PPI in the News Compliance Corner - June 11, 2020 Archive
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On June 8, 2020, the IRS released Notice 2020-44, which announces that the adjusted applicable dollar amount for PCOR fees for plan and policy years ending on or after October 1, 2019, and before October 1, 2020, is $2.54. This is a $.09 increase from the $2.45 amount in effect for plan and policy years ending on or after October 1, 2018, but before October 1, 2019.

As a reminder, PCOR fees are payable by insurers and sponsors of self-insured plans (including sponsors of HRAs). The fee doesn’t apply to excepted benefits such as stand-alone dental and vision plans or most health FSAs. The fee, however, is required of retiree-only plans. The fee is calculated by multiplying the applicable dollar amount for the year by the average number of lives and is reported and paid on IRS Form 720 (which hasn’t yet been updated to reflect the increased fee). It’s expected that the form and instructions will be updated prior to July 31, 2020, since that’s the first deadline to pay the increased fee amount for plan years ending between October and December 2019. The PCOR fee is generally due by July 31 of the calendar year following the close of the plan year.

The PCOR fee requirement is in place until the plan years ending after September 30, 2029.

IRS Notice 2020-44 »

On June 3, 2020, the IRS released Notice 2020-42, providing temporary relief for participant elections required to be witnessed by a plan representative or a notary public, including a required spousal consent. This relief is in response to the social distancing prompted by the COVID-19 public health emergency and applies from January 1, 2020, through December 31, 2020.

As background, when spousal consent is required for distribution payments or a plan loan, it is required that such consent be physically witnessed by a notary public or plan representative. However, Notice 2020-42 now provides that if certain rules are satisfied, there is temporary relief from the physical presence requirement for any participant election witnessed by a notary public or plan representative.

More specifically, the physical presence requirement for a participant election witnessed by a notary public is satisfied for an electronic system that uses remote notarization if executed via live audio-video technology (that otherwise satisfies the requirements of participant elections and adheres with state laws applicable to the notary public). Further, the physical presence requirement for a participant election witnessed by a plan representative is satisfied for an electronic system if executed via live audio-video technology that meets the following criteria:

• The individual signing presents a valid photo ID during the live audio-video conference.
• The live audio-video conference must allow for direct interaction between the individual and plan representative.
• The individual must transmit (via fax or electronic means) a copy of the signed document directly to the plan representative on the same date it was executed.
• The plan representative must acknowledge the signature has been witnessed by the plan representative in accordance with these requirements and must send the executed document (and acknowledgement) back to the individual via a system satisfying certain requirements for electronic notice.

Although intended to assist in providing distribution payments and plan loans related to COVID-19 (as expanded by the CARES Act), this temporary relief applies to any participant election requiring an individual’s signature to be witnessed in the physical presence of a plan representative or notary.

Employers should be aware of the temporary relief provided by Notice 2020-42 and confirm that any procedures are administered in accordance with this new guidance.

IRS Notice 2020-42 »

On May 28, 2020, the IRS issued Notice 2020-35, which extends even more tax deadlines due to the COVID-19 emergency. The extensions apply to deadlines falling within the time period starting on March 30, 2020, and ending on July 15, 2020, which the notice calls “the relief period.” The following requirements and related rules are disregarded during the relief period:

• Funding provisions for defined benefit pension plans. Typically, plans (other than multiemployer plans) must meet minimum funding standards or file a waiver in the event of a temporary substantial business hardship. The waiver application is normally due no later than the 15th day of the third month beginning after the close of the plan year.
• Form 5330, Return of Excise Taxes Related to Employee Benefit Plans
• Initial remedial amendment period for Section 403(b) plans. Eligible employers typically have until March 31 to retroactively correct form defects in their written Section 403(b) plan by timely adopting a pre-approved plan or by otherwise amending its individually designed plan.
• The end of the second six-year remedial amendment cycle for pre-approved defined benefit plans initially was scheduled to end on April 30, 2020.
• Deadlines for voluntary correction under the Employee Plans Compliance Resolution System (EPCRS). The EPCRS correction programs are available for sponsors of retirement plans (complying with Sections 401(a), 403(a), 403(b), 408(k) or 408(p)) to correct certain failures in order to continue providing employees with tax favored retirement benefits. The EPCRS programs are the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP).
• Form 5498, IRA Contribution Information; Form 5498-ESA, Coverdell ESA Contribution Information; and the Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information are now due August 31, 2020.

Employers should work with their benefit plan providers and tax advisors to understand and comply with the new extensions.

IRS Notice 2020-35 »

On June 3, 2020, the DOL issued an information letter concerning the role of private equity funds in defined contribution plans governed by ERISA, such as 401(k) plans. Specifically, the letter addresses the use of private equity investments as designated investment alternatives made available to participants and beneficiaries in individual account plans.

The DOL writes that plan fiduciaries of an individual account plan may offer an asset allocation to private equity as an option under the plan without violating the fiduciary duties under Section 403 and 404 of ERISA. However, due to private equity’s complexity, long-term nature and generally higher fees, the fiduciary must engage in a careful and thorough analysis of the allocation fund with a private equity component in order to make a prudent decision concerning whether to offer it. In order to determine that the option is a prudent one, the DOL suggests that fiduciaries should consider:

• Whether adding the particular asset allocation fund with a private equity component would offer plan participants the opportunity to invest their accounts among more diversified investment options within an appropriate range of expected returns net of fees (including management fees, performance compensation, or other fees or costs that would impact the returns received) and diversification of risks over a multi-year period
• Whether the asset allocation fund is overseen by plan fiduciaries (using third-party investment experts as necessary) or managed by investment professionals that have the capabilities, experience and stability to manage an asset allocation fund that includes private equity investments effectively given the nature, size and complexity of the private equity activity
• Whether the asset allocation fund has limited the allocation of investments to private equity in a way that is designed to address the unique characteristics associated with such an investment, including cost, complexity, disclosures and liquidity, and has adopted features related to liquidity and valuation designed to permit the asset allocation fund to provide liquidity for participants to take benefits and direct exchanges among the plan’s investment lineup consistent with the plan’s terms

Plan administrators who would like to offer private equity in their defined contribution lineup should familiarize themselves with this guidance and consult with their advisor concerning any potential investments.

DOL Information Letter »

On June 1, 2020, the Supreme Court of the United States (SCOTUS) held that the plaintiffs in Thole v. U.S. Bank, N.A. lacked standing to bring a case for fiduciary breach. As background, the plaintiffs in the case alleged that the plan fiduciaries of the U.S. Bank defined benefit plan had violated ERISA’s duties of loyalty and prudence. Specifically, they alleged that the fiduciaries had mismanaged the plan’s assets, resulting in the loss of roughly $750 million dollars in potential plan gains. As the case proceeded through the lower courts, U.S. Bank contributed roughly $300 million dollars to overfund the defined benefit plan. As such, the district court dismissed the case, and the Court of Appeals for the Eighth Circuit affirmed that decision.

SCOTUS agreed with the lower courts, finding that the plaintiffs did not have standing to sue under ERISA because they were essentially unharmed. Because the plan is a defined benefit plan, the plaintiffs stood to be paid their specific benefit during their retirement, regardless of whether the plan fiduciaries made prudent investments. So since they had received all of their benefits to date and would do so in the future, they would be in the same position whether they won or lost this case. In holding this way, the court specifically rejected arguments implicating trust law and found that the plaintiffs could not represent the plan without having a concrete stake in the outcome of the case.

While this case was based on a complaint against a defined benefit plan, it is possible that this decision will have implications for defined contribution plan fiduciaries. Specifically, it could mean that any participant who seeks to bring a suit claiming that a fiduciary chose to invest plan assets in a particular fund would have to prove that they were actually harmed by that investment. In other words, they could not bring a case on behalf of other plan participants; they would have to show that their funds were actually contributed to the alleged imprudent investment. This could result in fewer fee and expense cases being brought.

Plan sponsors should always seek to act prudently with plan assets, but this case does provide some relief to plans that are properly funding their defined benefit plan. It could have some implications for defined contribution plan sponsors, too. It remains to be seen how this case will be relied upon as precedent in future fiduciary breach claims. Plan sponsors should consult with their adviser on any questions concerning plan investments.

Thole v. U.S. Bank, N.A. »

On June 1, 2020, the US Court of Appeals for the Sixth Circuit ruled that a debtor in Chapter 13 bankruptcy proceedings may exclude 401(k) plan contributions from disposable income payable to creditors. The decision involved the statutory interpretation of specific provisions of the Bankruptcy Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

As background, a debtor's Chapter 13 bankruptcy plan must provide for payment of all projected disposable income to unsecured creditors. Disposable income is the debtor’s current monthly income minus amounts reasonably necessary for the debtor’s maintenance or support. In certain situations, the current monthly income may be adjusted for known changes that will occur during the commitment period (i.e., payment period to creditors of typically five years). After the passage of the BAPCPA, it was unclear whether employee salary deferrals to a 401(k) plan could be considered part of the debtor’s maintenance or alternatively, whether such amounts were required to be included in disposable income payable to creditors.

In this case, the debtor filed for Chapter 13 bankruptcy and submitted a payment plan to the bankruptcy court for approval. Under the proposal, she claimed her monthly contributions of $220.66 to her employer sponsored 401(k) plan as an allowable maintenance expense. Her intention was to continue these deferrals, which had commenced prior to the bankruptcy filing, during the commitment period.

However, the bankruptcy trustee objected to the debtor’s proposed plan on the grounds that the future 401(k) deferrals were disposable income payable to creditors. The debtor then filed an amended bankruptcy plan that included her monthly 401(k) contributions in her disposable income, objected to the amended plan (which was confirmed by the bankruptcy court) and appealed to the Sixth Circuit.

Accordingly, the question before the Sixth Circuit was whether the Bankruptcy Code and BAPCPA permitted the exclusion of a debtor’s prospective 401(k) deferrals from disposable income payable to creditors. The Sixth Circuit reviewed the historical legal landscape, the statutory language and context, and legislative intent. The majority also observed that the debtor had made the monthly 401(k) deferrals for at least six months prior to her bankruptcy filing.

In a narrow ruling, the Sixth Circuit held that the debtor, and one in like circumstances, may deduct monthly 401(k) plan contributions from disposable income payable to creditors. However, the opinion notes that the decision is not intended to limit the good faith analysis applied by a bankruptcy court to any proposed payment plan in order to minimize abuse by debtors.

The case involves an interesting intersection of employee benefit plans and the federal bankruptcy laws. The ruling primarily impacts employees making 401(k) deferrals who file for Chapter 13 bankruptcy within the Sixth Circuit. (The Sixth Circuit handles federal appeals arising from Kentucky, Ohio, Michigan and Tennessee.) Employers may also want to be aware of this development.

Camille T. Davis V. Lauren A. Helbling, Chapter 13 Trustee »