In the March Monthly Minute, we review IRS proposed regulations implementing the SECURE Act, DOL guidance on cryptocurrency investments, and the extended National Emergency “Outbreak Period” guidance.
Crypto-Curious vs. Crypto-Cautious
The DOL has urged caution with respect to 401(k) investments in cryptocurrencies. In Compliance Assistance Release No. 2022-01, the DOL reminds plan fiduciaries that their prudence and loyalty obligations are the “highest known to the law” and bring with them the risk of personal liability for plan losses resulting from breach. In this regard, the DOL has voiced serious concerns about the prudence of exposing plan participants to direct investments in cryptocurrencies and related products, viewing them as speculative and volatile investments. The DOL also notes that cryptocurrencies may create challenges for plan participants to make informed investment decisions, and present various custodial, recordkeeping and valuation concerns. Further, the DOL expressed concern about the evolving regulatory environment which may engender compliance difficulties. In light of such concerns, the DOL plans to conduct an investigative program aimed at plans offering participant investment in cryptocurrencies and to take action to protect the interests of plan participants and beneficiaries with respect to these investments.
KMK Comment: The DOL does not mince words in its latest release on what it views as the risks of permitting cryptocurrency investments in 401(k) plan investment menus. This guidance serves as a strong warning to plan administrators who should proceed with caution and prioritize their fiduciary duties above speculative interest in cryptocurrency investments.
IRS Muddies the RMD Waters
The IRS recently proposed new regulations incorporating changes made by the 2019 SECURE Act (see our February, 2020 Legal Alert: What You Need to Know About the SECURE Act). Of note, the proposed regulations set forth rules for required minimum distributions (RMDs), including application of the 10-year rule. Under the proposed rule, most beneficiaries (except spouses, young children and certain other beneficiaries) who inherit a balance after the deceased participant had reached RMD age before death must take annual distributions until, at the end of the 10th year, the entire account balance would need to be distributed. Not surprisingly, this rule has many critics who object to the new annual distribution requirement, citing prior IRS guidance which indicated that no RMDs from years 1 through 9 would be required.
The proposed regulations also drill down the SECURE Act’s designations of eligible designated beneficiaries. For example, the “age of majority” is generally established as the child’s 21st birthday, although defined benefit plans are given some leeway to retain a prior definition. The new rules also refine the term “disability,” effectively changing what constitutes a “disability” depending on whether the beneficiary is under 18 years of age, although a safe harbor linked to disability determinations for Social Security benefits purposes is also available. Relatedly, the new rules also call for specific documentation requirements with respect to a beneficiary who is disabled or chronically ill as of the date of an employee’s death.
The new rules also address many other complex issues, such as whether the death of a participant who would have attained age 70 ½ on or after January 1, 2020, precludes application of the age 72 rule to determine the participant’s required beginning date and the required starting date for distributions to a surviving spouse who waits to begin distributions; distributions and deemed distributions that are not taken into account in determining whether a RMD has been made for the year; and how to determine benefit amounts if there are multiple designated beneficiaries.
KMK Comment: The proposed regulations would apply for 2022 and later calendar years, and operating in accordance with the proposed regulations will be considered a reasonable, good-faith interpretation of the SECURE Act changes for 2021 RMDs. While the proposed regulations are intended to bring clarity and alignment with statutory changes under the SECURE Act, skeptics complain that the lengthy regulations unveil inconsistent agency guidance and create unnecessary complexity. In this regard, it is essential to work closely with administrators and legal counsel to ensure compliance with these complex rules.
And the Beat Goes On: COVID-19 National Emergency Extended
Last month, the Biden Administration released a Notice announcing the continuation of the COVID-19 National Emergency which had been set to expire on March 1, 2022, as discussed in the February 2021 Monthly Minute UPDATE. This means that various plan deadlines will continue to be tolled for one year (or, if earlier, 60 days from the end of the National Emergency). As previously reported, these “outbreak period” extensions generally apply to: HIPAA special enrollment periods; COBRA qualifying event and disability extension notices; COBRA election notice deadlines, election timeframes and premium payment deadlines; and, benefit claims and appeal timeframes.
KMK Comment: Given various COVID-19 measures seem to be winding down, the extension of the “outbreak period” may come as an unwelcome surprise to plan administrators. However, considering the mounting pressure to announce an end to the National Emergency, it is possible that the Biden Administration may change course in the coming months. We will keep you updated as new guidance is released.
COMPLIANCE ALERT — Cycle 3 Restatement Deadline
The Cycle 3 restatement window for pre-approved defined contribution plans began August 1, 2020 and ends July 31, 2022. Adopting employers should be working with plan providers and legal counsel now to ensure timely restatement.
