Industry & Regulatory News

Public Hearing Announced for Proposed Regulations on Postponements Due to Federally Declared Disasters

Published in the Federal Register is an IRS notice of public hearing on proposed regulations for automatic 60-day postponement of certain deadlines following federally declared disasters. (The proposed regulations were published January 13, 2021, in the Federal Register.)

The public hearing is scheduled for March 23, 2021. Oral comments at the hearing can be made by telephone. Speakers outlines must be received by the IRS by March 15, 2021. The notice contains details on how to submit outlines and to receive an agenda prepared by the IRS. If no outlines are received, the hearing will be cancelled.

The tax-related acts covered by these proposed regulations are defined in Internal Revenue Code Section 7508A. This is the authority historically cited for postponement of deadlines in cases of local or regional disaster declarations. These postponements typically have a duration of as much as 120 days, though some are less. The new proposed regulations would create an automatic 60-day postponement in cases of federally declared disasters, ensuring that there would be at least 60 days to complete the tax-related acts covered by the guidance.

In addition to extending certain tax filing and tax payment deadlines, the postponements addressed in this guidance include completion of the many time-sensitive, tax-related acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1), which include filing Form 5500 for retirement plans, completing rollovers, making retirement plan loan payments, etc.


Washington Pulse: DOL Releases Final PTE on Investment Advice

The Department of Labor (DOL) has released Prohibited Transaction Exemption (PTE) 2020-02, which addresses how a financial organization or financial professional can receive certain compensation that would otherwise violate the prohibited transaction rules. This DOL class exemption and interpretation—entitled Improving Investment Advice for Workers & Retirees, is important for those who provide investment services to retirement plan participants, IRA owners, retirement plan and IRA beneficiaries, and plan fiduciaries. The PTE becomes effective on February 16, 2021, and outlines the factors that determine whether financial professionals are considered fiduciaries—while giving clear guidance about how fiduciaries must comply with their responsibilities.

In July 2020, the DOL released the proposed investment advice PTE. At that time, Ascensus published a Washington Pulse, which detailed the provisions of the proposed guidance. Because the final PTE is similar to the proposed PTE, this article will focus on the final PTE’s modified guidance and its practical implications.

Background

Guidance on investment advice creating fiduciary duties has evolved throughout the years.

  • Giving investment advice may create a fiduciary duty. Fiduciary duty—a legal concept with important implications for retirement plans—requires certain people to act with the utmost care when they serve in a particular role. While this duty may apply in numerous situations, it is especially relevant in retirement plans when one person owes this special duty of care to another. For example, this includes an employee benefit plan administrator, who must, among other things, administer the plan in the participants’ sole interest. The Employee Retirement Income Security Act of 1974 (ERISA) addresses some specific roles that give rise to this fiduciary duty. ERISA Section 3(21)(A)(ii) specifically lists someone who “renders investment advice for a fee” regarding plan assets as a fiduciary. (Internal Revenue Code Section 4975(e)(3)(B) contains a parallel definition of “fiduciary.”)
  • Guidance on investment advice has shifted. Over the years, the DOL and other regulatory entities have issued guidance on what constitutes investment advice. They have tried to strike a balance between protecting participants’ retirement assets while avoiding overly burdensome rules that could limit participants’ access to meaningful investment counseling. We now have a complex array of rules that dictate when financial professionals are providing investment advice—and that govern when they are bound by a duty to act in the best interests of those they serve. Even as this “final” PTE is being implemented, the new administration has indicated that proposed regulations (and other pronouncements that have not yet gone into effect) may be suspended pending further review. Although we do not know whether (or to what extent) the DOL or other departments may add to or modify investment advice guidance, understanding the latest guidance is still important.

The DOL Makes Four Changes in the Final PTE

The DOL received more than 100 written comments in response to last summer’s proposed PTE. Although the final PTE “retains the proposal’s broad protective framework,” it makes four important changes.

  • The disclosure requirements have been changed. The final PTE now requires financial organizations to document the reason that a rollover recommendation is in the retirement investor’s best interest—and they must provide this documentation to the investor before the rollover transaction. This differs from the approach in the proposed PTE. The proposed PTE did not require that financial organizations provide this rollover documentation to retirement investors before engaging in the rollover transaction. Rather, they were required to make this documentation available to a potentially broad range of parties.
  • Recordkeeping requirements have been narrowed. The broad access allowed to a financial organization’s compliance records generated concern. The proposed PTE permitted access by any
  • authorized employee of the DOL;
  • plan fiduciary that engaged in an investment transaction under the PTE;
  • contributing employer and any employee organization whose members were covered by a plan that engaged in such a transaction; or
  • participant or beneficiary of a plan, or IRA owner that engaged in such a transaction.

Several commenters objected that allowing such broad access to records would create a significant burden on financial organizations. This access might encourage information requests for use in litigation, which in turn might lead financial organizations to avoid addressing compliance concerns for fear of disclosure. Consequently, the final PTE limits access to a financial organization’s records to the Departments of Labor and Treasury. (The Treasury Department’s access was added as part of the final PTE.)

  • Retrospective review certification rules have been relaxed. Financial organizations must still conduct an annual review that is designed to assist the organization “in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the policies and procedures governing compliance with the exemption.” But while the proposed PTE required that the financial organization’s Chief Executive Officer (or equivalent) certify the details of the report, the final PTE now allows a “senior executive officer”—which includes the chief compliance officer, the president, the chief financial officer, or one of the financial organization’s three most senior officers—to certify compliance.
  • A self-correction provision has been added. Based on comments, the DOL added a new provision to the final PTE: a self-correction feature. Under this provision, the DOL will not consider a prohibited transaction to have occurred because of a failure to meet the PTE’s conditions if the
    • violation did not create a loss to the investor or if the financial organization made the investor whole for the loss;
    • financial organization corrects the violation and notifies the DOL within 30 days of the correction;
    • correction occurs no later than 90 days after the financial organization learned (or should have learned) of the violation; and
    • financial organization notifies those responsible for conducting the retrospective review, and the violation and correction are specifically set forth in the written report of the review.

The “Five-Part Test” Still Determines Fiduciary Status

In 1975, the DOL established a five-part test to determine fiduciary status, paralleled under the definition of “fiduciary” in Treas. Reg. 54.4975-9(c)(ii)(B). In 2016, the DOL finalized a new regulation meant to expand the definition of “investment advice.” In 2018, this final regulation was vacated by the U.S. Court of Appeals for the Fifth Circuit. Consequently, the 1975 regulatory text was restored. Under the 1975 regulation, an investment professional or a financial organization that receives a fee or other compensation is considered a fiduciary if it meets all of the following prongs of the test.

  • The investment professional or financial organization gives advice on investing in, purchasing, or selling securities, or other property.
  • The investment professional or financial organization gives investment advice to the retirement investor on a regular basis.
  • Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan, plan fiduciary, or IRA owner.
  • The retirement investor uses the advice as a primary basis for investment decisions.
  • The investment professional or financial organization provides individualized advice, taking into account the IRA’s or plan’s demographics, needs, goals, etc.

This five-part test relies on all the facts and circumstances that surround each scenario. But the DOL points out that not all recommendations, including recommendations to roll over plan assets to an IRA, would qualify as providing investment advice “on a regular basis.” Some such advice may truly be an isolated, one-time event. But other similar recommendations could be part of an ongoing relationship—or the start of an ongoing relationship—that could trigger fiduciary responsibilities. This is one reason that the DOL advises financial organizations and investment professionals to carefully consider their roles—even if they don’t think that their advice is provided on a regular basis.

The Final PTE Retains Four Main Requirements

Although the final PTE contains four provisions absent from the proposed PTE, the fundamental requirements remain. Briefly, here are those four elements.

  • Impartial Conduct Standards. The Impartial Conduct Standards impose three conditions.
    • The investment advice must be in the retirement investor’s best interest.
    • The compensation for the advice must be reasonable (and the best execution of the investment transaction must be sought, as required by federal securities laws).
  • The advice, when made, must not be materially misleading.
  • Before engaging in a transaction under the PTE, the financial organization must provide
    • a written acknowledgement that the financial organization and its investment professionals are fiduciaries under ERISA and the Internal Revenue Code (whichever applies);
    • a written description of the services to be provided and a conflicts-of-interest statement that is accurate and not misleading in all material respects; and
    • documentation that lists specific reasons for a rollover recommendation—before engaging in a rollover recommended under the PTE.
  • Policy and Procedures. Three requirements pertain to this element.
    • Financial organizations must establish, maintain, and enforce written policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards.
    • The policies and procedures must mitigate conflicts of interest to the extent that a reasonable person reviewing them as a whole would conclude that they do not create an incentive for the financial organization or investment professional to place their interests ahead of the retirement investor.
    • The financial organization must document the specific reasons that any recommendation to roll over assets from a plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another (such as from a commission-based account to a fee-based account) is in the retirement investor’s best interest.
  • Retrospective Review. Three requirements also apply to this provision.
    • The financial organization must conduct reviews (at least annually) that are designed to help achieve compliance with the Impartial Conduct Standards and with the policies and procedures governing compliance with the PTE.
    • A senior executive officer must receive a written report that addresses the methodology and results of the retrospective review.
    • A senior executive officer must certify each year that the retrospective review meets the detailed requirements in the PTE.

The DOL Rejects Its Analysis in the Deseret Letter

Throughout the final PTE, the DOL focuses on the potential conflicts of interest that rollover recommendations can pose. The final PTE cites the cumulative $2.4 trillion in ERISA Title I plans that was expected to be rolled over between 2016 and 2020. Given the enormous sums involved—and the general prohibition against an investment advice fiduciary receiving fees for recommending that a Title I plan participant roll over assets from a plan to an IRA—the DOL reaffirms an important assertion that it made in the proposed PTE.

In the final PTE, the DOL holds firm to its assertion in the proposed PTE that its analysis in Advisory Opinion 2005-23A (the “Deseret Letter”) was incorrect. The Deseret Letter stated that the advice to roll assets out of a Title I plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice. The DOL now rejects this analysis. But the DOL has also indicated that it will not pursue claims for breach of fiduciary duty or prohibited transactions between the 2005 release of the Deseret Letter and February 16, 2021, “based on a rollover recommendation that would have been considered non-fiduciary conduct under the reasoning in the Deseret Letter.”

Other Takeaways from the Final PTE

The final PTE remains largely the same as the proposed PTE. But some of the DOL’s responses to the many comments it received—and other details contained in the preamble—seem worth noting.

  • Parties can clearly communicate that they do not intend to enter into an ongoing relationship to provide (or receive) investment advice. And a single sales transaction may not confer fiduciary status. So when reviewing the transaction, the DOL will consider the reasonable understanding of each of the parties. While statements forbidding reliance on advice are not determinative, they can be considered, as can marketing materials and other communications.
  • Compliance with the standards of other governing entities (such as the Securities and Exchange Commission) does not constitute compliance with the DOL’s final PTE. Although the DOL’s standards are intended to be consistent with securities law standards, the DOL has not provided a compliance safe harbor.
  • As mentioned above, before engaging in a transaction under the PTE, the financial organization (or investment professional) must provide the retirement investor with an acknowledgment of the organization’s fiduciary status in writing, a written description of the services to be provided (along with any material conflicts of interest), and—if recommending a rollover—documentation that lists specific reasons for the rollover recommendation. Although the PTE does not include model language that satisfies all aspects of the disclosure requirement, it does include model language that will satisfy an entity’s acknowledgment of fiduciary status. In addition, although the PTE does not require it, the DOL has included plain-language, model text that spells out a fiduciary’s obligations to the retirement investor.
  • What if investment professionals or financial organizations are uncertain about their fiduciary status? Clearly, they wouldn’t want to sign a fiduciary acknowledgement if they don’t meet each prong of the five-part test. And yet the final DOL indicates that parties cannot rely on the PTE “merely as back-up protection for engaging in possible prohibited transactions” while they try to deny the fiduciary nature or their investment advice. In particular, the DOL believes that, “in light of the broad scope of relief in the PTE, it is critical for [those] who choose to rely on the PTE to determine up-front if they intend to act as fiduciaries, and structure their relationship with the Retirement Investor accordingly.” So if investment professionals or financial organizations intend to act as fiduciaries, they should disclose this clearly; if they do not intend to act as fiduciaries, they should also disclose this—clearly and unequivocally—so that they do not tempt retirement investors to place unwarranted trust in them.
  • The DOL has extended the relief provided in Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021. This FAB provides a transition period for parties to develop ways to comply with the final PTE. Specifically, the DOL indicates that “it [will] not pursue prohibited transaction claims against investment advice fiduciaries who worked diligently and in good faith to comply with Impartial Conduct Standards for transactions that would have been exempted in the new exemptions . . . .”

Looking Ahead

Over the past several years, we have experienced a whirlwind of investment advice guidance from different regulatory entities. This includes the DOL’s revising some of its own guidance. It is possible that, as a new administration evaluates priorities, it could revisit previously released guidance, including this final PTE. Ascensus will continue to analyze any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

Click here for a printable version of this issue of the Washington Pulse.


New Executive Order Revokes Previous Administration’s Health Policy Directives

On January 28, 2021, President Biden issued an Executive Order entitled Strengthening Medicaid and the Affordable Care Act. Included within the Order was what was described as an objective to “make high-quality healthcare accessible and affordable for every American.” Of particular interest in this Order is the revocation of two Executive Orders issued by former President Trump.

Executive Order 13765, Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, which was issued on January 20, 2017, gave federal agencies the authority to grant waivers, deferrals, or exemptions in an effort to delay implementation of the Affordable Care Act provisions that would impose fiscal burdens on states, individuals, healthcare providers, health insurers, and others.

Executive Order 13813, Promoting Healthcare Choice and Competition Across the United States, which was issued on October 12, 2017, directed federal agencies to identify actions that could be taken to facilitate the provision of high-quality healthcare at affordable prices and prioritized improvements in respect to association health plans, short-term limited-duration insurance, and health reimbursement arrangements.

President Biden’s Executive Order further directs the heads of agencies to review actions that are related to or that arose based on Executive Orders 13765 and 13813 and consider whether to suspend, revise, or rescind such actions.


2021 Could See More Retirement and Health Legislation

Despite political partisanship that has marked much of the 116th Congress in 2019 and 2020, there have been some notable exceptions with bipartisan outcomes. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 proved that cooperation is a possibility. That legislation, enacted in December 2019, made significant enhancements to tax-advantaged savings arrangements.

Enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 was a unified response to the pandemic that has disrupted many Americans’ lives in both economic and health terms. And, in December 2020, Congress was able to put aside differences in crafting legislation combining additional pandemic relief with needed last-minute federal agency appropriations.

What 2021 will bring is yet to be determined. The Democratic majority in the House of Representatives narrowed in the 2020 general election, and control of the U.S. Senate shifted to Democratic control by the narrowest of margins. A Democrat also now resides in the White House. His legislative agenda has yet to be revealed in detail, but—based on campaign messaging—may include the broadly-defined goal of “equalizing benefits across the income scale.”  This ambition aside, it can be difficult for any president to accomplish legislative objectives with such a narrowly divided Congress.

Unless, that is, these objectives align with those of a majority of lawmakers. Fortunately, tax-advantaged savings legislation has a history of being able to gather bipartisan support. It has win-win dimensions that tend to unify, rather than divide.  For this reason, there is optimism that one or more savings-focused bills could be enacted in 2021. Several introduced during the past two years will likely be re-introduced in the 117th Congress.

Securing a Strong Retirement Act

This legislation—called SECURE 2.0 by some, in reference to 2019’s SECURE legislation—is a further example of bipartisanship. It is jointly sponsored by House Ways and Means Committee Chairman, Representative (Rep.) Richard Neal (D-MA)— and GOP Ranking Member Kevin Brady (R-TX). Due to the prominence of these sponsors, the legislation is considered to have favorable prospects. It includes the following provisions.

  • Require employers—with exceptions for certain new and small businesses—to establish an automatic enrollment deferral-type retirement plan, such as a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

  • Provide an enhanced small employer plan start-up tax credit for such new plans.

  • Enhance the “saver’s credit” for IRA contributions and for deferral-type employer plan contributions, such as those made to a SIMPLE IRA plan.

  • Exempt up to $100,000 of accumulated IRA and employer-sponsored retirement plan assets from required minimum distribution (RMD) calculations.

  • Increase the RMD onset age from 72 to 75.

  • Reduce penalties for RMD failures.

  • Provide a second (age 60), higher IRA catch-up contribution limit.

  • Index IRA catch-up contributions for inflation.

  • Increase the limit for IRA and retirement plan assets that are exempt from RMD calculations under qualifying longevity annuity contract (QLAC) rules.

  • Reduce certain IRA error penalties and permit more self-correction.

  • Permit matching contributions, e.g., to SIMPLE IRAs—based on student loan payments.

Automatic IRA Act

It is widely accepted that up to 40 percent of American workers do not have access to a workplace retirement plan. A concept that dates back more than a decade proposes universal, automatic saving to an IRA through a worker’s place of employment, if no other retirement plan is available. This is the concept embodied in the Automatic IRA Act, legislation that has been introduced in several previous sessions of Congress.

In the absence of action at the federal level, many states have acted on their own to establish automatic IRA-based saving programs, which—while beneficial for those who are covered—has left geographic gaps, and a patchwork with differing program rules. A uniform national automatic IRA program could close these gaps and address differences.

  • Employers in business less than 2 years or employing fewer than 10 employees would be exempt.

  • Employees would be automatically enrolled and contributions withheld from pay, but they would be able to opt out.

  • Accounts would be Roth IRAs unless a Traditional IRA was elected.

  • Contributions would likely begin at 3 percent of pay, but with latitude to range between 2 percent and 6 percent.

  • Investments would include balanced, principal preservation, and target-date funds, as well as guaranteed insurance contracts.

 Past sponsors of automatic IRA legislation have included Rep. Richard Neal (D-MA) and U.S. Senator Sheldon Whitehouse (D-RI).

HSA Enhancements

Affordable health insurance for Americans continues to be an extremely challenging goal. One increasingly common option—an alternative to the comprehensive “major medical” health insurance model—is a high deductible health insurance plan linked to a savings and spending account known as a health savings account, or HSA.

This approach is intended to offer a path to lower health insurance premiums, and to allow individuals to save in a tax-advantaged manner for expenses that are below their health plan deductible, and for co-pay amounts they owe. What initially began as a temporary test program under medical savings account (MSA) nomenclature later evolved into the HSA we know today.

With many U.S. employers offering employees an HSA-based program as one—or perhaps the only—health insurance option, much focus has been on how the HSA might be tweaked to improve its usefulness. Following are some of the proposed HSA modifications, a composite of provisions from several bills introduced in the 116th Congress. Some, or all, could be proposed again in the 117th Congress that has just been sworn in.

  • Increase maximum annual HSA contributions; some have proposed doubling the limits.

  • Expand the treatments for which a plan’s high deductible need not be met before benefits commence, such as chronic care services and more medications, including nonprescription drugs.

  • Permit care at onsite employer or retail clinics without forfeiting HSA contribution eligibility.

  • Treat costs of participating in a fixed-fee primary care arrangement as HSA-eligible expenses.

  • Allow coverage of offspring under a parent’s HSA-compatible health plan to age 26; would mirror the Affordable Care Act (ACA).

  • Define ACA bronze-level and certain catastrophic health insurance plans as HSA-compatible.

  • Treat a defined portion of HSA accumulations spent for “fitness and health” as HSA-eligible expenses.

  • Allow a fixed amount from health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs) remaining at year’s end to be rolled over to an HSA.

  • Allow Medicare-eligible individuals enrolled only in Part A (Medicare-provided hospital care) to remain HSA contribution-eligible.

Other Legislative Ambitions

Beyond the possibilities noted above, other initiatives that may be in play in the 117th Congress could include getting closer to universal availability of 401(k)-type workplace retirement plans and addressing the solvency of under-funded defined benefit pension plans. These could be more contentious, carrying as they might the stigmas of “mandate,” and “bailout,” both of which draw resistance from a substantial number of lawmakers.

Stay tuned for more details on proposed legislation and regulatory updates that stand to impact the savings plan landscape. In the meantime, check out our latest analysis on industry and regulatory news here on ascensus.com.


Legislation Introduced to Aid Struggling Defined Benefit Plans

House Ways and Means Committee Chairman Richard Neal (D-MA) has introduced in the initial days of the 117th Congress the Emergency Pension Plan Relief Act (EPPRA) of 2021. Rep. Neal has previously introduced legislation to aid struggling defined benefit pension plans, including the Rehabilitation for Multiemployer Pensions Act—also known as the Butch Lewis Act—during the 116th Congress. EPPRA has some features in common with that legislation.

EPPRA has limited provisions addressing the solvency of single employer defined benefit pension plans. They include allowing certain single employer plan funding shortfalls to be amortized over 15 years instead of 7 years and extending pension funding stabilization percentages for single employer pension plans.

Among EPPRA’s multiemployer pension plan provisions are the following.

  • Expand existing Pension Benefit Guaranty Corporation (PBGC) authority to allow the agency to provide financial assistance to certain qualifying plans that are in critical or declining status, to help them maintain solvency and provide benefits.
  • Following enactment, deny new approvals for plans seeking to suspend benefits under the Multiemployer Pension Reform Act.
  • Delay future designations of multiemployer plans as being in endangered, critical, or critical-and-declining status, in order to provide flexibility and ease administrative burdens during the coronavirus (COVID-19) public health crisis.
  • Provide certain multiemployer plans in endangered or critical status an extension of their rehabilitation periods, giving them additional time to improve contribution rates, limit benefit accruals, and maintain plan funding.
  • Allow plans that experienced investment losses in 2019 and 2020 to amortize such losses over an extended period of time.
  • Double certain PBGC benefit guarantees for multiemployer plan participants and beneficiaries.

IRS Signals Compatibility of Pre-Approved Plan Documents and PEPs

The IRS in its January 20, 2021 edition of Employee Plans News has revealed that pre-approved qualified retirement plan documents may be used to establish arrangements known as pooled employer plans, or PEPs. These arrangements are a type of multiple employer plan (MEP) in which several employers may participate in this common plan structure. But PEPs are less likely to have common interest or common ownership among participating employers than is required of conventional MEPs.

The IRS indicated in Employee Plans News that it is creating language that can be used to amend current pre-approved qualified retirement plan documents to add a PEP feature. Document providers are not required to use IRS-drafted amendment language, but if drafting their own they “will not have reliance on those provisions,” the IRS states.

The PEP structure was created by provisions of the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019. PEPs are intended to consolidate plan administration functions, and these functions are to be carried out by a pooled plan provider that must register as a named fiduciary with the Department of Labor’s Employee Benefits Security Administration.


New Administration to Review Retirement Plan ESG Investments Guidance

On his first day in office President Biden issued an Executive Order entitled Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis. Included within the Order was what was described as a “non-exclusive” list of federal agency actions that will be reviewed for possible revision or withdrawal. Of particular interest on this list are recent Department of Labor final regulations issued under the title, Financial Factors in Selecting Plan Investments, which became effective on January 12, 2021.

This guidance is viewed by some as discouraging fiduciaries from considering environmental, social, and governance (ESG) factors when choosing retirement plan investments. It establishes in regulations parameters that fiduciaries must consider when selecting investments; for example, evaluating plan investments solely on financial factors and ensuring that participant interests are considered ahead of unrelated objectives. Further Biden administration action on this and other recent federal agency guidance of relevance will be closely monitored.


Retirement Spotlight: IRS Gives SECURE Act Guidance on Traditional and QACA Safe Harbor Plans

The SECURE Act makes it easier for employers to adopt ADP/ACP safe harbor plan provisions. These plans, which include both “traditional” safe harbor plans and qualified automatic contribution arrangements (QACAs), have proven popular with many employers. This is because such plans are usually deemed to pass several nondiscrimination tests. IRS Notice 2020-86 provides guidance on some of the details of these SECURE Act provisions, including direction on amendments and notices. But while this notice gives important direction, we await more comprehensive regulatory guidance.

 

Background

Retirement plans, such as 401(k) plans, are subject to various nondiscrimination tests. The ADP test1 applies to employee deferrals and the ACP test2 applies to matching and after-tax contributions. The top-heavy test helps ensure that key employees’ accounts do not contain a disproportionate share of overall plan assets. Failing these tests can result in certain employees having to remove deferrals or in employers having to make additional—and at times substantial—contributions. But Internal Revenue Code Sections (IRC Secs.) 401(k)(12) and 401(k)(13) contain provisions that allow employers to avoid the ADP test. And if certain other conditions are satisfied, they can also avoid the ACP and top-heavy tests. Plans known as traditional safe harbor plans and QACA safe harbor plans must meet the requirements of IRC Secs. 401(k)(12) and (13), respectively. Employers that have these plans must make the proper matching or nonelective contributions to non-highly compensated employees.

Employers with traditional safe harbor 401(k) plans must make either a matching contribution to those who defer income into the plan, or a nonelective contribution of 3 percent, which goes to all employees that are eligible to participate in the plan. Employers with QACA safe harbor plans must make similar contributions and must enroll eligible employees in the plan automatically. These employees must have at least 3 percent of their compensation deferred into the plan in the first year—unless they opt out or choose a different deferral amount. Each year, the deferral percentage is increased by at least 1 percent. When an employee’s deferral percentage reaches 6 percent, it can remain there, or it can continue to increase until the percentage cap is reached. Before the SECURE Act, the cap was set at 10 percent.

For all the benefits of adopting a traditional or a QACA safe harbor plan, there have been some concerns about the requirements that apply to these plans.

  • Employers must generally maintain the plan under the traditional or QACA safe harbor rules for the entire plan year.
  • Detailed notice requirements—in addition to other 401(k) notices—accompany these plans.
  • The QACA 10 percent automatic deferral cap may not provide employers with enough plan design flexibility or may not encourage a high enough savings rate.

 

SECURE Act Provisions

The SECURE Act, generally effective for plan years beginning on or after January 1, 2020, provides relief from some of the restrictions of the previous rules.

QACA plans now have a higher cap on deferral percentages Instead of the previous 10 percent cap on automatic deferrals, QACAs now have a maximum 15 percent default deferral rate. During the initial plan year, employers may automatically enroll eligible employees at a default rate ranging from 3 percent to 10 percent of their compensation. Employers may then automatically increase the deferral rate to 15 percent in the second year. Most employers, however, will likely increase the deferral rates more gradually. (The QACA rules still require the automatic deferral amount to be at least 4 percent in the second year, 5 percent in the third year, and 6 percent in the fourth year.)

Employers that make nonelective contributions may have reduced notice requirements and more opportunities to adopt a safe harbor feature – Under the old rules, an employer could amend an existing 401(k) plan to add a safe harbor nonelective contribution up to 30 days before the end of the plan year. But this was only allowed if the employer provided a contingent notice before the start of the plan year and a follow-up notice 30 days before the end of the plan year. Now, an employer may more easily adopt a safe harbor nonelective contribution design mid-year—without first providing notices—but only if the contribution is made on employees’ full-year compensation. This change allows employers to amend their plans, for example, if they discover that they are failing the ADP test for the current year. By adopting a safe harbor nonelective contribution feature, an employer may avoid the ADP test—and usually the ACP and top-heavy tests, as well. But specific contribution and timing rules apply.

  • As before, an employer may amend the plan up to 30 days before the end of the current plan year. Eligible participants must still receive a 3 percent nonelective contribution based on their full-year compensation. But in some cases, the SECURE Act removed the need to provide a contingent and follow-up notice.
  • The SECURE Act now allows an employer to amend the plan up to the end of the following plan year, but only if eligible participants receive a 4 percent nonelective contribution based on full-year compensation. For example, an employer could add a safe harbor feature to a calendar-year plan for 2020 up until December 31, 2021.

 

Notice 2020-86 Provides Details

Notice 2020-86 offers guidance on both the QACA default deferral cap and on electing safe harbor 401(k) status. The notice also acknowledges that more complete guidance is needed, stating that the notice “is intended to assist taxpayers by providing guidance on particular issues while the Treasury Department and the IRS develop regulations to fully implement these sections of the SECURE Act.”

While more than half of the notice deals with a variety of specific notice issues, the following items are the most relevant.

The 15 percent cap on QACA default deferrals – Employers may choose to amend their QACA plans to reflect the increase in the maximum automatic deferral percentage to 15 percent. For example, an employer with a plan that expressly limits the default deferral percentage to 10 percent may retain this provision.

But the notice also addresses other plans that may incorporate the maximum default percentage by reference to the statute. Because the SECURE Act raised the statutory cap to 15 percent, those employers that apply the statutory limit in the plan will raise the plan’s cap to 15 percent by default. On the other hand, for a plan that incorporates the statutory limit, the employer could keep the cap at 10 percent. But the employer would have to document this decision, continue to consistently apply this cap, and amend the plan by the deadline (discussed below).

Notice requirements – Traditional and QACA safe harbor regulations have allowed a safe harbor provision to be added to a 401(k) plan mid-year if the employer 1) gives the nonelective safe harbor contribution (versus a matching contribution) and 2) provides the proper notices. The regulations required two distinct notices: a contingent notice and a follow-up notice. The contingent notice was required to be given a reasonable time before the beginning of each plan year, specifying that the plan may be amended mid-year to provide a nonelective contribution to satisfy the safe harbor rules. A follow-up notice would be required—at least 30 days before the end of the plan year—if the employer amended the plan mid-year to adopt the safe harbor provision.

  • The SECURE Act eliminated the notice requirements in IRC Secs. 401(k)(12) and 401(k)(13) for employers that adopt a nonelective safe harbor feature. For example, consider a 401(k) plan that has only a deferral feature and no employer contributions. If an employer determines during the year that the plan will fail the ADP test, providing a 3 percent nonelective contribution will allow the plan to be treated as passing the test. (If no other contributions are made, the plan is also deemed to pass the ACP test and the top-heavy test.)
  • The SECURE Act did not, however, eliminate the notice requirements of IRC Sec. 401(m)(11), which address the ACP test requirements for plans that provide for matching (or after-tax) contributions. Consequently, plans that allow for matching contributions that fall within the ACP test safe harbor limitations (e.g., no match on deferrals that exceed 6 percent of a participant’s compensation) are still subject to the notice requirements that normally apply to traditional safe harbor plans. The result is different for QACA arrangements where employers are making safe harbor nonelective contributions. This is because the SECURE Act did eliminate the safe harbor notice requirement under IRC Sec. 401(m)(12) for those plans. QACA arrangements are, however, still subject to annual notice requirements that allow plan participants to opt out of automatic contributions.
  • Notice 2020-86 uses several examples to illustrate when various notices are required. Some of these examples also show the complexities of the notice requirements. In Q&A 4, the notice uses an example of a 401(k) plan that meets the ADP safe harbor nonelective contribution requirement and also provides matching contributions that are not intended to satisfy ACP safe harbor rules. The plan does not need to satisfy the ADP or ACP safe harbor notice requirements, but it must satisfy the ACP test.
  • Notice 2020-86 points out that the requirements for permissible reduction or suspension of safe harbor contributions have not changed. For example, if an employer wishes to amend a plan to remove the safe harbor contribution requirements during a plan year, it either 1) must be operating at an economic loss, or 2) must have included in the notice a statement that the plan may be amended during the year to reduce or suspend contributions. While certain notice requirements have been eliminated, employers wishing to retain the option to reduce or suspend contributions should continue providing this language to participants.
  • Notice 2020-86 addresses numerous combinations of nonelective and matching contributions for both traditional and QACA safe harbor plans. But because the IRS is expected to release additional guidance, employers may choose to continue providing the same safe harbor notices that they have been providing—even if they may not be required to in every case.
  • To assist with providing notices in general, Q&A 7 contains further relief. For the first plan year beginning after December 31, 2020, safe harbor notices will be considered timely if given to each eligible employee 30 days before the beginning of the plan year or January 31, 2021, whichever is later. For calendar-year plans, this gives employers approximately 60 days more than normally allowed.

Amendment requirements – Throughout Notice 2020-86, the IRS points out that employers must generally amend their plans for SECURE Act provisions by the end of the plan year that starts on or after January 1, 2022. (Governmental plans have two additional years to amend.) Of course, plans must operationally comply with whatever plan provision is in effect before the formal amendment. In addition, a plan may be amended after the applicable SECURE Act plan amendment deadline, in accordance with the plan amendment provisions that apply to adopting the nonelective safe harbor provisions in the SECURE Act. So if adopting a 3 percent nonelective contribution in the current year, the employer must amend the plan before the 30th day before the end of the plan year. If adopting a 4 percent nonelective safe harbor contribution for the previous plan year, the employer must amend the plan by the end of year following the year to which the amendment applies.

Contribution deductibility – The notice also addresses contribution deductibility when a plan adopts the 4 percent nonelective safe harbor feature. It clarifies that, to claim a deduction for the year for which the contribution is made, the contribution must be made by the tax return due date, plus extensions, for the business. If the employer makes the safe harbor contribution after that date, the deduction may be taken for the taxable year in which the contribution is made, to the extent otherwise deductible under IRC. Sec. 404.

 

Looking Ahead

While Notice 2020-86 provides needed guidance on a few particular issues, the IRS has indicated that more comprehensive regulatory guidance is coming. Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for further developments on this and other guidance.

 

Click here for a printable version of this issue of the Retirement Spotlight.

 

 

 

1The ADP test—or the actual deferral percentage test—compares the highly compensated employees’ (HCEs’) deferral percentage with the nonHCEs’ average deferral percentage. This test helps ensure that HCEs do not contribute a disproportionate percentage of deferrals in relation to nonHCEs.

2The ACP test—or the actual contribution percentage test—is like the ADP test. But the ACP test compares the HCEs’ percentage of matching and after-tax contributions with the nonHCEs’ percentages of such contributions.


DOL Guidance to Aid Retirement Plans Facing Missing Participant Issues

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) has released a three-part guidance package to assist retirement plan fiduciaries in dealing with issues of missing or unresponsive participants. These issues typically involve terminated participants who have vested benefits remaining in an employer-sponsored plan, or terminating or abandoned plans. An EBSA news release accompanies the guidance package.

The guidance package consists of the following components.

 

Best Practices Guidance

The “Missing Participants – Best Practices for Pension Plans” element of the guidance describes steps that fiduciaries of retirement plans—including both defined benefit and defined contribution plans, such as 401(k) plans—can take to avoid incidents of missing or unresponsive participants, and to locate those with benefits due them that have not responded to efforts to locate them. This element also describes documentation that should be retained by retirement plans to show evidence of due diligence in meeting this fiduciary obligation.

 

Compliance Assistance Release 2021-01

The Compliance Assistance Release No. 2021-01—addressed to EBSA regional directors—describes the investigative and enforcement approach that the agency will take in assessing whether a defined benefit pension plan fiduciary has met its obligations to find and convey plan benefits that are due terminated participants. It is intended to guide the EBSA’s regional offices in facilitating voluntary compliance by retirement plan fiduciaries under the agency’s Terminated Vested Participants Project.

 

Field Assistance Bulletin (FAB) 2021-01

FAB 2021-01 describes the DOL’s temporary enforcement policy with respect to retirement plans’ use of a recently provided option that allows participant benefits in terminating or abandoned defined contribution plans to be transferred to the Pension Benefit Guaranty Corporation (PBGC) under its Defined Contribution Missing Participants Program.

There is currently a regulatory safe harbor for participant benefits in terminating or abandoned defined contribution plans to be transferred to IRAs, and—in limited circumstances—to be transferred to state unclaimed property funds. The EBSA envisions expanding this regulatory safe harbor to include the transfer of such benefits to the PBGC under its Defined Contribution Missing Participants Program.

Pending the expansion of this safe harbor, FAB 2021-1 states that it will not pursue violations against responsible plan fiduciaries of terminating defined contribution plans or qualified termination administrators (QTAs) of abandoned plans who transfer benefits to the PBGC in accordance with its missing participant regulations.


Opinion Letter Addresses Interaction Between ADEA and Individual Coverage HRAs

The Equal Employment Opportunity Commission (EEOC) has issued an Opinion Letter dated January 7, 2021, to clarify whether the Age Discrimination in Employment Act (ADEA) prohibition against requiring older workers to bear a greater proportion of the cost of a fringe benefit than younger workers will affect contributions to Individual Coverage Health Reimbursement Arrangements (ICHRAs).

The Opinion Letter reviews two scenarios: (1) a defined contribution amount (i.e., fixed), and (2) a contribution based on a percentage of premium cost (with premium cost increasing with age).

In its Opinion Letter, the EEOC clarifies that the ADEA prohibition applies to fringe benefit plans that require employee contributions. Because ICHRAs are funded completely by employer contributions, they are not subject to the ADEA prohibition, and an employer could offer an ICHRA under either of the scenarios described above. In addition, the EEOC clarified that the individual insurance coverage selected by the employee is not administered or selected by the employer, and, therefore, does not trigger a prohibition under ADEA. The EEOC opinion did not consider whether the contribution formulas would be permissible under the requirements of the final health reimbursement arrangement regulations, only the restrictions imposed by the ADEA.