Washington Pulse

Washington Pulse: IRS Provides Additional SECURE Act Guidance

At the end of 2019, the President signed the most comprehensive retirement reform package in over a decade: the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is one of multiple bills that were included in the Further Consolidated Appropriations Act, 2020 (FCAA).

The SECURE Act’s primary goals include expanding retirement savings, simplifying existing rules, and preserving retirement income. As with any major legislation, the SECURE Act created numerous outstanding questions. And while the IRS has previously provided some answers, no SECURE Act guidance has been as detailed as the recently released IRS Notice 2020-68. In addition to providing guidance on the SECURE Act, this Notice provides guidance on the Bipartisan American Miners Act, which is also part of FCAA.

 

SECURE Act Guidance

Qualified charitable distributions and the repeal of the Traditional IRA contribution age limit

Effective for 2020 and later taxable years, taxpayers with eligible compensation can make Traditional IRA contributions at any age, not just for years before reaching age 70½. Notice 2020-68 states that financial organizations that accept such contributions must amend their Traditional IRA plan agreements and disclosure statements and provide the amended documents to IRA owners.

Although most financial organizations  are likely to adopt the relaxed eligibility requirements, Notice 2020-68 states that they are not required to accept such contributions. Keeping the old contribution limitation—or delaying implementing the new rule—may benefit organizations who face possible programming concerns.

The Notice confirms that, because IRA contributions and required minimum distribution (RMDs) are reported as two separate transactions, IRA owners may not offset their RMD amount for a taxable year by the amount of contributions made for the same year. So while Traditional IRA owners may contribute past age 70½ (if they are otherwise eligible), they may also have to take an RMD for the same year.

In addition to allowing individuals to make contributions after age 70½, the SECURE Act made changes to qualified charitable distributions (QCDs). Beginning at age 70½, IRA owners and beneficiaries may donate—while satisfying their RMDs—up to $100,000 of IRA assets tax-free to a qualified charity.

The SECURE Act requires that IRA owners age 70½ and older who make deductible Traditional IRA contributions reduce the amount that they can exclude from income when taking a QCD. Notice 2020-68 confirms the formula that IRA owners should use to determine this amount.

Example: In 2020, Mike attains age 70½ and makes a $7,000 deductible contribution to his Traditional IRA. Mike also takes a $9,000 distribution payable directly to his church, which is a qualified charity. How much of the $9,000 QCD can Mike exclude from income?

Excludable QCD amount = A – (B – C)

A = the QCD amount for a year before any reduction

B = the aggregate deductible contributions made for all tax years beginning with Mike’s 70½ year

C = prior year income exclusion reductions made as a result of the SECURE Act

Excludable QCD amount = $2,000, which is $9,000 – ($7,000 – $0)

NOTE: In future years, deductible contributions made after age 70½ will continue to lessen the amount by which QCDs will be excluded from income. Contributions that reduced the excludable QCD amount in previous years are ignored; contributions that have not reduced prior-year excludable QCD amounts are aggregated with current-year deductible contributions to determine what amount of the current QCD is included in income.

 Participation of long-term, part-time employees in 401(k) plans

Effective for 2021 and later plan years, employees who have three consecutive 12-month periods with at least 500 hours of service (and who satisfy the plan’s minimum age requirement) generally must be allowed to make elective deferrals in an employer’s 401(k) plan. The current, more restrictive, eligibility rules could continue to be applied to other contribution sources (such as matching contributions) and to ADP/ACP safe harbor plans. Employers may also exclude such part-time employees from coverage, nondiscrimination, and top-heavy test rules. The SECURE Act states that no 12-month period that begins before January 1, 2021, is considered when determining the three years of service for eligibility.

Notice 2020-68 confirms that an employer can apply the new eligibility rule to employer contributions that are subject to vesting requirements. But then for vesting purposes, the employer must generally consider each 12-month period for which the employee has at least 500 hours of service starting from the employee’s date of hire—including periods of service incurred before January 1, 2021. An employer may, however, continue to exclude periods of service described in Internal Revenue Code Section (IRC Sec.) 411(a)(4) (such as periods of service incurred before age 18 or before the plan was established).

It may be difficult for some employers to determine the correct periods of service for an employee who was previously excluded from the employer’s plan. As a result, the IRS is seeking comments on how to reduce possible administrative concerns related to counting years of vesting service beginning before January 1, 2021.

Small-employer automatic-enrollment tax credit

The SECURE Act created a new tax credit for small employers that include an eligible automatic contribution arrangement (EACA) feature in their new or existing qualified employer plan. A “qualified employer plan” includes a 401(a) plan, a 403(a) plan, a simplified employee pension (SEP) plan, and a savings incentive match plan for employees of small employers (SIMPLE) plan. To be eligible for the credit, employers must have had 100 or fewer employees who earned at least $5,000 in compensation during the previous calendar year. The maximum annual tax credit is $500 for each of the first three years that the employer includes an EACA in a qualified employer plan. This provision is effective for 2020 and later taxable years.

Notice 2020-68 clarifies that employers may receive a credit for each year during a single three-year period, starting in the first year that an employer adds an EACA. In addition, employers that maintain more than one qualified employer plan must offer an EACA in the same qualified employer plan for each year of the three-year period. For example, an employer that maintains two different 401(k) plans cannot receive a tax credit in 2021 if it adds an EACA to Plan A in 2020, amends to remove the EACA from Plan A in 2021, and then amends to add the EACA to Plan B in 2021.

Notice 2020-68 also clarifies that each eligible employer that participates in a multiple employer plan (MEP) may receive the tax credit. The three-year period begins with the first taxable year that an eligible employer includes an EACA under a MEP. An employer will continue to be eligible for the credit even if it spins off and establishes its own single-employer plan.

Qualified birth or adoption distributions (QBADs)

As of January 1, 2020, distributions taken within 12 months of the birth of a child or adoption of an “eligible adoptee” are exempt from the 10 percent early distribution penalty tax. An eligible adoptee is a child under the age of 18 or an individual who is physically or mentally incapable of self-support. An eligible adoptee does not include a child of the individual’s spouse. Each parent may distribute up to $5,000 in aggregate, per birth or adoption event, from an IRA, a 401(a) defined contribution plan, a 403(a) or 403(b) annuity plan or contract, or a governmental 457(b) plan.

Individuals may repay these amounts to an IRA or eligible retirement plan. While there is currently no stated deadline for repaying a QBAD, the Treasury Department plans to issue regulations under IRC Sec. 72(t) that will address recontribution rules, including rules related to the timing of recontributions.

Notice 2020-68 clarifies that individuals are “physically or mentally incapable of self-support” if they meet the disability definition found in IRC Sec. 72(m)(7). According to this definition, an individual is disabled if he “is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.”

In addition, the Notice addresses several other matters.

  • Individuals may receive a QBAD for each birth and each adoption. For example, an individual who gives birth to twins may distribute $10,000 from her IRA and treat the entire amount as a QBAD.
  • A QBAD is not treated as an eligible rollover distribution for purposes of the direct rollover rules, the IRC Sec. 402(f) notice requirement, and the 20 percent mandatory withholding requirement.
  • A QBAD is an optional distributable event, so employers are not required to add the feature to their plans.
  • A plan administrator may rely on a reasonable representation that the individual is eligible for a QBAD, unless the administrator has actual knowledge to the contrary.
  • An eligible retirement plan must accept QBAD recontributions if 1) the retirement plan permits QBADs, 2) the individual received a QBAD from that plan, and 3) the individual is otherwise eligible to make a rollover contribution to that plan at the time he wishes to recontribute the QBAD to the plan.
  • A QBAD that is recontributed to an eligible retirement plan is deemed to be an eligible rollover distribution that meets the 60-day rollover rule.
  • A participant who receives an in-service distribution from a plan that does not offer QBADs may still claim that distribution as a QBAD on her income tax return and recontribute the amount to an IRA.

Difficulty-of-care compensation eligible for IRA contributions

Certain foster care providers receive payments that are not includable in taxable income and therefore were not considered to be compensation. As a result, such individuals may not have been able to contribute to a retirement plan. Now such after-tax “difficulty-of-care payments” will qualify as eligible compensation for IRAs and defined contribution plans. This provision is effective for IRA contributions made after December 20, 2019, and for contributions made to defined contribution plans in 2016 and later plans years.

Notice 2020-68 confirms that difficulty-of-care payments to an employee must be made by the employer in order to be treated as eligible compensation. Employers that make difficulty-of-care payments to their employees must amend their retirement plans to include difficulty-of-care payments in their plan’s definition of compensation. Notice 2020-68 also notes that the IRS will release future guidance to address whether the six percent penalty tax will apply to excess IRA contributions that are based on difficulty of care payments.

 

Bipartisan American Miners Act Guidance

Under IRC Sec. 401(a)(36), pension plans could allow in-service distributions at age 62. Effective for 2020 and later plan years, the Bipartisan American Miners Act allows in-service distributions at age 59½ to participants in governmental 457(b) plans and 401(a) pension plans.

Notice 2020-68 verifies that allowing participants to take in-service distributions starting at age 59½ does not solely affect the plan’s normal retirement age. A pension plan’s definition of normal retirement age must still meet the requirements of Treas. Reg. 1.401(a)-1(b)(2), which states that a plan’s normal retirement age may not be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. A normal retirement age that is age 62 or later is deemed to satisfy the reasonably representative requirement. Notice 2020-68 also states that employers may continue to rely on the proposed regulations that were issued in 2016 for governmental pension plans. Employers are not required to offer the age 59½ in-service distribution.

 

Amendment Guidance

To help synchronize amendment deadlines for the SECURE Act, the Bipartisan Miners Act, and the Coronavirus Aid, Relief, and Economic Security Act, Notice 2020-68 states that employers with qualified retirement plans and 403(b) plans that are not maintained by a public school will have until the last day of the first plan year beginning on or after January 1, 2022, to amend their plans for the SECURE Act and the Bipartisan American Miners Act. This is a change from the Bipartisan Miners Act, which gave employers until the end of their 2020 plan year to amend their plan documents. Those employers with qualified governmental plans under IRC Sec. 414(d), collectively bargained (union) plans, and 403(b) plans maintained by a public school have until the last day of the first plan year beginning on or after January 1, 2024.

Governmental 457(b) plan administrators must amend their documents for the SECURE Act and the Bipartisan American Miners Act by the later of the last day of the first plan year beginning on or after January 1, 2024, or if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the IRS that the plan was administered in a manner that is inconsistent with the requirements of IRC Sec. 457(b).

Notice 2020-68 provides long awaited IRA amendment guidance. The Notice states that financial organizations must amend their IRA plan agreements and disclosure statements for the SECURE Act by December 31, 2022, or a later date as prescribed by the Treasury Secretary. The IRS expects to issue revised model IRA documents and an updated Listing of Required Modifications (LRMs). The LRMs will contain sample language that document providers may use when updating their IRA prototype documents. Employers must amend their deemed IRA documents based on the deadline applicable to the retirement plan under which the deemed IRA is established.

 

Next Steps

If they haven’t already, employers and financial organizations should educate themselves and their staff on the new requirements and determine whether they will offer any of the optional provisions. They should also start considering the amendment process for their retirement plan and IRA documents.

The IRS is requesting comments on the topics covered in Notice 2020-68—especially on the provision relating to long-term, part-time employees. Comments must be submitted on or before November 2, 2020, and should refer to Notice 2020-68. The Treasury Department and IRS are still expected to provide further guidance—including new regulations—on the SECURE Act and Bipartisan American Miners Act.

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

 

 

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Washington Pulse: PEP Model Evolves with DOL Proposed Registration Guidance

The DOL has issued a proposed rule on registration for pooled plan providers (PPPs), who may begin offering pooled employer plans (PEPs) on January 1, 2021. As this date quickly approaches, those who are considering offering or adopting a PEP need further guidance. But at least this proposed rule starts to answer some of the many questions that must be resolved before PEPs can become a viable alternative for employers.

 

Background

Single employer plans are established by individual businesses—or groups of closely related businesses, such as controlled groups or affiliated service groups. By contrast, multiple employer plans (MEPs) have generally been the solution for certain loosely related businesses that want to adopt a common retirement plan. Historically, the rules on who can participate in a MEP have presented significant obstacles for employers: only those in the same bona fide group, association, or professional employer organization (PEO) can adopt a MEP and, until the release of the final regulations on association retirement plans (ARPs) and other MEPs in July 2019, the rules defining such groups were unclear. While the ARP regulations provided much needed clarity and provided an opportunity for expanded use of MEPs, many believed the full potential for MEPs could still not be reached.

Congress addressed this perceived gap by creating the PEP framework in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was enacted in December 2019. PEPs offer a different way to gain access to retirement plans by allowing a MEP structure for unrelated businesses. By removing the commonality requirement previously associated with other MEPs, and by transferring most administrative and fiduciary duties from the employer to the PPP under a PEP arrangement, lawmakers hope to reduce employer barriers to adopting retirement plans for their employees.

While the SECURE Act provided a framework, many significant questions must be addressed before prospective providers can confidently enter the PEP marketplace. The SECURE Act directs various federal agencies to provide necessary guidance, including model plan language, that identifies the administrative duties and other actions required of PPPs. But even as we await further guidance, the SECURE Act provides important details about PEPs and PPPs.

NOTE: Before guidance describing the operational aspects of PEPs is issued, employers and pooled plan providers who comply in good faith with a reasonable interpretation of the SECURE Act provisions will be treated as meeting the requirements.

PEP documentation. The Treasury Department is required to issue model plan document language (as well as other guidance). The PEP plan documents must contain, among other things, the following provisions:

  • Designation and acknowledgement in writing that the PPP is a named fiduciary and plan administrator under ERISA.
  • Designation of one or more trustees (other than the employer) as responsible for collecting contributions, holding the assets of the plan, and implementing written contribution collection procedures.
  • Prohibition on unreasonable restrictions, fees, or penalties charged by the PPP to employers, participants, and beneficiaries with regard to ceasing participation or other plan transactions, such as distributions and transfers.

Fiduciary responsibilities. With single employer plans, employers bear fiduciary responsibility for plan operations; with pooled employer plans, PPPs are required to be a named fiduciary. So while employers cannot fully delegate all of their fiduciary duties, they can share the burden with the PPP.

Each employer in the PEP retains fiduciary responsibility for

  • Prudently selecting and monitoring the PPP,
  • Prudently selecting and monitoring any other named fiduciaries of the plan, and
  • Investing and managing their employees’ assets within the PEP (unless the PPP delegates this duty to another fiduciary, such as an investment advisor).

The PPP takes over plan administration—such as facilitating plan amendments, testing for compliance, and filing annual information returns—but employers still have a role in monitoring the PPP. The process begins, however, with the registration of PPPs.

 

Electronic Registration for Pooled Plan Providers

The SECURE Act requires each PPP to register with the DOL and the Treasury Department—and to register each PEP that it establishes. This requirement will be satisfied by completing the new Form PR – Registration for Pooled Plan Provider, which is included in the DOL’s proposed rule. By gathering this information, the DOL and Treasury will be better prepared to oversee the PEP market and to provide regulatory agencies, prospective employer customers, and the public with relevant data about available PPPs.

Each PPP will be responsible for its own registration and for any update or supplement to past filings.

  • Initial Registration – 30 to 90 days before beginning operations, the PPP must register with basic identifying information and a summary of its services, marketing activities, and any pending legal or regulatory actions in which they are involved. The DOL considers a PPP to begin operations when it begins publicly marketing a PEP. Under the proposed regulations, “preliminary business activities” may be undertaken before registration, but publicly marketing services as a PPP cannot.
  • Supplemental Notice – The PPP must inform the DOL of each new PEP and make supplemental filings within 30 days of any change to the initial registration—or of other changes such as a significant change in business structure of the PPP.
  • Amendments – Errors and omissions related to the initial registration must be corrected by amending the filing within a reasonable period following discovery.
  • Final Filing – The PPP must complete a final filing when the last PEP it administers is terminated and all assets have been properly distributed.

Consistent with regulatory efforts to simplify procedures and become paperless, the DOL will administer the registration process online with the same “EFAST 2” electronic filing system currently used to receive the Form 5500.

 

Comment Period

The proposed rule was published in the Federal Register on September 1, 2020 with a 30-day comment period, so the DOL will accept comments until October 1, 2020. Comment has been requested on various aspects of the PPP registration process to ensure that the proposed rule is not unreasonably burdensome. The DOL has specifically asked for comments on particular concerns, including whether PPPs should be required to report additional information upon registration and whether the DOL should refer to other filings to acquire information necessary for registration.

 

Next Steps

In order to make the registration platform available before the start of 2021, the DOL will need to issue a final rule on registration requirements soon after the comment period ends. The DOL’s proposed registration requirement alone is not likely to dissuade those institutions who are already preparing to become pooled plan providers. But more guidance on PEPs and PPPs is still needed.

 

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

 

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Washington Pulse: IRS Releases Guidance on Loan Offset Rollovers

As part of the Tax Cuts & Jobs Act of 2017 (TCJA), Congress provided more time for plan participants to roll over certain types of plan loan offsets. The IRS has released proposed regulations—which can be relied on as of August 20, 2020—to align the IRS’s guidance with the statutory rules, while providing additional clarification and examples on how these rules work.

 

Background

A plan loan offset is generally described as the process by which a participant’s accrued benefit is reduced (offset) in order to repay an outstanding plan loan. The offset can occur only when the participant has a distributable event, such as a severance from employment. Often, plan loan policies require loan repayments to be made through payroll withholding, so former employees cannot continue previously scheduled loan payments. In this case, a loan default occurs when a participant leaves the employer. At that point, the participant can cure the default by paying off the loan balance.

More likely, however, the participant will request a distribution of the account, and the plan administrator will offset the loan amount, removing it as a plan asset. This cancelled loan amount—the offset amount—is not simply “forgiven.” It is considered an actual distribution and is taxable to the former employee for the year in which it is offset, unless it is rolled over. But often participants will not do this. It could be that they don’t have the out-of-pocket funds to roll over the offset amount. Or perhaps they don’t understand their options.

Before the TCJA was enacted, the 60-day rollover rule would require participants to complete the rollover within 60 days of the loan offset. But participants might not understand that the offset amount is included in income until they receive IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which may be well after the 60-day time frame. More fundamentally, 60 days doesn’t provide much time to come up with the money to roll over the offset amount. If a participant cannot repay the loan to the plan, it’s also unlikely that the participant can make up the offset amount by rolling over the loan amount into another eligible plan within 60 days. Under the TCJA, participants have a much longer time period to complete a rollover of certain loan offsets.

 

Existing Rules Pertaining to Offsets Still Apply

Many of the familiar rollover rules pertaining to offset amounts remain intact. For instance, the revised regulations still contain a definition of “plan loan offset amount,” which is eligible to roll over within 60 days. And Treasury Regulation (Treas. Reg.) 1.401(a)(31)-1 Q&A-16 still applies. This provision exempts offsets from the requirement that a plan administrator must offer a direct rollover option on all eligible rollover distributions. Although offset amounts are eligible for rollover treatment, they cannot be rolled over directly because the outstanding loan assets are no longer in an account that can be paid to another eligible plan. Instead, offset amounts can be indirectly rolled over.

Another rule, under Treas. Reg. 31.3405(c)-1, Q&A-11, provides that offset amounts alone are not subject to 20 percent mandatory federal withholding. But if the offset is processed along with a cash distribution that is also an eligible rollover distribution, the 20 percent that must be withheld is calculated on the sum of the cash distribution plus the offset amount.

Example: Participant A severs from employment and requests a lump-sum distribution of his entire individual account under the plan. This balance includes $7,000 in mutual funds and a $3,000 loan amount, which is offset immediately upon termination in accordance with the plan’s loan policy. The total distribution eligible for rollover is considered to be $10,000. Therefore, the plan administrator must withhold $2,000 on the lump-sum distribution, which is equal to 20 percent of the total $10,000 eligible rollover distribution. The plan administrator withholds $2,000 from the $7,000 cash portion of the distribution, leaving the participant with a $5,000 net cash amount.

 

Proposed Regulations Give More Clarity

While “regular” plan loan offset amounts still exist, the TCJA created a new term: qualified plan loan offset (QPLO). Available for 2018 and later tax years, a QPLO describes offsets that occur only upon plan termination or severance from employment. Here is the crux of the new rule under the TCJA and the proposed regulations: participants and spousal beneficiaries have until their tax filing deadline (including extensions) for the taxable year in which a QPLO occurs to indirectly roll over all or part of it to another eligible retirement plan or IRA. This rule applies to QPLOs from Internal Revenue Code (IRC) Section 401(a) plans (such as profit sharing plans, 401(k) plans, and defined benefit plans), 403(a) plans, 403(b) plans, and governmental 457(b) plans.

Two “Qualifying” Conditions

The proposed regulations define a qualified plan loan offset—a QPLO—as a plan loan offset amount that meets the following two conditions.

  • The loan amount is treated as distributed from an eligible employer plan to a participant or spousal beneficiary because
    • the eligible employer plan was terminated, or
    • the participant incurred a severance from employment that caused a failure to meet the loan repayment terms.
  • The loan offset amount must relate to a plan loan that met the requirements of IRC Sec. 72(p)(2) immediately before the plan termination or the participant’s severance from employment.

IRC Sec.72(p)(2) contains the plan loan conditions that must be met to avoid treating a loan as a distribution. Such conditions include the $50,000 limitation, the five-year term maximum, and the level repayment requirement. If these loan requirements are not met immediately before the loan offset occurs, the offset amount cannot be treated as a QPLO.

Example: Participant B and Participant C both take loans in 2019 from Plan X. Participant B’s loan meets all of the conditions of IRC. Sec. 72(p)(2), and she has not missed any payments on her loan when her plan was terminated on August 1, 2021. Any offset amount may be considered a QPLO because all loan requirements were satisfied immediately before plan termination. On January 1, 2021, Participant C defaulted on his loan payments. The employer provided a cure period until June 30, 2021, during which Participant C made no repayments. When the plan terminates on August 1, 2021, Participant C’s loan offset amount will not be a QPLO because the loan did not satisfy the level repayment requirement immediately before plan termination. It will, however, still be eligible to be rolled over within 60 days.

Timely Tax Filing Allows Automatic Six-Month Extension on Rollover

The relief granted under the TCJA allows those who request a tax filing extension to roll over QPLOs by the extended filing deadline: October 15. In the proposed regulations, the IRS has clarified that the automatic six-month extension under Treas. Reg. 301.9100-2(b) also applies to the deadline by which a QPLO must be rolled over, provided that

  • the taxpayer files a timely tax return, and
  • the taxpayer takes corrective action within the six-month period.

Example: On June 1, 2020, Participant D has a $10,000 QPLO amount that is distributed from her plan. She may roll over the $10,000 amount as late as October 15, 2021. The automatic six-month extension applies if Participant D timely files her tax return (by April 15, 2021, the due date of her return), rolls over the QPLO amount within the six-month period ending on October 15, 2021, and amends her tax return by October 15, 2021, if necessary, to reflect the rollover.

12-Month “Bright-Line” Test

The IRS provides a test in the proposed regulations that is designed to help plan administrators to identify QPLOs after a severance from employment. A plan loan offset amount will meet the severance from employment requirement if the plan loan offset

  • relates to a failure to meet the loan’s repayment terms, and
  • occurs within the period beginning on the date of the participant’s severance from employment and ending on the first anniversary of that date.

As a result, plan administrators must not report an offset as a QPLO if the offset occurs more than 12 months after the participant’s severance from employment. Offsets occurring after the 12-month period will be treated like regular loan offset amounts, which are subject to the 60-day indirect rollover deadline.

Form 1099-R reporting codes

Plan administrators must report whether a distribution is a regular offset amount or a QPLO on Form 1099-R. The 2020 Form 1099-R instructions provide that if a participant’s accrued benefit is offset to repay a loan (a regular offset amount), the plan administrator should report the distribution as an actual distribution (code 1 for an early distribution or code 7 for a normal distribution) in Box 7 and not use code “L,” which is used only for deemed distributions. But for a QPLO, the administrator should enter the special code “M” in Box 7, along with any other applicable code.

 

Next Steps

The proposed regulations contain helpful clarifications and numerous examples. Fortunately, the new rules are fairly straightforward. Nonetheless, the IRS is taking comments and requests for public hearing on the proposed regulations until October 5, 2020. The proposed rules are slated to apply to distributions on or after the date that the final regulations are published in the Federal Register. But taxpayers and plan administrators may rely on this guidance immediately.

 

Ascensus will continue to follow new developments as they arise. Visit ascensus.com for the latest information.

 

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Washington Pulse: Lifetime Income Disclosures: A New Requirement for Pension Benefit Statements

Financial security in retirement is the ultimate goal of those who participate in employer-sponsored retirement plans. But while saving for retirement is important, the Department of Labor (DOL) has expressed concern that participants may need more information from their employers to be confident about a positive retirement outcome. Many factors influence retirement readiness. It’s not just whether we save; it’s also how much we save, how we invest our savings, and—among other things—when we retire.

To help participants know whether they’re saving enough for retirement, the Employee Retirement Income Security Act of 1974 (ERISA) Section 105(a) requires plan administrators to provide each defined contribution plan participant with an annual pension benefit statement. Participants who have the right to direct their own investments must receive statements at least quarterly. But knowing how much is in your retirement account may not give much insight into whether you’ll have enough to retire on.

The DOL attempted to address this concern in 2013 by issuing an advance notice of proposed rulemaking (ANPRM). In the ANPRM, the DOL considered requiring plan administrators to provide up to four lifetime income illustrations in their pension benefit statements. But the DOL never adopted the ANPRM as a final rule.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act—signed into law in December 2019—amended ERISA Sec. 105(a) to require ERISA-covered defined contribution plans (profit sharing plans, 401(k) plans, ERISA 403(b) plans, money purchase pension plans, and target benefit plans) to provide more information to participants. The SECURE Act requires plan administrators of such ERISA-covered plans to disclose (at least annually) an estimated monthly payment that participants could receive in a lifetime income stream that is equivalent to their current accrued benefit. Plan administrators must also provide this disclosure to beneficiaries—such as alternate payees or deceased participants’ beneficiaries—who have their own individual account under the plan. Although plan administrators must disclose a projected annuitized payment amount, they are not required to actually offer annuities as a distribution option.

To implement this new disclosure mandate, the DOL’s Employee Benefit Security Administration (EBSA) has posted at its website an interim final rule (IFR), entitled Pension Benefit Statements-Disclosure Regarding Lifetime Income. (At the time of this writing, the official version of the IFR had not yet been published in the Federal Register.) The DOL has also issued an accompanying Fact Sheet and a News Release.

           

New Disclosure Requirements

Plan administrators must meet the following requirements when providing lifetime income disclosures.

Timing Requirements

The IFR will be effective one year after its publication in the Federal Register. This means that the IFR’s disclosure requirements will apply to pension benefit statements provided after that date. Plan administrators have been required to include disclosures at least annually. So, depending on the type of plan and on the date of the last disclosure, the latest that a disclosure could be made is during late summer 2022.

Monthly Payment Calculation

The disclosure must contain illustrations of projected monthly payout amounts. The IFR contains the following assumptions that plan administrators must rely on when calculating each participant’s estimated monthly payment amount.

  • Two types of The disclosure must contain two illustrations of converting assets: one to a single life annuity (SLA) and the second to a qualified joint and 100 percent survivor annuity (QJSA). The SLA and QJSA illustrations are designed to show payment amounts for both single and married participants, whether or not they are currently married.
    • The SLA illustration must assume that the annuity will pay a fixed amount each month during the participant’s life.
    • The QJSA illustration must show the participant receiving a fixed payment amount each month during the joint lives of the participant and spouse. Once the participant dies, the surviving spouse will continue to receive the same monthly payment amount for life. When calculating the QJSA payment, the plan administrator must assume that each participant has a spouse who is the same age as the participant. This assumption applies even if the participant is not married.
  • Account balance. Plan administrators must assume that participants will convert their entire account balance to either an SLA or a QJSA. The illustrations assume that participants are 100 percent vested in their accounts and that any outstanding loans that are not in default have been repaid.
  • Payment start date. Plan administrators should calculate the monthly payments assuming that the participant will begin receiving payments on the last day of the pension benefit statement period (for example, December 31 for a benefit statement covering the fourth quarter).
  • Age when payments start. Under the IFR, plan administrators must assume that payments start when the participant turns age 67. For most individuals, this is considered full retirement age for Social Security benefits. Plan administrators must use the participant’s actual age if the participant is older than age 67.
  • Interest rate. To calculate the monthly payments, plan administrators must use the 10-year constant maturity Treasury (CMT) securities yield rate as of the first business day of the last month of the statement period. So for a fourth quarter benefit statement with a December 31 commencement date, the December 1 CMT rate would be used. This rate best represents interest rates used in the actual pricing of commercial annuities.
  • Mortality table. Lifetime annuities offered by ERISA plans must be priced on a gender-neutral basis. To meet this requirement, plan administrators must use the gender-neutral mortality table reflected in Internal Revenue Code Section 417(e)(3)(B).

 

Specific Rules for In-Plan Annuities

Plan administrators that offer an in-plan annuity distribution option through a licensed insurer—which is designed to allow participants to take out scheduled payments instead of a lump-sum distribution—may use the assumptions contained in the IFR or may use the actual terms of the annuity contract. Plan administrators that use the actual annuity contract terms must still provide illustrations of monthly SLA and QJSA payments, using the IFR assumptions that

  • payments will start on the last day of the statement period,
  • the participant will start payments at age 67 (or the participant’s actual age if older than 67), and
  • the participant has a spouse who is the same age.

Plan administrators offering a deferred income annuity (DIA) option, which allows participants to purchase a future income stream of retirement payments, are subject to different disclosure requirements. With this type of annuity, purchases occur during working years, but payments are delayed to a selected retirement age—or possibly later, in the case of a qualifying longevity annuity contract (QLAC). For the portion of an accrued benefit that purchases a DIA, the separate disclosure must

  • indicate the payment start date and the participant’s age on that date;
  • explain the frequency and payment amount as of the start date in current dollars;
  • describe any applicable features, such as a survivor benefit or a period certain commitment; and
  • state whether the annuity has fixed or variable payments, and if the payment amount could vary (e.g., for inflation), the disclosure must explain how the payments will change.

The plan administrator must use the generally applicable disclosure rule assumptions under the IFR for any portion of a participant’s account that is not invested in a DIA.

 

Model Language Available

The lifetime income disclosure must contain certain explanations about the estimated annuity payments. For example, one of the required explanations is designed to help participants understand that the monthly payment amounts shown in the disclosure are estimates—there is no guarantee that participants will actually receive the estimated amounts. The DOL provides model language to address the required explanations, in the form of 11 separate language inserts, plus 2 standalone supplements that incorporate the 11 language inserts.

To satisfy the IFR rules, plan administrators may choose to incorporate each of the DOL’s 11 separate model language inserts into their existing pension benefit statements. Alternatively, plan administrators may use one of the standalone supplements: the Model Benefit Statement Supplement or the Model Benefit Statement Supplement—Plans That Offer Distribution Annuities.

Plan administrators may also provide their own language to address the needed explanations. To receive liability relief (discussed next), plan administrators using their own language must ensure that it is substantially similar to the DOL’s model language. Only minor variations of the model language may be used. And although there is no required format for the explanations, the DOL does require the statements to be written in a manner so as to be understood by the average participant.

 

Liability Relief

Plan administrators who meet certain requirements will not have any liability for providing monthly payment illustrations that are different from the amount actually received by the participant. To qualify for this relief, plan administrators must

  • provide illustrations of estimated SLA and QJSA payment amounts;
  • use the IFR’s model language (or substantially similar language); and
  • use the IFR’s required assumptions (i.e., account balance, payment start date, age when payments start, interest rate, and mortality table).

The IFR clarifies that, because deferred income annuity information is not derived in accordance with the assumptions or model language provided, liability relief is not available to plan administrators who provide lifetime income disclosures for DIAs. In addition, liability relief is not available for any additional illustrations provided in the disclosure.

 

Comment Period

The DOL has provided a comment period that will end 60 days after the IFR is published in the Federal Register. The DOL will consider any comments that it receives before issuing final regulations, which it plans to do before the IFR becomes effective. The DOL specifically requests comments on several topics, including these.

  • How will plans that currently provide lifetime income disclosures be affected by these new requirements?
  • Is age 67 an appropriate annuity commencement age to use?
  • Should a different interest rate or a combination of interest rates be used?
  • Should plan administrators incorporate a “term certain or other feature” in the disclosure examples?

 

Next Steps

Although the IFR’s effective date is still a year away, plan administrators should work with their software provider, recordkeeper, or insurance company to ensure that the required assumptions and model language will be incorporated into their lifetime income disclosures by then.

 

Ascensus will continue to follow new developments as they arise. Visit ascensus.com for the latest information.

 

 

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Washington Pulse: The DOL’s New Proposal to Regulate Investment Advice

Few aspects of retirement plan governance have been as controversial as regulating investment advice. Exactly what obligation—if any—does an investment professional have to provide impartial, conflict-free advice to savers and retirees?  When do financial professionals step over the boundary that can make them a fiduciary, with the ethical and legal obligations that come with this duty?

The answers have been inconsistent, stretching over many years. Department of Labor (DOL) fiduciary investment advice regulations date back to the 1970s. Those regulations needed revision in order to better align with today’s investment products and participant-directed retirement plans. Changes were proposed in 2010, withdrawn in response to public comments, revised again in 2015, and made final in 2016.

The DOL delayed implementing the 2016 final investment fiduciary regulations and accompanying guidance. These regulations were ultimately struck down in 2018 as “regulatory overreach” by the United States Court of Appeals for the Fifth Circuit.

The DOL later issued Field Assistance Bulletin (FAB) 2018-02, which states that the DOL will not pursue prohibited transaction claims against fiduciaries who make good-faith efforts to comply with the Impartial Conduct Standards (discussed later). FAB 2018-02 remains in effect.

The DOL has again issued investment advice guidance, this time to replace the guidance struck down by the appellate court. This latest guidance package includes a proposed prohibited transaction class exemption entitled Improving Investment Advice for Workers and Retirees, and a technical amendment to DOL Regulations (Regs.) 2509 and 2510 that implements the appellate court’s order by

  • reinstating the original version of DOL. Reg. 2510.3-21 (including the five-part test);
  • removing prohibited transaction exemptions (PTEs) 2016-01 (the Best Interest Contract Exemption) and 2016-02 (the Class Exemption for Principal Transactions);
  • returning PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128 to their original form; and
  • reinstating Interpretive Bulletin (IB) 96-1, which is intended to help investment providers, financial institutions, and retirement investors determine the difference between investment education and investment advice. Investment providers and financial institutions may rely on the safe harbors in IB-96-1 in order to avoid providing information that could be construed as investment advice.

The technical amendment became effective on July 7, 2020.

 

What is the five-part test?

The original version of DOL Reg. 2510.3-21 (which the technical amendment reinstates) contains a five-part test that is used to determine fiduciary status for investment advice purposes. Under the test, an investment provider or a financial institution that receives a fee or other compensation is considered a fiduciary if it meets all of the following standards (i.e., prongs) of the test.

  • The provider or institution gives advice on investing in, purchasing, or selling securities, or other property.
  • The provider or institution gives investment advice to the retirement investor on a regular basis.
  • Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan or its fiduciaries.
  • The retirement investor uses the advice as a primary basis for investment decisions.
  • The provider or institution provides individualized advice, taking into account the plan’s demographics, needs, goals, etc.

 

Has the DOL’s opinion changed on rollover recommendations?

In the preamble of the proposed PTE, the DOL clarified that it no longer agrees with the guidance originally provided in Advisory Opinion 2005-23A (better known as the Deseret Letter). In the Deseret Letter, the DOL indicated that a recommendation to distribute and roll over retirement plan assets would not generally constitute investment advice because it would not meet the first prong of the five-part test. But because it is common for the investments, fees, and services to change when the decision to roll over assets is made, the DOL now believes that a recommendation to distribute assets from an IRA or an ERISA-covered plan would be considered investment advice with respect to the first prong of the five-part test.

The DOL acknowledges that advice encouraging an individual to roll over retirement plan assets may be an isolated and independent transaction that would fail to meet the second “regular basis” prong. But determining whether advice to roll over assets meets the “regular basis” prong depends on the facts and circumstances.  So the DOL could view a rollover recommendation that begins an ongoing advisory relationship as meeting the “regular basis” prong.

As discussed above, the proposed PTE would allow investment professionals to receive compensation for advising a retirement investor to take a distribution from a retirement plan or to roll over the assets to an IRA. The investment professional could also receive compensation for providing advice on other similar transactions, such as conducting rollovers between different retirement plans, between different IRAs, or between different types of accounts (e.g., from a commission-based account to a fee-based account).

Under the proposed PTE, financial institutions would need to document why the rollover advice was in the retirement investor’s best interest. Documentation would need to

  • explain whether there were other alternatives available (e.g., to leave the assets in the plan or IRA and select different investment options);
  • describe any applicable fees and expenses;
  • indicate whether the employer paid for some or all of the plan’s administrative expenses; and
  • show the different levels of services and investments available.

In addition, investment providers or financial institutions that recommend rolling over assets from another IRA or changing account types should consider and document the services that would be provided under the new arrangement.

 

Who is covered under the proposed PTE?

The proposed PTE would apply to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions), and their employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors. The proposed PTE would also apply to any affiliates or related entitites.

“Retirement investors” include

  • IRA and plan fiduciaries (regardless of plan size),
  • IRA owners or beneficiaries, and
  • plan participants or beneficiaries with authority to direct their accounts or take distributions.

The proposed PTE defines a “plan” as including 401(a) plans (e.g., 401(k) plans), 403(a) plans, 403(b) plans, defined benefit plans, owner-only plans, simplified employee pension (SEP) plans, and savings incentive match plan for employees of small employers (SIMPLE) plans. The proposed PTE would also apply to employee welfare benefit plans that have established a trust (e.g., VEBAs).

The proposed PTE, defines an “IRA” as an individual retirement account, an individual retirement annuity, a health savings account (HSA), an Archer medical savings account (MSA), and a Coverdell education savings account (ESA).

 

What protection does the proposed PTE offer?

The Internal Revenue Code and ERISA generally prohibit fiduciaries from receiving compensation from third parties and compensation that varies based on investment advice provided to retirement plans and IRAs. Fiduciaries are also prohibited from selling or purchasing their own products to retirement plans and IRAs (known as principal transactions).

Under the proposed PTE, financial institutions and investment professionals providing fiduciary investment advice could receive payments (e.g., commissions, 12b-1 fees, and revenue sharing payments) that would otherwise violate the prohibited transaction rules mentioned above. For example, the exemption would provide relief from prohibited transactions that could occur if a financial institution or investment professional

  • advises a client to take a distribution or roll over assets to an IRA or retirement plan;
  • provides recommendations to acquire, hold, dispose of, or exchange securities or other investments; or
  • recommends using a particular investment manager or investment advice provider.

In addition, the proposed PTE would cover riskless principal transactions  (e.g., when a broker-dealer purchases a security for their own account knowing that it will be sold to a retirement investor at a certain price) as well as principal transactions involving certain specific types of investments (e.g., municipal bonds).

The following transactions would not be covered by the PTE.

  • Transactions where advice is provided solely through a computer model without any personal interaction (i.e., robo-advice arrangements).
  • Transactions in which the investment professional is acting in a fiduciary capacity other than as an investment advice fiduciary under the five-part test, as described below (e.g., a 3(38) investment manager with authority to make discretionary investment decisions).
  • Transactions involving investment providers, financial institutions, and their affiliates if they are the employer of employees covered by the plan; or are a named fiduciary, plan administrator, or affiliate who was chosen to provide advice by a fiduciary who is not independent of the investment professional, financial institution, or their affiliates.

Certain individuals and institutions (and all members within the institution’s controlled group) would be ineligible to rely on the exemption—including those who have been convicted of a crime associated with providing investment advice to a retirement investor, or those who have a history of failing to comply with the exemption. The period of ineligibility would generally be 10 years, but a financial institution with a conviction may petition the DOL for continued reliance on the exemption.

 

What does the proposed PTE require?

To take advantage of the relief provided under the proposed PTE, investment professionals and financial institutions must provide advice in accordance with the Impartial Conduct Standards. The Impartial Conduct Standards contain three components—a reasonable compensation standard, a best interest standard, and a requirement that prohibits investment providers or financial institutions from giving misleading statements about investment transactions or other related matters.  The Impartial Conduct Standards also requires financial professionals and financial institutions to provide the best execution possible when completing security transactions (e.g., completing the transaction timely).

Under the best interest standard, investment professionals and financial institutions are not required to identify the best investment for the retirement investor, but any investment advice given must put the retirement investor’s interests ahead of the interests of the investment professional, financial institution, or their affiliates. This is consistent with the SEC’s Regulation Best Interest.

Investment providers and financial institutions cannot waive or disclaim compliance with any of the proposed PTE’s conditions. Likewise, retirement investors cannot agree to waive any of the conditions. In addition, the proposed PTE would require a financial institution to

  • provide the retirement investor—before the transaction takes place—with an acknowledgment of the institution’s fiduciary status in writing, and a written description of the service to be provided and any material conflicts of interest;
  • adopt and enforce policies and procedures designed to discourage incentives that are not in the retirement investor’s best interests and to ensure compliance with the Impartial Conduct Standards;
  • maintain records that prove compliance with the PTE for six years; and
  • conduct a review at least annually to determine whether the institution complied with the Impartial Conduct Standards and the policies and procedures created to ensure compliance with the exemption. Although an independent party does not need to conduct the review, the financial institution’s chief executive officer (or the most senior executive) must certify the review.

Note that the proposed PTE would not give retirement investors new legal claims (e.g., through contract or warranty provisions) but rather would affect the DOL’s enforcement approach.

 

Next Steps

Many investment advisers, broker-dealers, banks, and insurance companies that will be affected by the proposed PTE currently operate under similar standards found in various state laws and in the SEC’s Regulation Best Interest.  The DOL’s temporary enforcement policy discussed in FAB 2018-02 also remains in effect, as do other more narrowly tailored PTEs.

Each type of investment provider and financial institution is likely affected differently, whether in steps to comply or costs involved. Financial institutions and investment providers may want to review the proposed PTE and start taking steps to comply with it. This may involve creating and maintaining any policies and procedures they don’t already have in place as a result of state law or the Regulation Best Interest.

In the meantime, a 30-day comment period for the proposed PTE starts on July 7, 2020. Comments may be submitted at www.regulations.gov. The Docket ID number is EBSA-2020-0003.

 

 

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Washington Pulse: More Options for Delivering Retirement Plan Disclosures

Nearly seven months after releasing proposed regulations, the Department of Labor (DOL) has released final regulations on default electronic delivery of retirement plan disclosures. These final regulations provide an additional safe harbor that may make it easier for plan administrators and their service providers to electronically deliver (either through email or by posting online) certain required disclosures to participants and beneficiaries in ERISA-covered plans. In addition to these final regulations, the DOL also released an accompanying News Release and Fact Sheet.

 

Overview

The new safe harbor created by the final regulations is simply meant to provide employers an additional option for delivering DOL-required disclosures. Employers are not required to follow the new regulations.

The final regulations apply only to disclosures (i.e., “covered documents”) under Title I of ERISA that pension benefit plan administrators must provide to covered individuals; they do not apply to IRS disclosures or to welfare benefit plan disclosures at this time. A covered document does not include a document provided only upon the participant’s written request (e.g., a request for a copy of the plan’s trust agreement). Examples of covered documents include

  • a summary plan description,
  • a summary of material modifications,
  • a summary annual report, or
  • an annual funding notice.

A covered individual is defined as a participant, beneficiary, or another individual (e.g., alternate payee) entitled to covered documents. A covered individual must either provide an electronic address (e.g., an email address or smartphone number) or, in the case of a covered individual who is an employee, have one assigned to them by the employer. The electronic address assigned by an employer must be for employment-related purposes that include, but are not limited to, the delivery of covered documents under the new safe harbor.

 

What Has Changed From the Proposed Regulations?

The final regulations contain some welcome changes from the proposed regulations (see our previous Washington Pulse for more information on the proposed regulations.) The major changes contained in the final regulations are summarized below.

New Initial Notice Requirements

Plan administrators must provide an initial paper notice to participants who are defaulted into receiving covered documents electronically under the new safe harbor. In addition to the requirements in the proposed regulations, the final regulations require the notice to identify the specific electronic address that will be used to provide the covered documents to a covered individual. While this new requirement may make it more difficult for plan administrators to create the initial notice, it should enhance the long-term prospect of individuals receiving required disclosures.

New Email Delivery Option

In addition to posting covered documents on a website, plan administrators may now send covered documents directly to the email addresses of covered individuals, with the covered documents included either in the body of the email or as an attachment to the email. Whether using email or posting documents online, employers must ensure that the delivery method protects the confidentiality of personal information relating to any covered individual.

More Generalized Requirements for “Opt Out” Election

The proposed regulations allowed participants to opt out of receiving some documents electronically. Under the final regulations, a right to globally opt out must be provided free of charge. Plan administrators may also decide to offer recipients a “pick and choose” option (also free of charge) to receive some documents in paper form and some electronically. Similarly, a plan administrator that uses electronic means to deliver some covered documents need not use electronic means for all.

The final regulations also clarify that plan administrators need only provide one copy of any specific covered document free of charge.

New Website Requirements

  • Flexibility in definition of “website” The final regulations acknowledge the importance of including new and developing technologies in applying the guidance, as long as the safe harbor requirements can be met. For example, mobile applications now qualify as a website.
  • Reasonable procedures for website maintenance: These final regulations add “technical maintenance” of websites as a reason why disclosure documents may be unavailable for a reasonable amount of time.
  • Clarification on availability of web-posted documents: A covered document posted to a website must remain available on the website until it is superseded by a subsequent version, if applicable, but in no event less than one year after the date it is posted to the website. The annual Notice of Internet Availability (NOIA) must inform participants that the covered document may not be available past this time frame.
  • Plan administrators are not required to monitor website use: Plan administrators that choose to post covered documents on a website are not required to monitor whether covered individuals visit the website and view the information. The DOL also noted a recent court case that addressed whether a recipient has read, understood, and has “actual knowledge” of the information posted. The DOL did not, however, provide any further guidance on this issue.

New NOIA Requirements

  • Combined notices of online postings: Certain notices of online postings can be combined in a single annual NOIA, including the following.
  • Summary plan description (SPD)
  • Documents or information that must be provided annually (e.g., summary annual report (SAR))
  • Other documents authorized by the Secretary of Labor
  • Notices required by the IRS if authorized by the Secretary of the Treasury (e.g., automatic contribution arrangement (ACA) notice)

Unlike the proposed regulations, the final regulations clarify that plan administrators may not include a summary of material modifications or quarterly benefit statements in a combined NOIA. These covered documents must have their own NOIAs.

The NOIA, if applicable, must be sent to the covered individual’s electronic address. If the address is a phone number, it must be capable of receiving written text messages, and plan administrators must confirm this. Delivery of a NOIA by voice message does not meet this requirement.

  • NOIAs may contain an “invitation to take action” statement: A NOIA may contain a statement explaining that 1) the covered individual is invited or required to take action in response to the covered document and how to take such action, or 2) no action is required, provided that such statement is not inaccurate or misleading. For example, a NOIA may include a statement that a benefits claim denial delivered to a covered individual is an invitation to take action and requires action within a specific time frame or else the covered individual may forfeit a right to a benefit. In this example, it would be misleading for a plan administrator to suggest on a NOIA that no action is invited or required.
  • Document description accompanying a NOIA: Under the final regulations, a NOIA must include a brief description of a covered document if a covered document’s name does not reasonably convey the nature of the covered document. For example, a NOIA for a quarterly benefit statement ordinarily would not need a brief description, but a NOIA for a blackout notice would.

More Flexible Readability Requirements

Detailed guidelines for readability in the proposed regulations (using the Flesch reading ease score) were removed, and are not included in the final regulations. The final regulations simply require that communications under this guidance be “written in a manner calculated to be understood by the average plan participant.”

Special Rule for Severance from Employment

Procedures must be in place to ensure that a plan administrator will continue to have a valid electronic address to which notices can be provided after a covered individual’s severance from employment. The DOL revised this provision in the final regulations so that it applies only when an electronic address assigned by an employer is used to furnish covered documents. These particular procedures are not required when a personal email address is used to furnish covered documents.

 

Previous Guidance Still Applies

In 2002, the DOL created a safe harbor for electronically delivering any plan disclosures required by ERISA. Although the 2002 safe harbor is not the only permissible way that an employer may use electronic media, those using it may treat the notice or other document sent by email or other electronic means as having been properly delivered.

In March 2020, the DOL, Treasury Department, and the Department of Health and Human Services released EBSA Disaster Relief Notice 2020-01. This guidance extends deadlines for providing notices, disclosures, and documents that are due to plan participants and beneficiaries between March 1, 2020, and the end of a 60-day period following the close of the COVID-19 National Emergency (known as the Outbreak Period), which has yet to be announced.

Under this notice, plan fiduciaries will not violate ERISA as long as they act in good faith and provide required information as soon as practicable. Acting in good faith includes sending the information electronically when the plan fiduciary reasonably believes that the intended recipient has effective access to the information.

Although the DOL has yet to comment, it does not appear that plans have to rely on either one of the safe harbors in order to take advantage of Disaster Relief Notice 2020-01.

 

Transition Relief Granted

For an 18-month period following the effective date of these final regulations, plan administrators can also rely on prior guidance for the delivery of certain covered disclosures. This guidance includes FAB 2006-003, FAB 2008-003 (Q&A 7), and Technical Release 2011-03R. Thereafter, the relevant portions of the prior guidance are superseded by the final regulations.

Plan administrators may also rely on previously obtained electronic addresses—in existence on the effective date of the final rule—provided that they reasonably, in good faith, comply with the requirements of the safe harbor.

 

Effective Date

This guidance officially becomes effective on July 27, 2020. Plan administrators may, however, rely on these regulations immediately because the DOL will not take any enforcement action against those relying on the safe harbor before its effective date because of the COVID-19 pandemic. This approach, it is hoped, will help support the government’s overall response to the pandemic.

 

 

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Washington Pulse: New COVID-19 Relief for Employee Welfare Benefit Plans

During the last few months, the Department of Labor (DOL), Treasury Department, and Department of Health and Human Services (DHHS) have jointly issued multiple pieces of guidance intended to provide much needed relief to those suffering economic hardships from the coronavirus (COVID-19) pandemic. In this article, we’ll explain how the most recent relief affects employee welfare benefit plans.

 

Overview of New Relief

To help overcome the financial hardships facing millions of Americans, the DOL and the Treasury Department published a final rule on May 4, 2020. The final rule extends and suspends various employee welfare benefit plan and COBRA deadlines that fall between March 1, 2020, and the end of a 60-day period following the close of the COVID-19 National Emergency (known as the Outbreak Period), which has yet to be announced.

The DOL and Treasury Department also worked with the DHHS to create EBSA Disaster Relief Notice 2020-01. This guidance extends deadlines for providing notices, disclosures, and documents that are due to plan participants and beneficiaries between March 1, 2020, and the end of the Outbreak Period. The relief applies to plan fiduciaries that act in good faith to provide this information as soon as administratively practicable. The EBSA notice also confirms that Form 5500 filing deadlines that occur between April 1, 2020, and July 14, 2020, must now be filed by July 15, 2020 (calendar-year plans are not affected).

On May 12, 2020, the IRS issued Notice 2020-29 and Notice 2020-33. Notice 2020-29 allows employees to make election changes relating to employer-sponsored group health coverage, health flexible savings accounts (FSAs), and dependent care FSAs mid-year with no special enrollment events. The notice also allows for health FSA and dependent care FSA participants to submit new claims for reimbursement up to December 31, 2020, from amounts that remained in accounts as of a plan year end or the end of the grace period that occurred at any time in 2020.

Notice 2020-33 increases the maximum $500 health FSA carryover amount to an amount that is equal to 20 percent of the maximum salary reduction contribution for the plan year. The increase takes effect immediately, making the maximum amount that can be carried forward for the 2020 plan year $550 (20 percent of $2,750).

 

How the Final Rule Affects Employee Welfare Benefit Plans

The most significant impact of the final rule involves providing certain individuals extended deadlines for performing certain acts. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

  • Filing a benefit claim: The final rule extends the deadline for filing claims for benefits under welfare benefit plans. Importantly, this relief will also include calendar-year health FSAs and health reimbursement accounts (HRAs) that had a runout period ending on March 1, 2020 or later. Although this provision will help individuals with existing claims, it does not allow them to incur new claims applicable to an old plan year.
    • Example: An employee terminated employment and lost health coverage on May 1, 2020. Because the plan has a 90 day-runout period for terminated participants, the employee would normally have until July 30, 2020, to submit claims for reimbursement of eligible expenses incurred before the employee terminated employment. The period between the date of termination and the end of the Outbreak Period is now disregarded. If March 2, 2021 is the end of the Outbreak Period, the 90-day runout period will start on March 3, 2021, and end on May 31, 2021.
  • Filing an appeal and requesting a review: The final rule extends the period to file an appeal of an adverse benefit determination. This period must be at least 60 days (for welfare benefit plans) or 180 days (for group health plans) following notification of the adverse benefit determination. The final rule also extends the four-month period for filing a request for external or internal review.
  • Special Enrollment Periods: Employees and their eligible dependents now have more time to enroll in a group health plan following a special enrollment event. Usually individuals must elect coverage during a 30-day period (or a 60-day period, depending on plan provisions) following a special enrollment event.
    • Example: An employee had a child on March 20, 2020. The employee would normally have 30 days to elect coverage for the child. The period between the birth and the end of the Outbreak Period is now disregarded. If October 10, 2020, is the end of the Outbreak Period, the 30-day period would start on October 11, 2020, and end on November 9, 2020.

 

How Notice 2020-29 Affects Employee Welfare Benefit Plans

IRS Notice 2020-29 gives plans additional deadline flexibility and eases restrictions associated with various plan requirements found in the Internal Revenue Code and associated Treasury Regulations. The extensions provided by the Notice are described below.

  • Modified rules on irrevocable elections: Notice 2020-29 eliminates certain restrictions that limit the ability of participants to revoke and make new plan elections after the start of the plan year. During the 2020 plan year, elections pertaining to employer health coverage, health FSAs, and dependent care FSAs can now be made at any time on a prospective basis. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example: A participant elected to defer $1,200 into an FSA during open enrollment for a plan year that began on January 1, 2020. The participant is now permitted to change her election at any time and defer a different amount (e.g., $2,200) if she so chooses.
  • Extended the deadline for incurring claims: Plan participants in health FSAs and dependent care FSAs may now incur and submit new claims for reimbursement up to December 31, 2020, based on amounts that remained in their FSA as of the end of a plan year or the end of a grace period that occurred at any time in 2020. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example:  An employee was a participant in a 2019 calendar year FSA with a grace period that ended on March 15, 2020. He had $1,200 remaining in his account as of that date. He had not incurred any claims that he could submit for reimbursement through March 15, 2020. On June 29, 2020, the participant received medical services in excess of $1,200. He can submit his claim and be reimbursed for that amount.

 

How the Final Rule Affects COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) helps employees going through a qualifying event (such as termination of employment) maintain health coverage, often at a lower cost than they might find in the marketplace. To assist those who have lost health insurance coverage because of the pandemic, the final rule extends several COBRA-related deadlines. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

Delayed COBRA Election Deadline

To assist those who have lost health insurance coverage through termination of employment or a reduction of hours, the final rule extends the deadline to elect COBRA coverage. Normally, the election period ends 60 days following the later of 1) the qualifying event or 2) the date the plan provides the COBRA election notice to the qualified beneficiary.

  • Example: An employee is terminated on April 10, 2020, and loses coverage on April 30, 2020. If the terminated employee receives the COBRA election notice on May 5, 2020, he would normally have until July 4, 2020, which is 60 days, to elect COBRA coverage. But the Outbreak Period is now disregarded. If November 14, 2020, is the end of the Outbreak Period, the 60-day election period would start on November 15, 2020, and end on January 13, 2021.

This provision also gives employees flexibility in determining whether to spend money to continue coverage based on the type of medical issues they have during the extended deadline. Some people may choose to not enroll in COBRA coverage unless some type of expensive medical event makes it necessary. Normally, they would have a shorter window to determine the necessity of enrollment.

While the extended deadline helps individuals, it also creates risk for insurers and employers who may see employees taking advantage of the deadlines to enroll only if they incur significant costs. Healthy employees who would normally elect coverage, pay the premiums, and incur limited costs, will not have incentive to enroll during the window and will not be able to help offset costs as they normally would.

Delayed COBRA Payments

The final rule extends the amount of time that a qualified beneficiary has to submit a COBRA premium payment before coverage under the plan will cease. To be considered timely, the payment deadline is normally 30 days after the due date (or 45 days for the initial payment). While it is possible for qualified beneficiaries to take advantage of this relief in order to minimize expenses and avoid paying their premiums during the Outbreak Period, it is important to note that once the Outbreak Period is over, qualified beneficiaries must fully pay all prior months’ premiums in order to retain coverage. This could be a substantial financial burden. But if a qualified beneficiary has a major medical event, it could be cheaper to make up the costs of numerous months of premiums than to pay for the medical expenses.

Delayed COBRA Notices

  • Extended qualified event notification deadline: The final rule extends the date by which a covered employee or qualified beneficiary must notify the plan administrator of the following qualifying events: divorce (or legal separation) or a dependent child ceasing to be a dependent child. The normal deadline is 60 days after the date of the qualifying event.
  • Extended disability notification deadline: Covered employees and qualified beneficiaries have more time to notify the plan administrator of a disability determination. The normal deadline is 60 days after the date of being determined to be disabled.
  • Extended COBRA rights notification deadline: Plan administrators have more time to notify qualified beneficiaries of their COBRA rights following a qualifying event. The normal deadline is 14 days following the qualifying event (or 44 days when the employer is the plan administrator). Although plan administrators are not required to provide the COBRA election notice during the Outbreak Period, they must provide COBRA coverage if a participant elects it. Plan administrators will likely want to provide timely notices to encourage qualified beneficiaries to elect and pay for COBRA coverage.

 

Previous Relief Affecting Employee Welfare Benefit Plans

In March 2020, the IRS released Notice 2020-18, postponing the due date for all Federal income tax returns normally due on April 15, 2020, to July 15, 2020. Although not mentioned, contribution deadlines were expected to be delayed as well. A few weeks later, these expectations were met when Notice 2020-23 officially extended multiple deadlines that fell on or after April 1, 2020, and before July 15, 2020, to July 15, 2020—including deadlines for

  • making 2019 HSA contributions;
  • completing a 60-day rollover;
  • providing Form 5498-SA to HSA owners and to the IRS;
  • forfeiting unused FSA benefits;
  • receiving cash for unused vacation days; and
  • electing benefits in a noncalendar-year cafeteria plan.

 

Watch for Future Guidance

The last few months have seen a flurry of new guidance. This trend may continue for the duration of the pandemic. In fact, at the time of this writing the House of Representatives had just introduced a fourth stimulus package. Ascensus will be closely monitoring all future guidance. Visit ascensus.com for the latest updates.

 

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Washington Pulse: New Coronavirus Law Provides Retirement Plan and Healthcare Relief

With virtually every part of the U.S. economy facing unexpected financial challenges from the coronavirus (COVID-19) pandemic, Congress has passed the largest relief package in U.S. history. Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is designed to assist the millions of Americans affected by the outbreak. The legislation has multiple provisions that affect retirement and health savings arrangements.

 

Retirement Savings Provisions

Most financial experts advise against using assets that have been set aside for retirement. But many individuals may have to do just that in order to supplement their income. The following provisions are intended to help individuals access their IRA and retirement plan assets and to replenish those assets later on.

  • New coronavirus-related distributions (CRDs). Individuals may withdraw up to $100,000 in aggregate from eligible retirement plans without paying the 10 percent early distribution penalty tax.
    • A CRD is defined as a distribution made on or after January 1, 2020, and before December 31, 2020, to a qualified individual, defined as
      • an individual (or the spouse or dependent of the individual) who is diagnosed with the COVID-19 disease or the SARS-CoV-2 virus in an approved test; or
      • an individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reduced hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Secretary.

The CARES Act clarifies that employers may rely on participants’ certification that they meet the CRD requirements.

    • An eligible retirement plan is defined as a qualified retirement plan (e.g., a 401(k) plan), 403(b) plan, governmental 457(b) plan, or an IRA.
    • CRDs will meet the retirement plan distribution requirements, as long as all distributions from one employer do not exceed $100,000.
    • Individuals may repay CRDs over three years beginning with the day following the day a CRD is made. Repayments may be made to an eligible retirement plan or IRA.
    • CRD repayments made within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
    • CRDs will be taxed ratably over a three-year period, unless an individual elects otherwise.
    • Although CRDs may be rolled over, they are not considered “eligible rollover distributions” for certain purposes. Employers are not required to offer a direct rollover option. Employers are also not required to withhold 20 percent on a CRD or provide a 402(f) notice, which explains the tax and rollover options required by IRC Sec. 402(f).
  • Waiver of RMDs in—or for—2020. Financial markets have taken a hit in the wake of the coronavirus outbreak. To help savers retain more in their retirement accounts, the CARES Act waives the required minimum distribution (RMD) in 2020 for plan participants, IRA owners, and beneficiaries.
    • RMDs normally required to be taken for 2020 are waived.
    • This waiver also applies to individuals who turned 70½ in 2019 but who did not take their first RMD before January 1, 2020. In the absence of additional relief, the next RMD for those individuals must be taken by December 31, 2021.
    • For purposes of counting the five-year period for beneficiary distributions, 2020 is disregarded and one year is added to the remaining period. For example, for deaths occurring in 2019, the five-year period in which the inherited assets must be distributed will end on December 31, 2025, instead of on December 31, 2024.
    • A distribution that is taken in 2020—but that is not an RMD because of the waiver—may be rolled over to another eligible retirement plan or to an IRA within 60 days of the distribution. Though such distributions may be rolled over, they are similar to CRDs in that they are not treated by employer plans as eligible rollover distributions for purposes of the 20 percent mandatory withholding, the 402(f) notice, or the direct rollover requirements.
  • Increased maximum plan loan amount. The retirement plan loan maximum for a qualified Individual (defined as meeting the COVID-19 or SARs-CoV-2 conditions described previously) is increased to the lesser of $100,000 or 100 percent of the participant’s vested balance. This increased amount applies to loans made during the 180-day period beginning on March 27, 2020.
  • Delayed plan loan repayment date. Retirement plan loan repayment dates that occur between March 27, 2020, and December 31, 2020, can be delayed for one year, with the amortization period—including the five-year repayment deadline—adjusted accordingly.
  • Funding relief for defined benefit plans. For single-employer defined-benefit pension plans, the minimum required contributions due during 2020 can be delayed to January 1, 2021 (adjusted for interim earnings). Employers also have an option to use an alternative funding target percentage.
  • Expanded DOL authority to postpone certain deadlines. In addition to taking action in response to a disaster or terroristic threat, the DOL may now postpone certain deadlines under ERISA if a public health emergency (like the COVID-19 pandemic) occurs.
  • Amendment guidance. Plan sponsors generally must amend their retirement plans for these provisions by the last day of the 2022 plan year (government plans have an additional two years), or such other date as the Treasury Secretary may prescribe, with operational compliance during the interim period.

 

Health-Related Provisions

  • Allowable Services. Health insurance plans can pay for telehealth and remote care services without first requiring an individual to satisfy a deductible. Such payments will be deemed not to violate existing HSA requirements. This relief applies to plan years that begin on or before December 31, 2021, and promotes diagnosis and treatment while helping individuals avoid possibly risky in-person contact.
  • New qualified medical expenses. Certain medicines or products do not need to be a “prescription” to be qualified medical expenses for HSA, HRA, MSA, and health FSA purposes. The CARES Act specifically includes over-the-counter menstrual care products.

Although the CARES Act represents the largest relief package in U.S. history, there may be more to come. Government officials have stated that more relief will be available if needed. For now, the CARES Act should help many Americans get some of the financial relief that they desperately need. We are closely reviewing the CARES Act and other possible COVID-19 guidance. Visit ascensus.com for the latest information and developments.

 

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Washington Pulse: Congress and the IRS Provide Separate COVID-19 Guidance that Addresses Payment for Diagnosis and Treatment

The U.S. government has delivered two pieces of welcome relief in the midst of the coronavirus (COVID-19) pandemic. First, the President has signed legislation that requires healthcare insurance providers to cover COVID-19 testing without charging the patient. Second, the IRS has indicated that high deductible health plans (HDHPs) will retain their qualified status even if they cover the cost of COVID-19 testing and treatment before the satisfaction of the plan deductible. This will enable individuals with health savings accounts (HSAs) to continue to make tax-deductible contributions.

 

Legislative Relief for COVID-19 Testing

President Trump signed the Families First Coronavirus Response Act (the Act) on March 18, 2020, to address the many disruptions caused by the COVID-19 outbreak. One of the primary concerns addressed in this bill is the fear that those exposed to the virus might hesitate to be tested for the disease if they have to pay for such testing out of pocket. To encourage testing, the Act requires group and individual health insurance plans to provide coverage for two items.

  • Diagnostic testing products. This refers to federally approved products that detect the COVID-19 virus.
  • Items and services that are associated with the use of such a diagnostic product. Simply put, this requires health insurance plans to cover the costs of
    1. the office visit (even if virtual),
    2. any materials or services needed to determine whether testing is needed, and
    3. administering the test.

Health insurance plans must provide this coverage with no cost sharing (e.g., no deductibles, copayments, or coinsurance) and with no prior authorization. The statute gives joint enforcement authority to the Secretary of Health and Human Services, the Secretary of Labor, and the Secretary of Treasury, and each of these departments has the authority to issue guidance to implement these provisions.

 

IRS Relaxes HDHP Rules

To help facilitate the nation’s response to the COVID-19 virus, the IRS issued Notice 2020-15 on March 11. This guidance provides a green light for insurers offering HSA-compatible HDHPs to cover the cost of the COVID-19 diagnostic testing and associated treatment without application of a deductible or other cost sharing. The IRS notes that doing so will not disqualify the HDHP, so individuals covered by these plans may continue to contribute to their HSAs.

Normally, individuals can make HSA contributions only if they maintain HSA-compatible HDHPs. This means that the HDHP must meet certain requirements such as minimum deductibles and maximum out-of-pocket expenses. In general, individuals must not also be covered by a non-HDHP.

The concern that the cost of COVID-19 testing could be a barrier to seeking medical care during this outbreak led the IRS to relax current rules. The IRS states in Notice 2020-15, that

Due to the nature of this public health emergency, and to avoid administrative delays or financial disincentives that might otherwise impede testing for and treatment of COVID-19 for participants in HDHPs, this notice provides that all medical care services received and items purchased associated with testing for and treatment of COVID-19 that are provided by a health plan without a deductible, or with a deductible below the minimum annual deductible otherwise required . . . for an HDHP, will be disregarded for purposes of determining the status of the plan as an HDHP.

This easing of the existing HSA-compatible HDHP rules should be a welcome relief for many individuals who may be affected by the COVID-19 outbreak.

 

The Interaction of Legislative Relief and Notice 2020-15

IRS Notice 2020-15 states that an HDHP  that covers the cost of COVID-19 testing or treatment will still be considered an HSA-compatible HDHP—and eligible HSA owners will still be able to make tax-deductible contributions. The new federal statute, on the other hand, requires health plans to cover COVID-19 testing expenses, but not treatment expenses.

Individuals participating in HDHPs or any other type of health plan should consult the insurer regarding their costs associated with COVID-19 testing and treatment, including the potential application of any deductible or cost sharing. Watch ascensus.com Latest News for further developments regarding the effects of the COVID-19 pandemic on both health and welfare and retirement arrangements.

 

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