Retirement Spotlight

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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Retirement Spotlight: Legislative Support for Small Businesses During Coronavirus Pandemic

Many U.S. businesses—large and small—are experiencing uncertainty and varying levels of hardship as they try to stay afloat during the coronavirus (COVID-19) pandemic. Hit particularly hard are small businesses and their workforce, which according to the Small Business Administration (SBA) encompasses 99.9 percent of U.S. businesses and represents nearly half of the U.S. private sector workforce. What lies ahead for the economy during 2020, and maybe even 2021, is surely unknown as these are unprecedented times. In the meantime, the federal government is deeply involved in helping to stabilize the economy until it can be opened up fully again.

Four bills have so far been enacted to help U.S. businesses and workers survive this time of turmoil, and more are expected. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, and authorizes the SBA to administer the Paycheck Protection Program (PPP). The PPP provides federally guaranteed, low-interest loans to businesses with 500 or fewer employees, and it includes the potential for loan forgiveness. The program’s key purpose is to keep employees on business payrolls during this unprecedented economic downturn. Specifically, the PPP loans help employers meet payroll (and certain other operating) costs during the eight weeks after the loan is disbursed. Among other things, approved payroll costs include wages (and withheld taxes), leave payments, and employee benefits such as retirement benefits and group healthcare coverage.


Second PPP Legislative Action

In the first PPP bill, the CARES Act provided approximately $350 billion in small-business loans. The program was so popular that the funds were depleted by mid-April. Subsequently, on April 24, the Paycheck Protection Program and Health Care Enhancement Act (H.R. 266) was signed into law, adding another $320 billion to the program, which includes $60 billion earmarked specifically for PPP loans to be administered through small, medium, and local financial institutions, like credit unions and community banks. The intent was to provide access to PPP loans to traditionally underserved businesses.


General Terms of the Loan

The PPP is administered by the SBA, but loans are obtained through financial organizations. Businesses with no more than 500 employees—including not-for-profits, sole proprietors, and independent contractors—can apply for the PPP loans through approved lenders. If the employer follows certain requirements, the loan will be forgiven and considered tax-free.

No collateral or personal guarantees are required, and neither the government nor lenders will charge small businesses any fees. PPP loans that are not forgiven must be repaid within two years at a one percent interest rate, but any loan repayments will be deferred for six months. Loan forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. The amount of the loan forgiven will be reduced if full-time headcount declines or if salaries and wages decrease.

Specific details of the program and information on how to apply can be found at the SBA website. Small-business owners may find it helpful to confirm whether the financial organizations they currently do business with are participating in the program.


PPP Loan Payroll Costs Include Retirement and Health Coverage

In an interim final rule and FAQs issued in April, the SBA confirmed that eligible payroll costs include a number of employee benefits, including among other things, employer contributions to defined contribution or defined benefit retirement plans,  group healthcare coverage (including payment of premiums), and certain parental, family, sick, and medical leave (with some exceptions if certain tax credits are claimed). Employees that are furloughed but remain on the payroll could presumably continue their salary deferrals to retirement accounts as well as their portion of health coverage and contributions to health savings accounts (HSAs), at their option. Employers may also continue their retirement contributions to these accounts if such contributions would be considered qualifying payroll expenses for the eight-week period.


Loan Forgiveness

Perhaps the key feature of the program is loan forgiveness. If program rules are followed, the PPP provides for forgiveness of the loan—up to the full principal amount plus accrued interest. Loans will generally be forgiven if employees are kept on the payroll for eight weeks following the loan date and if the loan assets are used for payroll, rent, mortgage interest, or utilities. The amount spent on payroll costs will determine how much of the loan can be forgiven; no more than 25 percent of the forgiven loan amount can be for non-payroll costs.

In addition to retirement contributions and healthcare and certain leave benefits, payroll costs also include the following.

  • Salary, wages, commissions, and tips up to $100,000 of annualized pay per employee
  • Allowance for dismissal or separation
  • Payment for vacation, parental, family, medical, or sick leave
  • State taxes and local taxes withheld from the employee’s compensation
  • Payments of compensation or income to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment not more than $100,000
  • Excluded are qualified sick leave and qualified family leave for which credit is claimed under the Families First Coronavirus Response Act (FFCRA); compensation paid to an employee whose principal residence is outside the United States; and the employer portion of payroll taxes (FICA), Railroad Retirement Tax (RRTA), and federal employment taxes

The $100,000 per-employee limit on annual payroll expense does not apply to non-cash benefits such as employer contributions to qualified retirement plans, health benefits, and taxes withheld from employees’ pay. The borrower may also use up to 25 percent of the funds for mortgage interest, rent payments, or utility payments if the indebtedness or service started before February 15, 2020.


Strong Cautions for Employers: Consult Your Tax or Legal Adviser and Your Lender

The employer is required to document and certify to the lender that the loan funds were used to retain workers and to maintain payroll or make mortgage interest, lease, and utility payments for the eight-week period following the loan in order to qualify for loan forgiveness. The SBA has also indicated it will release additional guidance regarding loan forgiveness. Because these loans may be used cover a variety of expenses, employers should work with their tax or legal advisors and the PPP lender in determining how to qualify for loan forgiveness.


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

Retirement Spotlight – IRS Offers First Answers to Post-SECURE Act Reporting Questions

The most extensive changes to retirement saving in more than a decade became law when President Trump signed the Further Consolidated Appropriations Act of 2020 (FCAA) on December 20, 2019. While the main purpose of the FCAA was to fund the federal government for the next fiscal year, Congress also added significant retirement provisions to the FCAA by including the Setting Every Community Up for Retirement Enhancement (SECURE) Act in the broader bill.

Most of the retirement enhancements in the SECURE Act have been well received. But some provisions of the Act took effect mere days after enactment—on January 1, 2020—making implementation more difficult. Industry groups have requested that the IRS expedite guidance on the most pressing questions. This Retirement Spotlight will address the guidance that we have so far: some that is explicit and some that we can glean through draft instructions for required tax reporting.


New RMD Age of 72

The SECURE Act raised the age at which required minimum distributions (RMDs) must begin. Starting in 2020, RMDs from non-Roth IRAs and employer-sponsored retirement plans must be taken for the year the account owner turns 72, rather than 70½. On the other hand, those who reached age 70½ by the end of 2019 must take an RMD for 2019 and for all later years. So it is only those who turn 70½ in 2020 or later who will have no RMD until they reach age 72. (Remember that many employer plans permit non-owners to delay RMDs until retirement, an option not offered for IRAs or IRA-based plans.)

If an RMD has to be distributed for a given year, the IRA custodian, trustee, or issuer must inform the IRA owner by January 31. They must also tell the IRS that a taxpayer needs to take an RMD. To do this, the reporting organization simply checks a box on Form 5498, IRA Contribution Information, and files it by May 31 of the year the RMD is due (June 1 for 2020).


IRS Relief for Inaccurate IRA Custodian, Trustee, and Issuer Reporting

Because the SECURE Act became law so late in 2019, some organizations have struggled to accommodate the new rules. For example, they may have told IRA owners turning 70½ in 2020 that an RMD is required for 2020. This is incorrect, since RMDs in this case would be required at age 72 instead. Fortunately, IRS Notice 2020-6 grants relief from sanctions that could be assessed for this reporting inaccuracy if the following conditions are met.

  • By April 15, 2020, inform IRA owners who received the inaccurate information that no 2020 RMD is required.
  • Ensure that the 2019 Form 5498 for such clients—filed with the IRS by June 1, 2020—does not have a check mark in Box 11 (“Check if RMD for 2020”).
  • Ensure that the 2019 Form 5498 for such clients has no entries in Box 12a (“RMD date”) or Box 12b (“RMD amount”).


Relief for IRA Owners?

It is likely that some IRA owners who turn 70½ in 2020 have taken—or will take—a distribution this year in the mistaken belief that they must take an RMD. This belief may be based on receiving an inaccurate notice from their IRA administrator. They might have chosen not to take a distribution had they been aware that no RMD was required. And some might even wish to return the amount distributed to their IRA. But unless the assets were rolled over to an IRA within 60 days, this could not be done without IRS relief.

  • Notice 2020-6 did not address whether an IRA owner (or plan participant) who received a distribution they believed to be an RMD would be granted an extended period—beyond 60 days—to complete a rollover back into a tax-qualified savings arrangement.
  • The Notice also did not address whether an IRA owner could escape the one-rollover-per-12-month rule. This could be a concern, for example, if an IRA owner had set up systematic or periodic IRA withdrawals that had been calculated to satisfy an anticipated 2020 RMD. Under current rules, only one of these withdrawals would be eligible for rollover.


More Guidance Being Considered by IRS

Notice 2020-6 states that the IRS is “considering what additional guidance should be provided . . . including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.” We hope that upcoming IRS pronouncements will provide helpful guidance.


IRS Recommends Additional Communication with IRA Owners

Because of the potential for IRA owners to misunderstand the RMD age transition from 70½ to 72, the IRS “encourages all financial institutions . . . to remind IRA owners who turned age 70½ in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020.”


Qualified Birth or Adoption Distributions

We have received limited IRS guidance on a second SECURE Act provision, which allows for a “qualified birth or adoption distribution” from an IRA or employer retirement plan. An IRA owner or plan participant may withdraw up to $5,000—for each birth or adoption event—without facing the 10% early distribution excise tax. This provision is effective for 2020 and later years, and certain conditions and options apply.

  • Such distributions must occur within 12 months of the birth or adoption.
  • For adoptions, the adoptee may be a minor or an individual who is incapable of self-support.
  • Amounts withdrawn under this provision may be recontributed to an employer plan or IRA.


Tentative Guidance Received

Questions remain on these distributions. But we recently got limited guidance from the IRS through a draft version of the 2020 Instructions for Forms 1099-R and 5498. (Form 1099-R reports distributions from IRAs and employer retirement plans, while Form 5498 reports contributions, rollovers, and other information on IRAs.) While these draft instructions may not be definitive, the IRS’s approach in reporting such amounts is helpful.

  • A withdrawal taken as a qualified birth or adoption distribution is to be reported on Form 1099-R based on the recipient’s age (reported in Box 7, Distribution codes). For a recipient under age 59½, use Code 1, “Early distribution, no known exception.” The reporting entity makes no determination whether the distribution qualifies for the birth or adoption exception; this is the recipient’s responsibility.
  • The draft instructions further indicate that re-contributions of qualified birth or adoption distributions to an IRA must be reported on Form 5498 in Box 2, Rollover contributions, for the tax year received.


Many Unanswered Questions on Qualified Birth or Adoption Distributions

We are hoping for IRS guidance on the many open questions pertaining to this feature of the SECURE Act, including the following.

  • Confirmation that this feature is an optional feature for employer plans.
  • Clarification of the steps a plan administrator must take, if any, to substantiate that a distribution qualifies as a birth or adoption distribution.
  • Whether there is a time limit for the taxpayer to repay such distributions to an IRA or employer plan.
  • Clarification of the repayment process, including any tax implications.
  • Whether repayments of amounts distributed from an IRA will be subject to the one-per-12-month IRA-to-IRA rollover limitation.



The path to a full understanding of the FCAA and SECURE Act provisions—and their effect on retirement and other tax-advantaged savings arrangements—could be challenging. The IRS has so far given only minimal navigation assistance. More will be forthcoming—and the sooner, the better. Ascensus will continue to assess the effect of this legislation and any related guidance. Visit for future updates.


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

Retirement Spotlight: January 2020 Spotlight on Important SECURE Act Provisions For Financial Advisors

The new year promises to provide plentiful opportunities for financial advisors to gain business and to demonstrate expertise to existing clients. As you likely know, the SECURE Act was signed into law on December 20, 2019. Many of the Act’s provisions took effect on January 1, 2020. Most of them offer real benefits to your clients; other provisions may not be as helpful, but you still need to understand them to provide the best service possible. This Retirement Spotlight focuses on a half-dozen SECURE Act provisions that will make the most significant impact on your retirement plan practice.

Let’s start with three provisions that you will most certainly get questions on.

  1. Traditional IRA owners can now contribute after age 70½. Since they were first available in 1998, Roth IRAs could receive contributions from individuals over 70½ provided that they were otherwise eligible. That is, Roth IRA owners had to have earned income—but not too much Now Traditional IRA owners will enjoy the same benefit. Your clients that continue to work—or that have working spouses—will be able to contribute even after they reach age 70½.

    More of your clients may be working well past the “normal retirement age”; now they can also keep contributing to their Traditional IRAs. Even though they may have to take required minimum distributions at the same time that they contribute to their IRAs, there is a good chance that they will be able to contribute more than they have to distribute each year. So this provision is a great way for your clients to ensure that they have sufficient retirement assets once they stop working.

  2. Traditional IRA required minimum distributions (RMDs) will now start at age 72. Not only can your clients make Traditional IRA contributions past age 70½, but now they can begin taking RMDs later. If your clients turn age 70½ in 2020 or later, they now can wait until age 72 to begin taking RMDs. Specifically, they will have until April 1 of the year following the year they turn 72 to take their first RMD. This year-and-a-half delay is not necessarily the big relief that some in the retirement industry had hoped for. But this change certainly provides some benefit.

    Based on increased life expectancies over the past several decades, Congress could have increased the starting age to 75 or later. There are, however, significant revenue implications for any delay in the RMD starting date. So this age-72 requirement was a bit of a compromise. The important thing to remember is this: if your client already turned age 70½ by the end of 2019, then RMDs cannot be delayed under the new rule. In other words, all of your clients born on or before June 30, 1949, are subject to the old rule, which makes the 70½ year the first distribution year.

  3. “Stretch IRAs” as we now know them are disappearing. For decades, IRA and qualified retirement plan (QRP) beneficiaries were able to take death distributions over their life expectancies. For example, a 20-year-old grandchild could distribute a grandparent’s IRA balance over 63 years. But now this generous provision has been altered to require faster distributions (generally over a 10-year time frame), which is designed to increase federal revenue. Nonspouse beneficiaries of account owners who die on or after January 1, 2020, are subject to this new rule, unless they are
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries who are not more than 10 years younger than the decedent’s age,
    • minor children of the decedent (they must begin a 10-year payout period upon reaching the age of majority), or
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.

    We expect that this change to the distribution rules will create considerable confusion for clients. They may be subject to two separate sets of beneficiary distribution rules, depending on the date of the account owner’s death. Some beneficiaries, such as spouses, will have the same options that we are familiar with; many others will face an accelerated payout. It may take time for the industry to sort through the many questions that will arise. And we may have to wait for definitive guidance from the IRS. But meanwhile, you can assure your clients that, while the beneficiary rules for both IRAs and QRPs have changed considerably, no immediate action is needed.

  4. The second group of changes involves employer-sponsored retirement plans and not IRAs specifically. Still, each of them could provide potential benefits to your clients.

  5. Employers may adopt a qualified retirement plan (QRP) up until their tax return due date, plus extensions. If you have clients that are also business owners, you have probably been asked at year end, “What can I do to reduce my tax burden?” For employers without a retirement plan, establishing such a plan can be a great idea. But QRPs were generally required to be adopted by the end of the employer’s tax year. (SEP and SIMPLE IRA plans have different deadlines.) Trying to quickly establish a new plan at year-end could cause unwanted stress and could lead to hasty decisions and compliance problems. Starting with 2020 tax years, employers may establish a QRP by their tax return due date, plus extensions. For example, unincorporated business owners could establish a plan for the 2020 tax year until October 15, 2021, if they have a filing extension.

    This new rule aligns the deadline for QRP establishment with the current SEP IRA plan adoption deadline. And though we still expect that some of your client employers will wait until the last minute to act, at least this new provision gives them more flexibility and options. Keep in mind, however, that salary deferrals must be made prospectively. So establishing a 401(k)-type “cash or deferred arrangement” will not allow plan participants to defer salary or wages that they have previously earned.

  6. Safe harbor 401(k) plans now have more contribution flexibility. Businesses with employees sometimes struggle to pass certain 401(k) testing requirements. Simply stated, plans are generally not allowed to provide highly compensated employees (including owners) with benefits that disproportionately favor them over the nonhighly compensated employees. One such test compares the salary deferrals of these two groups. To pass this test, owners (especially) often end up with much smaller deferrals than they would like. Fortunately, a “safe harbor” 401(k) provision deems this test to be passed, but only if the plan guarantees a healthy matching or nonelective contribution for rank-and-file employees. Unfortunately, detailed notification and timing requirements made these safe harbor provisions less than user friendly. For example, under one scenario, an employer could have made a three percent nonelective contribution in order to pass the nondiscrimination test—but only if the employer had notified employees, before the plan year started, that she might make this contribution to pass the test. In addition, the employer would have had to amend the plan before 30 days of the plan year end in order to take advantage of the testing relief. Now, employers can get the same testing relief, without a “pre-notice” and with substantially more time to amend the plan: instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a four percent contribution to all eligible employees rather than a three percent contribution.

    All of this is to say that employers now can enjoy much more flexibility when they adopt a safe harbor 401(k) plan. By some credible estimates, 30-40% of 401(k) plans that cover employees (in addition to owners) use this safe harbor feature. Making compliance easier for these plans—and for yet-to-be-adopted plans—is a great benefit. And learning more details about this provision will help you better serve your clients.

  7. Tax credits for small employers may help jump-start retirement plans. The SECURE Act provides two tax credits for small employers: one provision gives a $500/year startup credit for new 401(k) or SIMPLE IRA plans that include an automatic enrollment provision; another provision increases a startup credit (up to $5,000) for any small employer that adopts a qualified plan, SEP, or SIMPLE plan. Both credits are available to employers for three tax years, beginning with the start-up year. While these incentives may not—in and of themselves—convince an employer to adopt a retirement plan, they may take some of the financial sting out of the decision and prove that Congress is serious about increasing retirement plan coverage in America. Letting your clients know about these helpful tax credits can solidify your value in their eyes.

These six new provisions are likely to get a fair amount of coverage in the mainstream media and in the retirement industry. This Retirement Spotlight should help you discuss these changes more effectively with your clients. But keep in mind that the SECURE Act contains the most significant retirement plan changes in 15 years. There are many other provisions that affect IRAs and QRPs—and there are many questions that have already arisen about specific provisions and how certain changes should be implemented. As federal guidance is released, Ascensus will continue to share thoughtful analysis and practical insights.


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

Retirement Spotlight: Making Sense of the New Auditing Standard for ERISA Plans

On July 10, 2019, the American Institute of Certified Public Accountants (AICPA) issued formal guidance for those who audit financial statements that are included with Form 5500, Annual Return/Report of Employee Benefit Plan, filings. The AICPA first proposed this guidance in April 2017, following a request by the Department of Labor (DOL) to improve the quality of employee benefit plan audits. This guidance, released in a new Statement on Auditing Standards No. 136 (SAS 136), will apply to audits for reporting periods ending on or after December 15, 2020.


What is AICPA’s Role with ERISA Plans?

Founded over 130 years ago, the AICPA is the world’s largest member association representing accounting professionals. Many view the AICPA as an important source of guidance for the accounting profession. Aside from developing audit standards, the AICPA provides educational materials, creates and evaluates CPA exams, and ensures that technical and ethical standards are maintained. The AICPA has also established an Employee Benefit Plan Audit Quality Center to help CPAs meet the various challenges of performing plan audits.


When is an ERISA Plan Audit Required?

Before detailing the AICPA guidance, a quick review of the plan audit requirements may help. Plan sponsors whose plans are not subject to the Employee Retirement Income Security Act (ERISA) do not need to provide audit results to the DOL. This group includes most church plans and owner-only plans. In addition, smaller plans that meet certain waiver requirements are not subject to the Form 5500 audit requirements. But an employee benefit plan is subject to an independent audit if the plan

  • had 100 or more eligible participants as of the first day of the plan year and did not file as a small plan filer for Form 5500 reporting in the prior year, or
  • filed as a small plan filer for Form 5500 reporting in prior years but now has 121 or more eligible participants as of the first day of the current plan year.

An “eligible participant” is an employee who is eligible to participate in the plan (even if not deferring), or has terminated employment but still has a plan balance.


Limited Scope Audit vs. Full Scope Audit

Because SAS 136 does not change ERISA, plan sponsors can still elect to have a limited scope audit (now known as the ERISA Section 103(a)(3)(C) audit) if the qualified institution holding the assets provides a certified statement confirming the accuracy and completeness of the plan’s investment information. (A “qualified institution” is a financial organization that holds plan assets and is regulated and subject to periodic examination by a state or federal agency.)

During a limited scope audit, the auditor is not required to test the accuracy or completeness of the investment information, nor does the auditor need to assess the control risk related to assets held by the certifying institution. But the auditor does need to provide required financial statement disclosures and review and test controls on plan operations related to the plan’s noninvestment information—such as participant data, contributions, and benefit payments.

Auditors must conduct a full scope audit if the institution does not provide a certified statement on the plan’s investment information, or on any investments not included in the certification. During a full scope audit, the auditor must review and test both the plan’s investment and noninvestment information.


What’s “New” About the New Auditing Standard?

SAS 136 clarifies and formalizes current best practices that auditors working with employee benefit plans should already be familiar with. It also provides detailed requirements unique to employee benefit plans, which will help auditors meet their obligations. Some of the most significant provisions found in SAS 136 are described below.

  • SAS 136 replaces a modified opinion (typically a disclaimer) used with ERISA Section 103(a)(3)(C) audits with a two-pronged opinion. The opinion should indicate whether the
    • information in the financial statements not covered by certification is presented fairly, and
    • investment information contained in the financial statements reconciles with, or is derived from, the information contained in the certification.
  • The auditor must obtain plan sponsor acknowledgements that the sponsor is responsible for
    • determining whether a 103(a)(3)(C) audit is permissible and whether the certification meets ERISA requirements,
    • maintaining and providing a current plan document,
    • preparing and fairly presenting financial statements, and
    • providing a substantially completed (draft) Form 5500.
  • The auditor must read the current plan document and consider relevant plan provisions when designing and performing audit procedures.
  • The auditor must identify which investment information is certified.
  • SAS 136 requires the auditor to follow detailed requirements for providing written communication to the plan sponsor about the results of the audit.
  • SAS 136 reformats and changes certain content requirements within the auditor’s report.


Why Did the AICPA Create a Formal Auditing Standard?

The DOL grew concerned about the quality of ERISA plan audits after it conducted an assessment of Form 5500 filings and related audit reports for the 2011 filing year. The purpose of the DOL’s assessment was to determine whether the quality of ERISA plan audits had improved since the DOL last reviewed Form 5500 filings in 2004. The DOL found that ERISA plan audits had not improved since 2004. In fact, the audits had grown worse.

During the assessment, the DOL reviewed a sample of 400 plan audits from a pool of 81,162 Form 5500 filings. The DOL found that 39% of audits contained major deficiencies with respect to one or more generally accepted auditing requirements. These deficiencies could lead to the rejection of the Form 5500 filing and put $653 billion in assets for over 22 million plan participants at risk. (In 2004, 33% of audits contained major deficiencies.) Examples of major deficiencies included no documentation of an internal control environment, failure to test timely remittance of employee contributions, inadequate work determining eligibility and calculation of benefit payments, and no testing of participant investment options.

The DOL also reviewed the number of limited scope audits that were performed. In 2004, 59% of the 400 audits reviewed were limited scope audits. In 2011, that number increased to 81%. The DOL believes that the increased number of limited scope audits has contributed to the increased number of deficiencies found in audits.


How Should Plan Sponsors Prepare?

Although the SAS 136 provisions won’t take effect until 2021, plan sponsors should discuss the effect of these changes with their CPAs. While the new SAS 136 primarily affects audit practices, plan sponsors that have not taken an active role in past plan audits can anticipate more involvement under this newly formalized standard.

Ascensus will continue to monitor any developments regarding this guidance. Visit for future updates.

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


Retirement Spotlight: IRS Provides Welcome Relief From High VCP Fees

The retirement industry received a gift on April 19, 2019: Revenue Procedure (Rev. Proc.) 2019-19. This revenue procedure updates the Employee Plans Compliance Resolution System (EPCRS) by expanding the availability of self-correction options for more kinds of plan failures. The IRS anticipates that this expanded guidance will increase plan compliance and reduce some costs for employers.


A Step in the Right Direction

Expanding the options available through the IRS’s Self-Correction Program (SCP) will benefit employers that face increased fees if they correct plan failures under the Voluntary Correction Program (VCP). Under the VCP, an employer submits an application for correction to the IRS, and—if approved—has assurance that the failure will not result in greater sanctions or plan disqualification.

In January 2018, the IRS announced a new VCP fee structure based on plan assets, rather than on the number of plan participants. This fee structure eliminated several exceptions—including amendment or loan failures—that used to carry a fixed or reduced general fee. As a result, many employers face significantly higher fees to correct operational failures under the VCP. But the IRS also allows more employers to fix plan failures through self-correction, perhaps as a result of the vigorous criticism about higher fees.


New Plan Failures Available for Self-Correction

The SCP process requires that employers follow specific IRS correction steps. If properly completed and documented, the SCP gives employers assurance of plan compliance. But with the SCP, the IRS neither reviews the employer’s actions nor issues a “compliance statement,” which documents the IRS’s approval.  Rev. Proc. 2019-19 expands self-correction in three primary areas: plan document failures, operational failures, and loan failures.


Plan Document Failures
The revised procedure allows employers to self-correct many plan document failures—other than the initial failure to adopt a qualified plan or 403(b) plan document timely—as long as the plan has a favorable letter at the time of correction. The EPCRS generally considers plan document failures as “significant” failures. So to qualify for self-correction, an employer needs to correct the failure by the end of the second plan year following the year the failure occurred.


Operational Failures
The EPCRS now allows employers to retroactively amend their plans when they have failed to follow the terms of their plan documents. Through this process, an employer can conform the terms of the plan document to the way the employer actually ran the plan. Employers can retroactively amend these operational failures if they meet the following three conditions.

  • The plan amendment would result in an increase of a benefit, right, or feature.
  • The increase in the benefit, right, or feature applies to all eligible employees.
  • The increase in the benefit, right, or feature is permitted under the Internal Revenue Code and satisfies the EPCRS general correction principles.

As with plan document failures, employers must amend their plans for significant operational failures by the end of the second plan year following the year that the failure occurred.


Loan Failures
Employers may now self-correct a defaulted loan by 1) requiring the participant to make a corrective payment, 2) re-amortizing the outstanding balance of the loan, or 3) dictating some combination of these two options. Previously, employers could use these options only when filing through the VCP. The revised revenue procedure also allows an employer to

  • report a deemed loan distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in the year of the SCP correction (instead of for the year in which the failure occurred);
  • obtain after-the-fact spousal consent if the employer failed to obtain spousal consent at the time of the plan loan; and
  • retroactively amend the plan for exceeding the number of outstanding loans specified in the document.

Although the EPCRS has greatly expanded the availability of self-correction for loan failures, some restrictions do apply. According to Rev. Proc. 2019-19, the Department of Labor (DOL) will provide a no-action letter only to those employers who correct loan default failures through the VCP. Employers concerned about receiving the DOL’s no-action letter may wish to spend the additional time and money required to correct the failure under the VCP.

Another restriction applies to failures arising from loans that violate the statutory loan provisions. This includes loans that exceed the maximum loan limit, loans that exceed the maximum repayment period, and loans that were not subject to level amortization. These types of loan failures do not qualify for self-correction.


More Guidance to Come?

While Rev. Proc. 2019-19 provides employers with additional self-correction options, more clarification is needed. The IRS has indicated that it may provide additional examples of insignificant operational failures in the Correcting Plan Errors section of its website. Ascensus will continue to monitor the IRS’s website for new guidance. Watch News for any significant developments that may emerge.


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Retirement Spotlight: Congressional Hearings a Harbinger of Pension Reform?

We witnessed several important hearings in Congress during the first week of February. The two that drew our attention revealed what could be a healthy, bipartisan push for retirement plan reform—and this bodes well for those trying to close the retirement savings gap.

The hearings, which were held in both the Senate and the House, focused on Social Security solvency and on the importance of making retirement plans easier for private employers to adopt and maintain. Specific examples of private-sector employers having success with their own workplace plans were also provided. Both hearings included testimony from independent organizations (such as the Pew Charitable Trusts and the American Enterprise Institute), and the House hearing featured a small business owner who touted the merits of the OregonSaves automatic-IRA program for his employees.

Rather than detailing the contents of the hours-long hearings, this article outlines several key retirement plan proposals that seem to surface repeatedly. It also allows readers to make their own assessments on the proposals’ merits. But one thing this article does not try to do: predict whether any particular item will or will not become law. Ascensus has been in the retirement industry long enough to understand the foibles of retirement plan reform and simplification—and to know that that the legislative process is unpredictable.


Continued Bipartisan Support

Despite the frequent—and sometimes bitter—disagreements that seem to permeate lawmaking on Capitol Hill, there is widespread bipartisan support for pension reform. This was evident from the witness testimony and from the senators’ and representatives’ comments and questions during the hearings. While there remains disagreement about the depth of the retirement savings crisis and about the best remedies, both Democrats and Republicans substantially agree on many matters.


Issues Putting Retirement Funding at Risk

Here are some of the findings in the hearings. Many of these issues have been discussed for years and so may sound quite familiar.

  • One-third to one-half of U.S. workers have no access to a workplace retirement plan.
  • Those who do have access often don’t participate—or save much less than they need to.
  • Saving for retirement and other personal needs is difficult for a number of reasons—including low wage growth, high household debt, and the rising costs of out-of-pocket medical care.
  • Increased life expectancy, especially for women, will require more Social Security resources and additional personal savings in order to avoid financial hardship in retirement.
  • Defined contribution (DC) plans have largely replaced defined benefit (DB) plans over the past 40 years. Many DB plans—especially multiemployer (union) plans—are significantly underfunded, and DC plans shift much of the retirement savings burden from employers to employees.
  • Small business owners (in particular) face barriers to establishing retirement plans, such as high start-up costs, lack of administrative capacity, and overall unfamiliarity with complex plan rules.


Possible Solutions

To address these concerns, a handful of retirement plan provisions consistently appear in legislative proposals. Here are some of the most common ones—ones that seem to enjoy broad support.

  • Automatic enrollment into employer-sponsored plans – This key provision recognizes the natural tendency for employees to stick with whatever default feature is part of the plan. If a plan “defaults” eligible employees at a certain deferral percentage (5 percent is common), they tend to accept that contribution rate. Of course, employees could always opt out or choose a different deferral percentage.
  • Automatic escalation of deferrals each year – As with the auto-enrollment feature, automatic escalation involves a default, in this case, a default deferral percentage increase each year. This increase would usually occur in increments of 1 percent every year until a participant’s overall deferral percentage reached 10 percent. Again, employees could choose another deferral rate or opt out.
  • Tax credits for new plans and small employers – Many retirement plan proposals contain provisions that could make adopting a new plan less expensive. The details differ, but for a certain number of years an employer’s start-up costs (ranging from $500 – $5,000) could be credited back, and smaller businesses could get a credit for maintaining a plan.
  • Open multiple employer plans (MEPs) – Open MEPs allow many employers to join a single qualified retirement plan (e.g., a 401(k) plan). The MEP concept isn’t new, but currently employers must have some common connection—such as belonging to the same trade—before they can join other employers in adopting a single plan. This is known as a “closed MEP.” Open MEPs (or pooled employer plans (PEPs)) would permit completely unrelated employers to adopt a plan with other employers. This approach could prove helpful for smaller employers, who would possibly enjoy both lower costs and lower liability.

While a wide array of provisions may find their way into legislative proposals, the ones just mentioned arise consistently. And in both the House and Senate hearings, these themes came up repeatedly. From employers to legislators to expert witnesses, most seemed to agree that some form of these provisions would boost savings rates and help Americans’ retirement readiness. So we can reasonably expect at least some of these provisions to appear in any broad-based retirement plan legislation.


More Proposed Bills in the Works

As soon as the government shutdown ended and Congress was back in session, retirement plan bills were introduced. In fact, during the House hearing, two congressmen—Rep. Ron Kind (D-WI) and Mike Kelly (R-PA)—reintroduced the Retirement Enhancement and Savings Act of 2019 (RESA 2019), which seems to have broad bipartisan support. (See our Washington Pulse article for more details on RESA 2019.) The Family Savings Act of 2019 (Rep. Mike Kelly) and the SIMPLE Modernization Act (Sen. Susan Collins (R-Maine) and Sen. Mark Warner (D-VA)) were also reintroduced. Other bills are in the pipeline, and congressional leaders appear poised to release them soon, based on their comments in the hearings.

It is tricky business predicting whether particular bills will make it through the difficult legislative process and gain the President’s signature. Many members of Congress will offer their best solutions to the widely acknowledged retirement savings gap. And they know that starting to fix a system that is so critically important to the nation’s long-term financial security can be both fiscally sound and politically popular. Based on those criteria alone some retirement plan reform seems—can we say it—likely.

Ascensus will continue to encourage federal legislators to take bold action to address America’s retirement savings shortfall. We will also try to nudge them toward comprehensive retirement plan simplification. Watch News for any significant developments that may emerge.

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