Recent Retirement Plan/Employee Benefits Developments and Needed Amendments
Another Round of Fiduciary Lawsuits
The last few months have brought another round of lawsuits against plan sponsors, plan decision makers, and other fiduciaries (e.g., Boards and plan investment committees) alleging that they have permitted their retirement and other employee benefit plans to pay “excessive” administrative and investment-related fees and/or permitted poorly performing investments to remain in their plans. We expect this trend to continue.
In light of this trend, it is critical that every plan sponsor comply with, and document its compliance with, applicable law (generally set forth in federal law (ERISA), but possibly also state law). Compliance includes, but is not limited to, regularly and vigorously benchmarking the plan’s administrative and investment-related fees, selecting the plan’s administrative and investment service providers in a professional and prudent manner, and keeping an extensive, permanent file memorializing its efforts. Plan sponsors must take this same approach to the selection and monitoring of investment options for their participant-directed retirement plans and to their related 404(c), QDIA and fee disclosure compliance efforts. In addition to this diligence, it is important for employers to ensure that their internal personnel (e.g. Board members and administrative committee members) are not personally liable for their representative decision-making, and that appropriate training, insurance and indemnification are in place for all employer personnel with plan responsibilities. Although these lawsuits generally are filed in federal court against plan sponsors subject to ERISA, plan sponsors that are exempt from ERISA (e.g., church and governmental employers) have faced similar claims under state law.
Action Recommended: 1. Examine documents and processes concerning vendor selection and monitoring, fee review, and investment selection and monitoring. 2. Ensure that decision-making behavior conforms to the controlling documentation. 3. Schedule regular, legally oriented training to decision makers regarding their responsibilities and the steps they should take to best position the employer and the decision makers on these issues. 4. Review insurance coverage and indemnification provisions for adequacy. 5. Engage in a request for proposal or independent fiduciary review of plan fees and performance periodically.
Required Changes to Health and Welfare Benefit Plans/Wrap Plans
As we have advised previously, due to the novel coronavirus, the government and the regulators have enacted significant legislation and issued related guidance impacting retirement plans. In addition, this legislation and guidance impacts health and welfare benefit plans. Some of the guidance requires certain changes to these plans and some of the guidance allows for certain optional changes. As examples, optional changes include (but are not limited to) certain changes to cafeteria plan elections for health coverage, health care FSA contributions and dependent care FSA contributions during 2020, FSA grace periods, and FSA carryover amounts. Examples of required changes for ERISA-governed plans include (but are not limited to) the extension of certain time periods and deadlines relating to these plans during the COVID-19 "Outbreak Period" (from March 1, 2020 until 60 days after the announced end of the National Emergency or a later date announced by the regulators) related to (a) the 30-day period (or 60-day period, if applicable) to request special enrollment in a medical plan, (b) the 60-day election period for COBRA continuation coverage, (c) the date for making COBRA premium payments, and (d) the deadline for filing a claim for benefits or filing an appeal of a denial. Naturally, these are not exhaustive lists. Plan sponsors will need to amend their health and welfare benefit plan/wrap plan documents.
Action Recommended: If your Health and Welfare Benefit Plan/Wrap Plan documents have not been updated for the recent legislation and guidance discussed above and/or if your documents have not been updated for recent developments over the last several years, contact us so we can determine if changes are required and assist with the preparation of any required amendments, and any other optional changes you may want to make to your plan.
DOL Proposed Fiduciary Rule and Rule on Socially Conscious Investments
The Department of Labor recently issued two proposed rules that will have an impact on retirement plans, if finalized. The DOL recently reinstated its 1975 “5-part test” to determine who is/is not an investment advice fiduciary and proposed a new exemption from the prohibited transaction rules under ERISA related to conflicted fiduciary investment advice. (The DOL’s recent action is in response to the federal courts previously vacating the DOL’s attempt a few years ago at the development of a meaningful fiduciary/investment advice rule.) If finalized, the proposed rule will create a class exemption allowing investment advisors, if certain conditions are met, to (a) give fiduciary investment advice to plans and participants and (b) receive compensation that varies with recommendations and would otherwise be prohibited absent an exemption.
In addition, the DOL proposed a rule outlining a fiduciary’s duties when considering environmental, social and governance (ESG) investments. The DOL has stated that ERISA requires plan fiduciaries to act solely in the interests of retirement plan participants and beneficiaries and that sacrificing investment returns and/or taking on risk solely to make an ESG investment generally is not appropriate in an ERISA-governed plan.
Action Recommended: Financial advisors and financial institutions affected by the proposed fiduciary investment advice rule should become familiar with the key provisions and prepare for the effective date of the rule – while employers should monitor developments carefully and be sure that any contract with an investment adviser considers the newly proposed rule. Employers should be mindful of the DOL’s admonition in the ESG rule to make sure that its investment decisions are being made in the financial interests of plan participants and beneficiaries and to exercise caution before implementing any ESG policies that pose any risk of sacrificing investment yield.
Recent IRS Guidance under the FFCRA and the CARES Act
Over the last few months, the IRS has been very busy issuing several very important pieces of guidance that fill in many of the blanks in the emergency coronavirus-related legislation passed by Congress earlier this year. We have outlined some of the key notices below, but this is by no means an exhaustive list.
The IRS issued Notice 2020-50 to provide additional details to administrators of retirement plans with respect to coronavirus-related loans and distributions under the CARES Act. Specifically, the guidance expands the groups of individuals and events that could allow for coronavirus-related loans and distributions, includes a sample certification for a participant to certify he or she is eligible for such a distribution, allows participants who take coronavirus-related distributions to cancel deferrals under a nonqualified deferred compensation plan, and, perhaps most importantly, provides much needed guidance for employers that choose to allow coronavirus-related plan loan suspensions.
The IRS issued Notice 2020-51 which provides guidance on how defined contribution plans (e.g., 403(b) plans, 401(k) plans, and governmental 457(b) plans) implement the waiver of 2020 required minimum distributions (RMD’s) under the CARES Act. Among other things (including providing template amendment language), the notice allows for rollovers of amounts that would otherwise have been an RMD but for the change in the law and provides an August 31, 2020 deadline to rollover a previously distributed 2020 RMD in certain cases. Further, the Notice includes a series of Q&As addressing (among other things) the deadline for electing whether RMDs will be determined under the “five-year rule” or the “life expectancy” rule and the impact of the waiver on a participant’s required beginning date.
The IRS issued Notice 2020-54 which provides guidance on the W-2 reporting of qualified sick and family leave wages paid under the Families First Coronavirus Relief Act (which generally requires employers with fewer than 500 employees to provide mandatory sick and family leave pay in certain cases). As expected, the IRS indicated that these payments are taxable wages and are generally reported in boxes 1, 3 and 5 of the W-2. However, the Notice includes additional reporting requirements in box 14 (or on a separate attachment) related to sick leave and emergency family leave wages.
The IRS issued Notice 2020-61 which provides additional guidance for plan sponsors (and more importantly, their actuaries) on the funding relief for certain sponsors of defined benefit pension plans. The CARES Act provided that a funding contribution that would otherwise have been required during 2020 may be delayed to January 1, 2021 in certain cases and the IRS Notice provides guidance on how to apply the required interest adjustment on that delayed contribution and related issues.
Section 402(f) of the Internal Revenue Code requires certain information to be provided to plan participants who are eligible to make rollover distributions – this required notice is often referred to as the Special Tax Notice. The IRS issued Notice 2020-62, which provides a model notice that incorporates the various legislative changes made through early August and may be used to replace the existing Special Tax Notice.
Action Recommended: Employers subject to the FFCRA should review and update their W-2 reporting procedures to make sure that they are properly reporting any FFCRA payments. Retirement plan sponsors should review their distribution and loan procedures and forms and update them to make sure they are in compliance with IRS Notice 2020-50 and the RMD rules (as applicable). Actuaries and defined benefit pension plan sponsors should review the guidance in IRS Notice 2020-61 to ensure conformity with the requirements. Third party administrators and retirement plan sponsors should update their Special Tax Notices with the latest model.
Please contact us if you want to discuss any of the above provisions. We would be happy to set up a call to discuss, and advise you on, the provisions that are applicable to your plan(s) and help you make and implement an action plan.