Legislative and Judicial Actions
Art by James Yang
Financial Assistance for Multiemployer Plans
The American Rescue Plan Act (ARPA), signed into law earlier this year, allows multiemployer plans that are in critical and declining status to receive a lump sum of money to help keep the plan operating for the next 30 years—i.e., through 2051. Plans may use the money to make benefit payments and pay plan expenses. They must track the money they receive and earnings on that money separately from other funds. Unlike under the previously introduced Butch Lewis Act, the payment under the ARPA is not a loan, so it need not be repaid.
The Pension Benefit Guaranty Corporation (PBGC) has issued an interim final rule that lays out the requirements for special financial assistance (SFA) applications and related restrictions and conditions.
PBGC Director Gordon Hartogensis said the legislation and related regulations also address the solvency of the agency’s multiemployer program, which was projected to become insolvent in 2026. He said the agency expects that more than 200 plans will likely be eligible for SFA, affecting over 3 million participants. An estimated $94 billion in assistance will be provided to those eligible plans.
Faith-Based Entities May Now Benefit From the Public Student Loan Forgiveness Program
In response to the U.S. Supreme Court decision in Trinity Lutheran Church of Columbia Inc. v. Comer, the Department of Education has amended regulations regarding the eligibility of faith-based entities to participate in the Federal Student Aid programs. Eligible students may now obtain certain benefits through these programs, which were originally authorized under Title IV of the Higher Education Act (HEA) of 1965. Due to the ruling, as of July 1, employees at nonprofit organizations affiliated with religious entities qualify for the federal public service loan forgiveness (PSLF) program.
The Supreme Court case referenced in the Department of Education’s new regulations involved a licensed preschool and day care center that was initially opened as a nonprofit corporation but merged with Trinity Lutheran Church of Columbia, Missouri, in 1985. The preschool applied for a Playground Scrap Tire Surface Material Grant offered by the Missouri Department of Natural Resources but was denied because of a section of the Missouri Constitution that states, “No money shall ever be taken from the public treasury, directly or indirectly, in aid of any church, section or denomination of religion.”
Trinity sued, arguing that the denial of its application violated the equal protection clause of the 14th Amendment as well as the First Amendment’s protections of freedom of religion and speech, according to LexisNexis. Lower courts ruled in favor of the Missouri department. However, the Supreme Court held that the department violated a church’s rights under the free exercise clause of the First Amendment. The high court said the department’s policy discriminated against otherwise eligible recipients by disqualifying them from a public benefit solely because of their religious character and, in doing so, imposed a penalty on the free exercise of religion.
FINRA Project Examines How Regulators Can Support Diversity
In late April, the Financial Industry Regulatory Authority (FINRA) issued a formal request for comments from broker/dealers (B/Ds) and financial advisers on supporting diversity, equity and inclusion (DEI) in the financial services industry.
As FINRA stated at the time, in Regulatory Notice 21-17, its oversight of the B/D industry is based on, and limited by, its statutory mandates and authority, which focus on investor protection and market integrity. Furthermore, agencies such as the U.S. Equal Employment Opportunity Commission (EEOC) and its state and local counterparts are focused directly on discrimination issues in the workplace.
Nevertheless, FINRA noted, regulatory organizations such as itself “have an opportunity to evaluate and understand whether their rules and regulatory actions have [an] unintended disparate impact on those within the industries they regulate.”
The comment period detailed in Regulatory Notice 21-17 ended in the last week of June, and the FINRA website now includes several dozen comment letters filed by the likes of the Insured Retirement Institute (IRI) and the American Council of Life Insurers (ACLI), state governments, individual investment firms and single actors. For their part, the IRI and ACLI filed joint comments voicing support for FINRA’s consideration of this issue.
Suggestions from the industry include eliminating the 180-day enforced waiting period triggered by a third failed “top off” examination—the second step required for those pursuing a license to sell securities; involving community colleges in the licensing process; and making remote services a permanent feature of FINRA’s testing approach, even after the COVID-19 pandemic ends.
Alabama the Latest to Adopt NAIC Annuity Suitability Standard
The Alabama Department of Insurance has finalized key revisions to the state’s Insurance Regulation No. 137, which sets forth conflict of interest mitigation requirements concerning the suitability of the sale of annuities.
The revisions make Alabama’s suitability regulation substantially similar to the most recent revisions of the Suitability in Annuity Transactions Model Regulation developed by the National Association of Insurance Commissioners (NAIC). The state’s revisions take effect this coming January 1.
This development means Alabama is now the 13th state to embrace the model suitability framework the NAIC finalized early last year. By way of background, the NAIC is the country’s standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.
IRS Updates Employee Plans Compliance Resolution System
The IRS has issued Revenue Procedure (Rev. Pro.) 2021-30, updating its comprehensive system of correction programs for sponsors of retirement plans. The Employee Plans Compliance Resolution System (EPCRS) permits plan sponsors to correct plan and operational failures so they may keep providing their workers with retirement benefits on a tax-favored basis. The components of EPCRS are the self-correction program (SCP), the voluntary correction program (VCP) and the audit closing agreement program (audit CAP).
The new revenue procedure updates Rev. Pro. 2019-19, primarily to: expand guidance on the recoupment of overpayments of defined benefit (DB) plan benefits; eliminate the anonymous submission procedure under the VCP, effective this coming January 1; and add an anonymous, no-fee, VCP pre-submission conference procedure, also effective on January 1.
Further, it extends the end of the SCP correction period for significant failures by one year—this thereby also extends the safe harbor correction method for employee elective deferral failures lasting more than three months but not beyond the extended SCP correction period for significant failures; expands the ability of a plan sponsor to correct an operational failure under the SCP by plan amendment; and extends by three years—from December 31, 2020, to December 31, 2023—the sunset of the safe harbor correction method available when sponsors of 401(k) or 403(b) plans with an automatic contribution feature miss making an eligible employee’s elective deferrals.
Correction of Overpayments by DB Plans
The IRS says previous revenue procedures clarified the permissible methods for correcting overpayments under the Employee Plans Compliance Resolution System (EPCRS). Depending on the facts and circumstances, a correction may not need to include requesting that plan participants and beneficiaries return overpayments to the plan, the IRS says. The agency says that, based on comments it received from stakeholders, it is further clarifying and expanding the options available for recouping overpayments.
Previous guidance was revised to provide that plan sponsors may offer overpayment recipients the option of returning the money in a single sum, through an installment agreement or through an adjustment in future payments.
There are also two new overpayment correction methods: the funding exception method and the contribution credit method. “These reduce the need for defined benefit plans to seek recoupment from overpayment recipients and ease the process for [them] … while balancing the interest of other participants in the plan,” the IRS says.
Ruling Supports American Airlines Defendants
The 5th U.S. Circuit Court of Appeals has issued a complex ruling in response to the appeal of an Employee Retirement Income Security Act (ERISA) lawsuit involving American Airlines. The ruling the 5th Circuit reviewed was filed last August after more than four years of litigation. Under consideration was whether the airline should have offered a stable value fund in its 401(k) plan rather than an allegedly poorly performing fund known as the AA Credit Union Fund. The prior ruling granted summary judgment to American Airlines.
The original complaint stated the following: “The AA Credit Union Fund effectively delivered, at all material times, the returns of a poorly managed checking account. The AA Credit Union Fund consistently failed to outpace inflation and was at all times thus a categorically imprudent retirement investment under ERISA. Therefore, the defendants violated their duties of prudence under ERISA by including it as a retirement investment option in the plan’s menu of investment options.”
Judge John McBryde of the U.S. District Court for the Northern District of Texas had previously denied class certification of the case, denied a motion to dismiss the case and rejected a proposed settlement as being insufficient. The August 2020 opinion and order addressed motions for summary judgment filed by American Airlines, its Pension Asset Administration Committee (PAAC) and American Airlines Federal Credit Union (AAFCU).
Now, the 5th Circuit has affirmed, vacated and reversed parts of that ruling. While this sounds like a mixed outcome, the appellate ruling benefits American Airlines.
Industry Groups on New Regulations Needed for SDBAs
The 2021 Advisory Council on Employee Welfare and Pension Benefit Plans, also called the ERISA [Employee Retirement Income Security Act] Advisory Council, recently held a meeting in which it received testimony about brokerage windows—or self-directed brokerage accounts (SDBAs)—in defined contribution (DC) retirement plans. The council said it will examine brokerage windows to gain a better understanding of their design, prevalence and usage.
In 2012, the Department of Labor (DOL) issued a revised field assistance bulletin (FAB) that clarified what information related to a brokerage window needs to be disclosed under the participant-level fee disclosure regulation. It also observed that a brokerage window is not in and of itself a designated investment alternative. The guidance did not address ERISA’s fiduciary standards for brokerage windows.
In 2014, the DOL issued a request for information (RFI) to learn whether further guidance was appropriate and necessary to ensure that plan participants and beneficiaries with access to a brokerage window were adequately informed and protected under ERISA; the RFI focused on why and how often brokerage windows were offered and used in ERISA plans. Comments said no further guidance was needed.
The council’s current meeting report explains this and that the DOL is continuing its effort to confirm that additional guidance should not be supplied, also that the council’s examination is intended to aid in that effort.
Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee (ERIC), gave testimony at the meeting as a representative for large-plan sponsors. She told the council that large employers are confident in their ability to include brokerage windows as an option under the current ERISA guidance and need none further.
Chantel Sheaks, vice president, retirement policy, with the U.S. Chamber of Commerce, submitted a written statement saying brokerage windows are likely used by more sophisticated retirement plan investors. She also called the option an important tool for plan sponsors to use to respond to unique participant investing needs. “Based on member input, such requests include wanting more varied investment options beyond the core lineup or requesting a specific type of investment, such as Shariah investing, funds that do not include specific investments or overall ESG [environmental, social and governance] investing,” Sheaks said.