Compliance Newsletter December 2023
- Proposed Rule for LTPTEs
The IRS and Treasury have issued a proposed rule for long-time part-time employees. - 2024 Dollar Limits
Various 2024 compensation and dollar limits were announced. - Proposed Fiduciary Changes
The DOL issued a proposed rule that redefines an investment advice fiduciary. The agency also issued proposed amendments to prohibited transaction exemptions (PTEs).
Proposed Rule for LTPTEs
The IRS and U.S. Department of Treasury have issued proposed regulations for eligibility, vesting, and compliance testing requirements for long-term part-time employees (LTPTEs) that were adopted under the SECURE Act of 2019 (SECURE Act) and SECURE 2.0 Act of 2022 (SECURE 2.0).
Background
Prior to the SECURE Act, employers could generally exclude employees who do not work 1,000 hours in a year from participating in their 401(k) plans. Under the SECURE Act, employers maintaining a 401(k) plan are required to have a dual eligibility rule where an employee must complete either one year of service with 1,000 hours or three years of consecutive service with at least 500 hours of service in each year. Plan sponsors are allowed to exclude participants who meet the 500-hour rule for the following purposes:
- Matching non-elective contributions
- Non-discrimination testing
- Coverage testing
- Top-heavy testing
These provisions were effective for plan years started in 2021. Service earned prior to 2021 was not considered.
SECURE 2.0 reduced the entry requirements for LTPTEs from three consecutive years of service with 500 hours to two consecutive years of service with 500 hours of service effective for plan years starting in 2025. Service prior to 2023 should not be considered.
Changes
Here is a summary of notable clarifications from the proposed regulation:
- An employee only becomes an LTPTE if they’re eligible solely through the application of LTPT rules. In other words, if the plan has eligibility requirements that are less restrictive than the LTPTE requirements and the employee meets the less restrictive plan requirements, they are not an LTPTE. For example, if a plan allows immediate entry to all employees upon hire, the plan will not have any LTPTEs.
- One year of vesting service must be credited to LTPTEs for each 12-month period in which they have at least 500 hours of service (for service periods beginning on or after January 1, 2021). This provision also applies to 401(k) governmental and church plans.
- Eligibility computation for the initial 12-month period must begin when the employee is credited with an hour of service. Subsequent 12-month periods may start on the first day of the next plan year, including the plan year that starts within the first 12-month period.
- Plan sponsors may exclude LTPTEs from nondiscrimination and coverage testing, and they do not have to apply top-heavy vesting and benefit rules. Matching and nonelective contributions do not have to be made for excluded LTPTEs. However, the relief ends for any LTPTEs who work 1,000 hours within a plan year.
- Job classification exclusions are allowed as long as they’re not being used as a stand-in for impermissible age and service requirements.
- There is no break-in-service rule specific to LTPTEs. Therefore, if an employee meets the LTPTE eligibility requirements and then terminates employment, they are immediately eligible to participate in the plan as a LTPTE upon rehire.
- The proposed regulation does not amend the rules for plans that use an elapsed time method of determining eligibility. If an employee becomes eligible for the plan using the elapsed time method, the employee is not treated as an LTPTE.
- SIMPLE 401(k) plans cannot exclude LTPTEs for purposes of determining if a plan satisfies the SIMPLE 401(k) provisions, so LTPTEs would need to receive the matching or nonelective contributions in addition to being able to make elective deferral contributions.
Effective Date
The effective date is proposed to apply for plan years beginning on or after January 1, 2024. However, the guidance provided in the proposal can be relied upon prior to the publication of the final rules. SECURE 2.0 included special deadlines for plan amendments related to the SECURE Act and SECURE 2.0. This deadline is generally the end of the 2025 plan year. However, plan sponsors may amend their plans to allow earlier eligibility for LTPTEs.
Public comments can be made until January 26, 2024. Commenters are strongly encouraged to submit comments electronically; however, comments can be submitted using one of the following methods:
- Electronically: Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-104194-23)
- Mail: CC:PA:01:PR (REG-104194-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington DC, 20044.
2024 Dollar Limits
The contributions and retirement benefits for qualified retirement plans and Individual Retirement Arrangements (IRAs) are subject to certain limits that are adjusted by the Secretary of the Treasury annually for cost-of-living increases. Highlighted below are the various 2023 and 2024 limits that impact IRAs and retirement plans.
| Limit | 2023 | 2024 |
|---|---|---|
| Compensation Limit | $330,000 | $345,000 |
| Defined Contribution §415 Limit | $66,000 | $69,000 |
| Defined Benefit §415 Limit | $265,000 | $275,000 |
| Key Employee Officer | $215,000 | $220,000 |
| Highly Compensated Employee | $150,000 | $155,000 |
| Governmental Plan Compensation Limit | $490,000 | $505,000 |
| ESOP §409(o) Limits | $1,330,000 $265,000 |
$1,380,000 $275,000 |
Deferral and Catch-up Contribution Limits
| Limit | 2023 | 2024 |
|---|---|---|
| 401(k), 403(b), 457(b) Plan Deferral Limit | $22,500 | $23,000 |
| 401(k), 403(b), Governmental 457(b) Catch-up Limit | $7,500 | $7,500 |
| SIMPLE Plan Deferral Limit | $15,500 | $16,000 |
| SIMPLE Plan Catch-up Limit | $3,500 | $3,500 |
IRA Limits
The limit on contributions to a traditional or Roth IRA will increase to $7,000 in 2024, up from $6,500 in 2023. The limit that applies to IRA catch-up contributions (contributions for individuals age 50 and older) remains at $1,000.
Social Security
The Social Security Administration (SSA) announced an increase in the taxable wage base (TWB) for 2024to $168,600 (was $160,200 in 2023).Workers pay Social Security tax on wages up to the TWB and some retirement plans use the TWB when allocating contributions or calculating benefits.
HSA Contribution Limits
Although not a formal retirement plan, health savings accounts (HSA) often factor into retirement savings. The IRS announced the following 2023 limits earlier this year. These apply to individuals under a high deductible health plan (HDHP). The minimum deductibles and maximum out-of-pocket expenses the IRS uses to define HDHPs are outlined below, as well.
Proposed Fiduciary Changes
The U.S. Department of Labor (DOL) released a proposed rule that redefines who is an investment advice fiduciary. The DOL also released several proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. Below is a broad summary of the proposed changes.
Background
The Employee Retirement Income Security Act (ERISA) imposes certain requirements on fiduciaries of retirement plans and individual retirement accounts (IRAs). Under ERISA, fiduciaries have a duty to be prudent and loyal to individuals and beneficiaries as well as avoid conflicts of interest unless they comply with certain conditions outlined within a prohibited transaction exemption (PTE).
In 1975, the DOL provided a five-part test to determine whether a financial representative was providing fiduciary investment advice. Under the five-part test, a person is considered a fiduciary if the investment advice is:
- Providing the value of investing in securities or other property or makes recommendations regarding the purchase or sale of securities or other property,
- Given on a regular basis,
- Pursuant to a mutual agreement or understanding,
- The primary basis for the investment decision, and
- Individualized to the needs of the plan.
If fiduciary advice is provided, any compensation paid to a financial representative, or their organization, as a result of the advice is a prohibited transaction. In order to receive compensation, the financial representative needs to comply with the applicable PTE.
Investment Advice Fiduciary Defined
The proposed rule redefines an investment advice fiduciary as someone who provides investment advice or makes an investment recommendation to a retirement investor. A retirement investor includes a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary. The advice or recommendation is provided for a fee or other direct or indirect compensation, and the person provides the advice or makes the recommendation in one of the following contexts:
- The person has discretionary authority or control with respect to purchasing or selling securities or other investment property for the retirement investor;
- The person makes investment recommendations on a regular basis as part of their business and the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon as a basis for investment decisions that are in the retirement investor’s best interest; or
- The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.
Fiduciary status is determined on a transactional basis. Written statements that disclaim that an individual is not a fiduciary will not apply if it is inconsistent with the person’s oral communications, marketing, or other interactions with the retirement investor.
Entities can continue to offer a menu of investment options to fiduciaries for selection by participant-directed plans that are not customized or tailored to the retirement investor and would not be considered a recommendation.
PTE Amendments
This is the content for Layout P Tag
PTE 2020-02
- Additional required disclosures:
- Written statement of the Best Interest standard of care owed by the investment professional and financial institution to the retirement investor.
- Inform the retirement investor of their right, free of charge, to obtain additional fee information that is reasonably designed to illustrate the costs of the transactions and the significance and severity of conflicts of interests.
- Comments are requested around whether there should be additional web disclosure requirements.
- Conflicts of Interest: Policies and procedures updated to exclude offering incentives that might displace the retirement investor’s best interests. Quotas, appraisals, bonuses, and contests are a few examples that would not be permitted.
- Expanded availability to use this exemption for:
- Robo advice
- Pooled Plan Providers (PPP) providing investment advice to Pooled Employer Plans (PEP); however, a PPP’s decision to hire an affiliated or related party as an advice provider is excluded.
PTE 84-24
The DOL is proposing changes to the availability of the exemption and an additional section for independent insurance agents providing investment advice. The proposed changes include that this exemption:
- is no longer available for investment advice fiduciaries and fiduciaries who have discretionary management of plan assets (they would generally have to use PTE 2020-02).
- is not available for specific investment advice involving ERISA plans transactions where the insurance agent, insurer, or any affiliate is the employer of the employees covered by the plan, or the plan’s named fiduciary or administrator.
- is available to independent insurance agents authorized to sell annuities from two or more unrelated insurers to provide investment advice for annuity products (including rollovers); however, they must:
- Fully disclose their compensation;
- Comply with impartial conduct standards (like PTE 2020-02);
- Provide investor documentation as to why the recommendation is in their best interest; and
- Meet the disclosure requirements similar to PTE 2020-02regarding fiduciary status, fees, services, conflicts of interest, and a description of products they are licensed and authorized to sell, along with limitations.
PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
In general, these PTEs are amended so that investment advice to ERISA plans or IRAs are excluded (they would generally need to use PTE 2020-02). A high-level summary of each PTE is noted below:
- PTE 75-1: Covers a variety of brokerage transactions, mutual fund purchases, underwriting transactions, and extensions of credit.
- PTE 77-4: Covers a retirement plan or IRA’s purchase of an open-end mutual fund, discretionary transactions, and can be used to provide advice to a plan or IRA owner to purchase a proprietary mutual fund.
- PTE 80-83: Allows security purchase when the proceeds may be used to retire or reduce a debt to the fiduciary.
- PTE 83-1: Provides relief for the purchase of mortgage pool interests.
- PTE 86-128: Covers brokerage transactions where a plan pays a fee for executing securities transactions.
Effective Date
The DOL proposes to make the rule effective 60 days after the final rule and PTE amendments are published in the Federal Register. Comments are due on or before January 2, 2024. Comments are welcome on the proposed timeframe as well as other changes addressed within the proposals. The DOL is also anticipating that they will hold a public hearing on December 18, 2023.
Written comments must reference RIN 1210-AC02 and may be submitted either through:
- Federal eRulemaking Portal at http://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: Definition of Fiduciary RIN 1210-AC02.
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.
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