Legislative and Judicial Actions

Art by Klaas Verplancke

➜ The DOL Presents its Final ESG Rule

The Department of Labor (DOL) has published the final version of a new retirement plan investing rule, retaining the proposed version’s formal title: “Financial Factors in Selecting Plan Investments.” The rule addresses the use of environmental, social and governance (ESG) investments in tax-qualified retirement plans subject to the Employee Retirement Income Security Act (ERISA) and the supervision of the DOL’s Employee Benefits Security Administration (EBSA).

The rule’s final version includes some important differences compared with the proposed version, though the substance of that earlier attempt largely remains intact. The proposed rule, published on June 30, generated a tremendous amount of public input during the 30-day comment period. The DOL’s website shows there were more than 1,100 unique comment letters and more than 7,000 signed form letters submitted by the investment industry and the public.

Chief among the significant changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should use only “pecuniary” factors when assessing investments of any type—which is to say they should use only factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.

The final rule’s preamble, on the other hand, speaks directly to the ESG topic. DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice. The final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule stipulates that a fund is inappropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, not climate change’s impact on the financial outcomes of investors.

➜ IRS Simplifies Certain 403(b) Plan Terminations

The Department of the Treasury and the IRS have issued IRS Revenue Ruling (Rev. Rul.) 2020-23—employer and employee guidance related to terminating 403(b) plans that fund their benefits through individual or group 403(b)(7) custodial accounts. As explained by the two departments, the guidance reflects changes provided for in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. That landmark retirement legislation, which was passed last December, directed the IRS to issue guidance providing that individual custodial accounts (ICAs) may be distributed to all participants in-kind upon their plan’s termination, eliminating the requirement for a cash distribution. The SECURE Act demands the guidance to be effective retroactively for tax years beginning on and after December 31, 2008.

Sources say this new guidance will allow for these in-kind distributions under rules similar to those applying when a terminating 403(b) plan distributes annuity contracts. The new guidance establishes that, if a distributed custodial account continues to comply with certain requirements, no portion of it is includable in gross income until such amounts are actually paid out of the account to a participant or that person’s beneficiary.

Rev. Rul. 2020-23 presents a number of theoretical situations to assist in plan sponsor compliance. In one of these, the guidance explains that, after the occurrence of an in-kind distribution, the custodial account will be maintained as an ICA of the participant or beneficiary and is no longer part of the 403(b) plan from which it came. The distributed ICA is to be maintained by the custodian as a Section 403(b)(7) custodial account that adheres to Section 403(b) requirements in effect at the time the ICA is distributed—again until the participant or beneficiary is paid.

➜ PBGC Takes Over J.C. Penney Pension Plan

The Pension Benefit Guaranty Corporation (PBGC) will take on administrative and financial responsibility for the J.C. Penney Corp. Inc. Pension Plan, which covers approximately 36,000 current and future retirees. The takeover comes nearly six months after J.C. Penney Corp., along with more than a dozen subsidiaries and related entities, filed for Chapter 11 protection in the U.S. Bankruptcy Court in Corpus Christi, Texas, and just a few weeks after the retail company sought court approval of the sale of its operating assets to a joint venture led by Brookfield Asset Management Inc. and the Simon Property Group.

The joint venture did not agree to assume the pension plan, the PBGC reports, leaving it without an ongoing, viable sponsor. Thus, the agency has stepped in to become trustee of the pension plan. According to the PBGC, retirees will continue to receive benefits, and future retirees may apply for benefits as soon as they are eligible, but it will pay only pension benefits earned by J.C. Penney’s current and future retirees up to the legal limits. The plan’s termination was effective as of November 6. The PBGC estimates that J.C. Penney’s plan is 92% funded, with approximately $3.3 billion in assets and about $3.6 billion in benefit liabilities.

➜ The DOL’s Registration Requirements for PPPs

The Department of Labor (DOL) has announced its final rule on registration requirements for pooled employer plans (PEPs), pursuant to the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act amended the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) to establish PEPs. These plans are administered by pooled plan providers (PPPs).

PEPs may start operating this coming January 1, but their PPPs must first register with the secretary of Labor and the secretary of the Treasury at least 30 days prior, which they may do electronically by submitting the new Employee Benefits Security Administration (EBSA) Form PR. The new electronic filing system is available starting November 25 at https://efast.dol.gov. An informational version of the new Form PR and instructions will be made available at https://dol.gov/agencies/ebsa. Until January 31, the requirement to register at least 30 days prior to operating a PEP is waived, provided registration occurs no later than the start of the plan. Plans must also submit supplemental filings regarding any specific reportable events and a final filing after the provider’s last PEP has been terminated and has ceased operations.

The DOL first announced its notice of proposed rulemaking (NPRM) concerning these registration requirements in August. The proposal said the EBSA believes the most efficient approach is to integrate the Form PR registration filing process into the current electronic filing system that employee benefit plans use to file their Form 5500 annual return.

➜ New Life Expectancy Tables Will Decrease RMDs

The IRS has issued final regulations that update the life expectancy and distribution period tables used to calculate required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs), annuities and certain other tax-favored employer-provided retirement arrangements. The final regulations in this document apply to distribution calendar years beginning on or after January 1, 2022.

The effect of these changes is to reduce RMDs generally, which will allow participants to keep larger amounts in their retirement plans to account for the possibility that they may live longer, the IRS says.

➜ 2021 Contribution and Benefit Limits

Next year’s contribution limits, regardless of which type of defined contribution (DC) plan an employee invests in and whether he makes catch-up contributions, remain the same as this year’s limits. For participants in 401(k), 403(b) and most 457 plans and the federal government’s Thrift Savings Plan, the maximum contribution is and will be $19,500. For these participants who are 50 or older, the maximum catch-up contribution stays at $6,500.

The contribution limit for SIMPLE [savings incentive match plan for employees] retirement accounts remains $13,500 and for individual retirement accounts (IRAs) remains $6,000. The additional catch-up contribution limit for IRAs is not subject to an annual cost-of-living adjustment (COLA) and stays at $1,000.

Effective January 1, 2021, the limitation on the annual benefit for a defined benefit (DB) plan participant under Section 415(b)(1)(A) remains at $230,000. For a participant who separates from service before this coming January 1, his compensation limitation, according to Section 415(b)(1)(B), is computed by multiplying the limitation, as adjusted through 2020, by 1.0122.

The limitation for defined contribution plans under Section 415(c)(1)(A), which addresses annual additions to DC plans, has been increased for 2021 to $58,000 from $57,000. The limitation used in the definition of “highly compensated employee” (HCE) under Section 414(q)(1)(B) remains at $130,000.