Benefits August 19, 2024

IRS Offers Interim Guidance on Student Loan Matching Payments

The notice is intended to help plan sponsors implement the match program, with plans for regulation offering further guidance to come.

Reported by

The Internal Revenue Service on Monday published guidance to assist plan sponsors providing or planning to provide matching contributions based on employees’ qualified student loan payments, as permitted under the SECURE 2.0 Act of 2022.

The IRS published Notice 2024-63, which uses a question and answer format, to illustrate the rules for employers with 401(k), 403(b) and governmental 457(b) plans to provide student loan payment matching contributions based on qualified student loan payments, abbreviated as QSLP, rather than based only on elective contributions to retirement plans.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Student loan repayment is frequently identified as one of the largest causes of financial stress and impediments to retirement savings among U.S. workers.

The notice also separately outlines student loan payment matching contributions based on QSLP rules for SIMPLE IRA plans.

The IRS is taking public comments on the notice, which applies to plan years beginning after Dec. 31, 2024. The comment period runs for 60 days after the notice is published in the Federal Register.

The ERISA Industry Committee, representing large employers in their capacity as benefit plan sponsors, supported the IRS’ action.

“ERIC’s member companies are committed to the financial wellbeing of their employees, including those with outstanding student loans,” said  Andy Banducci, ERIC’s senior vice president for retirement and compensation policy, in a statement. “That is why we lobbied Congress to enact a tax law change allowing employers to make retirement plan matching contributions on account of workers’ qualified student loan payments. We applaud the IRS for issuing interim guidance implementing this change and look forward to providing technical comments to IRS in the coming weeks.”

The regulator also announced plans to issue proposed regulations providing further guidance on the QSLP benefit, stating that plan sponsors may rely on the notice until the proposed regulations are issued.

The guidance makes clear that plans cannot include provisions limiting QSLP matching to certain qualified education loans and that “all employees … eligible to receive matching contributions on account of elective deferrals must be eligible to receive matching contributions on account of ‘qualified student loan payments.’”

It also states that plans have to offer uniform treatment of elective deferral matches and QSLP matches.

“A plan with a QSLP match feature may not include provisions that exclude employees from receiving QSLP matches if those employees are eligible to receive elective deferral matches, and a plan with a QSLP match feature may not include provisions that exclude employees from receiving elective deferral matches if those employees are eligible to receive QSLP matches,”  the IRS wrote.

Overall, the notice addresses plan administration issues raised by Section 110 of SECURE 2.0, including:

  • Only an employee’s qualified education loan payments that were made during a plan year are eligible to be counted for purposes of the employee’s QSLP match for that plan year;
  • A qualified education loan payment is a QSLP only if the certification requirement is satisfied with respect to that payment. A plan may require a separate certification for each qualified education loan payment intended to qualify as a QSLP or permit an annual certification that applies for all qualified education loan payments intended to qualify as QSLPs for a year; and
  • To certify a QSLP, the plan or its third-party service provider much receive the amount of the loan payment made, the date of the loan payment, that the payment was made by the employee, that the loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, the employee’s spouse or the employee’s dependent, and that the employee incurred the loan.

The notice also offers examples of administrative procedures and optional Actual Deferral Percentage testing.

Compliance August 19, 2024

Plaintiffs Gain Class Action Status in Genworth 401(k) Suit

A federal judge granted class action status to participants invested BlackRock LifePath Index Funds, in contrast to numerous dismissals for similar allegations.

Reported by

A district court judge has granted class action status to the plaintiffs in a complaint similar to those dismissed by other judges alleging that a 401(k) retirement plan committee breached its fiduciary duty by defaulting participants into a BlackRock Inc. target-date series.

Former employees of Genworth Financial Inc. were granted a slightly narrowed class action status in Trauernicht et al. v. Genworth Financial Inc. et al., a lawsuit alleging the firm’s retirement plan committee breached its fiduciary duty under the Employee Retirement Income Security Act by defaulting participants into and leaving participants in BlackRock LifePath Index Funds, as opposed to shopping for and choosing different funds. The plaintiffs sought class action status for anyone enrolled in the 401(k) plan, but it was granted only for those invested in the BlackRock TDF—about 95% of participants, according to the court filing.

Get more!  Sign up for PLANSPONSOR newsletters.

U.S. District Senior Judge Robert Payne, presiding in U.S. District Court for the Eastern District of Virginia, granted the status on August 15. The original complaint had been filed in August 2022 on behalf of plaintiffs Peter Trauernicht and Zachary Wright, represented by attorneys from Miller Shah LLP.  

Miller Shah has filed other complaints alleging that plan fiduciaries breached their duties of responsibility by not shopping for alternatives to, and for not replacing, the BlackRock TDFs. Several of Miller Shah’s cases have been dismissed, including one filed against Wintrust Financial Corp.’s retirement plan savings committee, which was rejected on August 14 in U.S. District Court for the Northern District of Illinois, Eastern Division. That followed dismissals of similar cases filed against CMFG Life Insurance, Cisco, Microsoft and Capital One.

Those cases were often dismissed after judges found that, so long as the plan sponsors were following a prudent process in choosing the BlackRock funds—even if the funds did underperform over time—it was not a breach of fiduciary duty.

Genworth did not immediately respond to request for comment, and nor did Miller Shah.

Four Funds

Similar complaints have been filed against other TDF providers, including Fidelity Investments’ Freedom Funds, one of four TDFs cited as better alternatives in the Genworth case. The other funds listed were Vanguard Target Retirement Funds and the actively managed offerings of T. Rowe Price Retirement Funds and Capital Group’s American Funds Target Date Retirement Series.

According to the plaintiffs in the Genworth lawsuit, the firm’s retirement plan committee allegedly violated its fiduciary duties because “it failed to appropriately monitor, and as a result, imprudently retained the BlackRock TDFs in the Plan despite their significant underperformance … Genworth’s failure to jettison the BlackRock TDFs and replace them with a suitable alternative caused significant losses to the plan.”

The plaintiffs were seeking class action status for all participants enrolled in Genworth’s savings plan at any time on or after August 1, 2016, including any beneficiary of a deceased person who had been a participant during the class period.

Genworth argued that the class should not be certified because “plaintiffs have failed to adduce evidence that each class member has suffered an injury-in-fact standing of the class representatives” and that it did not meet the definition of an appropriate class for the action.

Payne, in reviewing the case, found that the plaintiffs met both the “injury-in-fact” standing and the requirements for a class, but he limited the class only to those invested in the BlackRock TDF series. Without making a judgment, Payne ruled there was enough in the complaint to provide class status.

“Demonstrating financial injury in the context of standing is different than in the context of the merits,” he wrote. “Plaintiffs do not have to prove that they have suffered financial injury to establish standing. … Rather, standing is a threshold inquiry to determine whether the court may proceed to the merits.”

Experts Differ

Payne’s memorandum details the differing opinions of experts brought in by each side to discuss the decision not to replace the BlackRock TDFs with other four TDF options.

Genworth’s expert witness focused on comparisons with other passive TDF investments and not actively managed investments, concluding that there were not significant differences from the BlackRock funds.

The plaintiffs’ witness, meanwhile, noted that actively managed funds were a viable comparison and that they outperformed the BlackRock TDFs “in every vintage over the class period.” In an analysis focused on replacing the BlackRock TDF with an American Funds TDF suite, the expert alleged that the plan suffered $34.6 million in total losses by not making such a move.

Payne noted that it was not up to the court to settle the dispute at this time, but in considering class status, the plaintiffs “easily satisfy that requirement because their model is consistent with their liability case and is capable of calculating plan-wide losses systematically across the entire plan.”

He went on to write that, “Although Genworth articulates how actively managed TDFs differ from passively managed TDFs, Genworth does not explain why a prudent fiduciary should be limited to only one type of strategy in considering possible alternatives to the BlackRock TDFs.”

Finally, Payne found that the lawsuit met the various requirements of a class action, including that the class can be identified and meets the need for “commonality” across the group.

The case will now continue with class action status for the participants. The plan held assets of $911 million as of December 31, 2021, according to a Form 5500 filing.

 

«