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Compliance Newsletter December 2022

PBGC 2023 Levels

Pension Benefit Guaranty Corporation (PBGC) announced the flat and variable rate premium amounts as well as maximum benefit levels for various purposes for 2023.

Flat and Variable-Rate Premiums

PBGC announced an increase to the flat and variable-rate premiums for plan years beginning in 2023. The table below highlights the change in rates from last year.

Plan Type Flat-Rate Premium Variable-Rate Premium
2022 2023 2022 2023
Single- Employer $88 $96 $48*
$598 Per Participant Cap		 $52*
$652 Per Participant Cap
Multiemployer $32 $35 Not Applicable

*per $1,000 of unfunded vested benefits

Maximum Benefit for 2023

PBGC increased the guaranteed maximum monthly benefit for participants in under-funded single-employer pension plans in 2023. Multiemployer plan maximum guarantees are calculated differently and are not based on an indexed amount.

Here is a table that compares 2022 and 2023 maximum monthly benefits for a 65-year-old in a single-employer plan.

Payment Option 2022 Maximum Benefit 2023 Maximum Benefit
Straight Life $6,204.55 $6,750.00
401(k), 403(b), Governmental 457(b) Catch-up Limit $6,500 $7,500
Joint and 50% Survivor* $5,584.10 $6,075.00

*Amounts must be adjusted if spouse is not the same age.

Present Value of Maximum Guarantee

When a defined benefit plan’s Adjusted Funding Target Attainment Percentage (AFTAP) is at least 60% but less than 80%, the plan generally must limit accelerated benefits, like lump sum distributions, to the lesser of:

  • 50% of the payment that would be paid if the restriction did not apply, or
  • The present value of the PBGC maximum guarantee

PBGC announced the present value of the maximum guarantee for 2023 is $1,067,191 for a 65-year-old individual. This is down from $1,189,022 in 2022. The maximum guarantee is adjusted for different ages. A complete table can be found at www.pbgc.gov.

Expanded Determination Letter Program for 403(b) Plans

The U.S. Treasury Department and the Internal Revenue Service (IRS) have released Revenue Procedure 2022-40, which expands the retirement plan determination letter program for individually designed 403(b) plans. There are no changes to qualified pre-approved plans at this time, but future guidance is expected.

Changes

Beginning on or after June 1, 2023, 403(b) individually designed plans may now apply for a determination letter under the following circumstances:

  • Initial plan determination letter: Plan sponsors may submit determination letter applications for initial plan determination. The initial application period will be staggered over three years each June 1st based on the plan sponsor’s employer identification number (EIN).
    • Initial plan determination filing is allowed, even if the plan was originally a pre-approved plan that filed for determination under Form 5307 but was later estated to an individually designed plan.
  • Plan merger: Qualified plans may submit a determination letter application if the following requirements are met:
    • The date of the plan merger occurs no later than the last day of the first plan year that begins after the plan year that includes the date of a corporate merger, acquisition, or other similar business transaction, and
    • A determination letter application for the merged plan is submitted within the submission period. The submission period is from the date of the plan merger through the last day of the first plan year that begins after the plan merger.
  • Qualification at plan termination: Plan sponsors can request a determination letter in connection with plan termination if it is filed no later than the later of the following (additional time limits may apply once substantially all assets have been distributed):
    • One year from the effective date of the termination, or
    • One year from the date on which the action terminating the plan is taken.

Other circumstances may be considered; however, for 2023, the IRS will only accept applications for the reasons listed above.

When the IRS conducts its review of qualification and section 403(b) requirements, they will generally consider items that have (as well as have not) been included in a Required Amendments List on or before the last day of the second calendar year preceding the year in which the determination letter is submitted.

Changes Proposed to VFCP

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has proposed changes to the Voluntary Fiduciary Correction Program (VFCP) and is seeking public comments. EBSA has also issued a proposal to revise the corresponding sections of the prohibited transaction exemption (PTE) to incorporate the proposed VFCP changes.

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 if specific conditions are met. While the program has been popular, the EBSA has received feedback that the time and expense required to file a VFCP application for delinquent contributions can be a disincentive to correct small-dollar transactions.

VFCP Changes

Under the proposal, plan sponsors would have the option to notify the EBSA electronically that they have self-corrected certain failures related to late contributions and loan payments. Here is a partial list of the conditions required to do so:

  • 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.
  • Self-correctors must use the VFCP online calculator to calculate lost earnings from the date of withholding or receipt and an online web tool to complete and file the self-correction component notice. They would also need to complete and keep a copy of the self-correction retention record checklist.

PTE Updates

Excise tax relief for six specific VFCP transactions is conditionally available under an associated PTE 2002-51, which the EBSA proposes to amend, as well. The proposed amendment includes:

  • Excise tax relief for the self-correction noted above.
  • Elimination of the 3-year limitation that may have prevented VFCP applicants from applying for more frequent relief.
  • No requirement for self-correctors to provide notice to interested persons. Instead, the self-corrector must contribute what would have been the excise tax back to the plan and allocate to participants and beneficiaries in the same manner as the plan allocates earnings.

Public Comments

Written comments for the VFCP proposal may be submitted on or before January 20, 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.

Written comments for the PTE proposal may be submitted on or before January 20, 2023, identified by Application No. D-11799 using the Federal eRulemaking Portal at www.regulations.gov at Docket ID number EBSA-2022-0024.

DOL Issues ESG Final Rule

The U.S. Department of Labor (DOL) has issued its final rule for environmental, social, and governance (ESG) factors used by plan sponsors when selecting retirement plan investments and exercising shareholder rights, such as proxy voting. The final rule mostly repeals the “pecuniary-only” standard created under the 2020 final rule and closely follows the 2021 proposed rule.

Background

On November 13, 2020, the DOL published a final version of the ESG rule that amended plan sponsor investment duties on treatment of ESG considerations in selecting investments available under a qualified retirement plan. Under that version of the rule, investment selection would have been based solely on financial factors such as return, risk, and a plan’s documented investment objectives. ESG factors were only to be considered if they were treated as material economic considerations. The rule became effective on January 12, 2021.

The final version of the proxy voting rule addressed the obligations of plan fiduciaries when voting proxies and exercising shareholder rights regarding shares of stock invested in the plan. The rule was published on December 16, 2020, and became effective on January 15, 2021.

On March 10, 2021, the DOL announced that it would not enforce either final rule.

On October 14, 2021, the DOL issued a proposed rule that included the following changes:

  • ESG Considerations: When considering risk-return factors, the proposed rule allowed for evaluation of the economic effects of climate change and other ESG factors, depending on the facts and circumstances.
  • QDIA Changes: The proposal removed the prohibition of usage of ESG factors in selection of Qualified Default Investment Alternatives (QDIAs).
  • Tie-breaker Test: Unlike the previous rule, the proposed rule allowed fiduciaries to consider collateral benefits as tie-breakers when investment would serve the financial interest of the plan equally.
  • Proxy Safe Harbors Removed: The following safe harbor proxy voting policies were removed under the proposed rule:
    • A policy to limit voting to when fiduciary deems it to be substantially related to the issuer’s business activities or expected effect on the value of the investment.
    • A policy to refrain from voting on particular types of proposals when below a quantitative threshold.
  • Removal of other proxy voting requirements, such as higher standard of maintaining proxy voting records.

Changes

The DOL notes that the new final rule does not change the core principle that plan sponsors are required under ERISA to follow the duties of prudence and loyalty and not subordinate the interests of participants and beneficiaries to any other objectives unrelated to the provision of benefits under the plan.

When making investment decisions, an ERISA fiduciary meets their:

  • Duty of prudence when “appropriate consideration” is given of relevant facts and circumstances in the fiduciary’s scope including the determination of role of investment action as part of the plan’s investment portfolio or menu.
  • Duty of loyalty when there is a prudent review of investment alternatives that would equally serve the financial interests in the plan with no sacrifice of investment return or taking additional investment risk for another objective.

The final ESG rule:

  • Adds clarifying wording that when a fiduciary selects investments for a qualified plan, the choice must be based on relevant risk and return analysis, which can include the economic effects of climate change and other ESG considerations.
  • Specifies that the same standards apply to QDIAs as when selecting other plan investments.
  • Removes the previous tie-breaker rule and instead requires the fiduciary to prudently conclude that competing investments or investment strategies equally serve the financial interests of the plan over time. In the case of a tie, the fiduciary can select investments or investment strategies based on collateral benefits other than investment returns. Special documentation is no longer required.
  • Adds a new provision stating that fiduciaries can consider participant preferences when creating a menu of prudent investment options for participant-directed individual account plans.
  • The proxy voting rules established in 2020 were largely repealed. The new version states that the fiduciary has duty to manage shareholder rights and rights to vote proxies for the exclusive interest of the plan with consideration of costs involved. This duty does not require the voting of every proxy or exercise of every shareholder right.

Questions on the final rule can be directed to the EBSA’s Office of Regulations and Interpretations at 202-693-8500.

PBGC Extends Public Comment Period on Withdrawal Liability Rates

On October 14, 2022, the Pension Benefit Guaranty Corporation (PBGC) issued a proposed rule with a 30-day public comment period. The proposed rule would provide a set of interest rate assumptions that may be used by plan actuaries for multiemployer plans to determine a withdrawing employer’s liability under the plan. In response to the public comments received so far, PBGC is extending the comment period from November 14, 2022, to December 13, 2022.

Public comments may be submitted by using any of the following methods:

  • Federal eRulemaking Portal: https://www.regulations.gov.
  • Email: reg.comments@pbgc.gov with subject line “4213 proposed rule.”
  • Mail or Hand Delivery: Regulatory Affairs Division, Office of the General Counsel, Pension Benefit Guaranty Corporation, 445 12th Street SW, Washington, DC 20024-2101.

The PBGC strongly encourages commenters to submit their comments electronically.

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.

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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PQ11297DEC22

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