military spouse credits, and SIMPLE IRAs, among other items. Accordingly, plan sponsors should be aware of this notice and consult with their advisors for further information regarding provisions applicable to their retirement benefits. 

The IRS intends to issue future guidance and invites public comments on the matters discussed in Notice 2024-2. Comments must be submitted on or before February 20, 2024. 

IRS.gov, Notice 2024-2 (PDF) »