In June 2022, the IRS launched a pre-examination pilot program for retirement plans that could help employers avoid costly penalties. The program aims to reduce the burden of, and time spent on, retirement plan audits, which are typically a time consuming endeavor for plan sponsors. The program ultimately should be good news for plan sponsors in terms of both financial penalties and, presumably, a more efficient audit process.
Qualified Retirement Plans
The SECURE Act added a new disclosure requirement for sponsors of defined contribution plans that becomes effective this year. Plan sponsors of ERISA-covered defined contribution plans must provide participants with a lifetime income disclosure (at least annually) which estimates the monthly income that a participant’s account balance could produce if paid in the form of a qualified joint and survivor annuity or single life annuity stream of payments, rather than a lump-sum.
For participant-directed plans, the initial lifetime income disclosures must be incorporated into benefit statements no later than June 30, 2022. For plans under which participants do not direct the investment of their account, the disclosures must be on the statement for the first plan year ending on or after September 19, 2021. For most plans, this will be October 15, 2022.
On April 14, 2021, the Department of Labor’s Employee Benefits Security Administration (“EBSA”) issued cybersecurity guidance for retirement plan fiduciaries and service providers, as well as plan participants. In the guidance, the EBSA states that ERISA fiduciaries are required to take appropriate steps to mitigate internal and external cybersecurity threats to plan participants and retirement plan assets. To assist fiduciaries and service providers in fulfilling this obligation, the EBSA issued two documents that describe cybersecurity best practices – Cybersecurity Program Best Practices and Tips for Hiring a Service Provider. The EBSA also issued some basic rules – Online Security Tips – to help participants reduce the risk of fraud and loss to their retirement accounts.
In addition to $600 checks for most Americans, the year-end COVID-19 stimulus package signed by the President on December 27, 2020, includes a new round of changes that employers will need to track for their employee benefit plans. The Consolidated Appropriations Act, 2021 (H.R. 133) (the “Act”) is the fourth major legislative attempt to provide relief to businesses and individuals facing economic hardship due to the COVID-19 pandemic. Although lacking a catchy acronym (like the “CARES” and “SECURE” Acts), this legislation makes the most significant changes to health plans since the Affordable Care Act, offers employers and employees additional flexibility for cafeteria plan benefits, and provides additional retirement plan relief.
The SECURE and CARES Acts provide a broad spectrum of required and optional changes that employers must evaluate with respect to retirement plan administration. One impending change is the SECURE Act’s broader eligibility requirement for part-time employees in 401(k) plans, which becomes effective on January 1, 2021. In addition, employers may be surprised to learn that some CARES Act distribution options were added to their plans automatically by their record keepers through a “default” process. Thus, employers should review their plan’s administrative procedures to determine if (and how) changes under the SECURE Act and CARES Act were (and are being) implemented to ensure administrative compliance with the plan document.
The IRS has granted additional, albeit temporary, COVID-19-related relief for sponsors of “safe-harbor” 401(k) and 403(b) plans (i.e., plans that are exempt from one or both of the ADP and ACP nondiscrimination tests). Notice 2020-52, which was issued on June 29, 2020, provides temporary relief from the current requirements for mid-year amendments to such plans, and provides additional clarification regarding mid-year amendments to safe-harbor plans that only affect highly compensated employees. This guidance is welcome relief for plan sponsors who feel the financial need to reduce or suspend employer contributions under these plans, but who may not be able to satisfy the current regulatory requirements for mid-year amendments.
The Department of Labor (DOL) has now finalized its October 2019 proposal (described in our previous blog) to create a new “safe harbor” for the electronic distribution of ERISA-required notices and disclosures. The final regulation establishes a new, voluntary safe harbor for retirement plan administrators who want to use electronic media, as a default, to furnish covered documents to participants and beneficiaries, rather than providing paper documents through mail or hand delivery. The new safe harbor permits electronic delivery by either (i) posting covered documents on the plan sponsor’s website, if appropriate notification of internet availability is furnished to the participant’s electronic address, or (ii) sending the documents directly to the participant’s electronic address, with the covered document either in the body of the e-mail or as an attachment thereto. Although the final rule is not effective until 60 days after its publication in the Federal Register, the DOL has indicated that it will not take any enforcement action against a plan administrator that relies on the safe harbor before that date.
The Department of Labor’s Employee Benefits Security Administration issued guidance on April 28, 2020, providing temporary, coronavirus-related relief from many deadlines and requirements under ERISA. Notably, the guidance relaxes the standards for employers to provide notices electronically, and affords significant latitude to COBRA qualified beneficiaries for electing, and paying for, COBRA continuation coverage.
The CARES Act signed by President Trump on March 27, 2020, includes relief for defined contribution plans, but defined benefit plans also received some relief. In addition, the IRS issued guidance that includes an extension for employers to adopt a pre-approved defined benefit plan. And, employers should remember their option to decrease the age at which employees may request an in-service withdrawal from defined benefit plans.
The recent turmoil in the financial markets, while troubling for individual investors, also has potentially significant implications for ERISA fiduciaries. Individuals and committees who have investment authority over plan assets should reevaluate their portfolios in light of these developments. Circumstances may not require a change in investment strategy, but ERISA’s prudence requirement requires fiduciaries to give immediate, thoughtful consideration to how those circumstances have changed.