On April 4, the U.S. Department of Labor (DOL) released guidance and updated model notices for annual funding notices (AFNs) required under ERISA. This update comes just weeks before the April 30, 2025 deadline for many defined benefit plans and places plan sponsors in a time crunch.
Managing the complexities of employee benefit plans can raise questions you might hesitate to ask—whether they feel too basic or you’re unsure where to begin. In this series, “Employee benefit questions you didn’t want to ask (but should),” we tackle some of the most common questions about employee benefits to help you navigate the details with confidence. Whether it’s understanding plan documents, clarifying key terms or addressing compliance issues, we’re here to provide the answers you need.
For decades, the ESOP community has asked the Department of Labor (DOL) to provide regulations regarding “adequate consideration.” The desired regulations would provide needed guidance to trustees and other fiduciaries on how to ensure that ESOP transaction terms are fair to participants, and that the price paid for company stock does not exceed fair market value.
Managing the complexities of employee benefit plans can raise questions you might hesitate to ask—whether they feel too basic or you’re unsure where to begin. In this series, “Employee benefit questions you didn’t want to ask (but should),” we tackle some of the most common questions about employee benefits to help you navigate the details with confidence. Whether it’s understanding plan documents, clarifying key terms or addressing compliance issues, we’re here to provide the answers you need.
Managing the complexities of employee benefit plans can raise questions you might hesitate to ask—whether they feel too basic or you’re unsure where to begin. In this series, “Employee benefit questions you didn’t want to ask (but should),” we tackle some of the most common questions about employee benefits to help you navigate the details with confidence. Whether it’s understanding plan documents, clarifying key terms or addressing compliance issues, we’re here to provide the answers you need.
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.
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:
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.
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.
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.
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.
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.
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
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
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
