Lessons Learned from Recent Fiduciary Victories

There is nothing a plan sponsor or ERISA fiduciary can do to prevent allegations of fiduciary breach; however, there are many things they can do to be prepared to rebut such claims. Unfortunately, because of “headline news,” it is easy for plan sponsors to focus on cautionary tales of what other plan sponsors and fiduciaries did wrong. However, it is just as important, if not more so, to be aware of what plan sponsors and fiduciaries did right….in their legal victories. Two recent fiduciary victories provide valuable insights into how a court would evaluate the decisions and processes of plan committees.[1] In these cases, the courts highlighted conduct by the fiduciaries as evidence that they did not breach their fiduciary duties. Specifically, the judges focused on having a process of review, seeking outside help, and diligently maintaining records. The favorable views of these activities provide guidance for other plan sponsors and fiduciaries regarding how their conduct will be viewed if they face similar claims in the future.

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IRS Announces 2022 Cost-of-Living Adjustments for Retirement Plans

The IRS recently announced the 2022 cost-of-living adjustments to various benefit and contribution limits applicable to retirement plans. Generally, the IRS increased the applicable limits for 2022, although certain limits remained unchanged. The following limits apply to retirement plans in 2022:

  • The limit on elective deferrals under 401(k), 403(b), and eligible 457(b) plans increased to $20,500.
  • The limit on additional catch-up contributions by participants age 50 or older remains unchanged at $6,500. This means that the maximum amount of elective deferral contributions for those participants in 2022 is $27,000.
  • The Internal Revenue Code (“Code”) Section 415 annual addition limit is increased to $61,000 for 401(k) and other defined contribution plans, and the annual benefit limit is increased to $245,000 for defined benefit plans.
  • The limit on the annual compensation that can be taken into account by qualified plans under Code Section 417 is increased to $305,000.
  • The dollar level threshold for becoming a highly compensated employee under Code Section 414(q) increased to $135,000 (which based on the look-back rule is applicable for HCE determinations in 2023 based on compensation in 2022).
  • The dollar level threshold for becoming a “key employee” in a top-heavy plan under Code Section 416(i)(1) is increased to $200,000.

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Day of the Dead…lines: Updating Your Plan’s Safe Harbor Notice

As the end of year approaches, now is the time for safe harbor 401(k) plan sponsors to prepare their annual safe harbor notices.

401(k) Plans that satisfy nondiscrimination testing via the employer contribution safe harbors in Internal Revenue Code §§ 401(k)(12) and (13) are required to send notices to participants within a reasonable time prior to the start of the plan year. Per IRS regulations, the timing is deemed reasonable if the notice is provided at least 30 days (and no more than 90 days) prior to the start of the plan year (so, by December 1 for calendar-year plans).

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Department of Labor Proposal Would Encourage Consideration of ESG Factors for Plan Investments

On October 13, 2021, the Department of Labor (DOL) released a new proposed regulation under ERISA that would replace the previous administration’s “pecuniary factors” rule – which is widely viewed as discouraging the use of environmental, social, and governance (ESG) factors when selecting plan investments – with one that would encourage their consideration and provide a clearer pathway for plan fiduciaries to do so.

Background

Over the years, the DOL’s stated position on the consideration of ESG and other “social” factors when selecting plan investments has toggled back and forth, largely along party lines.

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Revised IRS Correction Procedures (EPCRS) Include Helpful Changes

On July 16, 2021, the Internal Revenue Service (“IRS”) published an updated version of its correction procedures for qualified retirement plans, Revenue Procedure 2021-30, the Employee Plans Compliance Resolution System (“EPCRS”).

The revisions to EPCRS include a number of changes that are intended to help simplify and provide additional flexibility for correcting certain retirement plan failures. Below is a summary of the major changes:

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Forced Rollovers of Small Retirement Account Balances: What to Do with Missing Participants

When a participant experiences a distribution event (e.g., terminating service with the employer), and when the participant does not affirmatively elect to take the distribution, a plan document may require that an account balance of $5,000 or less be distributed immediately, and without the participant’s consent, by rolling the account over to an IRA. This is sometimes called a “forced rollover.” When making a forced rollover, a plan must comply with the applicable plan provisions and related Internal Revenue Service (“IRS”) and Department of Labor (“DOL”) guidance.

A forced rollover can only be made if a participant’s vested account balance is $5,000 or less. If a participant’s vested account balance is greater than $5,000, the account cannot be distributed without participant consent (unless the participant has attained the later of normal retirement age or age 62). The only exception to that limit is for terminating defined contribution plans. Additionally, although the Code does not require a forced rollover for distributions of $1,000 or less (where a “forced” distribution can be used in lieu of a rollover), the plan document can require that mandatory distributions of $1,000 or less be rolled over to an IRA.

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New DOL FAQs Provide Guidance Regarding Lifetime Income Illustrations for Defined Contribution Plans

On July 26, 2021, the Department of Labor (Department) issued frequently asked questions (FAQs) regarding the interim final rule (IFR) on lifetime income illustrations (LIIs) that must be included in participants’ pension benefit statements for defined contribution plans on an annual basis. The IFR on LIIs, which we previously discussed in a client alert, will become effective on September 18, 2021. The FAQs respond to comments received in response to the IFR regarding the applicability date of the rules and method for furnishing benefit statements.

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ERISA Litigation Roundup: Fifth Circuit Affirms Decision in Favor of American Airlines in Suit Over Plan Investment Alternative Selection

Following the Fifth Circuit’s decision in Ortiz v. American Airlines, plan fiduciaries should be aware that the application of the Thole decision may be deemed inapposite to claims for a defined-contribution plan, where participants’ benefits are tied directly to fiduciary investment decisions.

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PBGC Issues Interim Regulations on Special Financial Assistance for Multiemployer Pension Plans

Multiemployer pension plans are collectively bargained defined-benefit employee benefit plans that are funded by several unrelated employers for the benefit of unionized employees. In recent years, the crisis of significantly underfunded multiemployer plans has continued to grow. In response, Congress enacted the American Rescue Plan Act of 2021 (ARPA), which was signed into law on March 11, 2021. ARPA amended ERISA to establish a new program within the Pension Benefit Guarantee Corporation (PBGC) to offer “special financial assistance” (SFA) to multiemployer plans in danger of becoming insolvent; in contrast to other assistance offered by the PBGC, plans are not required to repay the SFA.

ARPA directed the PBGC to issue regulations or other guidance to prescribe the application requirements for SFA payments and for how funds are to be invested and to impose conditions on plans that receive SFA payments. On July 9, 2021, the PBGC issued this guidance in the form of interim regulations.

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Internal Revenue Service Extends Temporary Relief from the Physical Presence Requirement by One Year

The IRS recently issued Notice 2021-40, providing a one-year extension through June 30, 2022, of the temporary relief from the physical presence requirement for certain plan elections (including spousal consents) required to be witnessed by a plan representative or notary public. Issued in response to the COVID-19 pandemic, the IRS provided initial relief from the physical presence requirement for the period beginning January 1, 2020 and ending December 1, 2020, and then provided initial extended relief through June 30, 2021.

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