DOL and Treasury/IRS Release Fall 2021 Regulatory Agendas

[33969]

December 20, 2021

TO: ICI Members
Pension Committee
Pension Operations Advisory Committee SUBJECTS: Pension
Tax RE: DOL and Treasury/IRS Release Fall 2021 Regulatory Agendas

 

The Department of Labor (DOL) and the Treasury Department and Internal Revenue Service (IRS) recently issued their updated Fall 2021 Semi-Annual Regulatory Agendas (Agendas), which include projected dates for issuance of proposed and final regulations.[1] As described in more detail below, both DOL and Treasury/IRS expect to issue several proposed and final rules in the coming months.

DOL Agenda

DOL includes the following regulatory projects for the Employee Benefits Security Administration (EBSA) on the current Agenda:

• Definition of the Term "Fiduciary". The Agenda confirms that DOL intends to amend the regulation defining who is a fiduciary as a result of rendering investment advice for a fee (known as the five-part test).[2] The Agenda explains that "[t]he amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest." DOL also may consider amending existing exemptions or proposing new exemptions in conjunction with the rulemaking. The Agenda estimates a proposal by December 2021.
• Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (ESG investing and proxy voting). This Agenda item implements Executive Orders 13990 and 14030, related to climate change.[3] In October 2021, DOL proposed amendments to two regulations finalized by the Trump Administration in 2020: "Financial Factors in Selecting Plan Investments"[4] and "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights."[5] The proposal would largely retain the basic framework of the 2020 regulations, but includes changes that would remove perceived barriers for fiduciaries to consider environmental, social and governance (ESG) criteria as part of a fiduciary's investment analysis and correct any perception that fiduciaries may need to have special justifications for even ordinary exercises of shareholder rights.[6] Comments were due December 13, 2021 and ICI filed a comment letter supporting the proposal and recommending certain changes to assist DOL in achieving its goal of proposing a rule that is appropriately neutral toward ESG factors by treating them the same as other relevant investment factors, while not discouraging their consideration.[7] The Agenda describes the next action on this issue as "analyze comments" for March 2022.
• Prohibited Transaction Exemption Procedures. The Agenda indicates that DOL is updating its Prohibited Transaction Exemption Procedures Regulation (29 CFR Part 2570) to improve operation of the prohibited transaction exemption program. The Agenda estimates a proposal by December 2021.
• SECURE Act Implementation and Related Revisions to Form 5500 Reporting. The Setting Every Community Up for Retirement Enhancement Act ("SECURE Act")[8] directs the IRS and DOL to work together to modify Form 5500, Annual Return/Report of Employee Benefit Plan, so that all members of a group of defined contribution plans meeting certain requirements (including having the same trustee, named fiduciary, and plan administrator) may file a single consolidated Form 5500. The consolidated Form 5500 must be implemented not later than January 1, 2022 and shall be effective for returns and reports for plan years beginning after December 31, 2021. On September 15, 2021, the agencies published proposed forms revisions and amendments to the associated regulations to implement the SECURE Act changes and to make other changes intended to collect more plan information and make that data more minable.[9] ICI submitted a comment letter on October 29, 2021 urging the agencies to postpone aspects of the proposal not related to implementing the SECURE Act and, with respect to the new consolidated filing framework for groups of similar defined contribution plans, to (1) permit large plans within the filing group to have a consolidated plan audit, (2) expand the consolidated filing framework to cover 403(b) plans, and (3) clarify the requirement that participating plans have the same investments. The Agenda estimates a final rule by December 2021.
• Improvement of the Form 5500 Series and Implementing Related Regulations Under ERISA. In addition to implementing the SECURE Act changes to Form 5500 as described above, a separate item on the Agenda relates back to a 2016 proposal to more broadly revise and modernize the Form 5500.[10] The finalization of the 2016 proposal had been removed from the DOL's long-term agenda in 2019, but a new modernization project was added back to the Spring 2021 agenda. The project is described as "part of a strategic project with the [IRS and PBGC] to improve the Form 5500 . . . [by] [m]odernizing the financial and other annual reporting requirements on the Form 5500, making the investment and other information on the Form 5500 more data mineable . . . [and] enhancing the agencies' ability to collect employee benefit plan data that best meets the needs of changing compliance projects, programs, and activities." The Agenda estimates a proposal by September 2022.
• Pension Benefit Statements—Lifetime Income Illustrations. The SECURE Act requires defined contribution plans to include an annual lifetime income stream estimate on participant benefit statements, setting forth the lifetime income stream equivalent of the participant's total account balance under the plan, based on an annuity payout.[11] The SECURE Act requires DOL to provide a model lifetime income disclosure, issue rules, and prescribe assumptions. In August 2020, DOL issued an interim final rule, which became effective on September 18, 2021.[12] ICI submitted comments on the interim final rule in November 2020.[13] Though a final rule was expected in advance of the effective date of the interim final rule, the updated Agenda estimates release of the final rule by February 2022.[14]
• Adoption of Amended and Restated Voluntary Fiduciary Correction Program. DOL plans to amend and restate its Voluntary Fiduciary Correction Program (VFCP), which is designed to encourage the voluntary correction of fiduciary violations by permitting persons to avoid civil actions and penalties if they take steps to correct identified violations. According to the Agenda, "[t]he amendments will expand the scope of some transactions currently eligible for correction and streamline correction procedures for certain others." This project has remained on DOL's regulatory agenda for a number of years, and DOL currently estimates an interim final rule by April 2022.[15]
• Abandoned Plan Program. In December 2012, DOL issued proposed amendments to the abandoned plan regulations, which focused primarily on the ability of a chapter 7 bankruptcy trustee to act as a Qualified Termination Administrator and utilize the existing abandoned plan program to terminate abandoned plans and distribute benefits.[16] ICI submitted a comment letter in response to the proposed amendments.[17] The Agenda estimates an interim final rule by January 2022. Note that this agenda item had previously been on DOL's regulatory agenda but was removed in 2019.
• Improving Participant Engagement and Effectiveness of ERISA Retirement Plan Disclosures. In a new item on the Agenda, listed in the pre-rule stage, DOL intends "to explore ways to improve the effectiveness of retirement plan disclosures required under [ERISA], balanced with the cost to plans and plan participants and beneficiaries of providing such disclosures."[18] DOL "intends to start by consulting with a diverse set of stakeholders, including participant representatives, employers sponsoring ERISA retirement plans, and retirement plan service and investment providers, to explore alternatives for improving the understandability and effectiveness of such disclosures." Further, this review will "explore whether, and how, the content, design, and delivery of such disclosures may be reimagined, improved, consolidated, standardized, and simplified to enhance participants' disclosure experiences, promote greater participant engagement, and improve outcomes." The Agenda lists a "stakeholders meeting" for December 2021 but does not identify any specific meetings.
• Pooled Employer Plans. Another new Agenda item in the pre-rule stage relates to pooled employer plans (PEPs), created by section 101 of the SECURE Act as a new type of multiple employer pension benefit plan. Section 101 granted DOL authority to issue guidance appropriate to carry out the purposes of the new provisions. In November 2020, DOL established registration requirements for providers of PEPs, including creating new Form PR (Pooled Plan Provider Registration).[19] The Agenda describes this new action as exploring "the need for regulatory or other guidance regarding implementation of the" PEP provisions in the SECURE Act. DOL "intends to start by consulting with a diverse set of stakeholders, including employers and employees and their representatives and retirement plan service and investment providers, to explore areas where regulatory or other guidance would facilitate establishment and operation of pooled employer plans." The Agenda lists "stakeholder meetings" for November 2021, but does not identify any specific meetings. Note that DOL previously issued a request for information (RFI) on prohibited transactions involving PEPs in 2020, but has not taken further action on the topic.[20] The RFI indicated that DOL is considering whether to propose a class exemption to cover prohibited transactions involving PEPs and MEPs. It asked questions about the possible parties, business models, conflicts of interest, and prohibited transactions that might exist in connection with PEPs (or other MEPs that are not PEPs), for purposes of assessing the need for new prohibited transaction exemptions or amendments to existing exemptions.[21]

Treasury Department and IRS Agenda

The Treasury/IRS Agenda includes several retirement savings items, including:

• Guidance on 401(a)(9) Required Minimum Distributions (RMDs). The SECURE Act made a number of changes to the RMD rules for IRAs, qualified plans, 403(b) plans and 457(b) plans.[22] The Agenda indicates that IRS intends to issue proposed regulations to provide guidance on these changes, estimated by December 2021. The proposal will also address statutory changes to the rollover rules of Internal Revenue Code section 402(c) that have been made since regulations were first issued.
• MEPs and the Unified Plan Rule. In July 2019, the IRS proposed changes to the regulations relating to the unified plan rule (also known as the "one bad apple" rule) that would provide a process for dealing with violations of qualification requirements by one or more participating employers in a defined contribution multiple employer plan (MEP), without jeopardizing the tax-qualified status of the entire MEP.[23] The SECURE Act, enacted after the proposal was issued, modified the unified plan rule, allowing pooled employer plans (PEPs) (as well as other MEPs consisting of related employers) to continue to be treated as satisfying the tax qualification requirements despite the violation of those requirements with respect to one or more participating employers. In the case of a violation of the tax qualification requirements by a participating employer, the SECURE Act allows the plan to spin off the portion of the plan's assets attributable to that participating employer, into a separate plan maintained by that employer. According to the Agenda, IRS plans to re-propose the 2019 regulation to reflect the SECURE Act changes, estimated by April 2022.
• SECURE Act Modifications to Certain Rules Governing 401(k) Plans. The SECURE Act included several modifications to the 401(k) plan rules, including to: increase the auto-enrollment safe harbor cap on auto-escalation (section 102); ease rules for safe harbor 401(k) plans (section 103); permit distributions upon elimination of certain lifetime income investment options (section 109); allow 401(k) plan participation by long-term part-time workers (section 112); and exempt from the early withdrawal penalty certain distributions for birth or adoption of a child (section 113).[24] The Agenda estimates a proposed regulation to implement these provisions by March 2022.
• Guidance on Rules Applicable to IRAs and Roth IRAs. The IRS intends to update the regulations for IRAs and Roth IRAs to incorporate the statutory changes that have been enacted since the regulations were issued. The Agenda estimates proposed regulations by October 2022.
• Section 72(t) 10 Percent Additional Tax Regulations. The IRS intends to issue proposed regulations under section 72(t) of the Internal Revenue Code, regarding the application of the 10 percent early withdrawal penalty to that portion of a retirement plan distribution includible in gross income and received by a taxpayer before attaining the age of 59-1/2. The Agenda estimates a proposed rule by June 2022.
• Reporting and Notice Requirements for Deferred Vested Benefits Under Section 6057. In June 2012, the IRS issued proposed regulations regarding the filing of Form 8955-SSA, "Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits." In prior regulatory agendas, the IRS indicated an intent finalize those regulations. The updated Agenda indicates that the IRS will issue a new proposed regulation to provide guidance on furnishing an individual statement to participants who separate from service with a deferred vested benefit. The Agenda estimates a proposal by June 2022.
• Guidance on Timing of Use or Allocation of Forfeitures in Qualified Retirement Plans. The IRS plans to propose regulations describing when forfeitures may be used or allocated in a qualified retirement plan. The Agenda estimates a proposal by October 2022.
• Withholding on Certain Retirement Plan Distributions Under Section 3405(a) and (b). In 2019, the IRS proposed regulations regarding withholding on certain retirement plan distributions, including payments to be delivered outside the US.[25] The Agenda estimates final regulations by June 2022.

 

Elena Barone Chism
Associate General Counsel - Retirement Policy

 

endnotes

[1] DOL's Fall 2021 Agency Rule List is available at https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPubId=202110&showStage=active&agencyCd=1200. The Treasury Fall 2021 Agency Rule List is available at https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPubId=202110&showStage=active&agencyCd=1500.

[2] Following the Fifth Circuit's vacatur of the Obama era fiduciary rulemaking package, DOL reinstated the five-part test in 2020. See ICI Memorandum No. 32581, dated July 6, 2020, available at https://www.ici.org/memo32581. In the preamble to the prohibited transaction exemption (PTE 2020-02) finalized in December 2020, DOL provided additional commentary regarding its interpretation of the five-part test. See ICI Memorandum No. 32999, dated December 18, 2020, available at https://www.ici.org/memo32999. DOL provided additional guidance regarding the application of the five-part test in the form of FAQs issued in April 2021. See ICI Memorandum No. 33485, dated April 19, 2021, available at https://www.ici.org/memo33485. In October 2021, DOL extended its temporary enforcement policy relating to PTE 2020-02. See ICI Memorandum No. 33873, dated October 28, 2021, available at https://www.ici.org/memo33873.

[3] Executive Order (EO) 13990, dated January 20, 2021, titled "Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis," is available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/executive-order-protecting-public-health-and-environment-and-restoring-science-to-tackle-climate-crisis/. This EO directs federal agencies to review existing regulations promulgated, issued, or adopted between January 20, 2017 and January 20, 2021 that may be inconsistent with the Climate-related policies described in the EO. A separate Fact Sheet, available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/20/fact-sheet-list-of-agency-actions-for-review/, specifies that the Financial Factors in Selecting Plan Investments regulation should be included for review. Executive Order 14030, dated May 20, 2021, titled "Climate-Related Financial Risks," is available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/. This EO directs DOL to "consider publishing, by September 2021, for notice and comment a proposed rule to suspend, revise, or rescind" both final rules listed in this Agenda item and to provide a report on its actions within 180 days.

[4] For a description of the final rule, see ICI Memorandum No. 32888, dated November 3, 2020, available at https://www.ici.org/memo32888.

[5] For a description of the final rule, see ICI Memorandum No. 32984, dated December 15, 2020, available at https://www.ici.org/memo32984.

[6] For a description of the proposed regulatory amendments, see ICI Memorandum No. 33832, dated October 18, 2021, available at https://www.ici.org/memo33832. In March 2021, DOL announced that it would not enforce the 2020 regulations, pending a review. For a description of DOL's Enforcement Policy Statement, see ICI Memorandum No. 33176, dated March 10, 2021, available at https://www.ici.org/memo33176.

[7] For a description of ICI's comment letter, see ICI Memorandum No. 33954, dated December 14, 2021, available at https://www.ici.org/memo33954.

[8] For an overview of the SECURE Act, see ICI Memorandum No. 32118, dated December 20, 2019, available at https://www.ici.org/memo32118.

[9] For a description of the proposal, see ICI Memorandum No. 33783, dated September 22, 2021, available at https://www.ici.org/memo33783.

[10] For a summary of the 2016 proposal, which would have significantly increased plans' reporting burden, see ICI Memorandum No. 30071, dated July 25, 2016, available at https://www.ici.org/memo30071.

[11] For an overview of the SECURE Act, see ICI Memorandum No. 32118, dated December 20, 2019, available at https://www.ici.org/memo32118.

[12] See ICI Memorandum No. 32686, dated August 19, 2020, available at https://www.ici.org/memo32686.

[13] See ICI Memorandum No. 32915, dated November 17, 2020, available at https://www.ici.org/memo32915.

[14] This project is listed as a continuation of the Pension Benefit Statements project that appeared on the EBSA's long-term agenda in Fall 2019. Previously, the project related to DOL's Advance Notice of Proposed Rulemaking (ANPRM) regarding lifetime income stream illustrations in May 2013. For a description of the ANPRM, see ICI Memorandum No. 27228, dated May 8, 2013, available at https://www.ici.org/memo27228. For a description of ICI's comment letter responding to the ANPRM, see ICI Memorandum No. 27446, dated August 7, 2013, available at https://www.ici.org/memo27446.

[15] For a description of the latest revision to the VFCP, see ICI Memorandum No. 20012, dated May 5, 2006, available at https://www.ici.org/system/files/attachments/pdf/memo20012.pdf.

[16] For a description of the proposed amendments, see ICI Memorandum No. 26799 dated December 20, 2012, available at https://www.ici.org/memo26799.

[17] See ICI Memorandum No. 27050, dated February 26, 2013, available at https://www.ici.org/memo27050.

[18] In 2019, in conjunction with its proposed safe harbor for e-delivery of ERISA disclosures, DOL issued a request for information (RFI) "that explores whether and how any additional changes to ERISA's general disclosure framework, focusing on design, delivery, and content, may be made to further improve the effectiveness of ERISA disclosures." 84 Fed. Reg. 56894, 56894 (October 23, 2019). See ICI Memorandum No. 32022, dated October 24, 2019, available at https://www.ici.org/memo32022. As indicated in this memorandum, ICI also provided input to the ERISA Advisory Council on its related topic of study in 2017. While the Agenda does not refer to this prior RFI, the RFI may provide insight into the types of questions that DOL may be considering. ICI included responses to the RFI in its 2019 comment letter. See ICI Memorandum No. 32062, dated November 25, 2019, available at https://www.ici.org/memo32062.

[19] See ICI Memorandum No. 32921, dated November 18, 2020, available at https://www.ici.org/memo32921.

[20] See ICI Memorandum No. 32539, dated June 18, 2020, available at https://www.ici.org/my_ici/memorandum/memo32539.

[21] ICI filed a comment letter responding to the RFI. See ICI Memorandum No. 32622, dated July 20, 2020, available at https://www.ici.org/my_ici/memorandum/memo32622. In that letter, we urged DOL to provide guidance needed to implement the SECURE Act's PEP provision and to ensure that no barriers will stand in the way of financial services firms participating in the PEP market.

[22] For an overview of the SECURE Act, see ICI Memorandum No. 32118, dated December 20, 2019, available at https://www.ici.org/memo32118.

[23] For a summary of the proposed rule, see ICI Memorandum No. 31843, dated July 9, 2019 available at https://www.ici.org/memo31843. For a summary of ICI's comments on the proposal, see ICI Memorandum No. 31990, dated October 1, 2019, available at https://www.ici.org/memo31990.

[24] For more information on these SECURE Act provisions, see ICI Memorandum No. 32118, dated December 20, 2019, available at https://www.ici.org/memo32118. Note that in 2020, IRS issued Notice 2020-68, which provided initial guidance relating to sections 112 and 113. See ICI Memorandum No. 32741, dated September 4, 2020, available at https://www.ici.org/memo32741. IRS also issued Notice 2020-86, which provided initial guidance relating to sections 102 and 103. See ICI Memorandum No. 32978, dated December 11, 2020, available at https://www.ici.org/memo32978.

[25] See ICI Memorandum No. 31818, dated June 21, 2019, available at https://www.ici.org/memo31818.