Defined benefit plan

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.


PBGC Final Rule for Computing Union DB Plan Withdrawal Liability

The Pension Benefit Guaranty Corporation (PBGC) has issued final regulations that amend earlier agency guidance on the determination of withdrawal liability when a participating employer withdraws from a multiemployer (union) defined benefit pension plan. The regulations being amended are entitled, Allocating Unfunded Vested Benefits to Withdrawing Employers and Notice, Collection and Redetermination of Withdrawal Liability.

The amendments reflect certain statutory changes with respect to multiemployer plan withdrawal liability, including statutory changes in 2006 and 2014. They affect the determination of a withdrawing employer’s liability and annual withdrawal liability payment amount when the plan has had benefit reductions, benefit suspensions, surcharges, or contribution increases that must be disregarded. These amendments also provide simplified withdrawal liability calculation methods.

 


IRS Revenue Ruling Addresses Tax Benefits Related to Paycheck Protection Program Loans

The IRS has issued Revenue Ruling (Rev. Rul.) 2021-02, guidance that addresses certain tax benefits associated with employer loans under the federal Paycheck Protection Program (PPP), an element of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The PPP is a Small Business Administration lending program created by the CARES Act to help small employers meet payroll and other expenses, as businesses and the nation dealt with the economic effects of the coronavirus (COVID-19) pandemic. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group healthcare coverage, including payment of insurance premiums. If certain conditions are met, PPP loans can be forgiven and treated as a grant.

Rev. Rul. 2021-02 addresses questions related to other potential tax ramifications and/or benefits associated with expenses for which PPP loans are taken, including loans that are ultimately forgiven.

Rev. Rul. 2021-02 retroactively amends the CARES Act, as well as supersedes post-CARES Act guidance (Notice 2020-32 and Rev. Rul. 2020-27). In doing so, it provides that no amount will be included in the gross income of a PPP participant as a result of a PPP loan being forgiven. No tax deduction for such PPP-related expenses is to be denied, and no other tax benefit reduced, as a result of that exclusion from gross income.


Congress Approves Additional COVID Relief as Part of Government Funding Package

Following lengthy, intense negotiations that delayed the pre-Christmas adjournment of the 116th Congress, the U.S. Senate and House of Representatives have reached agreement and passed legislation on a new round of economic relief for victims of the coronavirus (COVID-19) pandemic. The relief provisions are combined with a larger omnibus spending package that includes funding for federal government agencies. Due to the massive size of the bill and the extra time needed to print and prepare it for signature, President Trump has until December 28 to sign the combined legislation into law.

The primary focus of the pandemic relief is an extension of unemployment benefits, direct economic stimulus payments to American taxpayers, support for small businesses, and funding for schools and the COVID-19 vaccination. There are limited provisions that directly affect tax-advantaged savings or health and welfare arrangements, but among them are the following.

PPP Extension

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, provided financial support to businesses adversely affected by the pandemic. Under the Paycheck Protection Program (PPP) provisions, qualifying businesses could borrow funds for payroll and other specified purposes—including retirement and health benefit funding—through approved lenders, with the potential for forgiveness of these loans. These loans are subject to the Small Business Administration’s rules and oversight.

  • This legislation provides an additional $284 billion for the PPP program, including a second round of potentially forgivable loans, under these conditions.
  • Businesses with 300 or fewer employees that have experienced at least a 25 percent revenue loss in any quarter of 2020 are eligible.
  • Expenses now can include supplier costs and the cost of providing coronavirus protection (e.g., personal protective equipment).
  • Business expenses paid with PPP loans are tax deductible, even if forgiven.
  • The loan forgiveness process for PPP loans of $150,000 or less is simplified.

This legislation includes rescinding approximately $146 billion in unspent allocations for the CARES Act PPP and depositing it into the general fund of the Department of the Treasury.

CRDs for Money Purchase Pension Plans

 The legislation extends to money purchase pension plans the option to permit coronavirus-related distributions (CRDs), which provides an in-service distribution trigger, as well as exemption from the early distribution penalty tax, three-year ratable taxation, and the option to repay such distributions over three years.

Partial Plan Termination Relief

Employers will be provided relief from partial plan terminations that could result from a reduction in workforce due to the COVID-19 pandemic. Under current guidance, a reduction in participant number of 20 percent or more during a plan year generally is considered to be a partial plan termination. The result is full vesting for those employees whose job loss has triggered the partial termination. This legislation would assist employers in avoiding this consequence by granting a grace period to March 31, 2021, to reach a participant count at least 80 percent of the number when the National Emergency was declared in March 2020.

Qualified Future Transfers – Pension Plans

Under the qualified future transfers provision, up to 10 years of retiree health and life benefit costs can be transferred from a defined benefit pension plan to a retiree health benefits account and/or a retiree life insurance account within the pension plan, if certain requirements are met.

Study of DOL Electronic Disclosure Final Regulations 

The Department of Labor (DOL) is directed to complete a comprehensive study and issue a report within one year on the impact of its electronic disclosure final regulations on “individuals residing in rural and remote areas, seniors, and other populations that either lack access to web-based communications or who may only have access through public means.”

Temporary Special Rules for Health FSAs and Dependent Care FSAs

  • For health flexible spending arrangements (FSAs) and dependent care FSAs (DCAPs) for plan years ending in 2020, the plan can permit a carryover of all unused benefits to the plan year ending in 2021.
  • For health FSAs and DCAPs for plan years ending in 2021, the plan can permit a carryover of all unused benefits to the plan year ending in 2022.
  • For health FSAs and DCAPS that have a grace period associated with the plan year that ends in 2020 or 2021, that grace period can be extended for 12 months after the end of the plan year (the normal maximum grace period is 2½ months after the end of the plan year).
  • For health FSAs and DCAPs, a plan can permit an employee who stops participating in the plan mid-year in 2020 or 2021 to continue to receive reimbursements of their unused contributions through the end of the plan year in which their participation ceased (if their plan adopts the 12 month grace period they would also get the extended grace period).
  • For DCAP plans, if the dependent ‘aged-out’ during the pandemic, the plan can substitute age 14 for age 13 (as the maximum age for the child could be considered a qualifying person under the plan), as long as the employee was enrolled in the DCAP for a plan year where the end of the regular enrollment period was on or before January 31, 2020, and the employee had one or more dependents who attained age 13 during the plan year, and the employee had an unused balance for a plan year that will be carried forward to the subsequent plan year.
  • For health FSAs and DCAPs that end in 2021, participants will be permitted to prospectively modify their contribution elections (without regard to a change in status).
  • To adopt the specified relief, health FSAs and DCAPs must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. In the interim, the plan must operate consistent with the terms of the amendment.

Modification to Internal Revenue Code Section 213

The medical expense deduction floor is reduced from 10 percent to 7.5 percent for taxable years beginning after December 31, 2020.

Preventing Surprise Medical Bills

  • A group health plan or a health insurance issuer that offers group or individual health insurance coverage to cover emergency services is required to provide such services without the need for prior authorization or other limitations, whether or not the healthcare provider is a participating provider. Any limitation cannot be more restrictive than requirements that apply to emergency services received from participating providers and facilities with respect to such plan or coverage.
  • A high deductible health plan (HDHP) will not be prevented from being treated as an HDHP if it provides medical care in accordance with this provision. This applies to plan years beginning on or after January 1, 2022.
  • Expand consumer protections through an external review process beginning in 2022 in cases of adverse determinations by group plans and health issuers.

Additional (Non-COVID-Related) Disaster Relief

The legislation provides limited non-COVID-related disaster relief for certain federal disasters declared on or after January 1, 2020, and ending 60 days after enactment of this bill. Relief includes the following.

Qualified Disaster Distributions

Distributions of up to $100,000 (less certain disaster distributions taken in prior tax years) may be taken by those whose principal residence is within the disaster area and who sustained an economic loss due to the disaster.

  • Provides for three-year taxation of the distribution, and three years to repay
  • Provides a distribution trigger for 401(k), 403(b), 457(b), and money purchase pension plans
  • Will not be subject to 20 percent mandatory withholding or 402(f) notice requirements

Hardship or First-Time Homebuyer Distributions

Such distributions that were taken to purchase or construct a principal residence may be repaid if the distribution was taken within the period 180 days before the disaster incident and 30 days after the disaster incident period, and are repaid between the first day of the disaster incident period and no later than 180 days after enactment.

Increased Retirement Plan Loan Limit

Plan loans taken within 180 days following the legislation’s enactment because of a disaster declaration will have an increased loan limit of up to the lesser of $100,000 or the vested account balance, if the borrower’s principal residence is in the disaster area and an economic loss was sustained as a result of the disaster.

Delay in Loan Repayment

Loan payments that are due within the period beginning on the first day of the disaster and ending 180 days after the disaster period may be delayed for one year (or, if later, 180 days after the legislation’s enactment), with the loan’s term extended by the period of the delay.

Amendments to implement these provisions will be required by the end of the 2022 plan year (2024 for governmental plans).

Multiemployer Pension Plan In-Service Distributions

One unanticipated provision is a change to certain multiemployer (union) pension plans that allows for a subset of individuals in the construction industry to take an in-service distribution at age 55 if several service and plan provisions are satisfied. Specifically, it would apply to distributions to individuals who were participants in the plan on or before April 30, 2013, if

  • the trust was in existence before January 1, 1970, and
  • prior to December 31, 2011, in-service distributions were permitted at age 55 when the plan received at least one written IRS determination that the trust in the first bullet constituted a qualified trust.

Because the circumstances are so specific, it is not likely to have broad applicability.

Education Related Provisions

  • A CARES Act provision that permitted employers to provide student loan repayment benefits of up to $5,250 to employees on a tax-free basis has been extended to December 31, 2025.
  • Made changes to the FAFSA program intended to simplify the application process and make aid more predictable
  • Increased the income limitations for phase-out of the lifetime learning credit
  • Repealed the deduction for qualified tuition and related expenses

PBGC Requests to Seek Information on Roth Account Data and Foreign-Source Income

The Pension Benefit Guaranty Corporation (PBGC) has requested from the federal Office of Management and Budget (OMB) permission to continue collecting information on certain retirement plan missing participant accounts under the authority of the Paperwork Reduction Act. This information collection request (ICR) differs somewhat in that PBGC is asking the OMB for authority to modify the scope of information that the agency collects on missing participants.

Such ICRs are generally routine, and agency authority to request information from taxpayer sources generally must be renewed every three years. The agency is seeking to modify its existing ICR in the following ways.

  • For retirement plans that have a designated Roth account (Roth 401(k) or Roth 403(b)) feature—and a balance will be transferred to PBGC under its missing participant program—the agency seeks permission to require a breakdown of both qualified and not-yet-qualified (earnings not yet tax-free) Roth account amounts, and the date that the first designated Roth account contribution was made.
  • For defined benefit and defined contribution qualified retirement plan accounts transferred to PBGC, the ICR would require the identification of any amount that would, under U.S. tax laws, be treated as foreign-source income and—for defined benefit plans—how that determination was made.

IRS Clarifies Extended Due Date for Single-Employer DB Plan Contributions

The IRS clarified today in IRS Notice 2020-82 that contributions to single-employer defined benefit plans due January 1, 2021, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act are considered timely if they are made no later than Monday, January 4, 2021.

The CARES Act delayed both the annual and quarterly minimum funding contributions for single-employer defined benefit plans to January 1, 2021. While plan sponsors appreciated this delay, this raised a concern, as January 1, 2021, is a federal holiday falling on a Friday. While tax deadlines falling on a federal holiday generally are considered performed timely if they are performed on the next day that isn’t a Saturday, Sunday, or legal holiday, it was unclear if this extension to January 1, 2021, would be considered performed timely if completed on January 4, 2021.

 


DOL Final ESG Guidance Published

Today’s Federal Register includes the DOL’s final rule prescribing fiduciary obligations when selecting plan investments—guidance initially focused on restricting the use of environmental, social, and governance (ESG) investments. The final rule codifies several requirements for fiduciaries to consider regarding the promotion of non-financial objectives when selecting plan investments.

  • The final rule confirms that ERISA fiduciaries must evaluate investments based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.
  • The final rule includes an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA Section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  • The final rule also includes a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
  • The final rule added new regulatory text that sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone.
  • The final rule indicates that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan. A fiduciary is not prohibited from considering an investment fund or product merely because it seeks or supports one or more non-pecuniary goals, provided that the fiduciary satisfies the prudence and loyalty provisions in ERISA and the final rule. However, the provision prohibits adding such a fund as a qualified default investment alternative if the fund or product includes non-pecuniary factors.

The rule is effective 60 days after publication in today’s Federal Register: January 12, 2021.

 


DOL Releases Final ESG Guidance

The Department of Labor today posted on its website a final rule prescribing fiduciary obligations when selecting plan investments—guidance initially focused on restricting the use of environmental, social, and governance (ESG) investments. Indicative of the recent frenetic pace of agency guidance, a proposed rule was issued in June with a brief 30-day comment period ending July 30. The final rule was recently submitted for review with the Office of Management and Budget on October 14.

While sub-regulatory guidance has been issued from time to time over the years regarding the promotion of non-financial objectives when selecting plan investments, this final rule importantly codifies several requirements for fiduciaries to consider.

  • The final rule confirms that ERISA fiduciaries must evaluate investments based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.
  • The final rule includes an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA Section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  • The final rule also includes a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
  • The final rule added new regulatory text that sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone.
  • The final rule indicates that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan. A fiduciary is not prohibited from considering an investment fund or product merely because it seeks or supports one or more non-pecuniary goals, provided that the fiduciary satisfies the prudence and loyalty provisions in ERISA and the final rule. However, the provision prohibits adding such a fund as a qualified default investment alternative if the fund or product includes non-pecuniary factors.

This guidance is effective 60 days after publication in the Federal Register.


Treasury and SBA Announce Simpler PPP Loan Forgiveness Form

The Treasury Department and the Small Business Administration (SBA) have issued a joint press release and Interim Final Rule announcing a “simpler” version of the form used by recipients of Paycheck Protection Program (PPP) business loans of $50,000 or less to request loan forgiveness.

The PPP is an SBA lending program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small employers meet payroll and other expenses as businesses and the nation have been dealing with the economic effects of the coronavirus (COVID-19) pandemic.

Importantly, if certain conditions are met, PPP loans can be forgiven and treated as a grant. Payroll expenses can include employer contributions to defined contribution and defined benefit retirement plans, as well as providing group health care coverage, including payment of insurance premiums.

The “simpler” PPP Loan Forgiveness Application Form 3508S and its instructions is intended for borrowers who received a PPP loan of $50,000 or less and did not, together with its affiliates, receive PPP loans totaling $2 million or greater. The standard Loan Forgiveness Application Form 3508 and EZ Loan Forgiveness Application Form 3508 EZ remain available for borrowers to use when applicable.

All of the loan forgiveness application forms are set to expire October 31, 2020.


House Passes Revised Pandemic Relief Bill, Disagreements Remain

The House of Representatives has passed by a vote of 214-207 a revised version of the HEROES Act estimated at $2.2 trillion to provide pandemic relief. As mentioned earlier this week, there are several benefits-related provisions included in the bill.

  • Targeted small business loan relief and other revisions of the Paycheck Protection Program
  • Coverage for COVID-19-related treatment with no cost sharing
  • Amendments to the Emergency Paid Leave Act
  • Relief for struggling union pension plans
  • Relief for single-employer pension plans
  • Extension of the deadline to roll over waived 2019 and 2020 RMDs
  • Clarification of the CARES Act’s application to money purchase pension plans
  • Grants to assist low-income women and victims of domestic abuse in obtaining qualified domestic relations orders
  • Technical corrections to SECURE Act provisions regarding funding for community newspaper pension plans
  • Creation of a union “composite plan” consisting of 401(k) and defined benefit plan provisions

The revised package has been reduced from the approximately $3.4 trillion stimulus bill that was passed by the House in May. Disagreements remain with Senate Republicans on several components of the relief package as well as the overall price tag—which is significantly higher than their proposed “skinny” package that was blocked by Senate Democrats just weeks ago. With elections just over a month away, time is running out on negotiations, as many legislators will be heading back out on the campaign trail.