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Compliance Newsletter March 2023

2023 Plan Year Form 5500 Updates

The U.S. Department of Labor (DOL), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation (PBGC) released changes earlier this month to the 2023 plan year Form 5500 Annual Return/Report of Employee Benefit Plan and Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan(collectively, referred to as Form 5500). Highlighted below are a few of the changes that may be of interest to retirement plan providers.

Participant Threshold for Audit

Generally, retirement plans with 100 or more participants are required to have an audit of the plan’s financial statements. The 2023 instructions changed the methodology for determining when a defined contribution(DC)plan meets this threshold. For 2023, the count includes only individuals with account balances as of the first day of the plan year.

Update to Questions

New questions added for 2023 include whether the plan sponsor:

  • Used the design-based safe harbor rules or the “prior year” or “current year” ADP test.
  • Adopted a pre-approved plan that received a favorable IRS Opinion Letter. If so, then the date and serial number of the Opinion Letter must be included.
  • Nondiscrimination and coverage tests are satisfied if the employer aggregated plans in testing.

Defined Contribution Group Changes

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 provided a simplified mechanism for filing a single Form 5500 information return for a collection of DC plans that have the same trustee, named fiduciary(ies), plan administrator, plan year, and investment options. These are often called defined contribution groups (DCG). Below are a few of the 2023 changes that impact DCG plans.

  • Single Form 5500 reporting option
  • New Schedule DCG for individual plan-level information that will have to be attached for each plan included in the DCG filing
  • Single Form 5558 that includes a list of the individual plans participating in the DCG
  • No requirement to use a single trust

Other Form 5500 Changes

  • Revised Form 5558 to allow electronic filing with EFAST2
  • Included changes to improve financial and funding reporting for Defined benefit Schedule R and Schedule SB
  • Added a new Schedule MEP (Multiple-Employer Retirement Plan Information)which includes pooled employer plans (PEP)
  • Added breakout categories to “Administrative Expenses” on Schedule H to include the following:
    • Salaries and allowances
    • Contract administrator fees
    • Recordkeeping fees
    • Independent Qualified Public Accountant audit fees
    • Investment advisory and investment management fees
    • Bank or trust company trustee/custodial fees
    • Actuarial fees
    • Legal fees
    • Valuation/appraisal fees
    • Other Trustee fees/expenses
    • Other expenses

DOL Extends Comment Period for Proposed VFCP Changes

The U.S. Department of Labor’s Employee Benefits Security Administration (DOL) extended the deadline for comments on the proposed changes to the Voluntary Fiduciary Correction Program (VFCP) published last year.

Background

The VFCP was originally introduced in 2002 with the intention of encouraging employers and plan fiduciaries to comply with ERISA by allowing them to self-correct certain fiduciary breaches. On November 21, 2022, the DOL proposed that plan sponsors would have the option to electronically notify the DOL that they have self-corrected certain failures related to late contributions and loan payments under certain conditions. Below is a partial list of the required conditions:

  • Participant contributions or loan repayments must be made to the plan no more than 180 calendar days from the date they’re withheld or received.
  • Lost earnings must not exceed $1,000.
  • The plan or self-corrector must not be under investigation, as defined in the VFCP.
  • The VFCP online calculator must be used to calculate lost earnings.

Also, the proposed amendment included additional changes under the prohibited tax exemption (PTE) 2002-51 to incorporate VFCP changes.

Comments

Section 305(b) of SECURE 2.0 enacted December 29, 2022,provides for an expansion of the Employee Plans Compliance Resolution System (EPCRS) to cover any “eligible inadvertent failure” relating to participant loans from retirement plans. As a result, the DOL is interested in comments on what revisions, if any, should be made to the VFCP to reflect the treatment of corrections of loans to participants. A few questions to consider:

  • Should there be an amendment to reflect items self-corrected under EPCRS that meet the requirements of VFCP?
  • Should the VFCP impose additional reporting or other procedural requirements, and why?
  • Are changes needed to PTE 2002-51?

Comments must be submitted on or before April 17, 2023, using the identifier RIN1210-AB64, to one of the following methods:

  • Federal eRulemaking Portal: at www.regulations.gov
  • Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room-N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention Amendment and Restatement of Voluntary Fiduciary Correction Program.

Proposed Forfeiture Regulations

The Internal Revenue Service (IRS) released proposed rules relating to the use of forfeitures in qualified retirement plans, including a new deadline for the use of forfeitures.

Clarification for Defined Benefit

The regulations for pension plan forfeitures established in 1963 and later updated in the Tax Reform Act of 1986 have become inconsistent with the minimum funding requirements established more recently. As a result, the proposed regulations will eliminate the rule to use forfeitures as soon as possible to better align with minimum funding requirements. The proposal also clarifies that forfeitures cannot be used to increase benefits prior to plan termination.

Defined Contribution Updates

Proposed regulations intend to clarify that forfeitures in defined contribution (DC) plans (including money purchase plans) must specify how forfeitures will be used. The alternatives include one or more of the following:

  • Pay plan expenses,
  • Reduce employer contributions under the plan, including restoration of inadvertent benefit overpayments, or
  • Increase benefits to other participants’ accounts according to plan terms.

Although the proposed regulations do not limit a plan from indicating only one purpose for forfeitures, there is a caution that a plan operational failure may result if forfeitures in a given year exceed the amount that may be used for that one purpose. For example, if forfeitures may only be used to pay plan expenses, but the forfeiture amount exceeds the amount of expenses, the plan would incur an operational qualification failure.

Additionally, the deadline to use forfeitures will be 12 months after the close of the plan year in which the forfeitures are incurred.

Effective Date and Comments

These changes are proposed to apply for plan years beginning on or after January 1, 2024. Taxpayers, however, may rely on these proposed regulations for periods preceding this date. A transition rule would allow forfeitures that have accumulated in any plan year that begins prior to January 1, 2024 to be considered incurred in the first plan year that begins on or after January 1, 2024 and must be used within 12 months following the end of this plan year.

The IRS also welcomes comments received by May 30, 2023. Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at www.regulations.gov. Comments must indicate IRS and REG-122286-18.

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 or 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.

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PQ11297MAR23

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