Defined contribution plan

IRS Publication Provides Some Details on Beneficiary Rules and CRD Repayments

The 2020 tax year version of IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs), reflects the following noteworthy updates pursuant to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE), Coronavirus Aid, Relief, and Economic Security (CARES), and Consolidated Appropriations Acts.

10-Year Rule

The publication confirms that designated beneficiaries who are not eligible designated beneficiaries are generally subject to a 10-year payout period. It indicates not to use any of the distribution tables if either the 5-year rule or the 10-year rule apply. The publication also cautions beneficiaries that if the 10-year rule applies, the amount remaining in the IRA, if any, after December 31 of the year containing the 10th anniversary of the owner’s death is subject to the 50 percent excise tax—further validating that the applicability of the 10-year rule is similar to the 5-year rule and no annual minimum distributions would be required, so long as the account was depleted by December 31 of the final year. However, an example within the publication (that was used in previous versions) illustrates a life expectancy calculation for a designated beneficiary where presumably one would not be required, raising questions as to its applicability or whether it was an oversight when the publication was updated.

Additionally, the publication implies that the 10-year rule is not an option for an eligible designated beneficiary if the IRA owner died on or after her required beginning date. Again, this raises questions as to whether this was also an oversight or the IRS is suggesting that the “at least as rapidly” rule would remain for such eligible designated beneficiaries, meaning that life expectancy payments must continue to be disbursed from the IRA once an IRA owner has reached her required beginning date.

Election Deadline for Eligible Designated Beneficiaries

There were outstanding questions on deadlines for making beneficiary elections. The publication states that the deadline for an eligible designated beneficiary making an election is the earlier of

  • December 31 of the year the beneficiary must take his first life expectancy payment or
  • December 31 of the year containing the 10th anniversary year of the owner’s death (or 5th anniversary year of the owner’s death if applicable).

Nonpersons as Beneficiaries

The sections of the publication addressing beneficiaries who are not individuals remain largely unchanged, confirming that pre-SECURE Act rules continue to apply to non-person beneficiaries such as estates, charitable organizations, and nonqualified trusts. Moreover, the sections addressing the “look through” provision for trust beneficiaries also remains unchanged, where there are numerous outstanding questions on how the SECURE Act provisions apply to trust beneficiaries.

CRD Repayments

The publication specifies that a coronavirus-related distribution (CRD) repayment is to be treated as a trustee-to-trustee transfer in that it is not included in income. This suggests that a CRD taken from a Traditional IRA could not be repaid to a Roth IRA, since trustee-to-trustee transfers may only occur between similar account types.

Proposed regulations addressing beneficiary and required minimum distribution rules under the SECURE Act are anticipated soon and should provide additional clarity.

DOL Releases Additional Prohibited Transaction Exemption Guidance

The Department of Labor (DOL) has issued two pieces of guidance on its new fiduciary advice prohibited transaction exemption, PTE 2020-02. The first piece is titled, “Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts,” which is intended to educate retirement savers about considerations when choosing a potential advisor. The second piece of guidance, which is briefly highlighted further below, is titled, “New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees,” and is a detailed set of frequently asked questions (FAQs).

PTE 2020-02 was issued under the Trump administration and replaced a fiduciary investment advice guidance package issued under the Obama administration that was struck down in federal court in 2018. While the exemption became effective February 16, 2021, the DOL had indicated related guidance would be published soon.

The guidance again confirms that a temporary EBSA enforcement policy that has been in place since the Obama era guidance was vacated—Field Assistance Bulletin (FAB) 2018-02—will remain in place until December 20, 2021.

The DOL indicates that it is considering additional actions to improve the exemption and the investment advice fiduciary regulation, but that core components of the exemption, including the impartial conduct standards, are fundamental investor protections which should not be delayed, and that any regulatory actions will be preceded by notice and opportunity for comment.

Several questions in the FAQ focus on rollover recommendations, including when the recommendation is considered to be on a “regular basis” and what considerations and documentation are needed to obtain prohibited transaction relief for such recommendations.

In the section titled, “Compliance with PTE 2020-02”, the DOL reviews requirements of the PTE related to the following.

  • Impartial conduct standards, including standards of best interest, reasonable compensation, and making no misleading statements
  • Disclosures concerning acknowledgement of financial institution and investment professional status as fiduciary, as well as any conflicts of interest
  • Policy and procedures to include addressing potential conflicts of interest related to financial institution “payout grid” or fixed percentage commission compensation schemes
  • Retrospective review including careful review and certifications by senior executives of a written report

DOL Releases Cybersecurity Guidance for Plan Sponsors, Fiduciaries, Service Providers, and Participants

The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) today released a three-part guidance package on cybersecurity for plan sponsors, plan fiduciaries, service providers, and participants. This guidance comes on the heels of the Government Accountability Office (GAO) report on cybersecurity risks for retirement plans released earlier this year. An EBSA news release accompanies the guidance release.

Tips for Hiring a Service Provider with Strong Cybersecurity Practices is a list of tips and questions for plan sponsors and fiduciaries to ask of their service providers about the providers’ cybersecurity practices. The tips are designed “to help business owners and fiduciaries meet their responsibilities under ERISA to prudently select and monitor such service providers.” Fiduciaries are encouraged to ask about a service provider’s security standards and practices, how those practices are validated, and how the service provider responded to any past security breaches. Additionally, fiduciaries are advised to ensure that their contract with a service provider covers areas regarding cybersecurity protection for the plan and its participants.

Cybersecurity Program Best Practices is a list of 12 best practices that recordkeepers and other service providers responsible for plan-related IT systems and data should follow. While designed as best practices, in implementation the list appears to establish minimum standards that recordkeepers should follow regarding their IT systems that hold plan and participant data. Among the recommendations, the best practices define how a “prudently designed” cybersecurity program will operate, including reviews of annual risk assessments and third-party audits, and how a recordkeeper maintains access control of information among its employees. Recordkeepers are also advised to maintain business continuity, disaster recovery, and incident response plans.

Online Security Tips is a list of common-sense recommendations for participants and beneficiaries to follow to help reduce the risk of fraud and loss in their retirement accounts. While designed with retirement accounts in mind, this list provides good recommendations for all general online activity that everyone should keep in mind. Individuals are advised to register and routinely monitor their online accounts while using strong and unique passwords with multi-factor authentication. Being mindful of phishing attacks and wary of free wi-fi are also important to reduce a criminal’s access to one’s personal information and accounts.

Congress Votes to Extend Paycheck Protection Program

A proposal to extend the Paycheck Protection Program (PPP) through the end of May has passed the Senate by a vote of 92-7. The PPP was set to expire on March 31, 2021, just weeks after changes were made to expand availability to certain small businesses. The House had voted earlier this month to pass the bill, and it now heads to the President for signature.

PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security Act. The loans are meant to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include wages and salaries, as well as employer contributions to defined contribution and defined benefit retirement plans. Expenses for providing group healthcare coverage—including payment of insurance premiums—can also be included.

IRS Announces Extension to File Tax Return

The Treasury Department and IRS have announced that tax filing due dates for 2020 tax year federal income tax returns, including the federal income tax payment deadline, will be automatically extended from April 15, 2021, to May 17, 2021. No special form must be filed to request the filing extension. The IRS will be providing formal guidance in the coming days.

While the postponement of federal income tax payments seems to suggest that certain other actions tied to the normal April 15, 2021 filing deadline may be extended as well—such as making 2020 IRA and health savings account (HSA) contributions, similar to the extension provided in 2020—it is not clear at this time.

IRS Issues Deadline Relief for Louisiana Victims of Winter Storms

The IRS has issued a news release announcing the postponement of certain tax-related deadlines for Louisiana winter storm victims. The tax relief postpones various tax filing and payment deadlines that occurred starting on February 11. The entire state of Louisiana is included in this relief. Taxpayers in other locations will automatically be added to this relief if the disaster area is further expanded.

In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of 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, and making retirement plan loan payments.

Affected taxpayers with a covered deadline on or after February 11, 2021, and on or before June 15, 2021, will have until June 15, 2021, to complete the act(s). “Affected taxpayer” automatically includes anyone who resides or has a business located within the designated disaster area. Those who reside or have a business located outside the identified disaster area, but have been affected by the disaster, may contact the IRS at 866-562-5227 to request the relief.

IRS Provides Updated Draft Withholding Forms

The IRS has made available a third early release 2022 tax year draft Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments. The IRS indicated previously that the form will be split into two forms. Form W-4P will continue to be used, but only to withhold federal income tax from periodic retirement plan and IRA payments. Periodic payments are installment payments at regular intervals generally over a period of more than one year.

A second early release 2022 tax year draft of new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, has also been released and will be used for nonperiodic and rollover distributions beginning in that tax year. Nonperiodic distributions are subject to a 10 percent withholding rate unless a different rate is elected. Eligible rollover distributions are subject to a mandatory 20 percent withholding rate on the taxable amount of the distribution unless a higher rate is elected.

Both drafts indicate that computational steps should not change, and the draft forms may be relied upon for purposes of initiating systems programming (but not for filing purposes).

DOL Announces Non-Enforcement of ESG and Proxy Rules

The Department of Labor (DOL) has issued a statement that it will not enforce two final rules that were issued late in 2020. One rule, “Financial Factors in Selecting Plan Investments,” was published November 13, 2020, and effective January 12, 2021. This rule codified requirements for fiduciaries to consider regarding the promotion of nonfinancial objectives when selecting plan investments, generally requiring investment selection to be predicated on financial or “pecuniary” factors.

The other rule, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” was published December 16, 2020, and effective January 15, 2021. This rule governs the proxy voting and shareholder rights exercised by fiduciaries of ERISA-governed retirement plans. They amend existing investment duties regulations that have been in place since 1979.

Federal agencies have been directed to review certain regulations that may be inconsistent with policies set forth under Executive Order 13990 titled, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis”. The DOL indicates that they have heard from a variety of stakeholders who have questioned whether the rules fail to appropriately consider the merits of environmental, social, and governance (ESG) factors in improving investment returns for retirement investors.

Until further guidance is published, the DOL will not pursue actions against plan fiduciaries based on a failure to comply with those rules with respect to an investment, including a qualified default investment alternative, or with respect to an exercise of shareholder rights. However, the DOL notes it is not precluded from enforcing any statutory requirement under ERISA, including the duties of prudence and loyalty in ERISA Section 404.

SBA Rule Allows Schedule C Tax Filers to Use Gross Income for PPP Loans

The Small Business Administration (SBA) has issued an interim final rule effective March 4, 2021, that would allow business owners who file an IRS Form 1040, Schedule C, to use gross income rather than net earnings from self-employment in determining payroll costs for Paycheck Protection Program (PPP) loans. Previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C, as payroll costs (if there are employees) plus net profits, which is net earnings from self-employment.

This change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very little or negative net profit, many of which are located in underserved communities. Business owners with employees can use either net profit or gross income minus certain employee benefit and wage expenses.

PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group healthcare coverage, including payment of insurance premiums.

To mitigate the risk of fraud or abuse, if a borrower that is Schedule C filer elects to use gross income to calculate his or her loan amount on a First Draw PPP Loan and more than $150,000 in gross income was reported on the Schedule C that was used to calculate the loan amount, the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith. The borrower may be subject to a certification review by the SBA.

The interim final rule also removes exclusions for small business owners with prior non-fraud felony convictions and those struggling to make student loan payments from participating in the program. Unless extended, the PPP is currently set to expire on March 31, 2021.

DOL Delays Effective Date for Independent Contractor Final Regulations

Consistent with a directive by President Biden in a January 20, 2021-issued memorandum entitled, “Regulatory Freeze Pending Review,” the Department of Labor (DOL) Wage and Hour Division has finalized its proposal to delay until May 7, 2021, the effective date of final regulations on independent contractor status. The regulations were published January 7, 2021, in the Federal Register. Their intended purpose as described by the DOL was to clarify distinctions between employee and independent contractor status in employment situations.

Businesses sometimes use independent contractors to control costs and create efficiencies. Some businesses have run afoul of federal and state laws by classifying workers as independent contractors when they are actually employees. Because various definitions of “independent contractor” have emerged under federal and state laws, determining whether workers are independent contractors or employees has, under some circumstances, been confusing at times, resulting in inconsistent worker classifications. The delivery of employee benefits, such as retirement savings and certain other benefits, is often tied to a determination of independent contractor or employee status.

On February 5, 2021, the DOL issued a notice of proposed rulemaking in accordance with the presidential memorandum proposing to delay the effective date of the independent contractor rule to May 7, 2021, which would be 60 days beyond its original effective date. In its request for a delayed effective date, the DOL stated that this action will not have negative effects because the final regulations have not yet been implemented, and the existing public guidance—Wage and Hour Division Fact Sheet #13, Employment Relationship under the Fair Labor Standards Act (FLSA)—”will continue to be available to all.”