Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

COBRA Subsidies for Involuntary Termination or Reduction in Hours – What is Old is New Again

There is an old saying – “People with weak stomachs should not watch sausage or legislation being made.”  A great application of that aphorism is seen in the current COBRA subsidy proposed legislation making its way through Congress.

The idea is simple – if people need continuing health care coverage (COBRA coverage) because they are involuntarily terminated from employment or have a reduction in hours of employment, they only have to pay 15% of the applicable premium through September 30, 2021.  Great.  But it is not so simple

An important issue is to identify the people who get the premium break.  In legal jargon, the subsidy is available to “assistance eligible individuals.”  Who are they?  It seems that, technically, the only people who get the break as the proposal is written are employees who are involuntarily terminated or have a reduction in hours, and not their spouses or other beneficiaries who might want to elect COBRA coverage.

This seems odd because the new proposal was ostensibly built off of a version of COBRA subsidies provided under the American Recovery and Reinvestment Act of 2009 (ARRA).  That legislation started out as a response to the financial crisis in 2008/2009 and provided a COBRA subsidy in the event of an involuntary termination of employment that occurred between September 1, 2008, and December 31, 2009.  The ARRA COBRA subsidy provisions were extended and expanded several times, eventually through May 31, 2010.  That law applied the subsidy to all qualified beneficiaries impacted by an involuntary termination; not just the terminated employees.  The IRS and DOL also issued hundreds of pages of guidance, FAQs, and notices interpreting, applying, and clarifying the legislative bowl of spaghetti known as ARRA.

Fast forward to today.  Below is a table showing the difference between the scope of “assistance eligible individuals” in the 2021 proposal and ARRA, as amended (which is just one of several key differences).  The highlighted language suggests that the new relief is limited to affected employees.

A summary of the proposal written by the staff of the Joint Committee on Taxation suggests that any affected qualified beneficiary could benefit from the subsidy just like under the ARRA wording.  Additionally, in a few places, the proposed legislation refers to “a qualified beneficiary” rather than an “assistance eligible individual” when describing the application of the COBRA subsidy.  For example, the proposal provides that commencement of COBRA coverage “elected by a qualified beneficiary” during the special election period generally starts on or after the first day of the first month after enactment of the proposed legislation.

If COBRA subsidies under the proposed legislation apply to all affected beneficiaries, why didn’t the drafters use the already existing definition of “assistance eligible individual”?  See the quote at the beginning of this blog entry.

PBGC Issues Final Rule with Simplified Methods for Withdrawal Liability Calculations

The Pension Benefit Guaranty Corporation (“PBGC”) issued a final rule on January 7, 2021 that impacts the calculation of withdrawal liability by multiemployer pension plans in endangered or critical status. The final rule applies to withdrawals from multiemployer plans that occur in plan years beginning on or after February 8, 2021.

The final rule contains amendments to implement the requirements under the Pension Protection Act of 2006 (“PPA”) and the Multiemployer Pension Reform Act of 2014’s (“MPRA”) requirements that benefit reductions, benefit suspensions, surcharges, and contribution increases under a funding improvement or rehabilitation plan must be disregarded when determining a withdrawing employer’s total withdrawal liability and withdrawal liability payment amount (the “disregard rules”). The final rule also provides optional simplified withdrawal liability calculation methods for applying the disregard rules in determining withdrawal liability and the annual payment calculation for withdrawal liability, and adds examples illustrating how the methods are applied.

The preamble to the final rule notes that, “similar to a safe harbor, a plan sponsor that adopts one of the simplified methods satisfies the requirements of the applicable statutory provision and regulations.” However, the preamble is clear that plan sponsors are not required to use the simplified methods. Although the PBGC will not approve any alternative methods on a plan-by-plan basis, the preamble notes that plan sponsors are welcome to informally consult with the PBGC on the use of alternative methods.

The final rule is generally consistent with the PBGC’s prior proposed rule from 2019 on these issues, which we reviewed in detail in our prior client alert. Highlights of the final rule and the key changes from the proposed rule are described below.

Adjustable Benefit Reductions and MPRA Benefit Suspensions

Like the proposed rule, the final rule provides optional simplified methods for plans to disregard adjustable benefit reductions and MPRA benefit suspensions. Using the simplified framework, a plan would first calculate an employer’s withdrawal liability using the plan’s withdrawal liability method and taking into account any adjustable benefit reductions and benefit suspensions. The plan’s second step would then be to add to the employer’s withdrawal liability the employer’s proportional share of the value of any adjustable benefit reductions or MPRA benefit suspensions. The final rule includes the same three simplified methods as the proposed rule for the second step: one method applies to adjustable benefit reductions (and is based on the guidance previously provided in PBGC Technical Update 10-3) and two apply to MPRA benefit suspensions (referred to as the “static value method” and the “adjusted value method”).

Contribution Increases

MPRA requires plans to disregard contribution increases that are required or made under a funding improvement plan or rehabilitation plan when determining the contribution amounts of a withdrawing employer that are used to determine the employer’s allocable share of the plan’s unfunded vested benefits and the employer’s highest contribution rate for withdrawal liability payment calculation purposes unless due to increased levels of work, employment, or periods for which compensation is provided.  An increase in the contribution rate is deemed required or made to enable the plan to meet its funding improvement or rehabilitation plan requirements except as noted in the prior sentence or where additional contributions are used to provide an increase in benefits. MPRA’s changes apply to contribution increases that went into effect in plan years beginning after December 31, 2014.

After MPRA’s enactment, certain underfunded plans that tie a participant’s accrued benefit to the amount of the employer contribution made on his or her behalf have continued to take into account contribution increases, even when expressly required by a funding improvement or rehabilitation plan, to the extent that the contribution increases result in higher benefit accruals for plan participants. These plans have reasoned that the increases are not solely required by the funding improvement or rehabilitation plan because the contribution increases increase participants’ benefit accruals. The proposed rule arguably supported this position because it provided that the portion of any contribution increases that increase benefit accruals as an integral part of the benefit formula (referred to in the preamble to the proposed rule as “benefit bearing increases”) are to be taken into account for calculating withdrawal liability. However, this language was removed in the final rule, and replaced with a reference to the portion of the statute which permits a plan subject to a funding improvement or rehabilitation plan to be amended to increase benefits or benefit accruals if the plan actuary certifies that such increase is paid for out of additional contributions not contemplated by the funding improvement or rehabilitation plan.

For those contribution increases which are required to be disregarded, the final regulation provides simplified methods for meeting this requirement when determining an employer’s withdrawal liability allocation fraction: one method for determining the numerator, and two alternatives for determining the numerator. The simplified methods in the final rule are generally consistent with the proposed rule.

  • Simplified method for determining the numerator. A plan using this method would first start with the employer’s contribution rate as of the “employer freeze date,” which is the later of (i) the last day of the first plan year that ends on or after December 31, 2014 and (ii) the last day of the plan year the employer first contributed to the plan. If the plan has a contribution rate increase after the freeze date that provides an increase in benefits which the plan actuary has certified is paid for out of additional contributions not contemplated by the funding improvement or rehabilitation plan, the rate increase is added to the contribution rate for each year to which the increase applies. The product of the employer’s contribution rate on the employer freeze date (adjusted to reflect the foregoing increase(s) as appropriate) and the employer’s contribution base units forms the numerator of the allocation fraction. A comparable amount determined for all employers would then be used for the denominator unless the plan uses the “proxy group method” for determining the denominator as described below.
  • Simplified methods for determining the denominator. As noted above, the final rule allows a plan to use the same principles as the simplified method for determining a specific employer’s numerator to determine the contributions by all employers for the denominator. Alternatively, the plan can use the “proxy group method.” Under the proxy group method, a plan must determine “adjusted contributions,” which is the amount of contributions that would have been made excluding contribution rate increases that must be disregarded for withdrawal liability purposes, based on the exclusion that would apply for a representative “proxy” group of employers, rather than performing calculations for each of the employers in the plan. Unlike the proposed rule, the final rules does not require that the proxy group of employers be named in the plan in the order to use the proxy group method.

Calculating Withdrawal Liability after Plan Exits Endangered or Critical Status

Once a plan exits endangered or critical status, the disregard rules for contribution increases change. Specifically, in determining the allocation fraction a plan sponsor is required to include contribution increases (previously disregarded) as of the expiration date of the CBA in effect when a plan is no longer in endangered or critical status. However, contribution increases continue to be disregarded in determining an employer’s highest contribution rate for withdrawal liability payment calculations. The final rule includes simplified methods to comply with the foregoing requirements which are substantially consistent with the methods provided in the proposed rule.

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As noted above, the final rule applies to withdrawals from multiemployer plans that occur in plan years beginning on or after February 8, 2021 (i.e., withdrawals on or after January 1, 2022 for plans with calendar plan years).

For Whom the Statute Tolls

As discussed in an earlier blog post on the DOL/Treasury relief extending benefit plan deadlines due to the pandemic, plans have to disregard an “outbreak period” when determining deadlines for COBRA elections and premiums payments, special enrollment in health plans, and the filing of claims and appeals. The DOL/Treasury guidance defined the “outbreak period” as the period from March 1, 2020 until 60 days after the COVID-19 National Emergency ends (or such other date as the agencies announce).

The government’s authority for issuing the April 2020 relief is a provision of ERISA (and a similar Internal Revenue Code provision applicable to the IRS), which states that the DOL may “prescribe, by notice or otherwise, a period of up to one year which may be disregarded in determining the date by which any action is required or permitted to be completed.” This rule is clear that disregarding relevant time periods is limited to one year. However, what is not clear is whether the tolling relief expires at the end of this month (i.e., one year from the March 1, 2020 start of the outbreak period), with all tolled periods re-starting for affected individuals, or whether the one year limit is merely a cap to be applied on an individual-by-individual basis.

As an example, assume that an employee lost health coverage in June 2020 and their 60-day COBRA election period normally would have started on July 1, 2020. The question is whether the election period is to begin again on March 1, 2021 (when the one-year relief period expires), or whether the employee is entitled to additional time to elect COBRA because the one-year tolling period would run for one year from the start of the employee’s election period on July 1, 2020 (subject to an earlier end of the outbreak period). Similarly, if an employee experiences a COBRA qualifying event on or after March 1, 2021, does the tolling relief apply at all?

Although the government is aware of this interpretive question, it appears they are not yet prepared to issue guidance. In the absence of guidance, plan sponsors and administrators will need to determine how to apply the tolling provision. If consideration is being given to continue tolling the deadlines beyond February 28, 2021, insured health plans (and self-insured plans with stop loss coverage) should discuss that approach with their insurance carriers and relevant vendors.

The April 2020 tolling relief also covers the deadline for health plans to provide COBRA election notices to qualified beneficiaries. Given the lack of guidance at this time, the more conservative approach is to operate in compliance with the usual COBRA notification deadlines as of March 1, 2021. To the extent pandemic-related business disruptions continue to make compliance difficult for some plans, the DOL presumably will adhere to its previously stated enforcement approach during the pandemic, which includes relief in appropriate circumstances.

ERISA Disclosure Requirements for Service Providers Extended to Group Health Plans

The recently enacted Consolidated Appropriations Act of 2021 (“CAA”) requires new disclosures for brokers and other consultants providing services to certain group health plans.  Under the CAA, “covered service providers” must disclose their “direct” and “indirect” compensation above $1,000 received during the term of the contract or arrangement to a responsible plan fiduciary of a “covered health plan.”

Previously, the DOL issued regulations pursuant to ERISA Section 408(b)(2) only requiring qualified retirement plans to disclose this information, specifically exempting group health and welfare plans.  The CAA amends ERISA Section 408(b)(2) to broaden the definition of “covered plan” to include “covered health plans”, and it requires the disclosure of direct and indirect compensation paid by “covered service providers” to such plans.

A “covered health plan” includes employee benefit welfare plans to the extent the plan provides medical care to employees or their dependents directly or through insurance, reimbursement, or other methods.  A “covered health plan” does not include a qualified small employer health reimbursement arrangement.

A “covered service provider” is defined to include entities that provide brokerage or consulting services for which the provider enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in direct or indirect compensation.  The brokerage and consulting services include the selection of insurance products, recordkeeping services, medical management vendors, benefits administration (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness design and management services, transparency tools, group purchasing organization agreements, participation in and services from preferred vendor panels, disease management, compliance services, employee assistance programs, or third party administration services.

“Direct compensation” includes all compensation paid directly from the plan.  “Indirect compensation” is defined as compensation from any source other than the covered plan, the plan sponsor, the covered service provider, or an affiliate.  It also includes compensation from a subcontractor unless it is received in connection with services performed under a contract or arrangement with a subcontractor.

The new law details specific items that must be disclosed by the service provider to the plan fiduciary, including a description of the services provided and a description of all covered direct and indirect compensation.  The disclosure requirements will be effective December 27, 2021.

Group health plans should begin working in coordination with covered service providers to determine whether these new disclosure requirements will apply to them and, if so, what indirect compensation must be disclosed.  In preparing to comply with these new disclosure rules, affected parties may seek guidance in the disclosures practices that developed under Section 408(b)(2) in connection with qualified retirement plans.

Biden Administration Requests Review of DOL’s Final “ESG” Rules for ERISA Fiduciaries – What Does that Mean for the DOL’s Final Proxy Voting Rules?

On October 30, 2020, the U.S. Department of Labor (the “DOL”) issued a final rule on “ESG” investing (summarized here) which requires ERISA plan fiduciaries to base investment decisions on financial factors alone, prohibits fiduciaries from selecting investments based on non-pecuniary considerations, and which could restrict “do-good” or “ESG” investing (the “ESG Rule”).  However, the fate of the ESG Rule is currently unclear, as the Biden administration directed the DOL to review the rule in a fact sheet issued on January 20, 2021.

In a separate (but related) rulemaking, the DOL published in the Federal Register on December 16, 2020, a final rule confirming its position that ERISA’s fiduciary duties of prudence and loyalty apply to an ERISA plan fiduciary’s exercise of shareholder rights, including proxy voting, proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms (the “Proxy Voting Rule”).  The Proxy Voting Rule went into effect on January 15, 2021 (although certain aspects of this rule have later compliance dates, as discussed below).

The ESG Rule and the Proxy Voting Rule were each structured in a manner that would amend the DOL’s “investment duties” regulation at 29 C.F.R. 2550.404a-1.  When the DOL finalized the ESG Rule, it reserved a section of the amended regulation for the final Proxy Voting Rule.  It is uncertain what action the Biden administration will take with respect to the ESG Rule following its review thereof, but it is very possible that the Proxy Voting Rule will have the same fate given how intertwined the two rules are.

The Proxy Voting Rule reflects the DOL’s attempt at clarifying its prior proxy voting guidance that “may have led to confusion or misunderstandings on the part of plan fiduciaries.”  In particular, the DOL acknowledged that there is a view among some that ERISA plan fiduciaries are required to vote all proxies or exercise every shareholder right – the Proxy Voting Rule makes clear that is not the case.  The Proxy Voting Rule instead takes a principles-based approach and details the obligations of fiduciaries when making such decisions in order to satisfy their duties of prudence and loyalty, which include the following:

  • act solely in accordance with the economic interest of the plan and its participants and beneficiaries;
  • consider any costs involved;
    • relevant costs will depend on the facts and circumstances, and could include: direct costs to the plan of determining how to vote and actually submitting the vote; potential reduction of management fees by reducing the number of proxies voted that have no economic consequence for the plan; any out-of-the-ordinary costs or unusual requirements, such as may be the case of voting proxies on foreign corporation shares; or any opportunity costs of voting, such as forgone earnings from recalling securities on loan or any restrictions on selling the underlying shares.
  • not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries;
  • evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights;
  • maintain records on proxy voting activities and other exercises of shareholder rights; and
  • exercise prudence and diligence in the selection and monitoring of persons (if any) who have been delegated authority to exercise shareholder rights, or who have been selected to advise or otherwise assist with the exercise of shareholder rights.
    • note, however, that a fiduciary may adopt a practice of following the recommendations of a proxy advisory (or similar) firm only if the fiduciary first determines that the service provider’s proxy voting guidelines are consistent with the requirements above.

The Proxy Voting Rule also provides an optional safe harbor for plan fiduciaries that adopt and follow proxy voting policies with specific parameters that are prudently designed to serve the plan’s economic interest.  The safe harbor is intended to reduce compliance burdens with respect to decisions as to whether to vote proxies, and does not apply with respect to decisions as to how to vote proxies.  The safe harbor permits a plan to adopt either or both of the following (though these are not meant to be the exclusive means for compliance):

  • A policy to limit voting resources to particular types of proposals that the fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the plan’s investment in the issuer.
  • A policy of refraining from voting on proposals or particular types of proposals when the size of the plan’s holdings in the issuer relative to its total investment assets is below a quantitative threshold that the fiduciary prudently determines, considering the plan’s percentage ownership of the issuer and other relevant factors, is sufficiently small that the matter being voted upon is not expected to have a material effect on the investment performance of the plan’s portfolio (or plan assets under management in the case of an investment manager).

If adopted, a proxy voting policy must be reviewed periodically by the plan fiduciary, and may not prohibit the fiduciary from (i) voting the proxy, if the fiduciary prudently determines that the matter being voted upon is expected to have a material effect on the value of the investment or the investment performance of the plan’s portfolio (or plan assets under management in the case of an investment manager) after taking into account the costs involved, or (ii) refraining from voting the proxy, if the fiduciary prudently determines that the matter being voted upon is not expected to have such a material effect after taking into account the costs involved.

The Proxy Voting Rule also reiterates the DOL’s longstanding position that the responsibility for voting proxies rests with the plan trustee, unless the plan trustee is being directed by the plan’s named fiduciary or voting authority has been delegated to an investment manager.  If authority to manage plan assets has been delegated to an investment manager, the investment manager will have the exclusive authority to vote proxies unless the applicable plan documents or investment management agreement specifically provide otherwise.

An investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan must either (i) reconcile (insofar as possible) any conflicts in the proxy voting policies of such plans, and vote (or abstain from voting) the relevant proxies in proportion to each plan’s economic interest in the pooled investment vehicle, or (ii) develop an investment policy statement consistent with the Proxy Voting Rule that the participating plans must accept before they are allowed to invest in the pooled investment vehicle.

The Proxy Voting Rule does not apply to shareholder rights that are passed through to participants and beneficiaries of individual account plans.  In such a case, the plan trustee must follow the direction of the plan participant or beneficiary, but only if the direction is consistent with the plan terms and not contrary to ERISA.

The Proxy Voting Rule went into effect on January 15, 2021 and applies to the exercise of shareholder rights after such date; provided, that (i) fiduciaries that are not SEC-registered investment advisers have until January 31, 2022 to comply with the requirements to evaluate material facts providing the basis for exercising a shareholder right and to maintain records on proxy voting activities, and (ii) all fiduciaries have until January 31, 2022 to comply with the requirement to confirm that a proxy firm upon whom the fiduciaries intend to rely has proxy voting guidelines that comply with the Proxy Voting Rule and the requirements relating to investment managers of pooled investment vehicles.

The Proxy Voting Rule also removes from the Code of Federal Regulations the DOL’s Interpretive Bulletin 2016-01, which may have been interpreted to permit consideration of a broader set of factors when making determinations regarding proxy voting, as it no longer reflects the DOL’s views on the exercise of shareholder rights.

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As noted above, although both the ESG Rule and the Proxy Voting Rule are currently effective, the fate of such rules remains uncertain.  We are monitoring the status of such rules, and are always available to assist plan fiduciaries, investment managers and other plan service providers in their compliance efforts related thereto.

Tax-Exempt Executive Compensation Excise Tax Regulations (Section 4960) Finalized

Employers that are tax-exempt or have tax-exempt affiliates (for example, a foundation) should pay close attention to a 21% excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation.  Final Regulations under Section 4960 are described here.  The discussion includes traps for the unwary.  Please reach out to your Proskauer contact to discuss how these rules affect your organization.

DOL Releases Guidance on Addressing the Missing Participant Problem

The problem of “missing” participants and beneficiaries (individuals for whom the plan administrator does not have adequate contact information) is an ongoing issue for retirement plan administrators.  It is also an area to which the DOL has dedicated significant attention in recent years, particularly in its enforcement actions, which has been a challenge for administrators. While there are general requirements under ERISA to maintain adequate plan records and distribute materials to participants and beneficiaries, there has been little in the way of specific DOL guidance regarding missing participants outside the context of plan terminations.   However, on January 12, 2021, the Employee Benefits Security Administration’s (EBSA) issued two pieces of helpful guidance, (i) outlining best practices for dealing with missing participants and (ii) explaining EBSA’s processes with respect to its Terminated Vested Participants Project (TVPP) audit program. The DOL also issued Field Assistance Bulletin 2021-01 on the use of the PBGC Missing Participant Program by terminating defined contribution plans, which is addressed in a separate blog post.

Best Practices for Preventing and Locating Missing Participants

EBSA outlined best practices that it has found “effective at minimizing and mitigating the problem of missing or nonresponsive participants,” summarized below. These are applicable to both defined benefit and defined contribution plans.  All of these practices may not be appropriate for each plan, but plan administrators should review and determine how best to supplement their existing practices. As discussed below, if audited a plan will be well-served if the plan administrator can point to the documented implementation of many of these best practices.

  • Maintain accurate participant census data.
    • Contact participants (current and former) and beneficiaries periodically to confirm or update contact information.
    • Include reminders in various communications about updating contact information.
    • Allow participants to update information online and include prompts to confirm information upon log in to the plan’s online platform.
    • Regularly request updates of beneficiary contact information.
    • Flag and follow up on undeliverable mail or email and uncashed checks.
    • Perform regular audits and correct any errors detected.
    • Take steps to ensure the appropriate transfer of information and to perform searches and corrections upon a change in record-keeper, merger or acquisition.
  • Communicate effectively.
    • Use plain language and offer language assistance where appropriate.
    • Clearly and prominently identify the subject matter.
    • Encourage use of plan websites and toll free numbers.
    • Build processes into onboarding, enrollment and exit procedures to update or confirm information, and to inform employees of the importance of ensuring information remains updated.
    • Clearly mark envelopes and correspondence with predecessor plan or plan sponsor names for participants who terminated before the change (for example, after a corporate merger or change in plan name).
    • Communicate about how the plan can help eligible participants consolidate accounts from prior employers or IRAs.
  • Perform missing participant searches.
    • Check related plan and employer records for information about the participant, beneficiary or, if needed the next of kin or emergency contact.*
    • Check with designated beneficiaries and/or employee emergency contacts on record.*
    • Use free online search engines, public record databases (e.g., for licenses, mortgages and real estate taxes), obituaries and social media.
    • Use commercial locator services, credit-reporting agencies or proprietary internet search tools to locate individuals.
    • Use USPS certified mail or a private delivery service with similar tracking feature to send mail to the last known mailing address.
    • Attempt contact through other means of communication (e.g., e-mail, phone, text, and social media).
    • Use death searches in the case of extended unresponsiveness (e.g., Social Security Death index) and, if death is confirmed, redirect communications to beneficiaries.
    • Reach out to colleagues of missing participants – for example by checking those who worked in the same office or by publishing missing participant lists on the intranet, in e-mails to remaining employees, or in communications with other retirees (for collectively bargained employees consider reaching out to union local office and having missing participant lists included in member communications).
    • Register missing participant on public and private pension registries with appropriate privacy and cyber security protections, and publicize registry through e-mails, newsletters, and other communications to existing employees, union members and retirees.

* If some of these steps create privacy concerns, the plan may request that the related plan or employer forward a letter from the plan to the missing participant or beneficiary on its behalf.

  • Document procedures and actions taken.
    • Keep and follow clear, written polies and procedures.
    • Document key decisions and actions taken to implement and comply with these policies and procedures.
    • Monitor use of third party record-keepers and work with them to identify and correct recordkeeping or communication issues (including procedures for pulling in relevant information held at the employer level).

EBSA’s TVPP Audit Program

The other piece of guidance released by EBSA on missing participants relates to its Terminated Vested Participants Project (TVPP) audit program, which focuses on identifying defined benefit plans with signs that there may be significant issues in identifying missing participants or beneficiaries and paying benefits at normal retirement age or when required minimum distributions (RMDs) are required to commence.

While each audit will be case-specific, EBSA will request and review a variety of plan documents, policies and census records, and will generally look for:

  • Systematic recordkeeping and administrative errors that create a risk of loss because benefits do not start before death of the participant or beneficiary, or because of excise taxes on RMDs.
  • Inadequate procedures for identifying and locating missing participants and beneficiaries, or for contacting terminated vested participants or beneficiaries shortly in advance of normal retirement age or when RMDs are required to commence.
  • Inadequate procedures for addressing uncashed distribution checks.

EBSA also identified a number “red flags” that come up during audits, including:

  • Missing and incomplete data in census records (including use of placeholders or clearly flawed data).
  • Uncashed checks or returned mail.
  • A significant number of terminated vested participants who are eligible for, but have not claimed, benefits (e.g., individuals over normal retirement or RMD age).
  • Continuing to send communications to bad addresses without taking steps to verify the correct address or using resources like missing participant services offered by existing service providers, the USPS Address Correction Service or the National Change of Address database.
  • Benefit statements that do not clearly advise of the participant’s vested status, the date at which they are eligible to start receiving benefits, or excise tax consequences of delaying commencement beyond the RMD requirements.
  • Confusing or unclear communications, for example those not in “plain English,” or that fail to include predecessor employer or predecessor plan names (e.g., after mergers or acquisitions).

If a plan is audited under the TVPP audit program, after EBSA receives and reviews the requested information, it will contact the plan fiduciaries to discuss potential remedies to the identified problems. The agency has indicated that it will enter into a dialogue and give plans a reasonable amount of time to address and respond to identified areas of concern. If EBSA determines that the remedies are adequate, EBSA will generally recite the corrective steps as part of its closing letter.  Absent widespread fiduciary breaches, EBSA has indicated that audits generally may be closed without citing individual plan fiduciaries for specific violations.

Proskauer Perspective.

The DOL has long been concerned with the issues surrounding missing participants and beneficiaries.  Plan administrators should review plan data and procedures, and discuss with their advisors whether to make any changes to their existing procedures and practices. In considering these policies and procedures, administrators and sponsors should also be aware of EBSA’s TVPP audit program, as it provides a helpful understanding of what the DOL will be reviewing on audit.

Terminating a 401(k) Plan? The DOL Blesses Use of the PBGC Missing Participant Program

The DOL recently issued Field Assistance Bulletin 2021-01, blessing the PBGC’s Missing Participant Program as an additional method of addressing a perennial issue in 401(k) terminations – the problem of missing participants and beneficiaries with remaining account balances.


After a defined contribution plan’s termination, DOL regulations provide a safe harbor allowing the distribution of remaining accounts to individual retirement accounts (IRAs).  This safe harbor is conditioned on the plan administrator providing the required distribution notice and the account holder’s failure to timely make a distribution election.  At the end of 2017, the PBGC expanded its Missing Participant Program, opening up the option for plan fiduciaries of defined contribution plans to transfer remaining account balances to the PBGC rather than to an IRA provider.  If the plan fiduciaries have performed a diligent search within the past 9 months, the PBGC Missing Participants Program allows the transfer missing participants’ account balances from a terminated plan to the PBGC for a fee of $35 per account.

Shortly after the PBGC expanded its program, the DOL announced its intention to review the safe harbor regulations in light of the availability of this new option.  In Field Assistance Bulletin 2021-01, the DOL has now announced its policy of not pursuing violations under ERISA’s distribution rules if a plan fiduciary otherwise complies with the safe harbor rules but transfers remaining account balances to the PBGC Missing Participant Program rather than to an IRA provider. This policy will remain in effect pending any further guidance.

Key Considerations.

  • Use of the PBGC Missing Participants Program does not relieve plan fiduciaries from the duty to diligently search for missing participants and beneficiaries before assets are distributed. The DOL requires plan fiduciaries to maintain adequate records and to take steps to ensure that the plan has complete and updated participant and beneficiary contact information (see our post on newly issued guidance regarding best practices with respect to missing participants). This becomes particularly important in the context of a plan termination, where assets must be distributed to the account holders. The DOL specifically noted that expansion of the safe harbor to include the PBGC Missing Participants Program does not preclude DOL findings of violations for failures to perform diligent searches or to maintain adequate plan and employer records.
  • Plan fiduciaries must otherwise comply with the requirements of the DOL safe harbor (although the required notices must be revised to reflect the transfer of the account to the PBGC, and to include the program’s website and consumer contact number). The DOL has a model notice that can be used to comply with the safe harbor requirements.  If the notice is returned as undeliverable, the plan fiduciary must take appropriate steps to try and locate the individual. Following the fiduciary’s search, the individual is deemed to have been furnished the notice and to have failed to make an election.
  • The PBGC’s fees may be paid from the transferred accounts, unless prohibited by the plan document (and, in the case of an abandoned plan with no remaining employer, the fees may be paid from account balances even if the plan document otherwise calls for payment by the employer).
  • Plan fiduciaries may transfer accounts to the PBGC if the participant or beneficiary previously elected a lump sum but failed to cash the check prior to its “cash-by” date (provided it is at least 45 days from issuance) or, if none, before the check’s stale date.

Proskauer Perspective.

Plan administrators should remain diligent in their efforts to update and maintain appropriate participant records in the course of ongoing plan administration, and plan fiduciaries must perform diligent searches for any missing or non-responsive individuals upon plan termination. However, by incorporating the PBGC’s Missing Participant Program into the regulatory safe harbor framework, Field Assistance Bulletin 2021-01 provides welcome guidance for plan fiduciaries trying to meet their responsibilities to distribute account balances after plan termination.

For a more detailed look at issues surrounding 401(k) plan terminations generally, see the article linked here.

[Podcast]: Cyber-theft of 401(k) Accounts

proskauer benefits brief podcast

In this episode of the Proskauer Benefits Brief, partner Robert Projansky and special guest Garrett Fenton, senior attorney at Microsoft Corporation, discuss cyber theft of 401(k) plan accounts.  Tune in as we discuss why 401(k) plans are vulnerable to cyber security breaches, what kinds of cyber security frauds we are seeing in 401(k) plans, evolving litigation on these issues and steps plan sponsors can take to mitigate risk.

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DOL Finalizes New Prohibited Transaction Exemption for “Investment Advice”, With Statement That Fiduciary Standard May Apply to IRA Rollover Guidance

****UPDATE:  The Exemption described in this notice appears to be covered by the regulatory freeze described in this Memorandum for the Heads of Executive Departments and Agencies, issued by Chief of Staff Ronald A. Klain on January 20, 2021.  Accordingly, we expect the effective date of the Exemption to be postponed for 60 days (until March 22, 2021) to allow review by the Biden administration’s Department of LaborStay tuned.****

On December 18, 2020, the U.S. Department of Labor (the “DOL”) published in the Federal Register a final prohibited transaction class exemption (the “Exemption”) that allows “investment advice” fiduciaries to provide advice that affects their compensation and to engage in otherwise prohibited “principal transactions.”  Importantly, the preamble to the Exemption (the “Preamble”) includes the DOL’s final interpretation of the “five-part test” for purposes of determining when IRA rollover advice constitutes fiduciary “investment advice.”

The Exemption (PTE 2020-02) is set to become effective on February 16, 2021.  At this time, it is not yet clear whether the Biden administration will delay or revoke the Exemption.

By way of background, on July 7, 2020, the DOL issued a guidance package (summarized here) that included the proposed Exemption and formally reinstated the “five-part test” from 1975 to determine what constitutes fiduciary “investment advice” under ERISA and Section 4975 of the U.S. Internal Revenue Code (the “Code”).  The reinstatement of the “five-part test” followed the direction of the U.S. Court of Appeals for the Fifth Circuit on March 15, 2018 to vacate the Obama administration’s 2016 fiduciary rule, and was final when published in July 2020.  Accordingly, any changes to the “five-part test” will require a new proposed rule and comment period.

Below we describe in more detail the DOL’s views on application of the “five-part test” to IRA rollover advice and the Exemption.

Advice to Roll Over Can Be Investment Advice Under the “Five-Part Test”

Under the “five-part test”, a person is considered to be providing “investment advice” only if the person: (i) renders advice as to the value of securities or other property, or makes recommendations as to investing in, purchasing or selling securities or other property, (ii) on a regular basis, (iii) pursuant to a mutual agreement, arrangement, or understanding with the plan, the plan fiduciary or IRA owner that, (iv) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and (v) the advice will be individualized based on the particular needs of the plan or IRA.  A person who meets all five prongs of the test and receives direct or indirect compensation will be considered an “investment advice” fiduciary with respect to the applicable plan or IRA.

Historically, service providers have often taken the position that advice on whether to leave money in a plan or to roll over to an IRA was not provided on a “regular basis” and/or was not provided pursuant to a “mutual” agreement, arrangement or understanding that the advice would serve as a “primary basis” for the decision.  Further, in Advisory Opinion 2005-23A (the “Deseret Letter”), the DOL stated that advice to roll assets from a plan to an IRA was not “investment advice,” because it was not advice with respect to assets of a plan.

In the Preamble, however, the DOL disclaimed its guidance in the Deseret Letter as an “incorrect analysis.”  The DOL now says that the “better view” is that IRA rollover advice is a recommendation to liquidate or transfer the plan’s property to effectuate the rollover.  This means that advice on whether to take a distribution from a retirement plan and roll it over to an IRA (or to roll over from one plan to another plan, or one IRA to another IRA) may be covered by the “five-part test,” if the advice is either part of an ongoing relationship or the start of an ongoing relationship.

In this regard, the DOL has withdrawn the Deseret Letter and stated the following:

  • The full “five-part test” applies for determining whether a service provider is an “investment advice” fiduciary. Whether or not the prongs of the test are satisfied “will be informed by all the surrounding facts and circumstances”;
  • IRA rollover advice may be an isolated and independent transaction that would fail to meet the “regular basis” prong, but the analysis will depend on the surrounding facts and circumstances:
    • In circumstances where an advice provider has been giving financial advice to an individual about investing in, purchasing, or selling securities or other financial instruments through a retirement vehicle subject to Title I of ERISA or the Code, any rollover advice provided to the individual would be considered part of an ongoing advice relationship that would satisfy the “regular basis” requirement;
    • Similarly, where a rollover advice provider will be regularly giving financial advice with respect to the IRA following the rollover (even if it has not otherwise provided any advice before the rollover), the rollover advice would be the start of an advice relationship that would satisfy the “regular basis” requirement; and
    • When the parties reasonably expect an ongoing advice relationship at the time of the rollover recommendation, the “regular basis” prong is satisfied;
  • The determination of whether there is a “mutual” agreement, arrangement, or understanding that the investment advice will serve as a “primary basis” for investment decisions will be based on the reasonable understanding of each of the parties:
  • To be subject to the fiduciary standard, the advice does not need to serve as “the” primary basis of investment decisions: it need only serve as “a” primary basis;
  • Written statements disclaiming a mutual understanding may be considered as part of the analysis, but are not determinative;
  • In evaluating the reasonable understanding of the parties, the DOL intends to consider marketing materials where the advice provider holds itself out as a trusted adviser (or, in the alternative, clearly disclaims any fiduciary relationship or position of trust and confidence); and
  • When a financial service professional makes recommendations that are based on the individualized needs of the recipient or made in accordance with a best interest standard such as the Securities and Exchange Commission’s (“SEC”) best interest standard, the parties “typically should reasonably understand that the advice will serve as at least a primary basis for the investment decision”; and
  • “Hire me” marketing communications generally will not be treated as “investment advice” if not accompanied by an investment recommendation.

Recognizing that some advisers have relied on the Deseret Letter, the DOL says it will not pursue claims for breach of fiduciary duty or prohibited transactions based on rollover recommendations made before the effective date of the Exemption, if the recommendations would not have been considered fiduciary “investment advice” under the Deseret Letter.

The Exemption

The final Exemption is largely consistent with the proposed Exemption.  It allows an “investment advice” fiduciary to provide advice that affects its compensation if the fiduciary complies with “impartial conduct” standards and satisfies certain other requirements. As described below, the “impartial conduct” standards incorporate ERISA’s principles of prudence and loyalty, and are intended to be aligned with the standards of conduct for investment advice professionals established and considered by other U.S. Federal and State regulators – in particular, the SEC and its Regulation Best Interest.  Notably, the Exemption is available only for eligible fiduciaries who give advice—not for fiduciaries who retain discretion with respect to the plan or IRA.

The Exemption is available for an “investment advice” fiduciary who is a registered investment adviser, broker-dealer, bank, or insurance company, or an employee, agent, or representative of an eligible entity.  Under the Exemption, an eligible investment advice fiduciary could receive direct compensation (such as management fees from a recommended investment) as well as indirect compensation such as 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties.

The Exemption also permits qualifying “investment advice” fiduciaries to enter into and receive compensation with respect to “riskless” and certain other “principal transactions” with a Retirement Investor (i.e., an ERISA plan participant or beneficiary, IRA owner, or fiduciary of an ERISA plan or IRA) where the fiduciary either purchases certain investments from a Retirement Investor for its own account or sells certain investments out of its own inventory to the Retirement Investor.

The Exemption’s critical protective condition is that the adviser must comply with “impartial conduct” standards – namely, the best interest standard described above (which includes prudence and not placing the fiduciary’s financial or other interests (including interests of the financial institution) ahead of the Retirement Investor’s interests); a reasonable compensation standard; and a requirement to make no materially misleading statements.  The Exemption also requires that the “investment advice” fiduciary:

  • Disclose both the financial institution’s and the investment professional’s status as an “investment advice” fiduciary, and provide an accurate description of the services to be provided and material conflicts of interest;
  • If the advice involves a rollover recommendation, document and disclose the reasons that the rollover recommendation is in the Retirement Investor’s best interest (this requirement was not in the proposed Exemption);
  • Establish, maintain and enforce policies and procedures prudently designed to ensure compliance with the “impartial conduct standards”; and
  • Conduct an annual review to ensure compliance with (and detect and prevent violations of) the conditions of the Exemption.

The Exemption is similar in substance to the “Best Interest Contract Exemption” that was vacated along with the Obama Administration’s fiduciary rule, except that it does not give Retirement Investors a separate right of action.

An “investment advice” fiduciary could lose the ability to rely on the Exemption for a period of 10 years for certain criminal convictions, providing misleading statements to the DOL in connection with relying on the exemption, or engaging in an intentional violation or systematic pattern of violating the conditions of the exemption.

The Exemption includes a “self-correction” mechanism for certain violations.  The self-correction mechanism was not included in the proposed Exemption and is available for violations that do not result in any losses to the Retirement Investor (or where the Retirement Investor is made whole by the financial institution for such losses), if (i) the violation is corrected within 90 days after the financial institution learned (or reasonably should have learned) of the violation, (ii) the DOL is notified within 30 days of correction, and (iii) the violation and correction is documented in the annual compliance review.

The Exemption does not cover advice arrangements that rely solely on “robo-advice” without interaction with an investment professional.  Those advice arrangements are covered by the statutory exemption in Sections 408(b)(14) and 408(g) of ERISA and Sections 4975(d)(17) and 4975(f)(8) of the Code and the regulations thereunder.

To facilitate transition, the DOL’s current non-enforcement policy for investment advice professionals that have established policies to comply with the “impartial conduct” standards under the vacated best Interest Contract Exemption and Class Exemptions for Principal Transactions (announced in Field Assistance Bulletin 2018-02) will remain in effect until December 20, 2021.

Proskauer Perspective

The withdrawal of the Deseret Letter is consistent with views the DOL has been stating publicly for some time now.  With a new administration coming into office, we do not think the reinstatement of the “five-part test” or the final Exemption will be the final word from the DOL on this topic.  Stay tuned.