Guidance to Make Us Feel More SECURE

Notice 2020-68 from the IRS provides valuable clarification for sponsors of qualified plans, 403(b) plans, and 457(b) governmental plans, as well as IRA holders, related to certain provisions in the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the Bipartisan American Miners Act of 2019.

A new tax credit under the SECURE Act aims to offset the costs of establishing and maintaining a qualified employer plan that provides an eligible automatic enrollment arrangement (EACA). The $500 credit is also available to eligible employers that amend an existing plan to add an EACA.  More…

IRS Notice on Presidential Order Deferring Payroll Tax Obligations Creates Additional Uncertainty

The Internal Revenue Service has issued Notice 2020-65 to provide guidance on the employment tax deferral that is the subject of President Donald Trump’s August 8, 2020, Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.

Pursuant to the Notice, the due date for the withholding and payment of the employee share of Social Security taxes on certain wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. While the Notice provides additional details as to how to determine which wages are subject to the deferral and when the deferred taxes must be repaid, it leaves many questions unanswered and creates potential liability for employers.   More…

Don’t Miss Out: Deadlines are Upon Us

Deadlines are a large part of employee benefit plan administration.  The past 12 – 18 months have contributed to potential confusion about standard deadlines and added new deadlines plan administrators will not want to overlook.  During this period, the IRS created a one-time window deadline, published extensions for some plans’ deadlines, and other deadlines were not extended but are rapidly approaching.  July and August 2020, bring the most immediate deadlines for plan administrators.

In March, as part of the COVID-19 relief, the IRS extended the deadline for the end of the second six-year remedial amendment cycle for pre-approved (including volume submitter) defined benefit plans to July 31, 2020.  The same relief postponed the beginning of the Cycle 3 remedial amendment period to August 1, 2020, but the end date for Cycle 3 remains January 1, 2025.  We initially discussed this extension in a March 2020, blog.

The IRS opened the determination letter program through its Revenue Procedure 2019-20, published in May of 2019.  The revenue procedure permanently opened the determination letter program for Individually Designed Plans (IDP) that meet the requirements of a “merged plan” as defined in the revenue procedure.  The procedure also opened a limited, 12-month window for statutory hybrid plans, e.g., cash balance plans, to submit for a determination letter.  That 12-month window ends August 31, 2020.  As we stated in our May 2019, blog, plan sponsors and practitioners would welcome additional, periodic opportunities to obtain determination letters on other plans.

The IRS also issued COVID-19 relief extending Form 5500 filing deadlines for some plans based on the plan year-end date.  The relief ended on July 15, 2020, and DID NOT extend filing deadlines for calendar year plans.  The Form 5500 or Form 5558 extension filing deadline for a 2019 calendar year plan remains July 31, 2020.  All other filing deadlines associated with Form 5500 filings for plan years ending after December 31, 2019, are not extended and should be filed timely as in prior years according to the plan year-end date.

The Bottom Line:

  • Pre-approved defined benefit plans’ second six-year remedial amendment period ends July 31, 2020;
  • The determination letter submission window for statutory hybrid plans, e.g., cash balance plans, ends August 31, 2020; and
  • Calendar year plans required to file Form 5500s must still file the Form 5500 or the Form 5558 extension by July 31, 2020.

We are available to help plan administrators sort through applicable deadlines.  Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

DOL Guidance on ESG Investing by Retirement Plans: Investment Committees Should Handle with Care

The United States Department of Labor (the “DOL”) recently issued a proposed rule on the fiduciary requirements under the federal pension law, ERISA, that apply to the selection and monitoring of environmental, social, and corporate governance (“ESG”) investments in retirement plans.  Under the proposed rule, which would be effective 60 days after it becomes finalized, retirement plan investment fiduciaries (e.g., investment committees for 401(k) and defined benefit pension plans), must apply a substantially heightened level of scrutiny when selecting or retaining ESG-based funds as investment options under their plans.

At its core, the proposed rule requires retirement plan investment fiduciaries, when making ESG-related investment decisions, to abide by the DOL’s “longstanding and consistent position” that such decisions must be “focused solely on the plan’s financial risks and returns, and the interests of plan participants and beneficiaries in their plan benefits must be paramount.”  Stated differently, retirement plan investment fiduciaries “must never sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals.”

It is a concern with the perceived non-pecuniary focus of ESG investing that has triggered the DOL to issue its proposed rule.  The DOL writes that it “is concerned . . . that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.  The Department is also concerned that some investment products may be marketed to ERISA fiduciaries [based on] purported benefits and goals unrelated to performance.”

The proposed rule includes several enhanced/new requirements for retirement plan investment fiduciaries to satisfy, including, principally, the following:

  1. Requiring a comparison of ESG investments or investment courses of action to other investment courses of action regarding factors such as diversification, liquidity, and potential risk and return. The DOL’s views this requirement “as an important reminder that fiduciaries must not let non-pecuniary considerations draw them away from an alternative option that would provide better financial results.”
  1. Making it “unlawful” for a fiduciary to “sacrifice return or accept additional risk to promote a public policy, political, or any other non-pecuniary goal,” and conditioning the qualification of ESG factors as economic factors considered pecuniary on such factors being considered alongside other relevant economic factors to evaluate the risk and return profiles of alternative investments. (This element of the rule tracks the DOL’s “longstanding and consistent position” on ESG investing, as well as the tenets of DOL Field Assistance Bulletin 2018-01, which addresses this comparative analysis.)
  1. Requiring adequate documentation of occurrences of ESG investments being chosen because they satisfy the “all things being equal test.” Under this test, which reflects the DOL’s “current guidance,” but on which the DOL requests comments, if, after the comparative evaluation of ESG and non-ESG investments described above, the investments “appear economically indistinguishable,” a fiduciary may then, in effect, “beak a tie” by relying on non-pecuniary factors.  To be clear, however, the DOL views the “all things being equal test” as mostly theoretical.
  1. Adding requirements for a prudent retirement plan investment fiduciary to consider in selecting investment funds for a defined contribution plan (e.g., a 401(k) plan), where such funds include one or more ESG assessments or judgments in their investment mandates or their fund names. Adding such an ESG fund is permissible only if:
    • The fiduciary uses only objective risk-return criteria, such as benchmarks, expense ratios, fund size, long-term investment returns, volatility measures, investment manager tenure, and mix of asset types in selecting and monitoring all investment alternatives for the plan, including any ESG investment alternatives;
    • The fiduciary documents compliance with such use on objective risk-return criteria; and
    • The plan does not use the ESG fund as a qualified default investment alternative (“QDIA”) under the plan. A QDIA is a fund into which participant accounts are invested absent participant investment elections.

The DOL has given interested persons 30 days to submit comments on the proposed rule.  Despite such comments, however, the DOL views much of the proposed rule as a restatement of its “longstanding and consistent position” on ESG investing.

It is troubling that, although the rule is proposed to be effective only after it is finalized, the DOL has issued ESG investigatory letters to plan investment fiduciaries over the past few months.  These letters not only focus significantly on the ESG issues addressed in the proposed rule, but also require the fiduciary to produce an extensive array of plan- and investment-related documents for the DOL to review.

In short, retirement plan investment fiduciaries would be well-advised to note the increasing level of scrutiny the DOL is applying to ESG funds in retirement plans.  Selecting or retaining ESG funds can be fraught with increased audit risk, including, potentially, imposing penalties for breach of fiduciary duty under ERISA.  401(k) and other defined contribution plans are at enhanced risk.  Any fiduciary receiving an ESG investigatory letter should consult immediately with qualified ERISA counsel on how to respond.  The stakes are too high to go into the lion’s den of a DOL audit alone.

Is Personal Information of Retirement Plan Participants an ERISA Plan Asset?

A little more than one year ago, we reported on a settlement (Cassell et al. v. Vanderbilt University, et al.) involving the alleged wrongful use of personal information belonging to retirement plan participants, claimed to be “plan assets.” This year, similar claims have been made against Shell Oil Company in connection with its 401(k) plan. Retirement plan sponsors may begin seeing more of these claims and they might consider some strategies to head them off.

The essence of the allegations is that employers breach their fiduciary duties of loyalty and prudence when they permit plan service providers to profit from the use of plan assets – sensitive personal information of plan participants – for non-plan purposes. Citing several “cross-selling” activities of plan advisors and other service providers, the Shell plaintiffs claim downstream sales opportunities working with retirement plans are more plentiful through better access to plan participant data, and without the need to engage in “cold-calling.”

The Employee Retirement Income Security Act (“ERISA) is the primary federal statute regulating employee benefit plans, including retirement plans. Currently, there are no express provisions in ERISA that prohibit the use of plan participant data for any particular purpose. However, as in the Vanderbilt case, the Shell plaintiffs rely on ERISA’s long-standing fiduciary duty provisions to support their claims concerning plan data:

  • ERISA’s fiduciary duty provisions require plan fiduciaries to discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries. 29 U.S. Code § 1104.
  • ERISA also prohibits plan fiduciaries from engaging in certain prohibited transactions, including transactions between the plan and a party in interest which the fiduciary knows constitutes a direct or indirect transfer to, or use by or for the benefit of a party in interest, of any assets of the plan. 29 U.S.C. §1106(a)(1).

For example, in Count IV of the complaint, the Shell plaintiffs alleged fiduciary duties under § 1104(a)(1) include:

restricting its use of Confidential Plan Participant Data solely to carrying out its Plan recordkeeping role, not using the data for nonplan purposes

Recordkeeping, investment of contributions, and other tasks associated with retirement plan administration require access to large amounts of personal information, usually in electronic format. The risks involving such information are not limited to data breaches. As the Vanderbilt and Shell cases indicate, plan participants have become increasingly aware of the vulnerabilities associated with handling their data, as well as how their data are being used by plan vendors. The California Consumer Privacy Act (CCPA) and similar laws emerging in other states may increase this awareness. At least for the time being, employees of CCPA covered entities are entitled to a “notice at collection” that must outline the categories of personal information collected and the purpose(s) that information is used. Regardless of whether ERISA preempts the CCPA, increased communication about privacy of personal information may cause participants to be more sensitive to the collection and use of their information.

There are some measures plan sponsors can take to minimize the risk of these kinds of claims.

  • Consider relationships with plan service providers more carefully and earlier in the process. ERISA requires plan fiduciaries to “obtain and carefully consider” the services to be provided by plan service providers before engaging the provider. Whether that duty extends to assessing the provider’s data privacy and security practices is not clear. Nonetheless, during the procurement process, consider basic questions such as: Who has access to participants’ data? How much (and what) data does the provider have access to, and what are they doing with that data? Is the service provider sharing data with other third parties?
  • Limit by contract the ability of plan service providers to use plan participant data to market or sell to participants products unrelated to the retirement plan, unless the participants initiate or consent.

Of course, depending on the bargaining power of the sponsor, it may not be able to convince a vendor to agree not to use participant data solely for plan administration purposes. However, sponsors should be sure their process includes these and other factors when making selections and when evaluating the performance of their service providers.

Mid-Year Safe Harbor Design Changes in a COVID-19 World

As COVID-19 continues its upheaval of nearly all aspects of life, retirement plan administration included (see some of our prior discussions here, here, here and here), the Internal Revenue Service recently issued guidance providing additional relief for the sponsors of certain plans.  IRS Notice 2020-52 clarifies requirements for mid-year changes to a safe harbor 401(k) plan that only reduces contributions made on behalf of highly compensated employees (HCEs), and provides temporary relief from certain requirements that would otherwise apply when a plan sponsor chooses to reduce or suspend safe harbor contributions during a plan year.

Contributions and benefits provided under a qualified retirement plan must not discriminate in favor of HCEs.  Certain tests must be run on a plan annually —the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests—to confirm that a plan is non-discriminatory.  Sponsors may instead choose to design their plan as a “safe harbor” plan by providing matching or nonelective contributions to non-HCEs under certain formulas specified under the safe harbor rules.  By doing so, a plan is generally deemed to pass the ADP and ACP tests.  In most cases, the safe harbor provisions of a plan must be adopted before the first day of a plan year and must remain in place for the entire 12-month period that follows.  If a sponsor does wish to make changes during a plan year—in particular, amending the plan to reduce or suspend the safe harbor contributions—they must either be operating at an economic loss or have included language in their annual safe harbor notice that a reduction or suspension may occur mid-year with 30 days’ advance notice.

The IRS recognizes, however, that many plan sponsors are facing unexpected and unprecedented financial hardship this year in light of COVID-19.  Sponsors may not know yet whether they are operating at an economic loss for the year and/or may not have included the requisite language regarding potential changes in their most recent safe harbor notices.  Sponsors may also have difficulty satisfying the timing requirements for suspending safe harbor contributions when doing so immediately is necessary to ensure they can meet their payroll and other financial obligations.

Because of these considerations, Notice 2020-52 clarifies that a mid-year amendment only reducing contributions to HCEs is not a safe harbor contribution change (as safe harbor contributions by definition are only made to non-HCEs), though an updated safe harbor notice is still required.  In addition, a plan may be amended to reduce or suspend safe harbor contributions between March 13, 2020, and August 31, 2020, without requiring economic loss or language in the annual safe harbor notice allowing such a mid-year change.  Such an amendment, regarding nonelective contributions only, may also be made without 30 days’ advance notice, as long as the amendment is effective on a prospective basis and an updated safe harbor notice is provided no later than August 31, 2020.  (Thirty days’ advance notice is still required for changes to safe harbor matching contributions as those contributions may directly affect the amount a participant chooses to defer.)

The relief under Notice 2020-52 also applies to safe harbor 403(b) plans.

If you have questions regarding Notice 2020-52, or any other COVID-19 relief afforded to qualified retirement or other benefit plans, please contact a member of our Employee Benefits practice group.

IRS Expands and Clarifies CARES Act Distribution Rules

Since March 27, 2020 when the CARES Act was signed into law, many questions have mounted related to implementing the retirement plan provisions.  Now, with roughly 3 months under our belts since the issuance of the Act and countless CARES Act distributions and loan suspensions processed, the IRS clarified several eligibility, administrative, and taxation reporting rules by issuing IRS Notice 2020-50.  The Notice provides safe harbors, a model certification, and information reporting codes.  It is a must-read for those responsible for administering employer-sponsored retirement plans.  We discuss the basics of the CARES Act in an earlier article.

Coronavirus-Related Distributions

The CARES Act authorized eligible retirement plans to offer for a limited time a new type of distribution, a Coronavirus-Related Distribution (CRD), which is afforded special tax treatment.  Only Qualified Individuals (QI) are eligible for a CRD.  Significantly, the Notice expands the definition of a QI under Section 2202 of the CARES Act to include individuals whose:

  • Pay was reduced because of COVID-19, including self-employment income;
  • Job offer was rescinded or postponed;
  • Spouses’ or other household members (someone who shares the individual’s principal residence) experience a COVID-19 related adverse financial consequence, including the closing or reducing of hours of a business they own and operate.

The CARES Act allows employers to rely on an employee’s certification, barring any actual knowledge to the contrary, of being a QI when requesting a CRD.  Administrators do not have a duty to investigate.  Instead, actual knowledge is present only when the administrator already knows facts to determine the truthfulness of the certification.  The Notice provides sample language of an acceptable certification for employers and individuals to use for documentation.

The Notice clarifies the types of distributions that qualify as CRD, noting that even distributions to beneficiaries, required minimum distributions, and plan loan offset amounts can qualify.  A QI may consider a distribution to be a CRD for personal tax reporting even if the plan does not.  But the Notice explicitly excludes certain distributions from designation as a CRD, including:

  • Corrective distributions of elective deferrals;
  • Loans treated as deemed distributions;
  • Dividends on employer securities;
  • Distributions from an eligible automatic contribution arrangement.

The Notice also clarifies that an employer may expand options for CRDs to include sources that ordinarily are not permitted without a distributable event or reaching age 59 ½.  Examples of these sources include qualified nonelective or qualified matching contributions.  However, the Notice reminds employers that the CARES Act does not change the distribution rules normally applicable to plans, noting for example that pension plans and money purchase pension plans cannot permit distributions before a permissible distribution event, even if it would qualify as a CRD.

Unlike other need-based distributions, e.g., hardship distributions, the amount a QI requests as a CRD need not correspond to an actual amount of need.  But the eligible retirement plan and any related plans are limited to an aggregate amount of $100,000 for a CRD to anyone QI.

CRDs are not subject to the 10% early withdrawal penalty, reportable as gross income over 3 years and most may be recontributed and treated as a rollover contribution over a 3-year period to an eligible retirement plan that accepts rollovers.  Notice 2020-50 clarifies how to treat a CRD for tax purposes and provides specific codes an administrator should use in box 7 of the Form 1099-R.

Recontributions of CRD

A QI may recontribute a CRD as a rollover contribution over 3 years to an eligible retirement plan that accepts rollovers.  The Notice explains how a CRD may be recontributed, even for distributions not normally eligible for rollover.  The Notice identifies one situation, any CRD paid to a QI as a beneficiary of an employee, where a QI may not recontribute a CRD.  The employer may also rely on the individual’s certification of satisfaction of the QI requirements when determining the status of a CRD as eligible for recontribution.

A plan that does not accept rollovers need not accept recontributions of CRDs.  Instead, the decision of whether to amend a retirement plan to implement these CARES Act provisions is at the discretion of the employer.


Among other plan loan changes, the CARES Act allows certain loan repayments due by QI to be suspended.  The Notice provides a safe harbor for implementing these plan loan suspension rules.  The safe harbor applies if the loan is re-amortized after the suspension period (which must not end later than December 31, 2020) over the remaining period of the loan plus 1 year.  Interest accruing during the suspension period must be included in the re-amortized payments.

The Notice acknowledges there are other reasonable, and perhaps more complicated, ways to implement the CARES Act plan loan suspension provisions.  The safe harbor is not the only option available.

Required Minimum Distributions

The SECURE Act raised the beginning age for Required Minimum Distributions from 70 ½ to 72.  The CARES Act waived the requirement that an individual receive the distribution in 2020.  Individuals may elect to not receive their Required Minimum Distribution in 2020.  The Notice provides that a QI eligible to receive a Required Minimum Distribution may elect to receive the distribution and consider it a CRD on their individual tax return, which would allow the individual to include the amount in gross income over 3 years.  But these distributions are not eligible for recontribution into an eligible retirement plan.

Cancellation of 409A Deferral Elections

The adverse financial effects of the COVID-19 pandemic have not been limited to only certain factions of the workforce.  The Notice acknowledges that those participating in nonqualified deferred compensation plans also may experience financial challenges.  It provides that an individual qualifying for a CRD will be treated as having received a hardship distribution for purposes of the regulations implementing Section 409A of the tax code, enabling service providers to cancel nonqualified deferred compensation plan deferral elections if the plan so permits.

We are available to help plan administrators understand the new guidance.  Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

IRS Issues Proposed Regulations for Tax-Exempt Organizations Paying Excess Executive Compensation

The IRS issued proposed regulations under Section 4960 of the Internal Revenue Code of 1986, as amended (the “Code”), which was added as part of the Tax Cuts and Jobs Act.   The proposed regulations published in the Federal Register on June 11, 2020, largely follow the IRS interim guidance under IRS Notice 2019-09. However, the IRS made some helpful changes in the proposed regulations which are briefly summarized below.

By way of background, Section 4960 imposes an excise tax equal to the corporate tax rate (21 percent for 2020) on that portion of a covered employee’s pay that exceeds $1 million or is treated as an excess parachute payment.  The tax applies to an applicable tax-exempt organization (called an “ATEO”) or a related organization paying excess remuneration to a covered employee.  The tax also applies to an ATEO’s payment of an excess parachute payment.

New Exceptions Under the Definition of a Covered Employee

Generally, under the proposed regulations, an employee is treated as a covered employee if he or she is one of an ATEO’s five highest-compensated employees, including pay from related organizations. Once an employee meets the definition of a covered employee, the employee is always a covered employee (even if the employee ceases to be one of the top five highest compensated employees or terminates employment).

However, the proposed regulations add several exceptions made in response to concerns that if a highly paid officer of a for-profit business provided volunteer services to a related ATEO, the for-profit business could find itself subjected to an allocable portion of the excise tax.

When identifying the five highest compensated employees, the proposed regulations specify that ATEOs can exclude employees meeting one of the three following exceptions:

  • Limited Hours Exception: This exception applies if 10% or less of the employee’s services are for the ATEO and all related ATEOs, and the ATEO pays no compensation (including granting deferred compensation, whether vested or unvested) for the services.   The proposed regulations also include a “safe harbor” under which an employee who performs fewer than 100 hours of services as an employee of an ATEO (and all related ATEOs) during a year is deemed to have worked less than 10 percent of the employee’s total hours for the ATEO (and all related ATEOs).


  • Nonexempt Funds Exception: The proposed regulations also provide a limited “nonexempt funds” exception for employees of controlling taxable organizations that perform significant services as an employee of the ATEO.  Under this exception, an employee is disregarded for determining an ATEO’s five highest-compensated employees for a year if (i) neither the ATEO, nor any related ATEO, nor any taxable related organization controlled by the ATEO pays the employee of the ATEO any remuneration for services performed for the ATEO (including granting deferred compensation, whether vested or unvested) and (ii) the employee provided services “primarily” to the related taxable organization or other non-ATEO (other than a taxable subsidiary of the ATEO) during the year.  This primarily tests if the employee provided services to the related non-ATEO for over 50% of the employee’s total hours worked for the ATEO and all related organizations (including ATEOs) during the year.


  • Limited Services Exception: The IRS proposed regulations retain the exception from IRS Notice 2019-09 applicable when the ATEO pays less than 10 percent of employee’s total pay.

Calculation of the Excess Parachute Payment Tax

The prior IRS guidance provided that the excise tax was calculated referring to any excess parachute payment paid by the ATEO or any related organization.  The proposed regulations narrow this, specifying that it is only the excess parachute payments made by the ATEO that are subject to the tax.  Related non-ATEOs that pay an amount that would otherwise qualify as an excess parachute payment are not subject to this tax.  The regulations also authorize the IRS to reallocate the payments if the IRS determines that the excess parachute payment was made by a related non-ATEO to avoid taxation.

The proposed regulations also provide that payments from related non-ATEO entities are included in both the base amount and the payments in the nature of compensation.  This means that the pay from the ATEO, related ATEO, and related non-ATEO entities are all combined to determine if there is an excess parachute payment.

The proposed regulations make other clarifications addressing foreign organizations and governmental entities.  Until final regulations are published, taxpayers may rely on either IRS Notice 2019-09 or the proposed regulations, including for periods preceding June 11, 2020.

Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

IRS Provides Guidance On Employer Leave-Based Donation Programs That Aid Victims Of The COVID-19 Pandemic

IRS Notice 2020-46 addresses the tax treatment of employees who elect to have their employers donate sick, vacation or personal leave as cash payments to charitable organizations that provide relief to victims of the COVID-19 pandemic.

The Notice provides that the donated leave should be not be treated as W-2 wages to the donating employees.  The donated leave should not be included in Box 1 [wages subject to income tax], Box 3 [wages subject to Social Security tax] or Box 5 [wages subject to Medicare tax] of the Form W-2.  But employees may not claim a charitable contribution deduction for the value of the donated leave.

The Notice also provides that an employer making the cash payments of the donated leave to a charitable organization may either claim a charitable contribution deduction for the payments or a compensation deduction.

The tax treatment provided by the Notice is essentially identical to prior IRS guidance regarding leave-based donations made regarding Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma and Tropical Storm Irma, and the Ebola Virus.

Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.