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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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