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Compliance Newsletter February 2024

Independent Contractor Final Regulations

The U.S. Department of Labor (DOL) issued final regulations for determining whether a worker is classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA).

Background

Traditionally, the DOL and courts have applied an economic reality test to classify a worker as someone dependent on the employer (an employee) or someone in business for themselves (an independent contractor). This was commonly thought to be based on a totality-of-the-circumstances analysis which generally included an analysis of the opportunity for profit or loss, investment, permanency, control, skill and initiative, and whether the work was integral to the employer’s business.

Economic Reality Test

The DOL provided the following revised six factors in determining whether the economic realities of the working relationship and economic dependence categorized a worker as an employee or independent contractor. No one factor is intended to have a higher weighting than another and additional factors may be relevant.

  • Opportunity for profit or loss depending on managerial skill – Whether the worker engages in efforts to expand their business or secure more work, has an opportunity for profit or loss, or may accept or decline jobs are some facts that may be relevant.
  • Investments by the worker and the potential employer – The focus is whether the worker’s investments are similar to the employer’s (even on a smaller scale).
  • Degree of permanence of the work relationship – Whether the work relationship is indefinite or project based. A lack of permanence, though, is not always indicative of independent contractor status, so other factors should be considered.
  • Nature and degree of control – Whether the potential employer sets the worker’s schedule, supervises work performance, or explicitly limits the worker’s ability to work for others. Control over economic aspects should be considered, as well.
  • Extent to which the work performed is an integral part of the potential employer’s business – Whether the function the worker performs is critical, necessary, or central to the potential employer’s business.
  • Skill and initiative – Whether the worker uses specialized skills or is dependent on the employer for training.

Effective Date

The DOL is not imposing additional reporting or recordkeeping requirements for employers or independent contractors. This final regulation will be effective March 11, 2024.

PLESA Anti-Abuse Guidance

The Internal Revenue Service (IRS) issued Notice 2024-22 (Notice) which gives initial guidance to help employers with implementation of pension-linked emergency savings accounts (PLESAs). PLESAs were included in the SECURE 2.0 Act of 2022 and are effective for plan years beginning in 2024.

Background

PLESAs are short-term Roth savings accounts established and maintained in connection with a defined contribution plan. Generally, balances within a PLESA cannot exceed $2,500, and it is not available to individuals making more than $155,000 for 2024. If the plan sponsor offers a PLESA, participants must be allowed the ability to withdraw from the account at least once a month. Those withdrawals are not eligible for rollover while the participant is actively employed and would not be subject to the 10% additional income tax penalty for early withdrawals.

Anti-Abuse

Because PLESAs may be matched, there have been concerns that participants will contribute to PLESAs solely for the purpose of maximizing employer matching contributions.

The Notice does not require plan sponsors to monitor PLESA abuse. However, a plan sponsor can employ reasonable procedures to prevent abuse. It did not offer reasonable measures to mitigate abuse that were not already noted in SECURE 2.0, such as matching on PLESA contributions last or setting a lower PLESA maximum than the $2,500 allowable.

The Notice stated, though, that the following enforcement techniques are unreasonable and not allowed:

  • Forfeiture of a matching contribution if the participant takes a withdrawal from the PLESA
  • Suspension of the ability to contribute to a PLESA if the participant takes a withdrawal from the PLESA
  • Suspension of matching contributions made on account of participant elective deferrals

Comments Requested

Comments are welcome related to reasonable procedures and examples to discourage abusive practices. Comments should be submitted in writing on or before April 5, 2024, and should reference Notice 2024-22. Comments may be submitted using one of the following alternatives:

  • Electronically via the Federal eRulemaking Portal at www.regulations.gov
  • By mail to the Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2024-22), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

DOL Proposed Regulation for Automatic Portability Transactions

The Department of Labor (DOL) released a proposed regulation that expands on the limited prohibited transaction exemption (PTE) relief related to automatic portability transactions under Section 120 of the SECURE Act of 2022 (SECURE 2.0).

Background

Automatic portability transactions are a plan design feature that involves the automatic transfer of a participant's account in an individual account plan to a Safe Harbor IRA and then to the eligible retirement plan of the participant’s new employer. The automatic portability transaction occurs with the mandatory small amount distribution from the participant’s prior employer plan. As stated by the DOL, the goal of automatic portability is to help workers keep track of their retirement savings accounts and improve retirement security by reducing cash-outs when they change jobs.

An automatic portability provider is a party that will work with cooperating recordkeepers to locate, match, and transfer participant accounts to the participant’s new employer plan (described by the DOL as the “transfer-in plan”). An eligible transfer-in plan includes a qualified defined contribution, governmental 457(b), or 403(b) plan (does not apply to defined benefit plans). The participant must be provided notice of the transfer, with the opportunity to opt out of such transfer.

Section 120 of SECURE 2.0

Section 120 of SECURE 2.0 made an update to allow a PTE so that an automatic portability provider may receive fees and compensation for the services they provide for the automatic portability transaction, if requirements are met.

Proposed Regulation

As explained by the DOL in their press release, the proposed regulation tracks the requirements under the statutory exemption that must be satisfied for the automatic portability transaction to be covered by the PTE. These topics include, among others:

  • The PTE is limited to the fees and reasonable compensation for services provided in connection with an automatic portability transaction.
  • Required written notices and disclosures, such as:
    • Notice of fees, compensation, and services.
    • Acknowledgement of the automatic portability provider’s fiduciary status.
    • Notice to the DOL within 90 days prior to operating as an automatic portability provider.
    • Description of the automatic portability program within the Summary Plan Description.
    • Enrollment, pre-transaction, and post-transaction notification to the IRA owner.
  • Require at least a monthly review of whether an IRA owner has an account with an eligible transfer-in plan. This includes completing frequent automatic and, if necessary, manual address validation searches.
  • Record retention requirements.
  • Annual audit and correction procedures if an auditor determines the automatic portability provider did not comply with the requirements of the statutory exemption and the proposed regulation.
  • Require transfer-in plan to invest transfers in the participant’s current investment election or, if no election, a default selected by the plan fiduciary.
  • An automatic portability provider may not:
    • Receive payment of third-party compensation other than the fee/compensation related to the automatic portability transaction.
    • Use disclaimers or hold harmless language that limits liability if an automatic portability transaction results in an improper transfer.
    • Use data obtained for other purposes outside of the automatic portability transaction or locating missing individuals.

Effective Date

Written comments are due by March 29, 2024, and must reference RIN 1210-AC21 and may be submitted either through:

  • Federal eRulemaking Portal at www.regulations.gov.
  • Mail to Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention: Automatic Portability Regulation RIN 1210-AC21.

PTE Application Process Final Rule

On January 23, 2024, the Department of Labor (DOL) published a final rule that amends the procedures around filing and processing prohibited transaction exemption (PTE) applications under the Employee Retirement Income Security Act of 1974 (ERISA) and Internal Revenue Code of 1986 (IRC). The final rule will be effective April 8, 2024.

Background

ERISA plan fiduciaries are prohibited from causing a retirement plan to engage in a variety of transactions with certain related parties who may be in a position to exercise improper influence. Statutory exemptions, commonly known as PTEs, have been in place since 1978 for certain services necessary for plan operation, investment advice transactions, as well as certain administrative exemptions.

The process to apply for a PTE has been cumbersome, so over the years, changes have been introduced to assist with that process. The latest was proposed on March 15, 2022; however, after review of the comments submitted, the DOL made several changes in this final rule.

Final Rule Highlights

  • Expands the definition of qualified independent appraiser and qualified independent fiduciary to include a facts-and-circumstances test.
  • Requires more information up-front that was most commonly requested later in the process.
  • Clarifies the documentation that will be part of the administrative record, which will include all information the DOL deems is material to the final PTE decision.
  • Requires applicants to include statements in their application that:
    • The exemption transaction will be in the best interest of the plans, participants, and beneficiaries;
    • All direct or indirect compensation received by a party involved in the exemption transaction will be reasonable;
    • All statements about the exemption transaction and other relevant matters will not be materially misleading.
  • Updates various timing requirements.
  • Allows for electronic submission.
  • Emphasizes that the issuance of an exemption does not affect the requirements of IRC section 401(a).
  • States that by submitting an exemption application, an applicant consents to public disclosure of the entire administrative record, leading to a fully transparent exemption process.

RFI for Reporting and Disclosure Requirements

The Department of Labor, Internal Revenue Service, and Pension Benefit Guaranty Corporation (the agencies) jointly issued a request for information (RFI) around reporting and disclosure requirements. This RFI is in response to Section 319 of the SECURE 2.0 Act of 2022 (SECURE 2.0), which requires agencies to complete a review of current requirements and make recommendations to Congress by December 29, 2025.

RFI Highlights

The RFI consists of 24 questions where the agencies are seeking responses in an effort to reduce compliance burdens as well as ensure timely receipt and a better understanding of the information plan participants and beneficiaries need. Below is a partial list of the questions being asked:

  • Is the effectiveness of disclosures impacted by the number of annual notices and disclosures required?
  • Does the timeliness of the disclosure impact the likelihood that participants and beneficiaries will pay attention to them?
  • Is there content that may be duplicative, redundant, or inconsistent?
  • What factors impact participants and beneficiaries understanding the notice or required disclosure?
  • What tools, if any, are used to confirm whether participants and beneficiaries are accessing disclosures?
  • Do plans collect data on participant and beneficiary levels of engagement in response to required notices and disclosures?
  • What data is available around how often, when, and how are participants and beneficiaries updating their contact information for plan purposes?
  • What method is used and/or preferred to deliver disclosures and notices?
  • To what extent do model notices reduce the cost to plans?
  • What are the aggregate annual costs to providing required notices and disclosures?
  • Are instructions for required reports back to the agencies clear and helpful?
  • Do the filing methods for reporting back to the agencies need to be updated or improved?

Comments

All comments will be shared across the agencies and must be received no later than April 22, 2024. Written comments must be identified by RIN 1210-AC09 and may be submitted using one of the following methods:

  • Federal eRulemaking Portal at www.regulations.gov.
  • Mail to Office of Regulations and Interpretations, Employee Benefits Security Administration, U.S. Department of Labor, Attention: Request for Information – SECURE 2.0 Section 319 – Effectiveness of Reporting and Disclosure Requirements, Room N-5655, U.S. Department of Labor, 200 Constitution Ave NW, Washington, DC 20210.

Disaster Relief for Rhode Island and Connecticut

In response to severe storms that impacted parts of Rhode Island beginning September 10, 2023, and Connecticut that began January 10, 2024, the Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) extended certain deadlines for individuals and businesses in impacted areas.

Impacted Areas

Individuals who reside or have a business anywhere within the covered area, as well as relief workers affiliated with a recognized government or philanthropic organization assisting in the relief effort, may be eligible for extended deadline relief.

The Rhode Island covered area currently includes Providence County. The Connecticut covered areas include New London County, and the Tribal Nations of Mohegan and Mashantucket Pequot.

Deadline Relief

For Rhode Island, certain deadlines are extended until June 17, 2024, if they fall on or after September 10, 2023. In Connecticut, certain deadlines are extended until June 17, 2024, if they fall on or after January 10, 2024.

Below is a partial list of retirement-impact tax filing and payment deadlines that may be extended:

  • Retirement plan loan repayments under Internal Revenue Code section 72(p)(2)
  • Required minimum distributions under Internal Revenue Code section 401(a)(9)
  • The 10% additional income tax continues to not apply even if the following is missed during the relief period:
    • Substantially equal payments made over the participant’s life or joint lives of the participant and designated beneficiary
    • Deadline for using a distribution from an IRA for a first-time home purchase by the close of the 120th day after the distribution is received
  • Prior tax year contribution deadlines for retirement plans
  • Indirect rollover distribution deadlines
    • 60-day rollovers
    • Rollover of qualified loan offsets
  • Refunds as a result of
    • Excess deferrals
    • ADP/ACP non-discrimination testing
    • Eligible automatic contribution arrangement (EACA) withdrawals
    • Excess IRA contributions
  • Deadline for recontributing qualified reservist distributions
  • Form 5500 and Form 8955-SSA filing Form 5498 for IRAs
  • PBGC premium payments
  • PBGC deadlines that are based on the Form 5500 deadline
  • Single Employer Plan Termination Forms 500 and 501

Additional Resources

For any questions related to IRS deadlines and other disaster-related issues, the IRS has a toll-free number at 1-866-562-5227. For PBGC disaster-related questions, call 1-800-736-2444 ext. 4136.

Yield Curve Final Regulations

The Internal Revenue Service (IRS) published final regulations that update the corporate bond yield curve that is used to derive interest rates used in calculating lump sums in defined benefit (DB) plans. These final regulations will be applicable beginning February 1, 2024.

Definition

The corporate bond yield curve may be used for determining DB funded levels, minimum or maximum deductible annual funding amounts, and, if available under the retirement plan, the minimum lump sum distribution to participants. Originally outlined in 2007, the yield curve is intended to mirror current market pricing.

Updates

The final regulations allow for certain callable bonds to be included in the yield curve data. The callable bond must have a call feature that is exercisable in the last year before maturity. The IRS added an intermediate step in the process to better reflect the shape of the yield curve. These changes were made to better reflect recent market trends.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Company®, a member of the Principal Financial Group®, Des Moines, IA 50392.

Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com, Principal®, Principal Financial Group® and the Principal logo design are registered trademarks of Principal Financial Services, Inc., a Principal Financial Group company, in the United States and are trademarks and service marks of Principal Financial Services, Inc., in various countries around the world.

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