PPI in the News Compliance Corner - September 19, 2019 Archive
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On August 21, 2020, the DOL published its “Promoting Regulatory Openness through Good Guidance Rule.” This procedural rule clarifies the agency’s policy regarding guidance it produces for regulations under its purview. Particularly, the agency seeks to make it clearer that its guidance does not have the full force and effect of law. Instead, the DOL issues public “statements of general applicability” setting forth “agency policy or the DOL’s interpretation of a statute or regulation intended to have future effect on the behavior of regulated persons, that sets forth a policy on a statutory, regulatory, or technical issue, or an interpretation of a statute or regulation.” The rule also seeks to make the process of producing such guidance as transparent and helpful as possible.

Pursuant to those goals, the rule requires (among other things) that guidance include a disclaimer that it does not have the force and effect of law, that guidance avoid terms such as “shall,” “must” and “require,” and that the term “guidance” be prominently displayed. The rule creates a review procedure that must be followed before the agency issues its guidance to make sure that these mandates are followed. Special procedures must be followed when guidance deals with matters that could have an economic effect of over $100 million, including a notice-and-comment process. The rule also requires that all of the agency’s guidance be accessible in a public database and that the public has an opportunity to petition the agency to modify or withdraw it.

The rule applies to all guidance issued, modified or withdrawn after September 28, 2020. Employers should be aware of this rule, as it will apply to guidance issued by the DOL regarding benefits.

Promoting Regulatory Openness through Good Guidance Rule »
Guidance Database »

A recent United States Court of Appeals for the Second Circuit decision reminds employers that fiduciary responsibility under ERISA ultimately lies with the employer, even when the actions of a service provider or third-party administrator (TPA) are in question.

In Sullivan-Mestecky v. Verizon Communications Inc. , the Second Circuit vacated the district court’s dismissal of Sullivan-Mestecky’s §502(a)(3) claim against Verizon and remanded the claim for further proceedings, among other issues. For reference, §502(a)3 authorizes a beneficiary of an employee benefit plan to bring an action to seek equitable relief as a result of fiduciary breaches, which are violations under ERISA. As further background, ERISA requires fiduciaries to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use.”

In this case, Sullivan-Mestecky, as the beneficiary of a life-insurance policy of her mother Kathleen Sullivan, brought suit against Verizon claiming fiduciary breach for failure to pay the entire life insurance benefit. The facts in this case demonstrate that Sullivan received various communications from Aon Hewitt (a service provider on behalf of Verizon) stating that her life insurance coverage “1x pay” amount was $679,700. However, upon Sullivan’s death, only $11,400 was provided as the death benefit, which was consistent with the terms of the plan.

As it turns out, Aon Hewitt had coded Sullivan’s annual $18,600 income as her weekly income, basing the communicated $679,700 coverage amount on an erroneous salary of $970,920. While the written plan terms were correct, what was repeatedly communicated to Sullivan by Aon Hewitt regarding her coverage amount was incorrect.

The Second Circuit concluded that Sullivan-Mestecky reasonably pled that Verizon breached its fiduciary duties by failing to provide complete and accurate information regarding the plan (supporting its remand of the §502(a) (3) claim). The Second Circuit further explained as part of its conclusion that as the plan administrator, Verizon was responsible for assessing Sullivan’s eligibility and for enrolling Sullivan in her benefits plan. Further, when Verizon arranged for Aon Hewitt to communicate with Sullivan about her benefits as the service provider, Verizon was performing a fiduciary function and bound by ERISA’s fiduciary requirement to properly administer the plan. The Second Circuit explains that Aon Hewitt’s negligence is imputed to Verizon, as Aon Hewitt’s principal, and states that “Verizon cannot hide behind Aon Hewitt’s actions to evade liability for the fiduciary breach that occurred here.”

The outcome of the case serves as a reminder to employers of fiduciary obligations under ERISA, and that such obligations are that of the employer (as the plan administrator) even when utilizing service providers or TPAs. So employers should routinely review and monitor service providers’ work to ensure that it accurately reflects the plans terms.

Sullivan-Mestecky v. Verizon Communications Inc. »

On August 31, 2020, the DOL issued a proposed rule instituting standards for situations where fiduciaries exercise shareholder rights, such as voting proxies. As background, ERISA’s investment duties regulation generally requires a fiduciary to act prudently when making decisions on investments. Sometimes, that duty involves the fiduciary having to vote on matters on behalf of plan shareholders (i.e., by proxy). The proposed rule provides guidance on the factors that fiduciaries should consider when exercising shareholder rights.

Specifically, the proposed rule requires fiduciaries who are exercising shareholder rights to carry out their duties prudently, solely in the interests of plan participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. When making decisions on behalf of shareholders, fiduciaries must:

• Act solely based on economic interests of the plan and participants, only considering factors that will affect the economic value of the plan’s investment
• Consider the likely impact the decision will have on the investment performance of the plan based on various factors
• Not subordinate the interests of the participants and beneficiaries to any non-pecuniary objectives or goals unrelated to their financial interests or the purposes of the plan
• Investigate material facts that are the basis of any particular proxy vote
• Maintain records on proxy voting and other exercises of shareholder rights
• Exercise prudence and diligence in selecting and monitoring plan advisers that assist with the exercise of shareholder rights

Additionally, the guidance clarifies that fiduciaries do not always have to vote proxies; instead, the fiduciary must only vote proxies when they determine that the matter being voted upon would have an economic impact on the plan. There is also a provision outlining permitted practices which would allow fiduciaries to adopt policies on proxy voting.

The DOL will operate a comment period for 30 days after the proposed rule is published in the Federal Register. Plan fiduciaries should discuss this rule with their plan advisers to ensure that they are meeting their fiduciary obligations related to exercising shareholder rights.

Fiduciary Duties Regarding Proxy Voting and Shareholder Rights Proposed Rule »

On September 2, 2020, the IRS issued Notice 2020-68 to provide guidance regarding certain provisions of the SECURE Act affecting qualified retirement plans, 403(b) plans and IRAs. The guidance, which is in the form of questions and answers (Q&As), is intended to assist plan sponsors and IRA custodians with the implementation of this legislation.

The SECURE Act, which was enacted on December 20, 2019, introduced significant changes with respect to retirement plan eligibility, contributions and distributions, among other items. (See our January 9, 2020 , edition of Compliance Corner for an article detailing the provisions of the act.) Notice 2020-68 provides needed clarification regarding specific sections of this law and the deadlines for adopting related plan amendments.

First, the notice addresses a new $500 tax credit under Section 105 of the SECURE Act that is available to small businesses (with up to 100 employees who were paid at least $5,000 a year) that newly establish an eligible automatic enrollment arrangement (EACA) to increase qualified plan participation. This one-time credit applies to the three-year period that begins when the EACA feature is first adopted. The $500 credit is available on an employer (as opposed to plan) basis; therefore, each employer participating in a multiple employer plan could be eligible to claim this amount.

Second, clarification is provided regarding Section 107 of the SECURE Act, which permitted certain changes with respect to IRA contributions and distributions beginning in 2020. Specifically, IRA owners are now allowed to make contributions after attainment of age 70.5, which was previously restricted. However, financial institutions that serve as custodian or trustee are not required to accept such post-age 70.5 contributions. Those that elect to do so must amend their IRA contracts by December 31, 2022, and notify accountholders within 30 days of the amendment adoption or effective date.

Additionally, Section 107 of the SECURE Act allows post-age 70.5 IRA owners to exclude from their gross income up to $100,000 of IRA distributions made directly to charities. The excludable amount must be reduced by any post-age 70.5 contributions, and the notice provides specific examples as to how the contribution offset would apply.

Third, the notice clarifies Section 112 of the SECURE Act, which modified 401(k) eligibility requirements to enable participation by long-term part time workers. Specifically, part-timers who have attained age 21 and completed three consecutive years each with 500 hours of service must be eligible to participate. This change is effective for plan years beginning on or after January 1, 2021. The Q&As explain that 12-month periods beginning prior to this date would not count in determining a part-time employee’s eligibility to participate, but would count towards the employee’s vesting in any employer contributions.

Fourth, significant guidance is provided with respect to qualified birth or adoption distributions, which are distributions of up to $5,000 from eligible retirement plans made within one year of the birth to or legal adoption of a child by the distributee. Under Section 113 of the SECURE Act, these distributions are taxable, but not subject to the 10% early withdrawal penalty that would normally apply to distributions prior to the age of 59.5. Additionally, the amounts are not subject to the mandatory withholding and notice requirements applicable to eligible rollover distributions, and can be recontributed to an eligible retirement plan or IRA. The Q&As explain that each parent can receive a distribution with respect to the same child and that the $5,000 maximum applies per child in the event of multiple births.

However, eligible retirement plans are not required to offer qualified birth or adoption distributions. Plans that elect to do so must be amended accordingly and must also accept recontributions of distributed amounts. The recontribution is treated by the receiving plan as if a direct trustee-to-trustee transfer of the funds; future IRS guidance will address the timing aspects. Furthermore, if a plan does not offer qualified birth or adoption distributions, an eligible participant can treat an in-service withdrawal as such and recontribute the amount to an IRA.

Other issues addressed by the notice include the optional inclusion of difficulty of care payments, which are a type of qualified foster care payment, in the determination of certain retirement contribution limitations. Guidance regarding retirement plan provisions in the Bipartisan American Miners Act of 2019 were also incorporated.

Finally, the IRS outlines the deadlines for SECURE Act plan amendments. Generally, qualified plans and 403(b) plans must adopt required amendments by the last day of the plan year beginning on or after January 1, 2022. The deadline for governmental plans and collectively bargained plans is the last day of the plan year beginning on or after January 1, 2024. The amendments must be retroactive to the effective date and the plan must operate in accordance with the amendment from such date.

Employers who sponsor retirement plans should be aware of this supplementary SECURE Act guidance. Comments can be submitted (preferably in electronic form) to the IRS through November 1, 2020, regarding the matters discussed in the notice.

Notice 2020-68 »

On September 2, 2020, the IRS released Revenue Procedure (Rev. Proc.) 2020-40, which revises the timeframe for when qualified pre-approved plans and 403(b) pre-approved plans must adopt discretionary plan amendments. Under Rev. Proc. 2016-37 for qualified pre-approved plans and Rev. Proc. 2019-39, the plan amendment deadline is the end of the plan year in which the plan amendment was operationally effective unless the IRS requires an earlier deadline under statutory provision or guidance.

Under Rev. Proc. 2020-40, the previous procedures are revised so that the timeline for discretionary amendments under pre-approved plans and 403(b) pre-approved plans is the end of the plan year following the effective date of the amendment unless the IRS provides a deadline that is either earlier or later.

The modification of the procedures is effective immediately.

Rev. Proc. 2020-40 »