Industry & Regulatory News

IRS Seeks More Information on Forms 5500, Public Comments Invited

The IRS has published in today’s Federal Register a notice offering the general public and other federal agencies the opportunity to comment on proposed changes to the information the agency collects on Form 5500, Annual Return/Report of Employee Benefit Plan, and the other returns in this series, Form 5500-SF, and Form 5500-EZ.

The IRS is proposing to add to these returns a checkbox to indicate if the plan was retroactively adopted under Section 201 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It is also proposing to add checkboxes to Form 5500-EZ to indicate if the plan return was filed under an automatic extension or under a special extension.

Written comments must be received by November 2, 2020, to be considered.

IRS Expands Circumstances for Extending Discretionary Amendment Deadlines

The IRS has issued Revenue Procedure 2020-40, which makes a minor modification to Revenue Procedures 2016-37 and 2019-39. Revenue Procedure (Rev. Proc.) 2016-37 sets forth procedures for obtaining determination or opinion letters for pre-approved qualified plans, while Rev. Proc. 2019-39 sets forth procedures for obtaining opinion and advisory letters for pre-approved 403(b) plans.

Specifically, both revenue procedures were modified to provide that the otherwise applicable deadlines within the revenue procedures apply unless statutory, regulatory, or other guidance is issued that sets forth a deadline that is either earlier or later. Previous verbiage indicated that only an earlier deadline could be prescribed.

IRS Issues SECURE Act and Miners Act Guidance in Q&As

The IRS has issued Notice 2020-68, guidance in question-and-answer (Q&A) format on provisions of legislation enacted in December 2019 that made significant changes to retirement savings arrangements. These changes were found within the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and Bipartisan American Miners Act, both of which were contained within the Further Consolidated Appropriations Act of 2020.

SECURE Act topics addressed in the Notice 2020-68 Q&As include the following.

  • Small employer automatic enrollment tax credit (Sec. 105)
  • Repeal of maximum age for Traditional IRA contributions (Sec. 107)
  • Participation of long-term, part-time employees in 401(k) plans (Sec. 112)
  • Qualified birth or adoption distributions (Sec. 113)
  • Difficulty-of-care compensation eligible for IRA contributions (Sec. 116)

The Notice 2020-68 Q&As also addressed the reduced minimum age for certain retirement plan distributions, part of the Bipartisan American Miners Act (Sec. 104). In addition, it provides guidance on the timing for plans to amend for provisions of the SECURE Act and Bipartisan American Miners Act.

Washington Pulse: IRS Releases Guidance on Loan Offset Rollovers

As part of the Tax Cuts & Jobs Act of 2017 (TCJA), Congress provided more time for plan participants to roll over certain types of plan loan offsets. The IRS has released proposed regulations—which can be relied on as of August 20, 2020—to align the IRS’s guidance with the statutory rules, while providing additional clarification and examples on how these rules work.



A plan loan offset is generally described as the process by which a participant’s accrued benefit is reduced (offset) in order to repay an outstanding plan loan. The offset can occur only when the participant has a distributable event, such as a severance from employment. Often, plan loan policies require loan repayments to be made through payroll withholding, so former employees cannot continue previously scheduled loan payments. In this case, a loan default occurs when a participant leaves the employer. At that point, the participant can cure the default by paying off the loan balance.

More likely, however, the participant will request a distribution of the account, and the plan administrator will offset the loan amount, removing it as a plan asset. This cancelled loan amount—the offset amount—is not simply “forgiven.” It is considered an actual distribution and is taxable to the former employee for the year in which it is offset, unless it is rolled over. But often participants will not do this. It could be that they don’t have the out-of-pocket funds to roll over the offset amount. Or perhaps they don’t understand their options.

Before the TCJA was enacted, the 60-day rollover rule would require participants to complete the rollover within 60 days of the loan offset. But participants might not understand that the offset amount is included in income until they receive IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which may be well after the 60-day time frame. More fundamentally, 60 days doesn’t provide much time to come up with the money to roll over the offset amount. If a participant cannot repay the loan to the plan, it’s also unlikely that the participant can make up the offset amount by rolling over the loan amount into another eligible plan within 60 days. Under the TCJA, participants have a much longer time period to complete a rollover of certain loan offsets.


Existing Rules Pertaining to Offsets Still Apply

Many of the familiar rollover rules pertaining to offset amounts remain intact. For instance, the revised regulations still contain a definition of “plan loan offset amount,” which is eligible to roll over within 60 days. And Treasury Regulation (Treas. Reg.) 1.401(a)(31)-1 Q&A-16 still applies. This provision exempts offsets from the requirement that a plan administrator must offer a direct rollover option on all eligible rollover distributions. Although offset amounts are eligible for rollover treatment, they cannot be rolled over directly because the outstanding loan assets are no longer in an account that can be paid to another eligible plan. Instead, offset amounts can be indirectly rolled over.

Another rule, under Treas. Reg. 31.3405(c)-1, Q&A-11, provides that offset amounts alone are not subject to 20 percent mandatory federal withholding. But if the offset is processed along with a cash distribution that is also an eligible rollover distribution, the 20 percent that must be withheld is calculated on the sum of the cash distribution plus the offset amount.

Example: Participant A severs from employment and requests a lump-sum distribution of his entire individual account under the plan. This balance includes $7,000 in mutual funds and a $3,000 loan amount, which is offset immediately upon termination in accordance with the plan’s loan policy. The total distribution eligible for rollover is considered to be $10,000. Therefore, the plan administrator must withhold $2,000 on the lump-sum distribution, which is equal to 20 percent of the total $10,000 eligible rollover distribution. The plan administrator withholds $2,000 from the $7,000 cash portion of the distribution, leaving the participant with a $5,000 net cash amount.


Proposed Regulations Give More Clarity

While “regular” plan loan offset amounts still exist, the TCJA created a new term: qualified plan loan offset (QPLO). Available for 2018 and later tax years, a QPLO describes offsets that occur only upon plan termination or severance from employment. Here is the crux of the new rule under the TCJA and the proposed regulations: participants and spousal beneficiaries have until their tax filing deadline (including extensions) for the taxable year in which a QPLO occurs to indirectly roll over all or part of it to another eligible retirement plan or IRA. This rule applies to QPLOs from Internal Revenue Code (IRC) Section 401(a) plans (such as profit sharing plans, 401(k) plans, and defined benefit plans), 403(a) plans, 403(b) plans, and governmental 457(b) plans.

Two “Qualifying” Conditions

The proposed regulations define a qualified plan loan offset—a QPLO—as a plan loan offset amount that meets the following two conditions.

  • The loan amount is treated as distributed from an eligible employer plan to a participant or spousal beneficiary because
    • the eligible employer plan was terminated, or
    • the participant incurred a severance from employment that caused a failure to meet the loan repayment terms.
  • The loan offset amount must relate to a plan loan that met the requirements of IRC Sec. 72(p)(2) immediately before the plan termination or the participant’s severance from employment.

IRC Sec.72(p)(2) contains the plan loan conditions that must be met to avoid treating a loan as a distribution. Such conditions include the $50,000 limitation, the five-year term maximum, and the level repayment requirement. If these loan requirements are not met immediately before the loan offset occurs, the offset amount cannot be treated as a QPLO.

Example: Participant B and Participant C both take loans in 2019 from Plan X. Participant B’s loan meets all of the conditions of IRC. Sec. 72(p)(2), and she has not missed any payments on her loan when her plan was terminated on August 1, 2021. Any offset amount may be considered a QPLO because all loan requirements were satisfied immediately before plan termination. On January 1, 2021, Participant C defaulted on his loan payments. The employer provided a cure period until June 30, 2021, during which Participant C made no repayments. When the plan terminates on August 1, 2021, Participant C’s loan offset amount will not be a QPLO because the loan did not satisfy the level repayment requirement immediately before plan termination. It will, however, still be eligible to be rolled over within 60 days.

Timely Tax Filing Allows Automatic Six-Month Extension on Rollover

The relief granted under the TCJA allows those who request a tax filing extension to roll over QPLOs by the extended filing deadline: October 15. In the proposed regulations, the IRS has clarified that the automatic six-month extension under Treas. Reg. 301.9100-2(b) also applies to the deadline by which a QPLO must be rolled over, provided that

  • the taxpayer files a timely tax return, and
  • the taxpayer takes corrective action within the six-month period.

Example: On June 1, 2020, Participant D has a $10,000 QPLO amount that is distributed from her plan. She may roll over the $10,000 amount as late as October 15, 2021. The automatic six-month extension applies if Participant D timely files her tax return (by April 15, 2021, the due date of her return), rolls over the QPLO amount within the six-month period ending on October 15, 2021, and amends her tax return by October 15, 2021, if necessary, to reflect the rollover.

12-Month “Bright-Line” Test

The IRS provides a test in the proposed regulations that is designed to help plan administrators to identify QPLOs after a severance from employment. A plan loan offset amount will meet the severance from employment requirement if the plan loan offset

  • relates to a failure to meet the loan’s repayment terms, and
  • occurs within the period beginning on the date of the participant’s severance from employment and ending on the first anniversary of that date.

As a result, plan administrators must not report an offset as a QPLO if the offset occurs more than 12 months after the participant’s severance from employment. Offsets occurring after the 12-month period will be treated like regular loan offset amounts, which are subject to the 60-day indirect rollover deadline.

Form 1099-R reporting codes

Plan administrators must report whether a distribution is a regular offset amount or a QPLO on Form 1099-R. The 2020 Form 1099-R instructions provide that if a participant’s accrued benefit is offset to repay a loan (a regular offset amount), the plan administrator should report the distribution as an actual distribution (code 1 for an early distribution or code 7 for a normal distribution) in Box 7 and not use code “L,” which is used only for deemed distributions. But for a QPLO, the administrator should enter the special code “M” in Box 7, along with any other applicable code.


Next Steps

The proposed regulations contain helpful clarifications and numerous examples. Fortunately, the new rules are fairly straightforward. Nonetheless, the IRS is taking comments and requests for public hearing on the proposed regulations until October 5, 2020. The proposed rules are slated to apply to distributions on or after the date that the final regulations are published in the Federal Register. But taxpayers and plan administrators may rely on this guidance immediately.


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DOL Pooled Plan Provider Registration Guidance In Federal Register

Appearing in the September 1st Federal Register are proposed regulations issued by the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA), guidance on registration requirements for a “pooled plan provider” under the new retirement plan structure known as pooled employer plan, or PEP. A pre-publication version of these proposed regulations was released by EBSA on August 20. Publication in the Federal Register on September 1 kicks off a 30-day comment period.

PEPs were created by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019. PEPs are expected to differ from similar multiple employer plans (MEPs) in being less likely to have common interest or common ownership among participating employers.

A pooled plan provider is the named fiduciary for a PEP, and must register with the DOL. These proposed regulations include a mock-up of the DOL registration form, as well its instructions for its use.

DOL Issues Proposed Regulation on Proxy Voting and Shareholder Rights

The Department of Labor’s Employee Benefits Security Administration has released a pre-publication version of a proposed regulation intended to govern shareholder rights and proxy voting by fiduciaries of ERISA-governed retirement plans. Securities held as investments in retirement plans may have certain shareholder voting rights, and fiduciaries to such plans may, within certain parameters, exercise those voting rights on behalf of—by “proxy”—for the participants within whose accounts these securities are held.

It is EBSA’s intention that this proposed regulation clarify a fiduciary’s duties of prudence and exclusive purpose with respect to a plan’s participants and the investments they hold, in matters of proxy voting and exercising of other shareholder rights. These proposed regulations will amend an existing investment duties regulation that has been in place since 1979. Other sub-regulatory guidance on this subject has also been issued during the intervening period.

In a news release accompanying this proposed regulation, the agency states that there have been misunderstandings and confusion surrounding proxy voting and shareholder rights issues, and that the proposed regulation has the overall goal of “ensuring plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.” A fact sheet has also been released.

Public comments will be accepted for a 30-day period following publication in the Federal Register.

Washington Pulse: Lifetime Income Disclosures: A New Requirement for Pension Benefit Statements

Financial security in retirement is the ultimate goal of those who participate in employer-sponsored retirement plans. But while saving for retirement is important, the Department of Labor (DOL) has expressed concern that participants may need more information from their employers to be confident about a positive retirement outcome. Many factors influence retirement readiness. It’s not just whether we save; it’s also how much we save, how we invest our savings, and—among other things—when we retire.

To help participants know whether they’re saving enough for retirement, the Employee Retirement Income Security Act of 1974 (ERISA) Section 105(a) requires plan administrators to provide each defined contribution plan participant with an annual pension benefit statement. Participants who have the right to direct their own investments must receive statements at least quarterly. But knowing how much is in your retirement account may not give much insight into whether you’ll have enough to retire on.

The DOL attempted to address this concern in 2013 by issuing an advance notice of proposed rulemaking (ANPRM). In the ANPRM, the DOL considered requiring plan administrators to provide up to four lifetime income illustrations in their pension benefit statements. But the DOL never adopted the ANPRM as a final rule.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act—signed into law in December 2019—amended ERISA Sec. 105(a) to require ERISA-covered defined contribution plans (profit sharing plans, 401(k) plans, ERISA 403(b) plans, money purchase pension plans, and target benefit plans) to provide more information to participants. The SECURE Act requires plan administrators of such ERISA-covered plans to disclose (at least annually) an estimated monthly payment that participants could receive in a lifetime income stream that is equivalent to their current accrued benefit. Plan administrators must also provide this disclosure to beneficiaries—such as alternate payees or deceased participants’ beneficiaries—who have their own individual account under the plan. Although plan administrators must disclose a projected annuitized payment amount, they are not required to actually offer annuities as a distribution option.

To implement this new disclosure mandate, the DOL’s Employee Benefit Security Administration (EBSA) has posted at its website an interim final rule (IFR), entitled Pension Benefit Statements-Disclosure Regarding Lifetime Income. (At the time of this writing, the official version of the IFR had not yet been published in the Federal Register.) The DOL has also issued an accompanying Fact Sheet and a News Release.


New Disclosure Requirements

Plan administrators must meet the following requirements when providing lifetime income disclosures.

Timing Requirements

The IFR will be effective one year after its publication in the Federal Register. This means that the IFR’s disclosure requirements will apply to pension benefit statements provided after that date. Plan administrators have been required to include disclosures at least annually. So, depending on the type of plan and on the date of the last disclosure, the latest that a disclosure could be made is during late summer 2022.

Monthly Payment Calculation

The disclosure must contain illustrations of projected monthly payout amounts. The IFR contains the following assumptions that plan administrators must rely on when calculating each participant’s estimated monthly payment amount.

  • Two types of The disclosure must contain two illustrations of converting assets: one to a single life annuity (SLA) and the second to a qualified joint and 100 percent survivor annuity (QJSA). The SLA and QJSA illustrations are designed to show payment amounts for both single and married participants, whether or not they are currently married.
    • The SLA illustration must assume that the annuity will pay a fixed amount each month during the participant’s life.
    • The QJSA illustration must show the participant receiving a fixed payment amount each month during the joint lives of the participant and spouse. Once the participant dies, the surviving spouse will continue to receive the same monthly payment amount for life. When calculating the QJSA payment, the plan administrator must assume that each participant has a spouse who is the same age as the participant. This assumption applies even if the participant is not married.
  • Account balance. Plan administrators must assume that participants will convert their entire account balance to either an SLA or a QJSA. The illustrations assume that participants are 100 percent vested in their accounts and that any outstanding loans that are not in default have been repaid.
  • Payment start date. Plan administrators should calculate the monthly payments assuming that the participant will begin receiving payments on the last day of the pension benefit statement period (for example, December 31 for a benefit statement covering the fourth quarter).
  • Age when payments start. Under the IFR, plan administrators must assume that payments start when the participant turns age 67. For most individuals, this is considered full retirement age for Social Security benefits. Plan administrators must use the participant’s actual age if the participant is older than age 67.
  • Interest rate. To calculate the monthly payments, plan administrators must use the 10-year constant maturity Treasury (CMT) securities yield rate as of the first business day of the last month of the statement period. So for a fourth quarter benefit statement with a December 31 commencement date, the December 1 CMT rate would be used. This rate best represents interest rates used in the actual pricing of commercial annuities.
  • Mortality table. Lifetime annuities offered by ERISA plans must be priced on a gender-neutral basis. To meet this requirement, plan administrators must use the gender-neutral mortality table reflected in Internal Revenue Code Section 417(e)(3)(B).


Specific Rules for In-Plan Annuities

Plan administrators that offer an in-plan annuity distribution option through a licensed insurer—which is designed to allow participants to take out scheduled payments instead of a lump-sum distribution—may use the assumptions contained in the IFR or may use the actual terms of the annuity contract. Plan administrators that use the actual annuity contract terms must still provide illustrations of monthly SLA and QJSA payments, using the IFR assumptions that

  • payments will start on the last day of the statement period,
  • the participant will start payments at age 67 (or the participant’s actual age if older than 67), and
  • the participant has a spouse who is the same age.

Plan administrators offering a deferred income annuity (DIA) option, which allows participants to purchase a future income stream of retirement payments, are subject to different disclosure requirements. With this type of annuity, purchases occur during working years, but payments are delayed to a selected retirement age—or possibly later, in the case of a qualifying longevity annuity contract (QLAC). For the portion of an accrued benefit that purchases a DIA, the separate disclosure must

  • indicate the payment start date and the participant’s age on that date;
  • explain the frequency and payment amount as of the start date in current dollars;
  • describe any applicable features, such as a survivor benefit or a period certain commitment; and
  • state whether the annuity has fixed or variable payments, and if the payment amount could vary (e.g., for inflation), the disclosure must explain how the payments will change.

The plan administrator must use the generally applicable disclosure rule assumptions under the IFR for any portion of a participant’s account that is not invested in a DIA.


Model Language Available

The lifetime income disclosure must contain certain explanations about the estimated annuity payments. For example, one of the required explanations is designed to help participants understand that the monthly payment amounts shown in the disclosure are estimates—there is no guarantee that participants will actually receive the estimated amounts. The DOL provides model language to address the required explanations, in the form of 11 separate language inserts, plus 2 standalone supplements that incorporate the 11 language inserts.

To satisfy the IFR rules, plan administrators may choose to incorporate each of the DOL’s 11 separate model language inserts into their existing pension benefit statements. Alternatively, plan administrators may use one of the standalone supplements: the Model Benefit Statement Supplement or the Model Benefit Statement Supplement—Plans That Offer Distribution Annuities.

Plan administrators may also provide their own language to address the needed explanations. To receive liability relief (discussed next), plan administrators using their own language must ensure that it is substantially similar to the DOL’s model language. Only minor variations of the model language may be used. And although there is no required format for the explanations, the DOL does require the statements to be written in a manner so as to be understood by the average participant.


Liability Relief

Plan administrators who meet certain requirements will not have any liability for providing monthly payment illustrations that are different from the amount actually received by the participant. To qualify for this relief, plan administrators must

  • provide illustrations of estimated SLA and QJSA payment amounts;
  • use the IFR’s model language (or substantially similar language); and
  • use the IFR’s required assumptions (i.e., account balance, payment start date, age when payments start, interest rate, and mortality table).

The IFR clarifies that, because deferred income annuity information is not derived in accordance with the assumptions or model language provided, liability relief is not available to plan administrators who provide lifetime income disclosures for DIAs. In addition, liability relief is not available for any additional illustrations provided in the disclosure.


Comment Period

The DOL has provided a comment period that will end 60 days after the IFR is published in the Federal Register. The DOL will consider any comments that it receives before issuing final regulations, which it plans to do before the IFR becomes effective. The DOL specifically requests comments on several topics, including these.

  • How will plans that currently provide lifetime income disclosures be affected by these new requirements?
  • Is age 67 an appropriate annuity commencement age to use?
  • Should a different interest rate or a combination of interest rates be used?
  • Should plan administrators incorporate a “term certain or other feature” in the disclosure examples?


Next Steps

Although the IFR’s effective date is still a year away, plan administrators should work with their software provider, recordkeeper, or insurance company to ensure that the required assumptions and model language will be incorporated into their lifetime income disclosures by then.


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DOL Announces Public Hearing on Proposed Investment Advice Prohibited Transaction Exemption

The Department of Labor’s Employee Benefits Security Administration (EBSA) has announced a September 3 public hearing on its proposed prohibited transaction exemption for investment advice fiduciaries, guidance officially known as the Improving Investment Advice for Workers and Retirees exemption. The EBSA announcement notes that the guidance is intended to “provide relief that is broader and more flexible than the Department’s existing exemptions.” Also, EBSA states that the “proposed exemption would also provide regulatory certainty and streamline requirements as investment advice fiduciaries could comply with one exemption for a variety of different types of transactions.”

In consideration of the coronavirus (COVID-19) pandemic, the public hearing will be virtual (conducted remotely), with no in-person presentations. Furthermore, testimony will be limited to those who submitted comments during the public comment period that began with the July 7, 2020, publication of the guidance in the Federal Register, and ended August 6, 2020. Requests to present testimony at the public hearing must be submitted to the agency by August 28, 2020.

DOL “PRO Good Guidance” Rule Issued in Response to 2019 Executive Order

The U.S. Department of Labor (DOL) issued a final rule that the agency states will formalize its policy and requirements for issuing, modifying, withdrawing, and using DOL guidance, as well as for making guidance available to the public. In addition, this final rule addresses agency notice-and-comment processes for significant guidance, as well as for accepting and responding to petitions regarding DOL guidance. A DOL fact sheet and news release accompany the final rule issued today.

The DOL notes in both its fact sheet and news release that the final rule is a response to Executive Order 13891, issued October 9, 2019, reflecting the Trump administration’s initiative to reduce regulatory burden.  The news release states that “pursuant to the Executive Order and this rule, the Department undertook a comprehensive review of its own guidance, rescinding nearly 3,200 documents.”

The official title of this DOL final rule is the Promoting Regulatory Openness through Good Guidance, or PRO Good Guidance. According to the DOL news release, it “seeks to create fairer procedures for the issuance and use of regulatory guidance at the Department of Labor.”

The news release also identifies four ways in which the final rule is intended to meet its objectives.

  • Providing that, for significant guidance involving impacts greater than $100 million, the DOL will provide for notice-and-comment review of the guidance
  • Requiring all DOL guidance be made available to the public in a searchable database
  • Allowing the public to petition the DOL on issues related to its guidance
  • Limiting the DOL’s use of guidance to avoid potentially unfair conduct

This final rule is to take effect 30 days after publication in the Federal Register.





DOL Issues Proposed Regulations on Pooled Plan Provider Registration Requirements

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) has issued highly-anticipated proposed regulations on registration requirements for entities that will function as “pooled plan providers” for retirement plans that will be known as pooled employer plans, or PEPs.

PEPs were created by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019. They will resemble the existing retirement plan structure, known as multiple employer plans, or MEPs, in which multiple employers participate in a common plan, and are treated as a single plan for certain important purposes, such as filing a single Form 5500, Annual Return/Report of Employee Benefit Plan.

PEPs are expected to differ from MEPs in being less likely to have a common interest or owner among participating employers. In a PEP administration, a pooled plan provider (PPP) is the named fiduciary, and must register with the DOL. PEPs can be established for plan years beginning in 2021.

Comments on these proposed regulations will be due 30 days from their upcoming publication in the Federal Register. In addition to this guidance, the EBSA has also issued a news release and fact sheet.

The EBSA news release notes that the proposed regulations include a mock-up of the required registration form, as well its instructions, and also notes that “the registration process [will] involve an initial registration, supplemental filings regarding specific reportable events, and a final filing after the … plan has been terminated and ceased operations.”