Washington Pulse

Washington Pulse: Spending Bill Contains Coronavirus Relief

On December 21, 2020, Congress passed additional measures to provide relief from the widespread economic effects of the coronavirus pandemic. On December 27, 2020, the president signed the bill into law. While both houses of Congress have been working on various provisions since the CARES Act was enacted last March, no agreements were reached until now. The coronavirus provisions are contained in a larger spending bill that funds the federal government through next September. The bill, entitled the Consolidated Appropriations Act, 2021 (CAA), contains relief for various industries, small businesses, and individuals. Although there is no broad employee benefit relief, the items discussed below may interest those that work with employers and with employer-sponsored plans.

Paycheck Protection Program Relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided significant relief to businesses adversely affected by the pandemic. The Paycheck Protection Program (PPP) allowed qualifying entities to borrow money through approved lenders, which are subject to the Small Business Administration’s (SBA’s) rules and oversight. Demand for the PPP funds was so great that last spring Congress approved a further infusion of federal aid to keep the program running. Employers who borrow PPP assets may have the loan forgiven if they follow the program rules, which generally include using the funds for payroll and certain other expenses, including funding a business’s retirement plan.

The CAA infuses nearly $300 billion of additional funding into the PPP to support small businesses. These are some of the significant provisions.

  • A second round of forgivable loans is available.
    • Businesses with 300 or fewer employees that have experienced at least a 25 percent revenue loss in any quarter of 2020—versus the same quarter in 2019—are eligible.
    • In addition to most payroll costs, expenses can now also include supplier costs and the cost of providing coronavirus protection (e.g., adding drive-through service or upgrading air filtration).
    • Business expenses paid with PPP loans are tax deductible.
    • There is a new simplified loan forgiveness process for PPP loans of $150,000 or less.
  • Funding is included for independent live-venue operators, including certain movie theaters and museums that were affected by COVID-19 restrictions.

Medical Expense Deduction Floor Reduced

The annual amount of unreimbursed medical expenses that individuals must incur in order to get a deduction has been permanently reduced from 10 percent of adjusted gross income to 7.5 percent. This provision applies to taxable years beginning on or after January 1, 2021.

Disaster Relief: Distributions and Loans

The CAA provides relief for those who have experienced an economic loss because of a “qualified disaster” and whose principal residence is located in a presidentially declared disaster area. This provision does not apply to any disaster declarations that are made only because of COVID-19. But this relief closely mirrors the coronavirus-related distribution (CRD) rules found in the CARES Act.

  • Individuals can distribute up to $100,000 for disasters that begin on or after December 28, 2019, and that end on or before December 27, 2020 (the date the CAA was signed into law). The disaster distribution must be taken within 180 days of December 27, 2020. If an individual is affected by multiple disasters, this dollar limit applies separately to each disaster.
  • As with CRDs, these disaster distributions
    • are not subject to a 10 percent early distribution penalty tax,
    • are taxed equally over 3 years (unless the taxpayer chooses taxation in the distribution year), and
    • may be repaid within 3 years of the distribution date.
  • Individuals can take distributions from IRAs and employer-sponsored retirement plans. Distributions from 401(k), 403(b), governmental 457(b), and money purchase plans are not treated as “eligible rollover distributions” for certain purposes: specifically, they are not subject to 20 percent withholding or to Internal Revenue Code (IRC) Sec. 402(f) notification.
  • Individuals who meet the following requirements may repay hardship distributions or first-time homebuyer distributions taken to purchase or construct a principal residence.
    • The individual received the distribution 180 days before the disaster (defined by FEMA) to 30 days after the disaster ended.
    • The principal residence is in the disaster area.
    • The individual did not use the distribution because of the disaster.
  • Loans may be taken for up to $100,000 or the participant’s vested account balance, whichever is less. This increased limit is available to eligible participants to who take a loan within 180 days following December 27, 2020.
  • Loan repayments may generally be delayed for a year (or if later, 180 days after December 27, 2020). But subsequent payments must reflect any interest accrued during the delay. This extended deadline applies to loan repayments that are due within the period beginning on the first day of the disaster and ending 180 days following December 27, 2020.

Although new disaster distributions or loans may be hard to process because the CAA was enacted so late in the year, these provisions may provide relief for qualified individuals who have already taken distribution or loans in 2020. As with CRDs, these disaster-related provisions are also optional for employer-sponsored retirement plans.

Money Purchase Plans May Offer Coronavirus-Related Distributions

The CARES Act authorized qualified individuals to take CRDs from IRAs and certain defined contribution retirement plans by December 30, 2020. Specifically, the CARES Act created a permissible distribution trigger for eligible retirement plans, including 401(k) plans, 403(a) and (b) plans, governmental 457 plans, profit-sharing plans, and IRAs. But this relief did not include money purchase pension plan assets, which are subject to in-service distribution restrictions. So the CAA amended the CARES Act to include money purchase pension plans in the types of plans that are treated as meeting the plan distribution requirements of IRC Sec. 401(a). This provision allows employers with money purchase pension plans to permit eligible participants to take CRDs as if such plans were originally included in the CARES Act.

Partial Plan Termination Relief

The coronavirus pandemic has caused countless employers to lay off or furlough portions of their workforce. Many of these employers took this action to preserve their businesses, hoping that they could rehire those workers once the economy started to recover. But under current rules, a partial plan termination generally occurs when there is a workforce reduction of more than 20 percent. This results in 100 percent vesting for the affected workers. To avoid treating all such temporary workforce reductions as partial plan terminations, the CAA changes the rules to give employers additional time to rehire workers. If the active participant count as of March 31, 2021, is at least 80 percent of the active participant count at the time the coronavirus national emergency was declared (March 13, 2020), a plan will not be treated as having a partial plan termination.

Qualified Future Transfer Elections

The CAA provides relief for certain defined benefit plan excesses transferred to health benefit accounts. This relief allows employers to make an election to end an existing transfer period if the election is made by December 31, 2021. Qualified future transfers allow excess pension assets to be transferred to health benefit accounts to pay for health or life insurance costs if certain requirements are met—including a minimum funding requirement.

Healthcare Provisions

Flexible spending and dependent care accounts. The CAA gives employers greater flexibility in permitting employees to carry over unused amounts in both their health flexible spending arrangements (FSAs) and their dependent care FSAs. All leftover amounts from 2020 can be carried forward to 2021. Employees can also carry over 2021 amounts to 2022. This is in addition to the CAA extending the normal grace period from 2½ months to 12 months for plan years ending in 2020 and 2021. Employees who stop participating in either kind of plan during calendar year 2020 or 2021 can continue to receive reimbursements through the end of the plan year in which they stopped. And finally—in addition to other minor changes—for plan years ending in 2021, participants in health and dependent care FSAs may modify their contributions without a change in status. Employers who choose to implement these optional provisions must operationally comply with them until they amend their plans to reflect the change.

Preventing surprise medical billing. A group health plan or a health insurance issuer that offers group or individual health insurance coverage to cover emergency services is required to provide such services without the need for prior authorization or other limitations, even if the healthcare provider is not considered a participating (in-network) provider. Any limitation that a plan or coverage contains cannot be more restrictive than requirements that apply to emergency services received from participating providers and facilities.

Other healthcare provisions. The CAA contains several other healthcare-related changes that may benefit employers or employees.

  • Families First Coronavirus Response Act (paid sick and family leave credit) extended This credit was set to expire on December 31, 2020, but the CAA extends this credit until March 31, 2021. The CAA also makes other minor changes.
  • Paid family and medical leave employer credit extended – This employer credit was also due to expire on December 31, 2020. The CAA extends the credit to December 31, 2025.

Education-Related Provisions

  • The CARES Act permitted employers to provide tax-free student loan repayment benefits of up to $5,250 to employees through 2020. The CAA now extends this benefit through December 31, 2025.
  • The CAA simplifies the Free Application for Federal Student Aid (FAFSA) program to make the application process easier and to make financial aid more predictable.
  • The CAA increases the income that individuals can earn and still receive the Lifetime Learning Credit—while repealing the deduction for qualified tuition and related expenses.

Looking Ahead

At nearly 5,600 pages, Ascensus will continue to analyze the bill for items pertinent to providers of retirement, healthcare, and education products and services. In addition, while the current Congressional session is winding down, many lawmakers have suggested that more coronavirus relief is needed. Ascensus will continue to monitor legislative activity pertaining to such relief. Visit ascensus.com for the latest information.

Click here for a printable version of this issue of the Washington Pulse.


Washington Pulse: DOL Releases Final Rule for Pooled Plan Provider Registration

The SECURE Act makes pooled employer plans (PEPs) a reality as of January 1, 2021. Many details need to be clarified by the Department of Labor (DOL) and IRS. But one initial hurdle has been cleared: The DOL has issued final regulations on registering as a pooled plan provider (PPP), which is one of the initial steps that such providers must take before offering PEPs. While the final rule is quite similar to the proposed rule (published on September 1, 2020), it contains several noteworthy revisions, including a provision that makes it easier to register in time for the January 1 PEP effective date.

Background

Last December, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was enacted. The SECURE Act revised both ERISA and the Internal Revenue Code to allow unrelated employers to participate in a pooled employer plan, which is a type of open multiple employer plan (MEP). While we expect detailed guidance on many other aspects of PEP implementation, we now have a clear picture of the registration process. This article focuses on the PPP registration requirements. For more background information on PEPs, see Ascensus’s September 11, 2020 Washington Pulse.

The SECURE Act added pooled plan provider language both in Internal Revenue Code Sec. 413(e) and in ERISA Sec. 3(44). These parallel provisions require that PPPs

  • designate and acknowledge in writing that the PPP is a named fiduciary and plan administrator under ERISA,
  • act as the person responsible to perform all administrative duties to ensure that the plan meets Internal Revenue Code and ERISA requirements,
  • ensure that all those who handle plan assets or act as plan fiduciaries meet ERISA’s bonding rules, and
  • register as a pooled plan provider.

Participating employers delegate significant responsibility to the PPP. This is why the last requirement—that PPPs register with the DOL and IRS—is so important. Registration before beginning operations enables both of these entities to immediately monitor those who become pooled plan providers. Information about PPPs and participating employers would eventually be captured when employers filed Form 5500, Annual Return/Report of Employee Benefit Plan. But there would be a lengthy delay between plan establishment and the first Form 5500 return due date. Hence the rule that PPPs must file a registration statement before operating a PEP.

Specific Registration Requirements

The DOL’s Employee Benefits Security Administration has released Form PR – Registration for Pooled Plan Provider in conjunction with publishing the final regulations. PPPs must file this form with the DOL electronically, which will ensure that the DOL and IRS receive all required information. (Filing the Form PR with the DOL satisfies the SECURE Act requirement to register with the IRS.) This electronic format will also expedite information requests made by interested stakeholders performing due diligence on PPPs.

Filing obligations. PPPs must file Form PR in several different contexts, with all filings intended to keep the DOL and IRS fully informed of any changes to a provider’s PEP operations.

  • Initial registration – The PPP must register at least 30 days before beginning operations. Under the proposed regulations, this meant at least 30 days before publicly marketing a PEP. But some entities may initiate certain public marketing activities before they decide to commit to entering the PEP market. So the final rule defines “initiating operations” of a PEP as “when the first employer executes or adopts a participation, subscription, or similar agreement for the plan specifying that it is a pooled employer plan, or, if earlier, when the trustee of the plan first holds any asset in trust.”
  • Supplemental filings – The final regulations identify two types of supplemental filings: one upon actual commencement of operations and the second when any changes happen after the initial registration. In the first type of supplemental filing, the PPP may not have submitted certain information (e.g., plan number and trustee data) with the initial registration. In this case, a supplemental filing is needed. But if all the required information had already been provided with the initial registration, the PPP would not need a supplemental filing before beginning PEP operations. PPPs must also submit a supplemental filing within the later of 30 days after the calendar quarter in which a change occurs or 45 days after the change. This deadline is later than what the proposed regulations called for. The following changes (or “reportable events”) require the PPP to submit a supplemental filing:
  • Changes in information previously reported.
  • Changes in corporate or business structure.
  • Receipt of notice of new administrative proceedings or enforcement actions.
  • Receipt of notice of finding of fraud, dishonesty, or mismanagement.
  • Receipt of notice of filing of criminal charges
  • Amendment and correction of registration information – Errors and omissions related to the initial registration and supplemental filings must be corrected by amending the filing within a reasonable period following discovery. The DOL expects to add a new question on the Form 5500 that would ask whether the PPP has filed its registration and any required updates. This will enhance the DOL’s power to enforce the registration process.
  • Final Filing – The PPP must complete a final filing when it terminates the last PEP it administers and all assets have been properly distributed. This final Form PR must be filed by the later of 30 days after the calendar quarter in which the final Form 5500 was filed or 45 days after such filing.

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.

Special transition period. Because the final regulations were released so close to the commencement date for PEPs, they became effective immediately upon publication in the Federal Register on November 16, 2020. They also contain a special provision that allows a PPP to file an initial registration any time before February 1, 2021, provided that it is filed on or before the PPP begins operations. This modification essentially waives the 30-day waiting period between registration and the start of plan operations—as long as the PPP files the registration by February 1, 2021.

Registration content requirements. In developing Form PR, the DOL tried to balance three overlapping considerations: 1) its own need for information to oversee PPPs, 2) employers’ need for information as they perform due diligence on PPPs, and 3) the possible administrative burden and expense involved for PPPs and the plans they operate. Form PR requires specific information on PPPs.

  1. Legal business name and any trade name (“doing business as”).
  2. Federal employer identification number (EIN).
  3. Business mailing address and phone number.
  4. Address of any public website or websites.
  5. Name, mailing address, telephone number, and email address for the PPP’s “responsible compliance official.”
  6. The PPP’s agent for service of legal process (that is, the person or entity that is authorized to receive legal documents) and the address at which these documents may be served on the agent.
  7. Approximate date when pooled plan operations are expected to commence.
  8. Description of the administrative, investment, and fiduciary services that will be offered or provided in connection with the PEPs, including a description of the role of any affiliates in such services.
  9. Statement disclosing any ongoing federal or state criminal proceeding (or any criminal convictions) against the PPP (or any officer, director, or employee) related to services to any employee benefit plan. (This generally applies to matters within 10 years of the registration date.)
  10. Statement disclosing any ongoing civil or formal administrative proceedings against the PPP (or any officer, director, or employee) involving fraud or dishonesty with respect to any employee benefit plan, or involving mismanaging plan assets.

While the final Form PR requires largely the same information that was required in the proposed regulations, the DOL did revise a number of items. For example, it clarified that a “compliance officer” can be identified by name, title, or office and that a PPP does not have to hire or promote an individual with any particular degree or certification. The DOL also more precisely defined “administrative proceeding” to exclude routine regulatory oversight activities and to specifically limit the term to formal administrative hearings.

More to Come

The DOL and IRS will certainly release more guidance on PEPs and PPPs. For instance, we’ll need detailed direction on the “one bad apple” rule—and how to remove such a noncompliant employer from the PEP. And we will need standard IRS text for amending prototype documents in addition to broad guidance on PEP administrative concerns. But at least regarding the registration requirements, we have a clear path. The DOL and IRS have coordinated to develop the final regulation. So registration with the DOL also satisfies the requirement to register with the IRS. And we expect continued coordination as further guidance is released. Meanwhile, the DOL has reiterated in the final regulations an important safe harbor: employers and pooled plan providers who comply in good faith with a reasonable interpretation of the SECURE Act’s PEP and PPP provisions before guidance is issued will not be treated as failing to meet such guidance once it is issued.

Ascensus will continue to follow any new guidance as it is released.

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Washington Pulse: IRS Issues Final Life Expectancy Regulations

On November 12, 2020, the IRS published final regulations updating life expectancy tables that are used for required minimum distributions (RMDs) and for other purposes. These new tables reflect an increase in life expectancies since the last tables were issued nearly 20 years ago. Although the updated tables do not apply until distribution years beginning in 2022, financial professionals should learn how the new life expectancy figures may affect their clients and should assess how their administrative systems will accommodate the changes.

 

Background

Two years ago, President Trump issued Executive Order 13847, which (among other things) directed the IRS to examine the life expectancy tables and to “determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis.” On November 8, 2019, the IRS published proposed regulations in response to the executive order. The IRS received numerous comments, but the only substantial change made in creating the final regulations was pushing back the applicability date to the 2022 calendar year.

Internal Revenue Code Section (IRC Sec.) 401(a)(9) and associated RMD regulations require “employees” to begin distributing their accumulated retirement assets by their required beginning date. (In this article, we will use the term “employee” because that is the term found in the Internal Revenue Code. It includes qualified plan participants, IRA owners, and all those who must take RMDs (e.g., beneficiaries).) The RMD rules help ensure that employees start taking distributions, and they permit payments over their life expectancy to avoid outliving their retirement savings. The IRS life expectancy tables determine the distribution period over which defined contribution-type retirement plans must be paid. The regulations specifically apply to RMDs taken from

  • qualified trusts (such as a 401(k) trust);
  • individual retirement accounts and annuities described in IRC Secs. 408(a) and (b);
  • eligible deferred compensation plans under IRC Sec. 457; and
  • IRC Secs.403(a) and §403(b) annuity contracts, custodial accounts, and retirement income accounts.

The life expectancy tables determine the distribution period for RMDs. The final regulations revise the three life expectancy tables found in Treasury Regulation (Treas. Reg.) 1.401(a)(9)-9. The Uniform Lifetime Table is used to determine the distribution period for those employees who must take RMDs during their lifetime. This table begins at age 72, which is the age at which RMDs must first be calculated under the SECURE Act rules. The distribution periods listed are simply the joint life expectancy of the employee at a certain age and a beneficiary who is exactly 10 years younger. Years ago, the IRS simplified the RMD process by allowing all employees—regardless of their beneficiary’s actual age—to use the Uniform Lifetime Table.

The Joint and Last Survivor Table reflects the life expectancy of two individuals. The ages in the table range from 0 to 120 years, and it shows the likely number of years that at least one of the two individuals will live. Despite listing all combinations of ages up to 120, this table is used in the RMD context for one purpose: to determine the distribution period for an employee who has named the spouse as the sole designated beneficiary—when the spouse is more than 10 years younger than the employee. This allows the employee to calculate the RMD using a longer life expectancy than under the Uniform Lifetime Table, resulting in a smaller RMD.

The third life expectancy table, the Single Life Table, is required in several situations. Perhaps the most common use is for determining the distribution period that a beneficiary must use when an employee dies. For example, assume that an IRA owner dies this year at age 75 and has named his 70-year-old sister as the sole beneficiary. Next year, his sister will determine her distribution period using the Single Life Table. The life expectancy for a (now) 71-year-old is 16.3 years under the current table.

The tables are also used for “substantially equal periodic payments” under IRC Sec. 72(t)(2)(A)(iv). The Internal Revenue Code contains an exception to the 10 percent early distribution penalty tax for certain pre-59½ distributions. Payments must be properly structured using the life expectancy tables contained in the regulations—and they must continue for at least five years and until the recipient reaches age 59½. This payment stream permits access to retirement funds while also preventing excessive fund depletion. The details of setting up such equal periodic payments are found in Revenue Ruling 2002-62, which the IRS expects to update to reflect the changes in the final life expectancy regulations.

 

The Transition Rule

The one provision that will likely create the most activity—and questions—is the final regulation’s “transition rule.” The IRS states that this rule is “designed to recognize that the general population has longer life expectancies than the life expectancies set forth in the formerly applicable Treas. Reg. 1.401(a)(9)-9.” The transition rule allows a beneficiary who has already locked into a life expectancy for RMD payouts to use a “one-time reset” to take advantage of the longer life expectancies in the new tables. This situation occurs when the employee died before January 1, 2021, and the beneficiary was using the old life expectancy tables to determine the RMD. Starting in 2022, the beneficiary’s RMD is based on the new tables, using the age for which the life expectancy was originally determined. An example may help.

Example: Frank died at age 80 in 2018. Frank’s nonspouse beneficiary, Rose, was 75 in the year he died. In 2019, the distribution period that Rose must use is 12.7 (the single life expectancy of a 76-year-old). For her distribution in 2021, Rose reduces that figure to 10.7 years: one year for 2020 and one year for 2021. Normally, Rose would then reduce her distribution period by one more year for 2022, to 9.7. But the transition rule permits Rose to reset her distribution period based on the new tables. Rose still uses her age in the year following Frank’s death, but she simply replaces the old life expectancy, 12.7, with the new one, which is 14.1. She then reduces that figure one year for each subsequent distribution year (2020, 2021, and 2022) to arrive at 11.1 instead of 9.7 (under the old tables).

Although this transition rule makes only incremental decreases in the amount that beneficiaries must distribute, this reset provides some relief for those who wish to distribute the smallest amount required in order to preserve assets. On the other hand, redetermining the distribution periods for beneficiaries who had commenced required distributions before 2022 will entail additional effort by financial organizations, plan administrators, and other advisers.

Note: The proposed regulations seemed to limit the circumstances under which a beneficiary could use the one-time reset. This apparent limitation was likely unintentional. But the final regulations revised the transition rule wording enough to verify a more expansive interpretation of the rule. So irrespective of how a beneficiary came to use the old Single Life Table, the new table can now be used. For those required to use “nonrecalculation” (by reducing the life expectancy by one year for each successive distribution year), the starting age remains the same. Spouse beneficiaries, who may use the “recalculation” method, simply start using the new tables in 2022.

 

Key Takeaways

The final regulations are nearly identical to the proposed regulations. While these new regulations are straightforward, there are still some important points to remember.

  • The new tables apply for distribution calendar years beginning on or after January 1, 2022.
  • The transition rule allows certain beneficiaries a one-time reset to use the longer life expectancies.
  • The IRS expects to review these tables every 10 years (or when new mortality studies are published).
  • The final regulations will require a significant number of individual RMD payout redeterminations.
  • Software platform providers and others may face sizeable programming tasks.

 

Looking Ahead

Fortunately, the IRS heeded commenters’ requests and delayed the final regulations’ applicability date to 2022. This will allow more time for all affected parties to integrate the new tables into their processes. The IRS will also release guidance regarding SECURE Act provisions, such as the rule that replaces certain beneficiary life expectancy payments with a requirement to deplete beneficiary accounts after 10 years. As guidance is released, rely on Ascensus to monitor developments and to publish helpful analysis.

 

 

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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 entities.

“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.

 

 

Click here for a printable version of this issue of the Washington Pulse.