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Employee Layoffs Due to COVID-19 Can Trigger Partial Retirement Plan Termination

Under current IRS guidance, when a “significant” number of participants cease to be eligible to participate in a tax qualified retirement plan, such as due to involuntary terminations of employment, a partial plan termination has occurred, and the affected participants must be made 100% fully vested in their account balances. The IRS considers an involuntary reduction in the number of plan participants by more than 20% in a given plan year to be significant for that purpose. In light of the significant disruptions to many employers’ businesses due to the COVID-19 pandemic, the question arises whether any of their workforce reductions also triggered a partial plan termination. The IRS recently issued FAQs which clarify that employees who are laid off or terminated in 2020 but are rehired by their employer by the end of 2020 will not have incurred an involuntary termination of employment for purposes of determining whether a… Continue Reading

Postponed Deadline for Reporting and Payment of Excise Taxes

The IRS recently released Announcement 2020-17 (the “Announcement”) postponing the due dates for reporting and paying excise taxes related to certain delayed minimum required contributions to single employer defined benefit plans. The Announcement only applies to excise taxes under Internal Revenue Code Sections 4971(a)(1) (failure to meet minimum funding standards) and 4971(f)(1) (failure to pay liquidity shortfall). Generally, these taxes must be reported and paid by the last day of the seventh month after the end of the employer’s tax year or eight and one-half months after the last day of the plan year that ends with or within the filer’s tax year. However, because the CARES Act postpones the deadline to make minimum required contributions that are otherwise due in 2020 until January 1, 2021, the Department of Treasury and the IRS are extending the deadline to report and pay the excise taxes under Sections 4971(a)(1) and 4971(f)(1) with… Continue Reading

Proposed Rule Addressing Fiduciary Duties of Prudence and Exclusive Purpose with Respect to Proxy Voting and the Exercise of Shareholder Rights

The DOL recently published a proposed rule (the “Proposed Rule”) that would amend the current investment duties regulations to provide guidance regarding how plan fiduciaries should exercise their duties of prudence and exclusive purpose with respect to proxy voting and the exercise of shareholder rights. Prior to the Proposed Rule, the DOL had addressed such fiduciary duties in sub-regulatory guidance and individual letters, which did not provide plan fiduciaries with consistent and clear guidance on how they must exercise their duties for proxy voting and other exercises of shareholder rights. Specifically, the Proposed Rule: Codifies the DOL’s long-standing position that plan “fiduciaries must carry out their duties prudently and solely in the interests of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan” when deciding whether, and when, to exercise shareholder rights, including the voting… Continue Reading

IRS Issues Guidance on Certain Changes Made Under the Secure Act and the Miners Act

The IRS recently issued Notice 2020-68 (the “Notice”), which contains several sets of questions and answers that provide helpful guidance regarding various provisions in the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) and Section 104 of the Bipartisan American Miners Act of 2019 (the “Miners Act”). Specifically, the Notice addresses certain issues concerning the following provisions of the SECURE Act: The small employer automatic enrollment credit; The repeal of the maximum age for traditional IRA contributions; Participation of long-term, part-time employees in 401(k) plans; Qualified birth or adoption distributions; and Permitting excluded “difficulty of care payments” to be taken into account as compensation for purposes of determining certain retirement contribution limits. The Notice also provides guidance with respect to the reduction in minimum age for in-service distributions as provided in the Miners Act. In addition, the Notice sets forth the deadlines to amend retirement… Continue Reading

IRS Issues Guidance on Deadline for Discretionary Amendment to Pre-Approved Plans

Revenue Procedures 2016-37 and 2019-3 provide that the general deadline to adopt a discretionary amendment to a pre-approved qualified plan or pre-approved 403(b) plan is the end of the plan year in which the plan amendment is operationally put into effect. Each Revenue Procedure also contains an exception, which provides in part that the general deadline does not apply when a statute or IRS guidance sets forth an earlier deadline. In Revenue Procedure 2020-40, the IRS recently modified this exception to provide that the general year-end deadline does not apply when a statute or IRS guidance sets forth an earlier or later deadline. Importantly, this change only applies to pre-approved plans that are tax qualified and not to individually designed plans. Revenue Procedure 2020-40 is available here.

Extended Time to Supplement Determination Letter Applications for Amended Individually Designed Statutory Hybrid Plans

On August 24, 2020, the IRS announced that applicants that submit determination letter applications for amended individually designed statutory hybrid plans, such as cash balance plans (“Hybrid Plans“), under Rev. Proc. 2019-20 may supplement such applications through the end of the year. Under Rev. Proc. 2019-20, applicants could submit determination letter applications for Hybrid Plans during the 12-month period ending on August 31, 2020. Now, an applicant may provide additional documents or information to supplement their initial submission, if it was filed by August 31, 2020, so long as: the initial application includes the Form 5300; Form 8717, including the appropriate user fee; and Form 8821 or Form 2848, if applicable; the cover letter to the initial application indicates that the application is made pursuant to Rev. Proc. 2019-20 Amended Hybrid Plan; and the cover letter to the initial application provides an address or fax number to which the IRS… Continue Reading

IRS Issues Guidance on Special Funding and Benefit Limitation Rules under the CARES Act

The IRS recently issued Notice 2020-61 (the “Notice”) containing 18 questions and answers that provide helpful guidance for sponsors of single-employer defined benefit pension plans regarding Section 3608 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Section 3608 of the CARES Act delays the due date for “minimum required contributions” otherwise due during calendar year 2020 until January 1, 2021. In addition, it allows plan sponsors to use the plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020, for plan years that include calendar year 2020. The Notice addresses issues related to the deadline extension for minimum required contributions under the CARES Act, including how the contributions are to be adjusted for interest. The Notice also discusses issues related to the use of the prior year AFTAP for benefit limitations. Plan sponsors should consult with their benefits counsel… Continue Reading

Approaching Deadline for Cash Balance Plans to Submit IRS Determination Letter Applications

Sponsors of retirement plans that use a statutory hybrid benefit formula (e.g., cash balance plans) have until August 31, 2020 to submit such plans to the IRS for a favorable determination letter. However, because “interested parties” must be notified of the filing at least ten days in advance of the submission, the decision on whether to file must be made sooner (within the next week or so). Among other things, under this special determination letter cycle for cash balance plans, the IRS will review plan provisions implementing the final cash balance plan regulations. This is true even if the plan’s cash balance formula was in place when the plan received a prior favorable determination letter. The guidance allowing for the special cycle for cash balance plans is available here.

Review Investment Policy Statements for ESG Investment Compliance

The DOL recently updated its “investment duties” regulation to provide further guidance in light of recent trends in environmental, social, and governance (“ESG”) investing, which we previously posted on our blog here. As the DOL increases its investigations and inquiries into ESG investments held by retirement plans, plan fiduciaries should review their plan investments and policies to: (i) determine if their retirement plans hold any ESG-type investments, and (ii) if they do hold such investments, (a) review their investment policy statements (“IPS”) and evaluate whether such policies comply with the current rules for ESG investments (and will comply going forward with the DOL’s guidance), and (b) confirm whether such investments remain appropriate for the plan. Plan fiduciaries may need to consult with their financial/plan advisors to determine if ESG-type investments are currently held by their plan. If a plan holds ESG investments and the IPS does not address such investments,… Continue Reading

M&A Considerations When the Seller Uses a PEO

Smaller companies often use professional employer organizations (“PEOs”) as a way to reduce benefit costs and to assist with many, if not all, human resources and payroll functions. While PEOs may work well for a company’s day-to-day operations, they can create headaches and complications in corporate transactions. When acquiring a company that uses a PEO, it is important to consider the following: Seller’s representations and warranties relating to employee benefit plan compliance generally include representations and warranties relating to the compliance of the plans it sponsors. Since individual companies do not sponsor PEOs, the typical benefit plan representations and warranties should be modified to include representations and warranties regarding any plans or benefits provided by the seller or its controlled group members plus more limited representations and warranties regarding the plans sponsored by the PEO. Depending on the PEO involved, it may be more difficult to get copies of actual… Continue Reading

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