Compliance March 2, 2023

IRS Offers New Rules on Deadline for Using Retirement Forfeitures

The proposal states that plan administrators need to use retirement plan forfeitures within 12 months.

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The Internal Revenue Service proposed new rules on Monday  formalizing the timing and use of forfeitures in qualified retirement plans by plan sponsors.

The proposal, which would affect participants in, beneficiaries of, administrators of, and sponsors of qualified retirement plans, according to information published in the Federal Register.

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It would more clearly define how retirement plans should handle money forfeited by participants when they leave an employer before the end of a vesting schedule, when they die or when other factors result in funds going back to the plan sponsor. While the rule likely will not change how plan advisers and administrators are currently operating, it would make those processes clearer, says R. Randall Tracht, an attorney with Morgan Lewis specializing in retirement plans and the Employee Retirement Income Security Act.

“The IRS has long been of the view that the Internal Revenue Code’s tax-qualification rules and requirements generally do not permit defined contribution plans to carry over unused and unallocated forfeitures from year to year,” Tracht says. “The IRS regularly expressed this position in the course of retirement plan audits, but, until now, the IRS had not issued formal regulations setting forth their position.”

In its proposal, the IRS said some defined contribution plan administrators place forfeited funds into a “plan suspense account” in which the money is held before being put to use. The proposed regulations would “generally require” that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures happened.

The proposal also specifies the uses for defined contribution plan forfeitures, which are to pay reasonable plan administrative expenses, reduce employer contributions or increase benefits for plan participants.

“Plan sponsors will want to review their plan terms and check with the plan’s recordkeeper to consider whether any changes to the plan’s terms or recordkeeping processes may be desirable,” Tracht says.

The proposed rules are effective for plan years beginning on and after January 1, 2024, and include a transition rule that deems pre-2024 forfeitures to have been incurred in the first plan year beginning on or after January 1, 2024, according to Tracht. This will allow plans time to comply with the new rules.

The IRS said that the proposed regulations are “not expected to require changes to plan terms or plan operations, or otherwise have a significant impact on plans or plan sponsors.” It did say, however, that it is seeking comment from smaller plans and plan sponsors to discuss the “impacts these proposed regulations may have.”

The agency will take public comments online or by mail until May 30 and will set a date for a public hearing if requested.

Compliance March 1, 2023

Senate Follows House in Rejecting DOL ESG Rule

A resolution to nullify the rule to allow for ESG factors in retirement plan investments will now go to Biden’s desk, where he has promised a veto.

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The U.S. Senate followed the House of Representatives in approving a resolution that overturns the Department of Labor rule paving the way for the consideration, but not the requirement, of environmental, social and governance investing in retirement plans.

The Senate vote on House Joint Resolution 30, overturning the rule, passed with a 50-46 vote, with all Senate Republicans voting yes, as well as Senator Joe Manchin, D-West Virginia, and Senator Jon Tester, D-Montana. Three Democrats where absent. The act will now move to President Joe Biden’s desk, where he said Monday he will veto it in order to keep the DOL rule intact.

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The vote follows a House vote yesterday in which the resolution passed along party lines with a tally of 216 to 204. The DOL rule was finalized in November 2022 after more than a year of public comment and review. The rule removed what was essentially a chilling effect on recommending ESG-focused investment in retirement plans governed by the Employee Retirement Income Security Act that was enacted under the administration of President Donald Trump. That rule said that plan fiduciaries should only consider “pecuniary” factors in investment decisions. 

The Congressional move comes amid a national Republican-led movement against ESG-focused investing that has included lawsuits, both state and federal, seeking the removal of the DOL retirement investing rule. It also comes on the same day that Biden officially nominated Julie Su to be the new Secretary of Labor, with a Senate confirmation hearing to come. In his remarks about the nomination, Biden urged a swift vote, saying: “I asked the United States Senate to move this nomination quickly, so we … can continue the progress to build this economy that works for everyone.”

The debate over ESG investing may extend that confirmation hearing, according to some experts. The Biden Administration argued in its statement on Monday that incorporation of ESG investing does serve a fiduciary purpose, as “there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries and companies.”

Dissenters, such as Tester, have said the potential to use ESG factors in plan investing will jeopardize the investments of everyday retirement savers.

“At a time when working families are dealing with higher costs, from health care to housing, we need to be focused on ensuring Montanans’ retirement savings are on the strongest footing possible,” Tester said in a statement on Wednesday. “I’m opposing this Biden administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state.”

Senator Patty Murray, D-Washington, spoke in favor of the rule on the Senate floor, arguing that her colleagues misunderstand the DOL’s position regarding ESG investing in plans.

“This is a really important point I think folks are missing: the Biden rule is fundamentally neutral on how ESG factors are taken into consideration so long as the investment fund is meeting its fiduciary obligations to its beneficiaries,” she wrote in a statement. “The rule we are talking about is neutral on whether a fiduciary is considering these factors from a particular perspective.”

A February post by two legal scholars on the Harvard Law School Forum on Corporate Governance agreed with that assessment, noting that “the 2022 Biden Rule largely reaffirms the Department of Labor’s longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.

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