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Fiduciary Investigation Program

“Do you have any insight into what happens during a DOL plan investigation?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Ohio is representative of a common inquiry related to Department of Labor (DOL) plan investigations.

Highlights of the Discussion

Yes, the Employee Benefits Security Administration (EBSA) division of the DOL has a very detailed Enforcement Manual posted on its website (dol.gov). One of the chapters of the manual pertains specifically to the Fiduciary Investigation Program (FIP), applicable to employee benefit plans such as 401(k) plans. Included along with the detailed descriptions and procedures in the FIP are several DOL checklists — referred to as “Figures” in the text — that the DOL auditor completes as part of an investigation. For example:

 Figure 3 is a Bonding Checklist
 Figure 4 is a Reporting and Disclosure Checklist
 Figure 5 is an Individual Benefit Statement Compliance Checklist
 Figure 6 is the DOL’s general Investigation Guidelines

The DOL clarifies that the Investigation Guidelines (Figure 6) should not be considered as either mandatory or all-inclusive but should be used to the extent deemed appropriate for the plan. Also, the DOL can expand the scope of the investigation beyond the original allegations or suggest additional areas of inquiry if new information is uncovered during the investigation.

The Investigation Guidelines are arranged in two parts:

 Part I, Background Information, covers data related to the type and size of the plan, and the responsible parties.
 Part II, Review Procedures, explores compliance with the Employee Retirement Income Security Act of 1974 (ERISA) and probes for potential violations of ERISA, particularly fiduciary violations.

The investigator may apply additional investigative steps if deemed necessary.

Conclusion
Plan sponsors can use the DOL’s FIP as a guide for conducting their own fiduciary reviews to uncover any potential deficiencies in their plans and implement remedies before the DOL targets them for formal investigations. For plan sponsors who have already been notified of a pending investigation, the FIP can give them an idea of what to expect.

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The Audit Formerly Known As “Limited Scope”

“My plan clients are asking questions about changes to what used to be called the “limited scope audit” for Forms 5500 that take effect for the 2021 plan year filings. Can you summarize the changes?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to the report performed by an independent qualified public accountant (the auditor) that accompanies certain Form 5500 filings.

Highlights of the Discussion
The limited scope audit related to Form 5500 filings is now more involved and has a new name: the ERISA Sec.103(a)(3)(C) audit. From a plan sponsor’s perspective, the changes do not affect anything in ERISA. Therefore, a sponsor’s ability to elect such an audit continues. The new rules change what is expected of the plan auditor, starting with the 2021 filing year in most cases.

Under the old rules, a limited scope audit permitted plan sponsors to elect to have the plan auditor exclude certain investment information from his or her review that pertained to investments held and certified by qualified institutions. In 2019, the American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board issued two new auditing standards related to the financial statements of employee benefit plans and transparency in annual reports:

1. Statement on Auditing Standards(SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA; and
2. Statement on Auditing Standards (SAS) No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports.

SAS 136 creates a new section in the AICPA Professional Standards, and deals with the auditor’s responsibility to form an opinion and report on the audit of financial statements of ERISA employee benefit plans. SAS 136 takes effect for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. SAS 137 enhances transparency in reporting related to the auditor’s responsibilities for nonfinancial statement information included in annual reports.

SAS 136 will affect limited-scope audits beginning with the 2021 filing by

1. Referring to such audits as ERISA Sec.103(a)(3)(C) audits;
2. Clarifying what is expected of the auditor, including specific procedures when performing the audit; and
3. Establishing a new form of report that provides greater transparency about the scope and nature of the audit, and describes the procedures performed on the certified investment information.

For a summary of the SAS 136 changes to Form 5500 reporting, please refer to AICPA’s At A Glance: New Auditing Standard for Employee Benefit Plans.

Conclusion
Limited scope audits associated with IRS Form 5500s have a new name and scope because of changes that are effective starting with the 2021 filing year in most cases. A plan sponsor’s ability to elect such an audit continues. The new rules change what is expected of the plan auditor. Make sure the plan has an experienced auditor who is keenly aware of the new expectations.

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Roth IRAs v. Designated Roth 401(k)s

“What are the differences between Roth IRAs and designated Roth 401(k) accounts?”

Highlights of discussion

While there are many differences, the following chart summarizes some of the key dissimilarities.

Feature Roth IRA Designated Roth 401(k) account
Investment options Generally, unlimited, except for life insurance and certain collectibles As specified by the plan
Eligibility for contribution  Must have earned income under $144,000 if a single tax filer or under $214,000 if married filing a joint tax return ·   Access to a 401(k), 403(b) or governmental 457(b) plan with a designated Roth contribution option and

·   The individual must meet eligibility requirements as specified by the plan

Contribution limit (2022) $6,000 ($7,000 if age 50 or older) $20,500 ($27,000 if age 50 or older)
Conversions Anyone with eligible IRA or employer-plan assets may convert them to a Roth IRA Plan permitting, anyone with eligible plan assets may convert them within the plan to a designated Roth account
Recharacterize contribution Yes, within prescribed period No
Required minimum distributions Not during owner’s lifetime Yes
Tax- and penalty-free qualified distributions, regardless of type of money Taken

·      After owning the Roth IRA for five years and

·      Age 59 ½, death, disability, or for first home purchase

Must have a distributiontriggering event under plan terms, plus

·   Five years after owning the designated Roth account and

·   Age 59 ½, death, or disability

Tax and/or penalty on nonqualified distributions based on type of money According to IRS distribution ordering rules:

1.     Contributions: Always tax- and penalty-free

2.     Taxable Conversions: On a first-in, first-out basis by year; always tax-free; penalty if taken within five years of conversion

3.     Nontaxable conversions:  On a first-in, first-out basis by year; always tax- and penalty-free

4.     Earnings: Taxed as ordinary income, subject to penalty unless exception applies

Withdrawals represent a pro-rata return of contributions and earnings in the account; earnings are taxable and subject to penalty unless an exception applies. See IRS Notice 2010-84 for rules applicable to the return of designated Roth 401(k) converted amounts
Timing of distributions At any time, subject to tax and/or penalty depending on type of assets distributed Following plan-defined, distribution triggering events
Loans No Yes, if plan permits
Five-year holding period for qualified distributions Begins January 1 of the year a contribution or conversion is made to any Roth IRA of the owner ·         Separate for each 401(k) plan in which an individual participates

·         Begins January 1 of the year a contribution or in-plan conversion is made to the account

 Beneficiary Anyone, but spousal consent required in community property states Anyone, but spousal consent required

 

Conclusion

While both Roth IRAs and designated Roth 401(k) plan contributions offer the potential for tax-free withdrawals, there are several key differences between the two arrangements. Whether one, the other or both may be right for a particular investor depends on the individual’s circumstances and goals and should be determined based on a thorough conversation between the investor and his or her tax advisor.

 

 

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When might a cash balance plan be a good fit?

“How can I determine if a cash balance plan might be a good fit for a business owner?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in New Mexico is representative of a common question related to maximizing retirement plan contributions.

Highlights of Discussion

The question of whether to set up a qualified retirement plan has important tax ramifications. Therefore, business owners would be best served by seeking the guidance of a tax professional when making such a decision.

As a type of defined benefit plan, a cash balance plan requires an adopting employer to fund the plan to provide participants with a promised retirement benefit. Cash balance plans are most popular among smaller, well-established firms that have significant and consistent cash flow (e.g., law firms, medical groups, and professional firms such as CPAs, architects, and consultants). They also work well for older small business owners who are no longer making heavy investments in their businesses, and have significant amounts of pass-through income, resulting in high tax bills.

To determine suitability for a cash balance plan, consider the following questions. The more “yes” responses the greater the possibility a business could benefit from having a cash balance plan.

Question Yes No Why it Matters
1.   Is the business owner over age 50?     The potential to contribute more income to a cash balance plan increases with age.
2.   Does the business owner have less of a need to reinvest in the business?     If the owner has put money into the business in prior years, the business is now, likely, well established, freeing up capital.
3.   Does the owner have significant pass-through income?     This can lead to discussions on how to reduce a large tax bill.
4.   Does the owner want to catch-up on saving more for the future?     Cash balance plans allow for higher contribution and deduction limits than defined contribution plans.
5.   Has the business owner shown interest in setting up a nonqualified deferred compensation plan (NQDC) to save more?     NQDC plans do not reduce taxable income for business owners of pass-through entities.
6.   Has the business owner shied away from a define benefit plan due to complexity and employee coverage issues?     Cash balance plans are less complicated to maintain than traditional defined benefit plans, and design features allow owners to maximize contributions for themselves.

As the table below illustrates, cash balance plans can allow much higher levels of contributions than a profit sharing or 401(k) plan. That equates to higher tax deductions for business owners. For some businesses, having both a defined contribution and cash balance plan may be appealing.

2022 Cash Balance Chart

Conclusion

There are some key characteristics to look for in a business owner when evaluating whether a cash balance plan might be a good fit. For the right candidate, a cash balance plan—or even a combination cash balance and defined contribution plan—can provide significant benefits. Above all, whether or not to set up a qualified retirement plan is an important tax-related question that a business owner should only answer with the help of his or her tax professional.

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Get Ready to Explain Lifetime Income Illustrations

“When are the new lifetime income illustrations due and what should I be telling my clients who are 401(k) sponsors and participants about them?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Colorado is representative of a common question related lifetime income illustrations in 401(k) plans.

Highlights of Discussion

  • It’s good you are thinking ahead! Sponsors of participant-directed defined contribution (DC) plans must provide lifetime income illustrations to participants in their plans no later than with the second quarterly benefit statements of 2022 (i.e., the first illustration needs to be in place for the quarter that ends June 30, 2022). For nonparticipant directed DC plans, sponsors must provide lifetime income illustrations on the annual pension benefit statement for the 2021 calendar year (e.g., making October 15, 2022, the deadline).
  • Showing what a lump sum amount will equate to as monthly income is a step in the right direction because people don’t retire on lump sums; they retire on monthly income. However, some say these particular income illustrations have the potential to upset participants and force plan sponsors and advisors into damage control mode because they are based on incomplete assumptions.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to require 401(k)s and other DC plans to include lifetime income illustrations in participant benefit statements on an annual basis. Final Department of Labor (DOL) interim final regulations, which provide the details for calculating these lifetime income illustrations, took effective September 18, 2021, and a series of DOL Frequently Asked Questions instruct plan sponsors on when they must provide the first disclosures (mid 2022).
  • According the DOL’s interim final regulations, the income Illustrations must show a monthly income amount based on a DC plan participant’s account balance as of the last day of the statement period converted to a lifetime income equivalent as a
  • Single life annuity (SLA) and
  • Qualified joint and survivor annuity (QJSA) involving a spouse.
  • The income projections for the new disclosures must be based on the following assumptions:
  • The participant is retiring at age 67 (the Social Security full retirement age for many workers) or the participant’s actual age, if older than 67),
  • An interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates;
  • Life expectancy from a gender-neutral Mortality table pursuant to IRC Sec. 417(e)(3)(B), and
  • The current account value—assuming no further contributions.
  • By not accounting for future contributions, the retirement income projections will be significantly smaller than the actual number at retirement—which could be shocking—especially for younger participants. Example:  Theresa is age 40 and single. Her account balance on December 31, 2022, is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December. The benefit statement of this participant would show the following amounts.

 

Current Account Balance $125,000
Single Life Annuity $645 per month for life (assuming Participant X is age 67 on December 31, 2022)
Qualified Joint and 100% Annuity $533 per month for participant’s life, and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022)

Source: DOL Fact Sheet

 

  • It is essential for advisors and plan sponsors to get in front of these upcoming disclosures from a messaging and communication perspective. Specifically, advisors are encouraged to take the following steps to prepare for the statement delivery this summer and fall.
  1. Alert plan sponsors to the rules, assumptions, and the potential for negative feedback from plan participants. Explain the DOL assumptions upon which the income illustrations are based and how they may understate the actual retirement income amount—especially for younger plan participants.
  2. Craft an employee communication strategy explaining the new statements and assumptions. Provide a positive, encouraging message about the importance of making ongoing deferrals, automatically escalating deferral rates, the time value of contributions, and explain why the actual number will likely be larger—especially with ongoing contributions.
  3. Execute the communication plan and provide ongoing support.

 

Conclusion

Slowly the DC market is shifting from a lump sum accumulation mindset to a retirement income mentality. Plan sponsors soon must implement the formalized lifetime income disclosure rules. Although the lifetime income illustrations under the DOL’s regulations are far from perfect, they do press the issue of helping participants understand how their retirement plan balances translate into monthly retirement income. Plan sponsors and advisors can use this impetus to carefully craft their participant communications and messaging. A key differentiator for advisors, moving forward, will be the ability to effectively support participants in transitioning to a true retirement income mindset.

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Designated Roth 401(k) Contributions and IRS Form 8606

My client made designated Roth 401(k) contributions in 2021. Because these contributions are made on an after-tax or nondeductible basis, does that mean he must file IRS Form 8606 to report them?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Tennessee is representative of a common question related to designated Roth 401(k) contributions.

Highlights of Discussion

  • When dealing with tax-related questions, always seek the guidance of a tax professional. What follows is general information based on IRS tax forms.
  • No, designated Roth contributions made to a 401(k) plan are not reported on IRS Form 8606, Nondeductible IRAs (see the instructions for Form 8606). The 401(k) [or 403(b) or governmental 457(b)] plan administrator reports such contributions on a worker’s IRS Form W-2, Wage and Tax Statement in box 12. Because designated Roth 401(k) contributions are subject to federal income tax withholding and Social Security and Medicare taxes (and railroad retirement taxes, if applicable), they also must be included in boxes 1, 3, and 5 (or box 14 if railroad retirement taxes apply) on Form W-2.
  • Please note that where designated Roth 401(k) contributions might show up on Form 8606 is on Line 22, which is used to report the basis in a Roth IRA. Any designated Roth 401(k) amounts an individual rolls into his Roth IRA during the year would be included as basis in the Roth IRA and included in the figure reported on Line 22.

Conclusion

Designated Roth contributions made to a 401(k) plan are not reported on IRS Form 8606, Nondeductible IRAs. However, a taxpayer will need to include designated Roth 401(k) amounts rolled into a Roth IRA in the value of the Roth IRA’s basis.

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Deadline for Summary Annual Reports

I have a client who failed to deliver the 2020 Summary Annual Report (SAR) on time for the business’s 401(k) plan. What are the consequences?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question related to required plan reports.

Highlights of Discussion

  • Let’s start with the due date of the SAR. The date a plan sponsor must deliver a SAR to plan participants and beneficiaries is tied to the due date for filing the Form 5500 series report for the plan. The SAR is a summary of Form 5500 information. The appropriate Form 5500 is generally due seven months after the end of the plan year (i.e., July 31st for a calendar year plan). The regulations require distribution of the SAR within nine months after the close of the plan year. So, a calendar year plan has a SAR distribution deadline of September 30th following the end of the plan year.
  • If the plan sponsor has an extension to file Form 5500 for the year, the sponsor also has additional time to provide the SAR (i.e., two months after the close of filing extension [DOL Reg. § 2520.104b-10(c)]. For example, if a calendar year plan has an extension to file Form 5500 until October 15th of the following year, the plan sponsor must distribute the SAR for the plan by December 15th.
  • If a plan fails to provide the annual SAR, there is no stated penalty per se. However, plan sponsors have a fiduciary duty to ensure compliance with all plan reporting and notice rules. The error could result in DOL fines or criminal action upon discovery. The best course of action is to distribute a current SAR as quickly as possible and document how this failure will be avoided in the future.
  • There is a potential penalty if a plan participant or beneficiary requests a SAR and the sponsor fails to provide one in a timely manner. Failure to provide a SAR within 30 days of receiving a request from a plan participant or beneficiary could result in a penalty of $110 per day per participant [ERISA § 502(c)(1)].

Conclusion

When applicable, plan sponsors have a fiduciary duty to distribute SARs each year to participants and beneficiaries. They also have a responsibility to timely provide them upon request.

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“How is a lump-sum payout of unused vacation treated for plan purposes–is it compensation?”

How is a lump-sum payout of unused vacation treated for plan purposes–is it compensation?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Massachusetts is representative of a common question compensation for plan purposes.

Highlights of Discussion

  • To answer this question, we need to consider two issues—ideally with the help of a tax advisor. First, how does the IRS treat a lump-sum payout of unused vacation for tax purposes and, second, what is the definition of compensation for plan purposes according to the governing plan document?
  • The following is not tax advice, but a general explanation of the rules based on IRS source materials. With respect to the first question, the IRS treats a lump-sum payout of unused vacation as “supplemental wages” subject to Social Security and Medicare taxes according to the IRS Publication 15, (Circular E), Employer’s Tax Guide. Any federal income tax withheld will be at the IRS supplemental wage tax rate, depending on whether the supplemental payment is identified as a separate payment from regular wages or combined with regular wages. (For more information, please see Publication 15 and Treasury Decision 9276.)
  • Regarding question number two, as supplemental wages, a lump-sum payout of unused vacation would be included in the definition of compensation for plan purposes—unless it is explicitly excluded under the terms of the plan document. Therefore, be sure to check the wording of the plan document carefully.

Conclusion

The IRS treats the lump-sum payout of unused vacation as supplemental wages for tax purposes. As supplemental wages, a lump-sum payout of unused vacation would be included in the definition of compensation for plan purposes—unless it is explicitly excluded under the terms of the plan document. For specific tax advice, please see the guidance of a tax professional.

 

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IRA
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How to make a $28,000 Roth or Traditional IRA contribution

A colleague of mine said a 60-year-old couple who is a client of hers plans to make a $28,000 IRA contribution by April 18, 2022. How is that possible? Won’t that be after the deadline and over the limit?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Columbus, OH is representative of a common question involving IRA contributions.

Highlights of Recommendations
• A $28,000 IRA contribution by April 18, 2022, for the couple is possible, courtesy of a combination of several IRS rules covering

1. carry-back and current year contributions,
2. spousal contributions,
3. catch-up contributions, and
4. the Emancipation Day holiday in Washington D.C.

• From January 1, 2021, to April 18, 2022, it is possible for a traditional or Roth IRA owner age 50 and over to make a $14,000 contribution: $7,000 (with catch-up) as a 2021 carry-back contribution and $7,000 (with catch-up) as a 2022 current-year contribution. That means a married couple filing a joint tax return could potentially make a $28,000 IRA contribution, with $14,000 going to each spouse’s respective IRA.

The tax filing deadline is, usually, April 15th, but the IRS said in a 2022 news release that because of the Emancipation Day holiday in Washington D.C. the tax filing deadline is moved to Monday, April 18, 2022. And the because of Patriot’s Day in Maine and Massachusetts the filing deadline is April 19, 2022

• Why April 18, 2022? By law, Washington, D.C. holidays impact tax deadlines for everyone in all states in the same way as federal holidays do. Because of the Emancipation Day holiday in the District of Columbia on Friday April 15th, the IRS has moved the due date for 2021 personal tax returns to Monday April 18, 2022.

• What about the Patriot’s Day holiday on April 18, 2022, in Maine and Massachusetts? The IRS has indicated that taxpayers in those states have until April 19, 2022, to file their returns considering the holiday.

• When making the contributions it is important to clearly designate to the IRA administrator that a portion is a carry-back contribution for 2021 and a portion is a 2022 current-year contribution in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution for 2022.

• Such a large, combined contribution for the couple would only be possible if

  • The couple had not previously made a 2021 contribution to a traditional or Roth IRA,
  • Each spouse was age 50 or older as of 12/31/2021,
  • The couple has earned income for 2021 and 2022 to support the contributions, and
  • For a Roth IRA contribution, the couple’s income is under the modified adjusted gross income (MAGI) limits for Roth IRA contribution eligibility.

• Whether the traditional IRA contributions would be tax deductible depends upon “active participation” of either spouse in a workplace retirement plan and the couple’s MAGI.

• Please see the applicable MAGI ranges in the following chart.

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Conclusion
The deadline for making 2021 traditional or Roth IRA contributions is April 18, 2022 (April 19, 2022, for residents of Maine and Massachusetts). That means there is a window of opportunity that allows eligible couples to double up their IRA contributions (for 2021 and for 2022) to the tune of $28,000.

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Failure to Fulfill PTE 2020-02’s Requirements

“When relying on PTE 2020-02 to provide investment advice for a fee, what are the penalties for failing to fulfill the requirements?” 

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Massachusetts is representative of a common inquiry regarding Prohibited Transaction Exemption (PTE) 2020-02.

Highlights of Discussion

PTE 2020-02 is the Department of Labor’s (DOL’s) newest PTE which, when followed, allows financial institutions and investment professionals to provide investment advice to retirement investors for a fee. Failure to comply with the PTE’s requirements could result in a variety of penalties, depending on the severity of the breach. Adopting the PTE is optional.

The most severe penalty is the imposition of a 10-year ineligibility period in the following scenarios.

  1. Financial institutions and investment professionals who are convicted of certain crimes arising out of their provision of investment advice to retirement investors will be ineligible to rely on the exemption for 10 years. “Crimes” are described in ERISA Sec. 411 (e.g., embezzlement, fraud, perjury, etc.). A financial institution with such a criminal conviction may submit a petition to the DOL to seek a determination that would allow it to continue to rely on the exemption. Petitions must be submitted to the DOL within 10 business days of the conviction.
  2. Financial institutions and investment professionals also will be ineligible to rely on the exemption for 10 years if they engage in systematic or intentional violations of the PTE’s conditions or provide materially misleading information to the DOL in relation to their conduct under the exemption. The DOL will first issue a warning and provide a six-month cure period. But without correction, the DOL will issue a written “ineligibility notice.”

Parties found to be ineligible to rely on PTE 2020-02 are permitted to rely on an otherwise available statutory exemption or administrative class exemption, or they can apply for an individual prohibited transaction exemption from the DOL.

With any misstep of the PTE’s requirements, the DOL has the right to transmit information to the IRS regarding the party’s violation of the prohibited transaction provisions of ERISA Sec. 406. IRC Sec. 4975 imposes a 15 percent tax on disqualified persons participating in prohibited transactions involving plans and IRAs.

Participants, beneficiaries, and fiduciaries with respect to plans covered under Title I of ERISA have a statutory cause of action under ERISA Sec. 502(a) for fiduciary breaches and prohibited transactions under Title I. The exemption, however, does not expand to IRA owners. ERISA Sec. 502(a) provides a cause of action for fiduciary breaches and prohibited transactions with respect to Title I Plans (but not IRAs) (see DOL FAQ #21).

Note the nonenforcement period that applies through June 30, 2022, for the rollover disclosure and documentation requirements of PTE 2020-02. (See an earlier Case of the Week for more details.)

Conclusion

Those who take advantage of the protections offered under PTE 2020-02 should be aware that failure to uphold the requirements could result in penalties and, potentially, loss of the PTE’s shield for a decade.

 

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