The DOL and IRS Have Been Busy! Quick Hits Employee Benefits Update
The DOL and IRS have been busy the past few weeks, issuing new guidance. This newsletter article offers a “quick hits” summary of some of the key changes:
1) New Determination Letter Program for 403(b) Plans. Earlier this fall, the IRS published Revenue Procedure 2022-40, which now permits determination letter requests for individually designed 403(b) plans. Unlike 401(k) plans and other qualified plans, individually designed 403(b) plans have not historically been permitted to submit determination letter requests. A favorable determination letter from the IRS is not legally required but offers assurance that the plan document is current and compliant with the Internal Revenue Code and applicable regulations. Favorable determination letters are valuable in the event of an IRS audit.
To avoid a huge wave of submissions, the IRS has staggered when applications for 403(b) plan determination letters may be submitted, over three years (beginning in June 2023) based on the plan sponsor’s EIN. Sponsors of individually designed 403(b) plans may now request a determination letter for the initial plan adoption, upon plan termination, and in certain other circumstances to be identified by the IRS in the future.
2) ACTION REQUIRED! December 31, 2022 Amendment Deadline for Tax-Exempt 457(b) Plans. Plan sponsors of tax-exempt 457(b) plans must amend their 457(b) plan by December 31, 2022, to incorporate the SECURE Act’s changes to required minimum distributions. In August, the IRS extended the amendment deadlines for required changes to retirement plans under the SECURE Act. However, in such extension, the IRS did not extend the deadlines for tax-exempt 457(b) plans. Accordingly, tax-exempt 457(b) plans must be amended by December 31, 2022, to incorporate the changes (including the increased required beginning date from 70½ to 72 and incorporation of the so-called “10-year rule”).
3) 2022 Required Amendments List. On November 21, the IRS published Notice 2022-62, with the 2022 required amendments list for qualified retirement plans and 403(b) plans. No amendments are required for 2022.
4) Proposed Changes to Voluntary Fiduciary Correction Program. On November 18, the DOL issued proposed amendments to its Voluntary Fiduciary Correction Program (“VFCP”). As background, the DOL established the VFCP to encourage voluntary compliance with ERISA by offering plan fiduciaries relief from liability if they disclose certain fiduciary violations in a VFCP application. The DOL’s proposal includes changes to the VFCP to streamline the program and encourage fiduciaries to correct breaches and reimburse plan losses on their own.
For example, instead of requiring a formal VFCP application to correct delinquent participant contributions and loan repayments, the DOL’s proposal would permit fiduciaries to self-correct these errors. Allowing fiduciaries to self-correct these common errors is a welcome change for retirement plan sponsors and will help to streamline the process to correct inadvertent errors that, left unfixed, would result in a fiduciary breach under ERISA.
5) Amendments (Again!) to ESG Investment Rules. On November 22, the DOL released the Final ESG Rule which regulates the investment of environmental, social, and governance (“ESG”) factors in employee benefit plans subject to ERISA. The DOL’s Final Rule significantly relaxes restrictions on ESG investing and takes a different tune than the DOL’s Final Rule issued on October 30, 2020,  under the Trump administration.
In its most recent guidance, the DOL stated the 2020 rule “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.” The DOL clarifies that fiduciaries can now “take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions.”
The new rules are effective beginning in January 2023. In light of the recent tug-of-war among administrations around this topic, plan sponsors considering investments in ESG factors should carefully analyze the pecuniary factors of such investments.