Defined benefit plan

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.


House Bankruptcy Bill Would Impact Retirement Plans

H.R. 7370, the Protecting Employees and Retirees in Business Bankruptcies Act of 2020, has been introduced by Rep. Jerrold Nadler (D-NY). This bill would modify provisions related to Chapter 11 bankruptcy, including expanding claims and priorities for payment of benefits for employees and retirees, and protections related to reduction or denial of benefits.

Specifically, H.R. 7370 would do the following

  • increase the avenues by which retirement and employee health and welfare benefit plans could be funded after the filing of bankruptcy;
  • discourage the reduction or elimination of employee benefit and retirement plans by employers in bankruptcy;
  • allow those who hold employee stock in a retirement plan to potentially recover losses caused by fraud or breach of fiduciary duty; and
  • prevent employers from later rewarding insiders, executives, and highly paid employees if employee benefits are reduced in bankruptcy.

H.R. 7370 currently resides with the House Committee on the Judiciary, which has held a mark-up session on the bill.

Prospects Questionable for New House of Representatives Pandemic Relief Bill

The House of Representatives on Monday released text of a revised coronavirus (COVID-19) pandemic relief bill, expected to be voted on this week before the House recesses for pre-election campaigning. The bill is based on the previously introduced HEROES Act.

However, the legislation substantially exceeds the level of assistance and cost that the GOP-controlled Senate and the Trump administration have expressed willingness to support. House passage of this estimated $2.2 trillion proposal is seen by some as potentially providing incumbents up for reelection with campaign talking points even if the bill is not taken up in the Senate.

In addition to general provisions that include financial aid to state and local governments and schools, direct cash payments to taxpayers, extended unemployment benefits, and aid to struggling employers, the bill contains the following benefits-related provisions.

  • 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 QDROs
  • 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

IRS Issues Final Regulations on Default Withholding Rate for Periodic Retirement Plan Distributions

The IRS has issued a pre-publication version of final regulations on the default tax withholding rate to be applied to periodic and annuitized distributions from retirement plans. These final regulations are a response to Internal Revenue Code changes contained in the Tax Cuts and Jobs Act (TCJA), legislation enacted in 2017, and provide guidance for 2021 and future calendar years.

Prior to the change, in the absence of a withholding election, the amount to be withheld on a periodic payment was determined by treating the taxpayer as a married individual who had claimed three withholding exemptions. TCJA amended this provision to eliminate this fixed formula, providing flexibility such that—in the absence of a withholding election—the rate of withholding on periodic payments (the default rate) would instead be determined under rules prescribed by the Secretary of the Treasury.

Comments received after these regulations were issued in proposed form included the suggestion that a 10 percent flat rate of withholding apply rather than the default married-with-three-exemptions formula, but that any change to current rules not apply before 2022.

These final regulations align with TCJA in specifying that rules and accompanying procedures for future years’ periodic distributions will be communicated in applicable IRS forms, instructions, publications, or other guidance. However, they also note that—for 2021—the rate for withholding on period distributions when no election is made will remain unchanged. That is, the rate for 2021 will be applied as if the recipient is married and has claimed three exemptions.

IRS Announces Deadline Relief for Alabama Victims of Hurricane Sally

The IRS has announced in News Release AL-2020-02 an extension of deadlines for completing certain time-sensitive tax-related acts for Alabama victims of Hurricane Sally. In addition to extending certain tax filing and tax payment deadlines, the relief also includes completion of many acts under Treasury Regulation 301.7508A-1(c)(1), such as completion of rollovers, making loan payments, filing Form 5500, etc.

Affected taxpayers with a covered deadline that is on, or after, September 14, 2020, and on, or before January 15, 2021, will have until January 15, 2021, to complete the act. Affected taxpayers automatically include those who reside, or have a business located, within the designated disaster area, which at this time includes Baldwin, Escambia, and Mobile counties. Affected taxpayers who reside or have a business outside the covered disaster area may contact the IRS at 866-562-5227 to request this relief.

Retirement Spotlight: DOL’s Proposed Rule Solidifies Shareholder’s Rights, Including Proxy Voting

The term “fiduciary” can have many meanings. A fiduciary’s fundamental role is to act on another person’s behalf, such as when acting as a trustee of a trust. When Congress passed the Employee Retirement Income Security Act of 1974 (ERISA), one significant aspect of that legislation was to ensure that retirement plan administrators and other plan fiduciaries act “solely in the interest of the participants and beneficiaries”.

Since ERISA’s enactment over 45 years ago, Congress, the Department of Labor (DOL), and the Internal Revenue Service (IRS) have continued to issue regulations and other guidance to protect plan assets for participants and their beneficiaries. On August 31, 2020, the DOL issued a proposed rule intended to clarify an ERISA fiduciary’s duties with respect to shareholder rights, including proxy voting on corporate stock (a proxy vote generally occurs when an individual or an organization casts a ballot on behalf of a shareholder who is not directly voting on a particular issue.)

The proposed rule would amend DOL Regulation 2550.404a-1 (known as the “Investment Duties” regulation), by adding a new subpart (e) Proxy Voting and Exercise of Shareholder Rights. The DOL issued this proposed rule in part to correct a “persistent misunderstanding” that ERISA fiduciaries must vote on all proxies presented to them. There have also been substantial changes in how plan administrators invest their plan assets and in how the investment industry operates as a whole. The proposed rule is intended to align the Investment Duties regulation with these changes and with recent SEC guidance on the proxy voting process.

This proposed rule would apply to ERISA-covered pension, health, and other welfare plans (such as qualified defined contribution and defined benefit plans, certain 403(b) plans, and certain self-insured health plans) that hold shares of corporate stock. The proposed rule would apply to plans that hold stock either directly or indirectly through an ERISA-covered intermediary (such as a common trust or a master trust). The proposed rule would not apply to plans that hold stock through a registered investment company, such as a mutual fund.


Why the DOL Issued the Proposed Rule

The DOL is effectively codifying its existing position regarding plan fiduciaries who are considering whether to exercise a proxy vote (or other shareholder rights) or who are already exercising such rights. The proposed rule makes clear that such activities are subject to the general ERISA fiduciary duty rules that require fiduciaries to conduct such actions

  • prudently and solely in the interests of plan participants and beneficiaries,
  • for the exclusive purpose of providing benefits to participants and beneficiaries, and
  • to defray the reasonable expenses of administering the plan.


Fiduciary Considerations

The proposed rule also includes the following list of specific factors that fiduciaries must consider when

deciding whether to vote on a proxy (or other exercise of shareholder rights) or when actually voting a proxy.

  • Act solely in the plan’s economic interest. Fiduciaries must only consider factors that will affect the plan investment’s economic value. This decision must align with the plan’s investment objectives and funding policy.
  • Consider the effect on the plan’s investment performance. Fiduciaries must consider multiple factors—including comparing the amount of stock owned by the plan to the total amount of plan assets, determining the plan’s ownership in the stock issuer, and calculating any expenses related to the vote or other exercise of shareholder rights.
  • Do not subordinate the participants’ and beneficiaries’ interests. Fiduciaries cannot sacrifice investment return or take on additional risk to support goals that do not align with the plan’s or a participant’s and beneficiary’s financial interests.
  • Investigate material facts. Fiduciaries may not follow an advisory firm’s recommendations without appropriate supervision or verifying that the firm’s voting guidelines and its guidelines for exercising shareholders’ rights line up with the economic interests of the plan and its participants and beneficiaries.
  • Maintain records. Fiduciaries must document their activities—including their reason for voting a certain way.
  • Exercise prudence and diligence when selecting and monitoring advisory firms. Fiduciaries must also research any applicable administrative services and recordkeeping and reporting services.

Applying the Considerations

After considering the previous list of factors, a plan fiduciary would be allowed to vote by proxy only if the fiduciary determines that the vote would affect the plan’s economic interests. In addition to considering the required list of factors, the fiduciary would also need to consider the costs involved (including any research costs).

Setting Parameters

The proposed rule allows fiduciaries to establish specific parameters in their proxy voting policies as to when voting authority will (or won’t) be exercised. Such parameters must be “reasonably designed to serve the plan’s economic interest” and must be reviewed by the fiduciary at least every two years. The proposed rule provides three examples of such policies.

  • Relying on the issuer’s voting recommendations for proposals that the fiduciary has determined are unlikely to significantly affect the plan’s investment.
  • Focusing only on the types of proposals determined by the fiduciary to be substantially related to the corporation’s business activities or that are likely to significantly affect the value of the plan’s investment.
  • Not voting on proposals where the plan’s holding in a particular stock is below a threshold that the fiduciary determines is sufficiently small enough that the vote’s outcome will not have a material effect on the plan’s overall investments.


Plan Trustees Generally Responsible for Proxy Voting

The proposed rule states that plan trustees are responsible for proxy voting unless either the trustee is subject to the directions of a named fiduciary, or a named fiduciary has delegated authority to an investment manager. If the fiduciary has delegated authority to an investment manager, the investment manager generally has exclusive authority to vote proxies.

Investment managers that offer a pooled investment vehicle to more than one employee benefit plan must attempt to reconcile any conflicting investment policies. The investment manager must vote (or not vote) in a way that “reflects such policies in proportion to each plan’s economic interest in the pooled investment vehicle.” The investment manager may require fiduciaries of each participating plan to accept one general investment policy. Before doing so, fiduciaries would need to determine whether the investment and voting policies comply with ERISA.


Authorized Third Parties Must Document Voting Decisions

The proposed rule states that when a fiduciary delegates proxy voting authority to an investment manager or to a proxy voting firm, the fiduciary must require such investment manager or proxy advisory firm to document the rationale for its proxy voting decisions or recommendations, including demonstrating that the decision or recommendation was based on an expected economic benefit to the plan.


DOL Intends to Eliminate Interpretive Bulletin 2016-01

In 2016, the DOL issued Interpretive Bulletin (IB) 2016-01. This Bulletin gave plan fiduciaries greater flexibility, including allowing them to consider environmental, social, and governance factors—sometimes called “socially responsible” factors—when voting proxies.

The new proposed rule states that the DOL no longer believes that IB 2016-01 properly reflects an ERISA fiduciary’s proxy voting responsibilities. As a result, the DOL plans to remove IB 2016-01 from the Code of Federal Regulations when it finalizes this proposed rule.


Next Steps

The DOL is requesting comments on the proposed rule. Comments must be submitted on or before October 5, 2020.

Plan fiduciaries that invest in corporate stock directly or indirectly should start reviewing their proxy voting policies (and begin considering possible updates for when the final rule is issued). Plan fiduciaries should also ensure that they will be able to fully document their proxy voting activities.

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PBGC Final Rule Modifies Benefit Assumptions, Discontinues Monthly Assumption Publishing

The Pension Benefit Guaranty Corporation (PBGC), the agency that insures benefits in single-employer defined benefit (DB) pension plans, has issued a final rule that modifies assumptions used to calculate de minimis lump-sum benefits in PBGC-trusteed terminated DB plans. Sponsors of single-employer DB plans pay benefit insurance premiums to the PBGC—amounts that will partially fund promised benefits in the event that a plan is terminated and unable to meet benefit obligations—and the PBGC assumes a trustee role on behalf of the plan’s participants and beneficiaries.

In addition to modifying certain assumptions used in de minimis lump sum benefit calculations, the final rule also notes the discontinuance of the PBGC’s monthly issuance of interest rate assumptions. The guidance notes that “because some private-sector plans use PBGC’s lump sum interest rates, the rule provides a table for plans to use to determine interest assumptions in accordance with PBGC’s historical methodology.”

This PBGC final regulation will appear in a future edition of the Federal Register. The document notes that the guidance will take effect January 1, 2021, and will affect plans with termination dates on or after January 1, 2021.

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 “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.