Retirement Spotlight

Retirement Spotlight: IRS Finalizes Mandatory 60-Day Postponement Period for Federally Declared Disasters

The average number of natural disasters continues to rise. As a result, Congress and the IRS have tried to keep pace by providing relief for those affected by major disasters and emergencies. In December 2019, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 amended Internal Revenue Code (IRC) Sec. 7508A by requiring a new mandatory 60-day postponement period for certain tax-related acts following a federally declared disaster. To help clarify the new rule, the IRS issued final regulations in June 2021. The regulations 1) explain how the new mandatory 60-day postponement period is determined, and 2) clarify how the term “federally declared disaster” is defined under IRC Sec.165.

Are there changes between the proposed and final regulations?

The final regulations are almost identical to the proposed regulations. Following the release of the proposed regulations, the IRS received several comments that suggested additional changes. In response to these requested changes, the IRS modified an example in the final regulations. The IRS made the change to clarify how the mandatory 60-day postponement period is calculated in the case of multiple disaster declarations. The other minor changes contained in the final regulations corrected typographical errors found within the proposed regulations.

The rest of this article will summarize the practical implications of the final regulations. For a more detailed analysis, please refer to the previous Retirement Spotlight, which was published in February 2021 when the IRS released the proposed regulations.

What is a “federally declared disaster”?

Similar to the proposed regulations, the final regulations do not change the definition of “federally declared disaster.” Instead, the regulations clarify the definition under IRC Sec. 165 to include both a major disaster declared under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) and an emergency declared under section 501 of the Stafford Act. The IRS made this change to address the terminology differences between IRC Sec. 165 and the Stafford Act. (IRC Sec. 165 used the term “federally declared disaster”; the Stafford Act uses the terms “emergency,” “disaster,” and “major disaster.”)

Who can take advantage of the mandatory 60-day postponement period?

This relief is available to certain individuals affected by federally declared disasters that occur on or after December 21, 2019, including

  • individuals who reside in the federally declared disaster area,
  • individuals who are injured in the disaster area,
  • individuals who are completing tax-related acts on behalf of those killed in the disaster area,
  • individuals whose principal place of business is in the disaster area,
  • relief workers who provide assistance to affected individuals in the disaster area, and
  • individuals whose tax records are located in the disaster area.

Which tax-related acts can be postponed?

The tax-related acts covered by this guidance are generally defined in IRC Secs.7508 and 7508A, Revenue Procedure 2018-58, and in Treasury Regulations. When a disaster occurs, the IRS announces the available relief in news releases that describe the affected area and the length of the deadline postponement. Examples of tax-related acts that may be postponed include

  • making IRA or employer plan contributions,
  • removing excess IRA contributions,
  • recharacterizing IRA contributions,
  • filing Form 5500,
  • making loan payments, and
  • completing rollover contributions.

When does the postponement period begin and end?

The mandatory 60-day postponement period generally begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends 60 days after the latest incident date.

Example: A hurricane batters the coast of Florida for several days. FEMA announces a disaster declaration and specifies that the earliest incident date for the affected counties is August 15. The latest incident date (when the flooding ends) is August 19. The deadline postponement begins on August 15 and ends 60 days from August 19.

While the 60-day postponement period guarantees a minimum time frame to complete certain tax-related acts, the IRS already had the authority under IRC Sec. 7508A to extend any applicable tax-related deadlines for up to one year following presidentially declared disasters, terroristic actions, or military actions. Although the IRS has typically provided 120-day extensions, some have been less.

The mandatory 60-day postponement period will not apply in certain situations. For example, the final regulations state that if the IRS does not postpone a tax-related act, then the act cannot be delayed under the mandatory 60-day postponement period. In addition, the mandatory postponement period will not apply if FEMA does not state specific incident dates. Instead, the IRS may independently postpone certain tax-related acts for up to one year.

When do the final regulations become effective?

The final regulations became effective on June 11, 2021, but there are separate applicability dates for changes made to IRC Secs. 7508A and 165. The clarifications to the new 60-day postponement period under IRC Sec. 7508A apply to disasters declared on or after December 21, 2019. The changes to the federally declared disaster definition under IRC Sec. 165 became applicable on June 11, 2021.

How do the final regulations affect taxpayers?

Ultimately, the final regulations didn’t really change the type of disaster relief that will be available or how the public will learn of that relief. Although certain eligible individuals may now have a guaranteed minimum 60-day postponement period, the IRS has already been postponing deadlines for more than 60 days. Taxpayers and businesses should still refer to the IRS’s website for the latest disaster relief information. And as always, visit for the latest news and developments.

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Retirement Spotlight: DOL Releases Additional Investment Advice Guidance

Objective investment advice. Simple concept, right? And most everyone agrees that every saver and retirement investor is entitled to this. But ensuring that individuals have access to objective investment advice is easier said than done. In fact, the Department of Labor (DOL) has been trying to make this happen since the 1970s, when it first released a five-part test to help determine whether investment professionals owed their clients a duty to provide objective advice.


This five-part test was created in 1975 to define investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. Since then, regulations have been issued, revised, and vacated. Another round of guidance came in July 2020, when the DOL issued proposed prohibited transaction exemption (PTE) 2020-02 and a technical amendment to DOL Regulations 2509 and 2510. Then in December 2020, the DOL finalized PTE 2020-02, a class exemption and interpretation, entitled Improving Investment Advice for Workers & Retirees. The final PTE outlines the factors that determine when investment professionals are considered fiduciaries—which gives rise to certain duties—and shows how fiduciaries must comply with these responsibilities.

In February 2021, the DOL confirmed that PTE 2020-02 would take effect as scheduled on February 16, 2021. At the same time, the DOL indicated that “in the coming days” it would publish related guidance for retirement investors, employee benefit plans, and investment professionals. This happened on April 13, 2021, when the DOL released two new pieces of guidance. The first piece, entitled New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions, contains a detailed set of frequently asked questions (FAQs) for investment professionals and financial organizations.

The second piece, Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts, contains a list of questions that retirement savers should consider asking their investment professional before following their recommendations.

While some of this information is new, most of it was previously released in PTE 2020-02. For the most part, the DOL has simply released the same guidance in a new, more accessible format. The rest of this article summarizes the main takeaways from this latest round of guidance.

FAQs for Investment Advice Fiduciaries

This first piece of guidance contains FAQs that are separated into four main sections.

  • Background
  • Compliance Dates
  • Definition of Fiduciary Investment Advice
  • Compliance with PTE 2020-02

There is only one Q&A in the Background section, which provides some context and explains why the DOL issued PTE 2020-02.

Compliance Dates

The Compliance Date section explains that the DOL considered delaying the February 16, 2021, effective date. But it believes that the PTE’s core components provide “fundamental investor protections” that will benefit retirement investors. The DOL also states that it will not delay its new interpretation related to rollover recommendations. Although the DOL now rejects the original analysis provided in Advisory Opinion 2005-23A (the “Deseret Letter”), the DOL reiterates 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, for recommendations that would have been considered “nonfiduciary conduct under the reasoning in the Deseret Letter.” (The Deseret Letter stated that advice to roll assets out of an ERISA plan did not constitute investment advice.)

The DOL mentions in Q&A 5 that it anticipates issuing additional investment advice guidance, possibly by amending or revoking other class exemptions and by amending PTE 2020-02 and the investment advice regulation. This approach will allow the DOL to update current guidance without delaying enforcement of the PTE’s core components, such as the policy and procedure requirements.

Definition of Fiduciary Investment Advice

In this section (Q&A 7), the DOL explains the point at which the advice to roll over assets meets the “regular basis” requirement for the five-part test. This prong of the five-part test is satisfied when an investment professional recommends rolling over plan assets to an IRA—either at the beginning of an ongoing relationship with the retirement investor or after a relationship has already been established.

Q&A 8 addresses the “mutual agreement, arrangement, or understanding” element of the five-part test. The DOL emphasizes that, although statements containing fiduciary disclaimers may be considered when determining whether this prong of the test has been met, the statements alone will not insulate from fiduciary liability. Instead, the DOL will consider the “reasonable understandings” of each party, based on the overall situation. This is meant to prevent organizations and investment professionals from using written disclaimers to avoid becoming a fiduciary.

Q&A 9 describes what financial organizations and investment professionals must do to receive relief under the PTE when providing rollover recommendations. For example, financial organizations and investment professionals must make “diligent and prudent efforts to obtain information about the existing employee benefit plan.” If this information is not readily available, then the organization or investment professional may rely on other public data sources, such as the current plan’s most recent Form 5500.

Compliance with PTE 2020-02

This section (which is the largest) explains how financial organizations and investment professionals can comply with PTE 2020-02. In Q&A 13, the DOL explains why a written fiduciary acknowledgment is required. The DOL believes that this requirement will help all parties taking advantage of the PTE to make a conscious, up-front determination that they are acting as a fiduciary. The DOL provides sample language that financial organizations and investment professionals can use to meet the written fiduciary acknowledgement requirement.

Q&A 14 requires financial organizations and investment professionals to disclose any conflicts of interest that they create based on their services or recommended investment transactions. The DOL warns that these disclosures cannot be a mere “check-the-box” transaction. Retirement investors must receive “meaningful information” that will help them assess the financial organization’s conflicts of interest.

Q&A 15 discusses documentation requirements for rollover recommendations. Financial organizations and investment professionals must document the factors they considered when determining whether a rollover was in the retirement investor’s best interest. When making a rollover recommendation, financial organizations and investment professionals should focus on more than just the retirement investor’s existing investment allocation: they should consider all investment options in both the current plan and the new arrangement.

Financial organizations must have policies and procedures in place to reduce any conflicts of interest. Q&A 16 describes how financial organizations can meet this mitigation standard. The DOL explains that policies and procedures must be designed to protect retirement investors. They must prevent recommendations to make excessive trades, to choose investments that are not in the investor’s best interest, or to allocate excessive amounts to illiquid or risky investments.

The conflict mitigation requirement extends not only to investment professionals but also to the financial organization’s own interests—including interests in proprietary products and limited menus of investment options that generate third-party payments (e.g., revenue-sharing arrangements). The DOL points out that financial organizations must comply with the PTE’s requirements to obtain relief from the prohibited transaction rules: there is no safe harbor for an organization that solely complies with other regulators’ standards.

A financial organization’s compensation structure must avoid any quotas, bonuses, prizes, or performance standards that a reasonable person would conclude are likely to encourage recommendations that are not in a retirement investor’s best interest. The DOL acknowledges that financial organizations cannot eliminate all conflicts of interest, but it stresses the need to lessen conflicts. For example, if a financial organization offers mutual funds, it could provide the same level of compensation regardless of which mutual fund the investment professional recommends.

An organization’s policies and procedures must include supervisory oversight of investment recommendations. Financial organizations should carefully monitor recommendations involving certain key liquidity transactions (such as rollovers), and recommendations that are at or near compensation thresholds. They should also closely monitor recommendations to invest in assets that are prone to conflicts (such as proprietary products). These requirements were previously mentioned in PTE 2020-02 and align with options identified by the U.S. Securities and Exchange Commission.

Q&A 17 revives some familiar concepts that financial organizations should consider when designing payout grids that determine an investment professional’s compensation.

  • Financial organizations that profit more from certain investments should not shift this potential conflict to their investment professionals by rewarding them with higher commissions on such products.
  • Grids with modest or gradual increases are less likely to create impermissible incentives. Financial organizations should be careful about using grids that disproportionately increase compensation at specified thresholds. These may cause investment professionals to favor their own interests above the client’s.
  • When an investment professional reaches a compensation threshold on the grid, any increase in the compensation rate should be made prospectively: the new rate should apply only to new investments after the threshold is met.
  • To encourage recommendations that are made in the retirement investor’s best interest, financial organizations using escalating pay grids should monitor and supervise investment professional recommendations. Financial organizations should ensure that the thresholds do not create inappropriate sales incentives.

Q&A 18 speaks to how the insurance industry can comply with PTE 2020-02. An insurance company (as the supervisory financial organization) must ensure compliance with the PTE’s terms. Alternatively, the insurance company can work with insurance intermediaries (such as independent marketing organizations), which can assist with its independent obligations under the PTE. Insurers and agents may also rely on PTE 84-24, which provides relief for a smaller range of compensation practices.

Q&A 19 discusses the annual retrospective review requirement. To ensure accountability, senior executive officers must thoroughly review the report before certifying compliance with the PTE: certifying compliance without reviewing the report would violate the PTE.

The DOL explains how to correct PTE violations in Q&A 20. A financial organization can correct violations within 90 days after it learns (or should have learned) about the violation. Both the violation and correction must be included in the retrospective review’s written report.

The DOL concludes this section (Q&A 21), by explaining its PTE enforcement process. The DOL plans to investigate and enforce ERISA-plan compliance. But participants, beneficiaries, and fiduciaries can also pursue fiduciary breaches and prohibited transactions under ERISA Section 502. For IRAs and other non-ERISA plans, the DOL has “interpretive authority” to determine whether the PTE requirements have been met. If the requirements have not been met, the DOL can report any noncompliance to the IRS, which can then enforce any applicable penalties.

Questions for Retirement Investors to Consider

The DOL’s second piece of guidance contains a list of questions that retirement investors should consider asking their financial professionals before following their investment recommendations. The publication also contains a list of FAQs about PTE 2020-02. Overall, this publication is designed to educate retirement investors about a fiduciary’s roles and responsibilities—and why it’s important to know whether an investment professional is, in fact, a fiduciary.

Questions to Ask an Investment Advice Provider

The DOL believes that retirement investors should consider asking these fundamental questions of investment professionals before following a recommendation.

  • Are you a fiduciary?
  • Can I have a written statement that you are a fiduciary (and if not, why)?
  • Are you and your organization complying with PTE 2020-02? If not, are you relying on another exemption, or do you believe that you do not have any relevant conflicts? (If an investment professional indicates that it is a fiduciary but is not relying on the new exemption or a previously issued exemption, the DOL recommends asking why.)
  • What fees will I be charged? Can you give me a list of those fees?
  • What conflicts of interest do you have? Do you or your organization pay anyone else if I follow your recommendations?
  • Are there limitations on the investments you will recommend?
  • Will you monitor the investments in my account? If yes, how frequently?
  • Why are you recommending that I roll money out of my 401(k) plan? (The DOL reminds retirement investors that there are many factors to consider before completing a rollover. Retirement investors should ask multiple questions to ensure that they understand the reasons for the recommendation.)

Questions About PTE 2020-02

To help educate retirement investors about PTE 2020-02, the DOL includes the following Q&As.

  • How do I know if my investment advice provider is relying on the exemption?
  • I received a Client or Customer Relationship Summary from my investment professional. Is that document required by PTE 2020-02?
  • What does it mean to have investment advice provided in my best interest?
  • Is my investment professional automatically on the hook if I lose money?
  • Does my investment professional have to identify the best investment for me?
  • Does PTE 2020-02 contain protections related to rollovers? (The DOL explains that investment professionals must give retirement investors a written document explaining why the rollover is in the investor’s best interest.)

Additional Resources, Online Publications, and Appendix

The last few sections provide a list of additional online resources that retirement investors may find helpful. There is also an appendix that defines common terms that retirement investors should be familiar with.

The DOL stresses the importance of hiring an investment professional who is a fiduciary (as opposed to a nonfiduciary) when getting investment recommendations on retirement accounts. Hiring a fiduciary will help retirement investors protect their interests from harmful conflicts of interest. The DOL also reminds retirement investors to consider hiring a different investment professional if their current investment professional says that they are not a fiduciary with respect to the investor’s retirement account, or that they have conflicts of interest but are not relying on PTE 2020-02.

The Takeaway

This latest DOL guidance package presents helpful information in a more understandable format. Investment professionals and plan sponsors should review this guidance and take any necessary steps to comply with it. They should also make sure that clients and plan participants know and understand their rights under PTE 2020-02.

Ascensus will continue to analyze any new guidance as it is released. Visit for the latest developments.


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Retirement Spotlight: IRS Regulations Address Tax on Unrelated Businesses in Plans

The IRS has released final regulations on computing unrelated business taxable income (UBTI) for a tax-exempt organization. This guidance may affect only a relatively small portion of tax-exempt retirement plans. For those plans that invest in certain types of assets, however, knowing the rules will be important. As explained later, these final regulations may help simplify administration and reporting requirements for what are usually considered to be more complex investments.

The final regulations pertain to Internal Revenue Code Section (IRC Sec.) 512(a)(6), added by the Tax Cuts and Jobs Act of 2017. The regulations are generally effective for taxable years starting on or after December 2, 2020. Tax-exempt organizations may choose to apply the final regulations to taxable years that start on or after January 1, 2018. Alternatively, they may rely on a “reasonable, good-faith interpretation” of IRC Sec. 512(a)(6) for such taxable years.

Rationale for the Unrelated Business Tax

IRC Sec. 501(c) contains the list of exempt organizations that receive special tax benefits. Perhaps most familiar to many are IRC Sec. 501(c)(3) entities, which are organized and operated for religious, charitable, scientific, educational, and other similar purposes. Because of the societal benefits that these organizations confer, they are exempt from federal taxation. Hence the name “exempt organizations”.

Because these exempt entities operate free from most taxation, they can devote more of their resources to their purpose. Some organizations own or operate businesses outside this purpose, usually to raise money to further the organization’s goals. But this could allow them to have an advantage over for-profit organizations conducting the same kind of business.

  • Example: Misty Meadows Arboretum is an IRC 501(c)(3) exempt organization whose primary purpose is to educate the community about various ecosystems. It relies primarily on charitable contributions from its members. It always has a spring plant sale, which is open to the public and brings in a modest profit. Misty Meadows’ new director sees potential in creating a larger plant sale. Eventually, the arboretum builds multiple greenhouses to meet the huge demand. Before long, the annual plant sale is by far Misty Meadows’ biggest revenue source. Unfortunately, Misty Meadows’ director wasn’t aware that the arboretum was prohibited from using its tax-exempt status to run the almost year-round plant-sales operation without paying any tax.

Exempt organizations that operate a business enterprise outside their tax-exempt purpose are required to pay taxes on profits from that enterprise. This levels the playing field so that not-for-profit entities do not have an unfair advantage, which would be contrary to public policy.

Retirement Plans as Exempt Organizations

In addition to the UBTI rules applying to IRC 501(c)(3) organizations, they also apply to trusts under IRC Sec. 401(a). This includes pension plans, profit sharing plans, and 401(k) plans. The IRS also applies the UBTI rules to IRAs.

In the vast majority of plans and IRAs, UBTI will not be a factor. Generally, most assets in these types of plans are invested in mutual funds or time deposits (i.e., certificates of deposit). Even participants in plans that permit greater investment latitude will often invest in individual securities. Only those plans that permit true investment self-direction will normally become subject to the UBTI rules. The plans most often associated with unrelated taxable businesses are truly self-directed owner-only 401(k) plans and IRAs. These types of accounts are referred to as self-directed accounts or SDAs. And while some financial organizations may permit SDA owners to place assets in investments that generate UBTI, many SDA investments (e.g., precious metals, promissory notes) do not.

How Does the Tax on UBTI work?

The rules on UBTI can be complex, but here are some of the basics.

  • Annual income of $1,000. Form 990-T: Exempt Organization Business Income Tax Return, must be filed for plans with gross income of $1,000 or more from an unrelated trade or business. Form 990-T must normally be filed for qualified plans and IRAs by the trust’s tax return due date (generally April 15 for calendar-year tax filers).
  • Tax rates. A filer gets a $1,000 “specific deduction.” So an IRA with exactly $1,000 in gross income from an unrelated business would have to file Form 990-T, but it doesn’t pay tax on the income unless there is UBTI after the $1,000 deduction (and any other deduction) is applied. The tax rate schedule for trusts then applies for any taxable unrelated business income. This rate starts at 10 percent—but quickly rises to 37 percent (on taxable income over $12,950).
  • Filing Form 990-T. This is one of the biggest concerns surrounding SDAs: who is responsible for actually filing Form 990-T? The Form 990-T instructions state that the exempt organization (e.g., the 401(k) plan) and the trustee or custodian of the IRA must file. Practically, the financial organization may address this requirement by clarifying (in a service agreement) that the account owner must prepare any Form 990-T that is needed, while the financial organization (as trustee or custodian) will file it with the IRS. It is important that both parties understand their roles. The financial organization may not know enough of the details about the underlying investments to prepare Form 990-T, but the account owner may assume that, because the financial organization is allowing self-directed investments, it is also taking care of every aspect of such investments. Unless financial organizations are charging for providing this service, it is unlikely that they will volunteer to do it. And if they agree to prepare Form 990-T, they must have access to sufficient information. This is but one reason that financial organizations must carefully consider whether they wish to offer self-directed accounts. If they do, they should ensure that their clients clearly understand their respective roles and duties.

NOTE: Any financial organization allowing—and any individual owning—retirement plan investments that require Form 990-T filing should consult with a competent tax adviser.

Specific Provisions in the Final Regulations

The regulations contain provisions that may affect how unrelated businesses operate within a retirement plan.

  • Multiple unrelated businesses are treated separately. The final regulations require an exempt organization subject to the unrelated business income tax—if it has more than one unrelated trade or business—to calculate UBTI separately for each one. But the rule also prohibits offsetting the income of one unrelated business with the net operating loss of another. Using the example above, let’s consider how the new rules would dictate how the arboretum would report UBTI if it decided to build and operate a restaurant to increase its income.

The final regulations require an exempt organization to identify each separate business using the first two digits of the North American Industry Classification System (NAICS) code. The NAICS code (pronounced “nākes”) is a six-digit system that classifies over one thousand industries. The first two digits identify the general sector of the business (e.g., construction, manufacturing, education). Each successive digit narrows the business definition. In our example, for instance, the arboretum’s greenhouse operation could be classified with the first two digits “45,” which identifies “Retail Trade”; the restaurant would be classified under “Accommodation and Food Service,” which is “72.” If multiple businesses have the same first two digits, they are not considered separate businesses of the exempt organization. If the digits are different, they must file a separate Form 990-T schedule for each business with gross income of at least $1,000. In addition, one unrelated business cannot reduce its tax obligation by using the net operating loss (NOL) of another. So if the arboretum’s greenhouse made a profit, it could not reduce its taxes by using the restaurant’s NOL. Each “separate” unrelated business must stand on its own.

  • Unrelated businesses in the nature of investments. An exempt organization may be permitted to treat various investments that are subject to UBTI as one distinct unrelated trade or business. This allows the organization to invest in multiple unrelated businesses that can be combined for UBTI purposes into one “business” classified as investment activity. The regulations limit such investments to
    • qualifying partnership interests (QPI),
    • qualifying S corporation interests (QSI), and
    • debt-financed properties.

An exempt organization may identify “investment activities” on its Form 990-T (Schedule A)—using a six-digit non-NAICS code rather than the two-digit NAICS code. But it can classify multiple unrelated investments as investment activity on one Schedule A only if each of the investments is one of the types just mentioned. The organization has a QPI in an unrelated trade or business if the organization

  • is not a general partner in the partnership, and
  • either holds no more than a 2 percent interest in the profits or capital, or holds no more than 20 percent of the capital interest and does not significantly participate in the partnership.

The regulations contain similar rules for a QSI. But instead of using the term “profits or capital interest,” the tern “stock ownership” is used. So for investments in both partnerships and S corporations, exempt organizations with limited ownership and involvement can combine such investments into one unrelated business classified as “investment activity.” This approach gives exempt organizations more investment flexibility by reducing their need to obtain information from entities they invest in—information that may be harder for a small investor to readily obtain.

Debt-financed properties are likely to be included in this investment activity category because special UBTI rules already apply to such properties. Grouping other investments together may be a practical way for the IRS to simplify Form 990-T filing, thus ensuring greater compliance.

Practical Impact on Retirement Plans

The only specific plan provision in the final regulations—adopted without change from the proposed regulations—merely codified a rule that the IRS has operated under for years. This addition clarifies that the definition of unrelated trade or business for trusts (such as qualified retirement plan trusts) also applies to IRAs.

Other than that, the effects on plans, if they apply at all, are likely minor. But they are still important. Consider a self-directed account owner, for example, who has invested in a debt-financed rental property and has also bought (at arm’s length) a very small interest in a partnership (a QPI). Historically, if each investment generated at least $1,000 in gross income, each would be reported as a separate business (with a separate Form 990-T schedule). Now it is clear that multiple investments can be more easily grouped into one classification: investment activities. And to the extent that different investments in a plan can be aggregated, there is less concern about the new limitation on NOLs reducing profits in another unrelated business. Most SDAs will simply require a Form 990-T with a single Schedule A that accounts for all their unrelated business investments.


Although these regulations may have little effect on retirement plans, those who work with self-directed retirement plans should consider the following questions.

  • Do any of my plans contain investments that may generate UBTI?
  • If so, do I know who is responsible for filing IRS Form 990-T? While a financial organization that operates in the self-directed account sector may file this form routinely (when needed), it may be worth verifying what the trust agreement or other controlling documents state.
  • Does the entity filing Form 990-T know about the details of the final regulation? While the implications of the final regulations are relatively minor, knowing the details can still be helpful.

The IRS has released a draft version of the updated Form 990-T (and instructions), which contain details on the filing requirements mentioned in the final regulations.

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Retirement Spotlight: Missing Participants – Prevention is the Best Cure

When employers start a retirement plan, they may ask who should be eligible to participate, what kind of contributions should be made, and how and when can employees access their account balances? Unfortunately, many employers don’t consider how to handle missing participants’ account balances—or more importantly—how to prevent losing track of participants in the first place.

The DOL did provide guidance for locating missing participants in 2014 with the issuance of Field Assistance Bulletin (FAB) 2014-01. Although FAB 2014-01 is helpful, it deals mainly with terminated defined contribution plans.

In January 2021, the DOL released three pieces of new guidance: Missing Participants – Best Practices for Pension Plans, Compliance Assistance Release No. 2021-01, and FAB 2021-01. The first piece in this package gives practical guidance on concerns to watch out for and actions to consider. The second piece sheds some light on the DOL investigative process for defined benefit plans. And the third piece gives temporary enforcement relief for terminating defined contribution plans that transfer missing participant benefits to the PBGC. This article will focus on the main points of this guidance and the steps that a plan fiduciary (typically the employer) can take to address concerns related to missing and unresponsive participants.

Tips for Reducing Missing Participant Issues

The DOL’s Missing Participants – Best Practices for Pension Plans identifies practical steps that plan fiduciaries can take to resolve problems created by missing participants. Plan fiduciaries should determine which reasonable, cost-effective practices will yield the best results considering the circumstances—such as the amount of accrued benefits and the cost of various search methods.

  • Maintain accurate census information. Although plan fiduciaries may obtain accurate contact information for new employees, there may be little follow-up afterwards. This often leads to inaccurate contact information, which makes it harder to distribute plan assets once the participant incurs a distributable event. The DOL lists several steps that fiduciaries can take to help ensure that participants’ information is up-to-date.
    • Periodically contact current participants, retired participants, and beneficiaries to verify that the correct contact information is on file. This information may include individuals’ home and business phone numbers and addresses, social media contact information, and emergency contact information.
    • Provide a contact information change request form when sending out other plan communications. Use these communications to encourage participants to notify the plan fiduciary when there is a change in contact information.
    • Offer a secure online portal that participants can use to update their contact information. In addition to offering an online portal, have messages or prompts appear when individuals log into the plan’s website. These messages or prompts should be linked to the online portal and should ask participants and beneficiaries to verify their contact information.
    • Identify uncashed checks and undeliverable mail or email. Once these items are identified, consider how to address and prevent these occurrences in the future.
    • During a merger, acquisition, or the hiring of a new record keeper, ensure that relevant employment records are provided to appropriate parties.

In addition to taking these steps, plan fiduciaries should also continually monitor census information and promptly correct any errors.

  • Create good communication procedures. The DOL suggests that plan fiduciaries take the following steps to ensure that participants are fully informed of their rights and benefits under the plan.
    • When sending correspondence to participants, include the plan sponsor’s name within the communication, and if delivered by mail, on the envelope that it’s delivered in. Clearly state why the participant is receiving the information. Plan fiduciaries should also ensure that their non-English-speaking participants get help in interpreting the correspondence.
    • Provide specific communications to new employees and to participants who are retiring or leaving the company. These communications should stress the importance of providing correct contact information. For example, the communications should explain that this information helps determine when participants can receive their benefits and what amount they’re eligible to receive.
    • Inform participants about their options to consolidate accounts from other employer plans and IRAs.
    • Make it easy for participants to ask questions about their plan benefits by explaining how to access the plan sponsor’s toll-free phone number and website.
  • Use reliable, extensive search methods. Sometimes, despite having good communication and audit procedures in place, plan fiduciaries lose track of their participants. When this happens, plan fiduciaries need to demonstrate that they’ve regularly taken sufficient measures to locate the missing individual, including these DOL-approved search methods.
    • Search all employer records (e.g., payroll records or group health plan records) for more accurate contact information, including email addresses, phone numbers, and social media.
    • Ask the participant’s beneficiaries, emergency contacts, or former colleagues for updated contact information.
    • Try to locate the participant through free online search engines, public databases, social media, commercial locator services, certified mail, or private delivery services.
    • Add participants to pension registries, such as the National Registry of Unclaimed Retirement Benefits, and publicize the registries (e.g., through email or newsletters) to current and former employees and union members.
  • Document steps taken to locate missing individuals. To help with compliance, plan fiduciaries should adopt clear, concise policies—and follow them. And they should document everything they do to locate the missing participant. For example, fiduciaries may develop a checklist of search methods that captures the result of each attempt to find a participant. Plan fiduciaries that use third-party administrators (TPAs) should identify and remedy any communication or recordkeeping concerns and should ensure that the TPA is performing all services that it has agreed to perform.

The DOL emphasizes that, when missing participants’ assets are forfeited under the terms of the plan, plan fiduciaries must still keep records of these participants’ accounts in order to distribute their benefits when due.

Issues the DOL Looks for During an Investigation

Several years ago, the DOL’s Employee Benefits Security Administration’s Regional Offices started a compliance initiative called the “Terminated Vested Participants Project (TVPP).” While this project is aimed at identifying defined benefit plan compliance problems, the DOL may look for similar problems in defined contribution plans. Similar fiduciary obligations apply regardless of the plan type. The Compliance Assistance Release No. 2021-01 (the second piece of the DOL’s guidance package) explains which types of noncompliance may cause the DOL to investigate a defined benefit plan. The DOL also explains that this guidance will help ensure a consistent investigative process for TVPP audits. For example, the DOL considers certain problems (such as missing or incorrect data, undeliverable mail, or uncashed benefit checks) “red flags” that could hint at more serious systemic failures. This guidance may help plan fiduciaries develop a checklist to formalize procedures that help keep track of participants.

  • Reasons for defined benefit plan investigations. The DOL may investigate a plan that appears to have systemic administration problems—especially those related to plan distributions and terminated participants’ vested benefits. Such problems increase with business bankruptcies or with mergers or acquisitions that result in the loss of participant data.
  • Information the DOL may ask for during an investigation. Once a defined benefit plan investigation starts, the DOL will typically seek documents that
    • relate to the plan’s distribution requirements;
    • contain demographic and participant information, such as actuarial reports, participants’ contact information, and employment status; and
    • describe communication and locating procedures: specifically, how the plan fiduciary communicates to individuals who are entitled to benefits and how internal policies dictate the steps taken to locate missing or unresponsive terminated participants.
  • Errors the DOL looks for during an investigation. Inadequate procedures, especially those used to identify and contact missing participants and their beneficiaries, will likely be on the DOL’s radar. For example, when reviewing plan communications, the DOL may examine whether the fiduciary repeatedly sends communications to a known “bad address” without seeking the correct address. Incomplete census data, including the use of placeholders (such as 01/01/1900 birth dates or “John Doe participants”) may also indicate procedural deficiencies.

Once the DOL completes the investigation, it will work with the plan fiduciary to correct any identified issues.

Don’t Forget About the PBGC

DOL regulations provide a safe harbor both to plan fiduciaries of terminating defined contribution plans and to qualified termination administrators (QTAs) of abandoned plans. This safe harbor generally permits plan fiduciaries and QTAs to roll over missing participants’ and beneficiaries’ assets to an IRA. And in certain cases, the assets can be placed in a federally insured bank account or a state’s unclaimed property fund.

In December 2017, the Pension Benefit Guaranty Corporation (PBGC) created a new program for terminating defined contribution plans. This program allows fiduciaries of terminating defined contribution plans to transfer missing participants’ and beneficiaries’ assets to the PBGC. This option helps plan fiduciaries complete the termination process—while making the plan assets accessible to missing individuals.

The DOL envisions expanding the safe harbor to include the transfer of missing individuals’ assets to the PBGC. FAB 2021-01 (the third piece of the DOL’s guidance package) states that, pending the expansion of the safe harbor, the DOL will not penalize plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans if they transfer plan assets to the PBGC. This temporary DOL policy provides another option when handling abandoned assets. Before transferring plan assets, however, the plan fiduciary or QTA must take all necessary steps to identify and locate the missing individual.

The DOL released FAB 2021-01 in part because it believes that the coronavirus pandemic may make it harder for plan fiduciaries and QTAs to stay in contact with former employees and their beneficiaries. Transferring assets to the PBGC could be a reasonable alternative to moving plan assets to an IRA, transferring the assets to a federally insured bank account, or escheating the account to the state.

The Takeaway

Plan fiduciaries should develop, document, and regularly review procedures that integrate best practices relative to missing participants. Taking decisive steps now may help prevent problems later—and may ensure that plan participants and their beneficiaries receive their proper benefits.

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Retirement Spotlight: IRS Aims to Clarify 60-Day Postponement Rule for Federally Declared Disasters

At the end of 2019, the Internal Revenue Code (IRC) was amended to create a mandatory 60-day postponement for certain federal tax-related deadlines in the event of a disaster. This new provision was designed to ensure that affected taxpayers would have guaranteed relief while recovering from a natural disaster or other emergency. But this measure didn’t seem to affect how the IRS had already been responding to such events. In fact, the new law created some ambiguity. In an effort to address this uncertainty, the IRS has released proposed regulations. These regulations provide more information about

  • what time-sensitive tax acts are covered;
  • how the 60-day postponement is determined; and
  • how the phrase, “federally declared disaster,” is defined for purposes of this 60-day period.

These regulations make it clear that the practical applicability of the automatic 60-day rule still ultimately depends on the IRS’s granting of deadline relief when disasters happen. And because the IRS has already been doing this—typically granting more than 60 days—there may not be a noticeable change.

60-Day Postponement Rule

The mandatory 60-day postponement rule was added (as IRC Sec. 7508A(d)) by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. (This act was part of the Further Consolidated Appropriations Act, which also contained the SECURE Act.) It requires the IRS to automatically postpone for 60 days certain time-sensitive, federal tax-related deadlines—including those related to retirement savings plans—in response to federally declared disasters that occur on or after December 21, 2019.

The rule applies to taxpayers

  • who reside in or were injured or killed in a disaster area,
  • who have principal places of business in the disaster area,
  • who are relief workers providing assistance in a disaster area, or
  • whose tax records necessary to meet a tax deadline are located in a disaster area.

The IRS already had the authority under IRC Sec. 7508A to extend certain tax-related deadlines for up to one year in response to presidentially declared disasters or terroristic or military actions. The IRS typically makes disaster declarations through news releases, describing the counties affected and the length of the deadline postponement. Extensions typically are 120 days. Some are less. But the 60-day postponement rule ensures at least a minimum time to complete the acts covered by the guidance.

Time-Sensitive Tax Acts

The 60-day postponement statute contains a list of specific time-sensitive, tax-related acts. Those that pertain to retirement plans are

  • making IRA or retirement plan contributions,
  • removing excess IRA contributions,
  • recharacterizing IRA contributions, and
  • completing rollovers.

The proposed regulations point to other time-sensitive acts—specified under IRC Sec. 7508, Treasury Regulations, and IRS Revenue Procedure 2018-58—such as filing IRS Form 5500 for retirement plans and making retirement plan loan payments. Thus, the proposed regulations do not limit the mandatory 60-day postponement to only those acts listed in new IRC Sec. 7508A(d). Instead, they reinforce the IRS’s discretion in identifying which tax-related acts will be postponed.

So, despite the seemingly automatic nature of the new 60-day extension, individuals must still wait for the IRS to grant relief that applies to a specific disaster and to a specific area. If the IRS decides not to postpone a time-sensitive act, the 60-day postponement statute simply doesn’t apply. On the other hand (for disasters with incident dates), if the IRS postpones an act, the postponement must be for at least 60 days.

60-Day Postponement Period

The mandatory 60-day postponement period generally begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends on the date that is 60 days after the latest incident date. For example, consider a hurricane battering a coastal state for several days. FEMA announces a disaster declaration that is approved by the president. It specifies the earliest incident date for the affected counties as August 15 and the latest incident date (when the flooding ends) as August 19. The deadline postponement begins on August 15 and ends 60 days from August 19.

Under the 60-day postponement statute, however, it is unclear how the 60-day period is calculated when the disaster declaration either does not contain an incident end date or does not contain any incident dates. This happened with the president’s March 13, 2020, emergency coronavirus declaration: no incident date was specified, and no latest incident date has yet been determined. The proposed regulations simply state that in such a case no mandatory postponement period applies. Rather, the IRS will determine the postponement period—under its discretionary authority under IRC Sec. 7508A(a)—not to exceed one year.

Federally Declared Disaster

The 60-day postponement statute uses the phrases “disaster area” and “federally declared disaster” and cites the definitions found in IRC Sec. 165(i)(5). There, “federally declared disaster” is defined as ‘‘any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.’’ But the words “federally declared disaster” are not used in the Stafford Act. Instead, the Stafford Act uses the terms ‘‘emergency,’’ ‘‘major disaster,’’ and ‘‘disaster (used to refer to both emergencies and major disasters).”

This language difference between IRC Sec. 165(i)(5) and the Stafford Act has led to some misunderstanding. For this reason, the IRS has also amended the regulations under IRC Sec. 165 to clarify that the term “federally declared disaster” includes references to both “major disaster” and “emergency,” as defined in the Stafford Act.

The Takeaway

The IRS is accepting comments on all aspects of the proposed regulations before they are adopted as final. Written or electronic comments and requests for a public hearing must be received by March 15, 2021.These regulations—when made final—may clarify the interplay between the new mandatory 60-day postponement rule and existing disaster relief. But practically, not much is likely to change. The IRS will continue to exercise its considerable authority to postpone tax-related deadlines. Postponements will generally continue to exceed 60 days. And individuals will still rely on the IRS to identify which disasters and tax-related items will qualify for deadline postponement.

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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.



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 for further developments on this and other guidance.


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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.

Retirement Spotlight: Terminating Custodial 403(b) Plans Get Distribution Relief

The IRS has issued Revenue Ruling 2020-23 to address how employers may terminate 403(b) plans that contain custodial accounts. This guidance gives plan administrators direction on how they can distribute plan assets to participants in order to satisfy plan termination requirements. The revenue ruling also gives the option for plan participants to preserve their accounts—as 403(b) accounts—following a plan termination, or to roll them over to an eligible retirement plan.



Three types of entities may adopt 403(b) plans: 1) public schools or other political subdivisions of a state (e.g., cities or townships), 2) organizations that are tax exempt under Internal Revenue Code Section (IRC Sec.) 501(c)(3), and 3) certain ministers. These eligible employers must invest plan assets in one of the following arrangements.

  • An annuity contract issued by a state-approved insurance company.
  • A custodial account invested exclusively in stock of a regulated investment company (mutual funds).
  • A retirement income account (this is for church-related organizations only, and is not restricted to annuity or mutual fund investments).

As with other types of retirement plans, 403(b) plans can be properly terminated only by distributing the plan assets as soon as administratively feasible (Treas. Reg. Sec 1.403(b)-10(a)). In many plans, such as a 401(k) plan, the employer typically controls the plan assets when they are held in a common trust. This allows the employer to readily distribute plan assets to participants. Many 403(b) plans, however, rely on individual annuity contracts or custodial accounts that are held and controlled by the participants—not the employer. So the employer does not always have the authority to liquidate such investments. This creates a roadblock to effectively terminating such plans.

Fortunately, the IRS issued guidance (almost 10 years ago) to partially address this problem. Revenue Ruling (Rev. Rul.) 2011-7 provides that the employer can consider the plan terminated if assets are distributed by delivering to the participants (or their beneficiaries) either 1) an individual annuity contract or 2) a certificate (under a group annuity contract) that shows that the participant owns the assets. As long as the assets remain subject to the 403(b) rules, they will continue to be tax exempt until distributed to the participant or beneficiary.

Unfortunately, the IRS did not specifically address custodial accounts in Rev. Rul. 2011-7. The ruling applied only to annuity contracts. It is not entirely clear why the IRS did not follow up with similar guidance for custodial accounts soon after the 2011 ruling. Because of this guidance gap, Section 110 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 directed the IRS to issue similar guidance for custodial accounts. The result is Rev. Rul. 2020-23, which mirrors Rev. Rul. 2011-7.


Highlights of Rev. Rul. 2020-23

Rev. Rul. 2020-23, which applies retroactively for taxable years beginning after December 31, 2008, presents two specific situations. The two situations are identical, except that the first situation addresses custodial accounts that are maintained under individual contracts and the second situation addresses custodial accounts that are maintained under group contracts.

Custodial Accounts Maintained Under Individual Agreements – Here are the facts that Rev. Rul. 2020-23 presents in Situation 1.

  • The 403(b) plan complies with all Internal Revenue Code and regulatory rules and contains both employer contributions and employee elective deferrals.
  • Neither the plan nor any participant under the plan is subject to the annuity payout rules of ERISA Sec. 205 (which generally requires annuity payouts unless certain distribution alternatives are chosen with proper spousal consent).
  • Plan assets can be distributed only after termination from employment or on plan termination.
  • On January 1, 2021, the employer properly initiates plan termination. This includes stopping all further contributions, fully vesting all balances, and notifying participants of their rollover rights.
  • Depending on each affirmative election, the employer distributes the balance to the participant or rolls over the assets to an eligible retirement plan.

There may be participants (and beneficiaries) who do not make an election. In this case, the employer may still terminate the plan by distributing an individual custodial account (ICA) in kind to the participant. This distribution involves notifying the participant that, even though the ICA is no longer part of the 403(b) plan, the 403(b) custodian is maintaining the account as a 403(b)(7) custodial account. If the ICA follows the 403(b) rules in effect at the time of the distribution, the account remains tax exempt until actually paid to the participant.

Custodial Accounts Maintained Under Group Agreements Rev. Rul. 2020-23 then presents a second situation. All other facts are the same as in Situation 1. But Situation 2 involves a plan that also holds assets that are maintained under group agreements. To distribute an in-kind ICA to a participant under a group agreement, the employer must provide a document that 1) confirms the participant’s (or beneficiary’s) ICA ownership, 2) states that individual’s nonforfeitable custodial account balance, and 3) describes the rights and responsibilities of the individual and the custodian.

As in Situation 1, the ICA (maintained in Situation 2 as a 403(b)(7) custodial account) remains tax exempt until paid to the participant or beneficiary. So the only apparent difference between the two situations is that, in Situation 2, the employer must provide sufficient documentation to the participant—documentation that provides clear evidence of the participant’s asset ownership and rights under the ICA.

403(b) Accounts That Are Subject to Annuity Distribution Requirements – 403(b) plans are not subject to the annuity payout rules and spousal rights provisions under IRC Secs. 401(a)(11) or 417. And many 403(b) plans—including governmental plans and most church plans—are exempt from the parallel rules under ERISA Sec. 205. Rev. Rul. 2020-23 does not address the situation in which these annuity and spousal rights rules apply to 403(b) plans. But some 403(b) plans that are maintained by private tax-exempt entities must comply with ERISA Sec. 205. This section generally requires that a distribution be made as a qualified joint and survivor annuity (QJSA) or as a qualified preretirement survivor annuity (QPSA), depending on the timing of the participant’s death. Some exceptions apply to this distribution requirement, including a different form of payment if a participant (and a married participant’s spouse) consents to the QJSA/QPSA waiver.

But obtaining these waivers can complicate or impede the plan termination process. To address this concern and others, the IRS released Notice 2020-80 concurrently with Rev. Rul. 2020-23. This notice requests comments from interested parties regarding how ERISA’s annuity and spousal rights provisions interact with an in-kind distribution outlined in Section 110 of the SECURE Act and in Rev. Rul. 2020-23. As the IRS considers how best to create guidance on this concern, it seeks input on special administrative burdens that may arise and on methods that could reduce those burdens.


The Takeaway          

For terminating 403(b) plans, Rev. Rul. 2020-23 is welcome news. Aligning earlier guidance on annuity contracts with the current guidance on 403(b) custodial accounts creates a more uniform path for employers to wind down their plans. They now know that an in-kind distribution will satisfy the IRS’s requirement that all plan assets must be paid out before a plan is considered terminated. So in-kind ICA distributions will make it easier for employers who receive no distribution directions from participants to properly terminate their plans. Visit for further developments on this and other guidance.


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Retirement Spotlight: IRS Releases New Escheatment Guidance

Handling unclaimed account balances has always challenged plan administrators and financial organizations. Even some government-approved options—such as rolling over plan assets to an IRA—can create difficulties when distributing missing or unresponsive individuals’ account balances. Escheating (i.e., reverting) assets to a state’s unclaimed property fund is also an option—especially for smaller account balances—but it’s usually considered a last-ditch effort by plan administrators and financial organizations who have tried but failed to locate missing account owners and their beneficiaries.

In January 2019, the U.S. Government Accountability Office (GAO) released a GAO 19-88 report that found reporting and withholding inconsistencies among plan administrators who escheated plan assets to a state’s unclaimed property fund. The GAO found that some plan administrators withheld taxes on escheated plan assets, but others did not. The GAO also found that administrators could benefit from additional guidance on reporting escheated assets and on whether individuals could later roll over escheated amounts to an IRA.

In response to the GAO’s recommendations, in October 2020 the IRS issued Revenue Ruling (Rev. Rul.) 2020-24 and Revenue Procedure (Rev. Proc.) 2020-46. This guidance builds on previous pronouncements in Rev. Proc. 2016-47, which provided self-certification procedures for rollovers, Rev. Rul. 2018-17, which explained how financial organizations should report escheated IRA assets, and Rev. Rul. 2019-19, which laid out reporting and withholding requirements for uncashed checks.

This Retirement Spotlight summarizes Rev. Rul. 2020-24 and Rev. Proc. 2020-46 and explains how they interact with other IRS and Department of Labor (DOL) guidance.


Highlights of Rev. Rul. 2020-24

In Rev. Rul. 2020-24, the IRS provides the following escheatment example and determines that the distribution is subject to withholding and reporting requirements.

  • A 401(a) qualified retirement plan administrator escheats an individual’s $900 account balance to a state unclaimed property fund. (This amount is beneath the $1,000 threshold that would require an automatic rollover to an IRA.)
  • The account does not include employer securities, nondeductible employee contributions, designated Roth amounts, or accident or health plan benefits.
  • The plan administrator does not have a withholding election on file for this individual.

Withholding Requirements – The IRS states that the $900 distribution is a “designated distribution” and is subject to the withholding requirements under Internal Revenue Code Section (IRC Sec.) 3405. A designated distribution is defined as any taxable payment from a deferred compensation plan (which is broadly defined), an IRA, or a commercial annuity. The IRS also notes that the following payments are not considered designated distributions.

  • Wages
  • Payments to a nonresident alien or corporation
  • Dividends on employer securities

Because the $900 designated distribution is considered an eligible rollover distribution, the plan administrator must withhold 20 percent ($180) for federal income taxes.

Reporting Requirements The IRS ruling verifies that plan administrators must report this type of distribution on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Although the escheated assets are being paid to the state’s unclaimed property fund, the plan administrator must report the $900 distribution amount in Box 1, Gross distribution, and the $180 federal withholding amount is reported in Box 4, Federal Income tax withheld. While Rev. Rul. 2018-17 verifies that financial organizations should report escheated IRA assets under the missing individual’s name and Social Security number, Rev. Rul. 2020-24 is silent on this issue. Additional guidance may be needed.

Transition Relief Although many plan administrators already follow the withholding and reporting requirements described in Rev. Rul. 2020-24, the IRS is providing a transition period for those who need time to prepare. Plan administrators must comply with this guidance by the earlier of 1) the first payment date that occurs on or after January 1, 2022, or 2) the date it becomes “reasonably practicable” to comply.


Highlights of Rev. Proc. 2020-46

IRC Secs. 402(c)(3)(B) and 408(d)(3)(I) authorize a waiver of the 60-day rollover requirement in certain circumstances, such as when a financial organization makes a mistake or if a family member dies or becomes seriously ill. Previous IRS guidance (Rev. Proc. 2016-47) included a sample letter that may be provided to a plan administrator or financial institution to identify the reason for extending the normal 60-day period in order to complete an otherwise eligible rollover.

Rev. Proc. 2020-46 modifies Rev. Proc. 2016-47 by adding another reason to the self-certification letter: “a distribution was made to a state unclaimed property fund.” So individuals who recover escheated retirement plan assets can use this self-certification to document their rolling over such assets to an eligible plan. Self-certification applies only to the waiver of the 60-day rollover rule, so individuals cannot use this process on a distribution that is otherwise ineligible for rollover treatment, such as a required minimum distribution (RMD). Rev. Procs. 2020-46 and 2016-47 apply to eligible rollovers from 401(a) plans, 403(a) and 403(b) annuity plans, governmental 457(b) plans, and IRAs.


Key Takeaways

This latest IRS guidance should be evaluated in light of existing DOL guidance. The DOL considers escheatment a less desirable option and believes that ERISA preempts state escheatment laws for active retirement plans. The DOL makes its position clear in Field Assistance Bulletin (FAB) 2014-1, which addresses fiduciary duties with respect to missing participants of terminated retirement plans. In FAB 2014-1, the DOL indicates that plan administrators should roll over unclaimed balances to an IRA when possible. As a last resort, plan administrators of terminated retirement plans may escheat any unclaimed balances to a state’s unclaimed property fund. Although the DOL has not issued any guidance for active retirement plans, escheatment may still be an option for ineligible rollover distributions, such as RMDs.

Some in the industry have asked for additional guidance on missing plan participants (such as a safe harbor for retirement plans with missing participants). Although the DOL has yet to release additional guidance, the IRS has included missing participant guidance in its 2020-2021 Priority Guidance Plan. Congress has also recently introduced legislation that proposes to create a national online “lost and found” database to connect individuals with unclaimed retirement account benefits.

Meanwhile, escheatment is a viable option only after pursuing all reasonable steps to locate a missing or unresponsive plan participant or IRA owner. The IRS’s guidance addresses how to withhold and report on escheated assets, but it doesn’t address whether or when escheatment should be used. Questions also remain on how to treat escheated assets once they’re rolled over to an eligible plan. For example, consider an individual who recovered escheated assets and rolled them over to an IRA. Would the assets be taxed when distributed from the IRA, or would they be considered basis in the IRA? If the assets are treated as after-tax basis, how would the IRA owner document this? And those considering escheatment should be aware of the substantial variation in rules from state to state.

Although questions remain, plan administrators who escheat plan assets should ensure that their systems are set up to apply the correct withholding amount and to report the distribution properly. Ascensus will continue to follow any new guidance as it is released. Visit for the latest developments.


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Retirement Spotlight: Proposed DOL Rule to Help Define “Employee” vs. “Independent Contractor”

Companies that use independent contractors can cut costs and boost productivity. But some businesses have run afoul of federal and state laws by classifying workers as independent contractors when they are really employees. Because various definitions of “independent contractor” have emerged under federal and state laws, determining whether workers are independent contractors or employees is confusing, causing courts—and businesses—to inconsistently classify workers.

To bring clarity and consistency to this process, the Department of Labor’s (DOL’s) Wage and Hour Division has proposed changes. On September 25, 2020, it published a notice of proposed rulemaking to help define “employee” under the Fair Labor Standards Act (FLSA), which sets the standards for minimum wage and overtime payments. This change should “promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.”


FLSA Economic Reality Test

Currently, the FLSA defines “employee” as “any individual employed by an employer” and defines “employ” as “to suffer or permit to work.” These circular and vague definitions are decidedly unhelpful and have led to numerous rule changes and court cases dating back to 1947. The Supreme Court has ruled that these definitions rely on the “economic reality” of the relationship between the parties: is the worker dependent on someone else’s business or in business for himself? This determination was generally based on the following six factors.

  1. Degree of control over the work performed
  2. Worker’s opportunities for profit or loss
  3. Worker’s investment in equipment or facilities
  4. Permanency of the working relationship
  5. Special skill required by the task or service
  6. Whether the work was part of the integrated unit of production

Since these factors have emerged—and have been refined—the courts have generally considered them when determining the economic reality of the relationship. But decisions were still inconsistent because different courts would give more or less weight to different aspects of the test; no factor had been clearly identified as being more important than another. Some of the factors overlapped, so the same facts could be considered under multiple factors, resulting in a skewed analysis. For example, a worker’s investment in equipment (one factor) could also have a direct effect on the worker’s profit or loss (a separate factor).


New Economic Reality Test

The DOL’s proposed rule adds a simpler “economic reality” test to the FLSA regulations, which will replace its previous interpretations. Five of the six factors remain, supporting the DOL’s intent “to clarify the existing standard, not to radically transform it.”

  1. Degree of control an individual has over his or her work
  2. Opportunity for individual profit or loss
  3. Amount of skill required to do the work
  4. Degree of permanence of the working relationship between the worker and employer
  5. Degree to which a worker’s output is integrated into other elements of the employer’s products or services


The big difference is that now, the first two factors—control and opportunity for profit or loss—will be given greater weight. The DOL considers these “core factors” as most likely to determine whether a worker is an employee or an independent contractor. After all, the extent by which workers can exercise substantial control over key aspects of their work performance—such as setting their own hours or choosing what projects to work on—and how much they can earn tend to be the main reasons for working as an independent contractor.

If both core factors point toward the same classification, that classification is probably accurate. On the other hand, if these two factors point to different classifications, the other three factors will help determine the correct classification. In applying all of these factors, the DOL advises that actual work practices are more important than a contractual arrangement when determining “employee” or “independent contractor” status.


ERISA Impact: Common Law Still Applies

The DOL’s proposed rule applies in the context of the FLSA. Different standards for determining independent contractor status may apply in different contexts or under other laws. For retirement plans and employee benefit plans covered by ERISA Title I, the term “employee” is defined as “any individual employed by the employer.” And because ERISA uses the same circular definition that the FLSA contains, the practical definition for ERISA purposes has also been determined by the courts.

The most relevant ERISA case on the subject is Nationwide Mutual Insurance Company v. Darden, 503 U.S. 318 (1992). In this case, the Supreme Court determined whether certain workers were either employees that were eligible for ERISA-covered benefit plans or independent contractors who could be excluded from those plans. ERISA’s definition of employee was not helpful. So the Court held that where Congress failed to provide a meaningful definition of “employee,” the term would be defined by incorporating traditional agency law criteria for identifying master-servant relationships. This common law test focuses on the hiring party’s right to control the means and manner of the work performed. It considers factors that are similar to the DOL’s newly proposed “economic reality” test, as well as others, like the location of the work and the method of payment.

This common law standard also must be used in other contexts when no clear statutory or regulatory definition of “employee” applies. For example, this standard is used for the Consolidated Omnibus Reconciliation Act (COBRA), which requires employers with 20 or more employees that maintain a group health plan to offer employees the right to continue their coverage under the plan after their employment ends. The IRS also uses the common law standard when considering whether businesses have properly classified workers for federal tax withholding purposes. In addition, the IRS considers the degree of control and independence by looking at facts that fall under three categories, each with additional underlying considerations: behavioral control, financial control, and relationship.

Although the new economic reality rules are proposed in the FLSA context, they may have a more far-reaching impact. To the extent that these rules provide a clear, practical method for evaluating the employer-employee relationship, they may help courts to apply a common law standard more consistently.


FMLA Impact; Economic Reality Applies

The proposed rule directly applies to the Family Medical Leave Act (FMLA), which uses the FLSA definition of “employee.” As a result, the new economic reality test applies. FMLA is a federal law permitting eligible employees of covered employers to take job-protected, unpaid leave for specified medical and family reasons. It also requires that health benefits be maintained during the leave period as if the employee had continued working instead of taking leave. Employers that are public employers (including state and federal employers and educational institutions) and private-sector employers that employ 50 or more employees are required to offer FMLA benefits.

In addition to the FMLA, the proposed rule affects other laws that use the economic reality test to determine employee status. These include the Age Discrimination in Employment Act (ADEA), which prohibits discrimination against employees age 40 and older, and the Equal Pay Act (EPA), which prohibits discrimination on account of sex in the payment of wages by employers.


State Law Standards May Apply

The proposed rule will not change how many states determine independent contractor status under their own wage and hour statutes. Certain states have their own standards for defining whether an employer-employee relationship exists—standards that may be more restrictive than the proposed rule—adding to the complexity that employers face when classifying workers. Employers should carefully review how applicable state laws apply to their workers, and, if the proposed rule becomes final, whether and how the rule would apply.


A Step in the Right Direction

Hiring contract workers is commonplace today. There are good reasons to do this, just as there are good reasons to favor hiring workers as employees. And it’s sometimes difficult to distinguish between “employee” and “independent contractor.” But the cost of misclassifying workers makes it critically important to have a clear standard.

Historically, the various tests that have evolved—either through statutes and regulations, or through case law—have added to the confusion. Clearer direction is needed for businesses to accurately classify workers. The DOL’s proposed rule is a step in that direction, giving companies additional guidance under the FLSA. But to minimize risk, employers will want to ensure that they classify their workers to satisfy any test that applies so that they do not have to manage workers that are classified as independent contractors for certain purposes, but are considered employees for others.


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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.

Ascensus will continue to follow any new guidance as it is released. Visit for the latest developments.




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