Employee Benefits Law Report

ESOP regulatory update regarding potential plan amendments

It has been a busy end of 2023 and first quarter of 2024 for the Internal Revenue Service and Department of Labor when it comes to implementing qualified plan regulatory guidance. You may have heard of some or more of these changes, many of which come from the SECURE Act and more recent SECURE 2.0. Although none of these items require plan document amendments this year, many administrative changes have become effective. ESOP plan sponsors should consult with their third-party administrators and legal counsel to make sure that their plans are being administered properly and to consider whether plan amendments are appropriate now to conform documents to administration. The key changes that may require action are summarized below.

Increased required minimum distribution age

Historically, participants were required to begin taking minimum distributions from qualified plans by April 1st of the calendar year after the calendar year in which the participant attained age 70 ½. Now, however, the required beginning date is April 1st of the calendar year after the year that the participant attains:

  • Age 70 ½ if born before July 1, 1949
  • Age 72 if born before Jan. 1, 1951
  • Age 73 if born on or after Jan. 1, 1951

Further, in 2033, the required minimum distribution age is scheduled to increase to age 75. A draft technical correction bill would require those born in 1959 to be subject to RMD at age 73.


Forfeitures represent amounts that did not vest, and so are not distributed to participants. The IRS recently issued proposed regulations that would require a plan to use forfeitures no later than 12 months after the end of the plan year in which they are incurred. A transition rule provides that any forfeiture incurred before Jan. 1, 2024, will be treated as if it were first incurred in the first plan year that begins on or after Jan. 1, 2024.

Plan sponsors need to consider the priority of uses for forfeitures. The preamble to the IRS regulations suggests that if the plan allows only a single use for forfeitures could create an operational failure if that single use does not use all forfeitures by the 12-month deadline. Additionally, recent litigation alleges that forfeitures should be used first to reduce plan expenses before reducing employer contributions. Although many commentators do not consider plan design regarding forfeitures to be a fiduciary function, the outcomes of these cases are yet to be determined.

Lost participants

The DOL will require employers to annually identify and report lost or missing participants who are entitled to a distribution. Much of the reportable information is what must already be reported on Form 8955-SSA. However, additional information regarding mandatory rollovers and purchases of deferred annuity contracts will also be required. The DOL has not yet released information yet on how to make these reports or when they will be due.
The reported information will be used to maintain a lost and found database for retirement benefits that participants will be able to search to determine if they have unclaimed retirement plan distributions. This reporting requirement does not relieve plan sponsors of having to locate missing participants. So plan sponsors will need to continue to make reasonable efforts to locate missing participants.

Long-term part-time employees (401(k) plans)

This item affects 401(k) plans, but we wanted to call attention to this item because most ESOP-sponsors also sponsor 401(k) plans. If you sponsor a 401(k) plan, remember that employees who have performed at least 500 hours of service for three consecutive years must be eligible to make elective deferrals. This three-year period is reduced to two years effective Jan. 1, 2025. Such an employee could receive a year of service for vesting by completing only 500 hours of service under this rule. That would represent a change in how vesting service typically is calculated.

Amendment deadlines

The changes described above represent significant changes. Amendments for these items generally will not be required in 2024. Deadlines for some items generally will be Dec. 31, 2025, and for others, Dec. 31, 2026. Because some of these changes are effective now, plan sponsors should consider whether to amend their plans now to conform the document to administration. We recommend that you work closely with your TPA and counsel to be sure your plans can be administered properly.

Proposed regulation for long-term part-time employees: Plan sponsors act now

savings, money, annuity insurance, retirement and people concept - close up of senior woman hand putting coin into piggy bank

Effective Jan. 1, 2024, employers who sponsor 401(k) plans must allow employees who work at least 500 hours a year over a period of consecutive years (“long-term part-time” or “LTPT employees”) to be eligible to make deferrals into the plan. This change requires immediate action by plan sponsors to change the way they administer their plans — specifically, counting service hours and increasing eligibility for LTPT employees.

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Can sellers be liable for ERISA fiduciary breaches in ESOP transactions?

ESOPs are increasingly a popular succession planning vehicle, and well they should be. When formed properly, an ESOP transaction preserves the legacy of the business that an owner helped create, while providing tax and financial benefits to the former business owner, the company and the employees. Continue Reading

Unanimous Supreme Court provides victory to plaintiffs in ERISA fee litigation

But just how big of a win is it?

The U.S. Supreme Court recently issued a unanimous decision in Hughes v. Northwestern University, reversing and remanding a lower court ruling that had dismissed the case against a retirement plan sponsor. This decision reaffirms that the Employee Retirement Income Security Act’s (ERISA) fiduciary duty of prudence requires continuous monitoring of all investment options under a plan, especially when lower-cost share classes are available for funds. Continue Reading

DOL proposes new ERISA fiduciary ESG and proxy voting rules

In what some commentators are describing as the latest volley in a game of regulatory ping-pong, the Department of Labor (DOL) published proposed regulations that would change the way an ERISA fiduciary should consider environmental, social and governance (ESG) issues and related proxy voting decisions with respect to plan investments (the proposed regulations). The proposed regulations would provide more flexibility than prior guidance and greater encouragement to fiduciaries to consider taking ESG factors into account for their investment decisions. They also would encourage fiduciaries to vote on more shareholder activist types of proxy proposals. Although this guidance is new, tried-and-true best practices such as documenting investment decisions and having (and following) an investment policy should remain best practices throughout this evolving guidance. Continue Reading

Plan sponsors now have a deadline for providing lifetime income illustrations

Employers who sponsor 401(k) plans and other defined contribution plans in which participants may direct the investments of their accounts now have a deadline to provide lifetime income illustrations in those plans’ benefit statements. The Department of Labor (DOL) recently published guidance addressing these requirements. While helpful, the guidance is still subject to change in a potential final regulation. As such, employers should work closely with their plan administrators and legal counsel to navigate the contours of the evolving lifetime income rules. Continue Reading

IRS updates Nonqualified Plan Audit Technique Guide—Is a new enforcement initiative on the horizon?

The Internal Revenue Service (IRS) recently updated its Nonqualified Deferred Compensation Audit Techniques Guide (NQDC). It released Publication 5528 (NQDC guide) on June 1, 2021. The IRS last updated the NQDC Guide in 2015. Interestingly, the 2015 NQDC Guide was published shortly after the IRS sent information document requests to publicly traded companies to determine how well companies were complying with Internal Revenue Code (IRC) Section 409A. This latest update to the NQDC guide contains much more detailed guidance than the prior version. That is noteworthy because President Joe Biden and many members of Congress have been proposing to increase the IRS’s budget in order to provide more resources for audit initiatives. Could a new executive compensation enforcement initiative be on its way?

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DOL confirms cyber security is an ERISA fiduciary issue and issues guidance for retirement plan sponsors, service providers and participants

The U.S. Department of Labor (DOL) recently announced new guidance for plan sponsors, fiduciaries, record keepers and participants on best practices for maintaining cyber security. This is the first time the DOL has issued such guidance, and it comes in response to a recent General Accounting Office (GAO) report responding to increased cybersecurity risks to retirement plan participant data and plan assets. If there is one central message to the guidance, it is this: The DOL now considers cybersecurity to be an ERISA fiduciary function. Stated another way, part of the fiduciary decision of the selection and monitoring of service providers requires an evaluation of the service providers’ cybersecurity program.

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For public companies, the time to update executive compensation practices is now: Final regulations issued under IRC Section 162(m) and American Rescue Plan Act further expands class of covered employees

At long last, the Department of the Treasury and Internal Revenue Service published final regulations to explain how changes to Internal Revenue Code Section 162(m) under the Tax Cuts and Jobs Act of 2017 (TCJA) affect the deductibility (or lack thereof) of compensation in excess of $1 million paid to covered employees. We have blogged about these changes and made recommendations to public companies in the past about how to manage these changes. For the most part, the final regulations did not change any prior guidance. We will not repeat these prior summaries here. Instead, we will highlight the items that we expect will result in the biggest changes or challenges to public companies and the administration of their executive compensation plans.

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Public companies may need to amend nonqualified and incentive compensation plans by Dec. 31, 2020

Public company nonqualified plans and incentive plans may need to be amended to avoid a potential violation of Internal Revenue Code (IRC) Section 409A as a result of changes to IRC Section 162(m) under the Tax Cuts and Jobs Act. This amendment most likely is required for employers that mandated deferrals of amounts that exceeded the limit under IRC Section 162(m) but not those whose plans permitted but did not require deferrals of such amounts. Nevertheless, an employer that actually exercised such discretion with respect to non-grandfathered amounts may need to amend such arrangements as well. That is because the act eliminated the performance-based exception to the $1 million deduction limit under IRC Section 162(m) for “covered employees” of publicly traded companies, along with other related changes. Proposed regulations under IRC Section 162(m) indicate that companies may need to amend their nonqualified plans or incentive compensation plans (or potentially both) to avoid an inadvertent violation of IRC Section 409A’s anti-acceleration rules. Otherwise, payment of non-grandfathered incentive awards could subject participants to additional taxes and penalties of 20% or more. We explain further in this blog.

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