Department of Labor Issues Interim Final Rule Implementing New Lifetime Income Disclosure Requirements for Defined Contribution Retirement Plans

Pursuant to the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), the Department of Labor on August 18 issued an interim final rule (“IFR”) providing a model disclosure and other guidance regarding the new requirement that defined contribution retirement plans provide annual benefit statements that include an illustration of the lifetime income stream a participant’s account balance would provide at retirement.

Under prior law, defined contribution retirement plans that allow participants to direct their investments were required to provide benefit statements at least quarterly, but were not required to provide information about the lifetime income stream that the participant’s account might produce. The IFR provides detailed explanations regarding how defined contribution retirement plans must provide the lifetime income illustrations, the assumptions upon which the illustrations must be based, and model language designed to explain the illustrations in terms accessible to an average plan participant. Plan administrators that provide the illustrations and model disclosures in the manner set forth in the IFR have protection against ERISA fiduciary claims that may be brought against them based on the lifetime income illustration disclosures.

The IFR is applicable to all types of ERISA-covered defined contribution retirement plans, such as 401(k) and 403(b) plans, whether or not the plan provides annuities or similar lifetime income distribution options. The DOL has determined that the annual lifetime income illustrations (“LII”) will include two estimates based on a single life annuity, and a 100% qualified joint and survivor annuity. The LIIs are based on the participant’s current account balance and are intended to show the lifetime stream of income they would be paid at age 67. The following table demonstrates what the DOL envisions a participant might receive:

The IFR sets forth the assumptions upon with the LII’s must be based, including:

• The participant’s account balance is 100% vested;
• Any outstanding plan loan is not in default and has been fully repaid;
• The estimated payments begin on the last day of the statement period;
• The participant is age 67;
• The participant’s spouse is the same age as the participant for purposes of calculating the QJSA survivor annuity;
• The estimated monthly payments are based on an interest rate equal to the 10-year constant maturity U.S. Treasury securities yield rate;
• Mortality assumptions are based the IRS gender neutral mortality tables in Code Section 417(e)(3)(B); and
• No adjustments are made for inflation.

The IFR includes model language designed to explain the single life annuity and 100% QJSA illustrations so that they may be understood by an average plan participant. Plan administrators are permitted to incorporate eleven distinct model statements into their existing benefit statements, or may adopt the Model Benefit Statement Supplement which is included as an appendix to the IFR. Plan administrators must ensure that language “substantially similar in all material respects” to that set forth in the IFR are included in their benefit statement. In particular, participants are to be cautioned that the LII outcomes are not guaranteed, and that the participant’s actual payments at retirement may vary substantially from the illustrations.

Plan administrators are shielded from liability under ERISA for furnishing the LII in a manner consistent with the IFR.

SECURE Act Update: DOL Publishes Proposed Rule on Registration Requirements for Pooled Plan Providers

For plan years beginning after December 31, 2020, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) removes possible barriers to the broader use of multiple employer plans (MEPs). Under rules enacted by the SECURE Act, unrelated employers will be able to more easily band together and provide retirement benefits under a pooled employer plan or PEP, which is a type of MEP. PEPs are individual account plans that will offer small employers, without the need for any commonality among the participating employers or other organizational relationship, access to qualified retirement plan benefits while potentially achieving cost and administrative efficiencies that are more easily realized by larger plans with larger participant pools and larger quantities of investible assets. A PEP is maintained and administered by a pooled plan provider (PPP) who is designated to act as the plan’s named fiduciary, and is responsible for performing all administrative duties that are reasonably necessary to ensure that the plan meets relevant tax qualification requirements.

A PPP must register with the Secretary of Labor before beginning operations. In August, the Department of Labor (DOL) published a proposed rule that would establish the requirements for PPPs to register with the DOL. PPP registrations are needed to provide the DOL the information it needs to monitor and oversee PPPs and the PEPs they operate. To allow for proper oversight, the proposed rules would require –

• An initial registration filing; and
• Supplemental filings to report –
  • Changes in the information in the initial filing;
  • Information about each specific PEP before operations are initiated; and
  • Information on specified reportable events (significant financial and operational events related to the PPP and the PEPs sponsored by that PPP, the initiation of bankruptcy/receivership/other insolvency proceeding for the PPP or an affiliate, the cessation of all operations as a PPP, receipt of written notices of administrative or enforcement actions against the PPP related to PEP services and operations, receipt of a finding of fraud or dishonesty by a court or governmental agency against the PPP, and receipt of written notice of the filing of criminal charges against the PPP or one of its officers, directors or employees relating to PEP services and operations).
• A final filing once the last PEP has been terminated and ceased operations.

The proposed rules would require registrations to be filed electronically. The DOL intends to use the same system and registration process for filing PPP registrations that plan administrators currently use to file a Form 5500.

IRS Provides Guidance on Plan Loan Offsets

The Tax Cuts and Jobs Act of 2017 (TCJA) provided certain participants with more time to rollover certain types of plan loan offsets. The Internal Revenue Service (IRS) has issued proposed regulations, which may currently be relied on, providing guidance on which participants qualify and the application of the provisions.

At the time a plan loan becomes immediately due and payable and the loan is not repaid by the participant, the loan is treated as either a “deemed distribution” or a “loan offset.” Usually this repayment failure occurs when a participant severs employment or the plan terminates. If the participant has a distribution event at the time the loan is not repaid, it is treated as a “loan offset” and an actual distribution. In most situations this loan offset distribution would qualify as an eligible rollover distribution. A deemed distribution, which might occur if the participant stops making loan repayments but has not severed employment, would not be an eligible rollover distribution.

Generally, an eligible rollover distribution must be contributed to an IRA or to an employer plan within sixty-days of the distribution. This sixty-day timing rule made it difficult for many participants to accomplish a rollover of loan offsets. TJCA provided participants with additional time to rollover loan offsets amounts.

Under TCJA, a Qualified Plan Loan Offset (QPLO) may be contributed to an IRA or employer plan at any time up to the deadline, with extensions, for the participant to file his or her tax return. For example, if a QPLO occurred in 2020, the participant would have until October 15, 2021 in order to complete the rollover.

In order to be a QPLO two requirements must be met. First, the loan must have been a loan that otherwise met the requirements for participant loans under Internal Revenue Code § 72(p). Second, the distribution must have occurred solely because either (i) the employer plan was terminated or (ii) the participant incurred a severance from employment that caused the loan offset to occur. The proposed regulations help clarify this second requirement by providing that the requirement is met if the failure to meet the repayment terms of the loan occurs with the first year following termination of employment. For example, many plans now permit terminated participants to continue loan repayment following termination of employment. If a terminated participant made these loan repayments for five months following termination of employment and then the loan offset occurred, this would still be a QPLO. Proposed Regulation § 1.402(c)(3).

IRS Updates Safe Harbor Eligible Rollover Distribution Notice

Section 402(f) of the Internal Revenue Code (“Code”) requires plan administrators to provide a written explanation to any recipient of an eligible rollover distribution that describes their rollover rights. The Internal Revenue Service (“IRS”) has historically made available safe harbor notices that may, but are not required to be used, by plan administrators for this purpose. The most recent safe harbor notice was made available by the IRS in 2018.

Certain changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) were not reflected in the IRS’s 2018 safe harbor notice. In particular, the 2018 safe harbor notice did not reflect the changes made to the required minimum distribution rules or that any “qualified birth or adoption distribution” would not be subject to the 10% additional tax on early distributions under Code Section 72(t).

The IRS recently published updated safe harbor notices that take in account changes made by the SECURE Act. In response, plan administrators using the IRS’s safe harbor notice should confirm that the updated safe harbor notice is being used. Similarly, plan administrators that use a customized notice should confirm that their customized notice takes into account the changes made by the SECURE Act.

The updated safe harbor notices are available here: https://www.irs.gov/pub/irs-drop/n-20-62.pdf