COVID-19 Joint Agency Relief Part 1: ERISA Enforcement Relief for Retirement Plans
As described in our May 1 blog post, the Department of Labor (DOL) and the Internal Revenue Service (IRS) recently issued guidance (the “Extension Guidance”) providing relief to benefit plan sponsors and participants for complying with certain deadline and notice requirements under ERISA and the Internal Revenue Code (“Code”). One piece of the Extension Guidance, EBSA Disaster Relief Notice 2020-01 (the “Notice”) focuses specifically on ERISA retirement plan obligations, including ERISA-required notices, ERISA rules for retirement plan loans, and ERISA timing requirements for remitting participant contributions to retirement plan trusts. This alert describes in more detail the relief in the Notice and implications for plan sponsors.
Note about terminology: “Extension Guidance” refers to the Final Rule: Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak and EBSA Disaster Relief Notice 2020-01. “Outbreak Period” is the time period that begins March 1, 2020 and ends 60 days after the announced end of the COVID-19 National Emergency. As an example, if the National Emergency ends on May 15, 2020, the Outbreak Period will end on July 14, 2020.
Broad Relief for Retirement Plan Disclosures Under ERISA Title I, Including Blackout Notices
The Coronavirus Aid, Relief and Economic Security (CARES) Act granted the DOL authority to provide extensions of up to one year, in response to a public health emergency such as the COVID-19 pandemic, for plans, plan sponsors, plan administrators and other individuals to complete ERISA-required actions.
In the Notice, the DOL exercised this authority to provide relief to plan sponsors and plan administrators for providing notices, disclosures and other documents required under Title I of ERISA over which the DOL has jurisdiction. Specifically, the Notice provides that an employee benefit plan (and its responsible fiduciaries) will not be in violation of ERISA for a failure to timely furnish a notice, disclosure or document otherwise required to be provided during the Outbreak Period, as long as the plan and fiduciary (1) act in good faith; and (2) provide the notice, disclosure or document as soon as administratively practicable under the circumstances. To illustrate its view of what constitutes “good faith,” the DOL stated in the Notice that a plan fiduciary may use alternative methods to communicate with plan participants if the plan fiduciary reasonably believes that the participant can effectively access the notice or disclosure via the method used. For example, email, text messages and continuous access websites all could qualify as good faith attempts to satisfy ERISA-disclosure requirements, depending on the circumstances.
Disclosures subject to this broad good faith relief would include, for example, annual funding notices, summary plan descriptions, summaries of material modifications, qualified default investment option (QDIA) notices, summary annual reports, participant fee disclosures, and certain loan-related disclosures. Blackout notices (generally required to be provided to individual account plan participants 30 days in advance of any temporary suspension, limitation, or restriction of participant rights, such as the ability to direct investments) also are subject to the broad relief. The Notice additionally clarifies that the exception to the advance blackout notice requirement, which applies when a plan administrator is unable to provide advance notice of a blackout period due to events beyond the plan administrator’s reasonable control, is deemed to apply during the Outbreak Period because “pandemics are by definition beyond a plan administrator’s control.”
Important Note: Plan sponsors and plan administrators should continue their normal practices for providing participants and beneficiaries with ERISA-required notices and disclosures, to the extent possible, during the COVID-19 pandemic. The Notice does not excuse a plan sponsor’s or plan administrator’s obligations under ERISA to provide various notices and disclosures. The Notice does not suspend the deadlines for providing ERISA-required notices and disclosures.
However, for plan sponsors and plan administrators that are having difficulty meeting the standard ERISA deadlines for providing notices and disclosures due to the COVID-19 pandemic, the Notice provides reassurance that the DOL intends to apply “a temporary policy of relaxed enforcement” as long as plan sponsors and plan administrators act in good faith when attempting to satisfy their fiduciary obligations related to ERISA-required notices and disclosures.
No Relief From Form 5500 Filing for Calendar Year Plans
Notably, the relief in the Notice does not apply with respect to Form 5500 filings for the 2019 calendar year. Absent future guidance, the deadline for calendar year plans to file the 2019 Form 5500 remains July 31, 2020 (or October 15, 2020, if an extension request is timely filed). For non-calendar year plans with a Form 5500 deadline on or after April 1, 2020 and before July 15, 2020, IRS Notice 2020-23 (discussed here) previously extended the deadline to July 15, 2020.
Limited Relief for Procedural Failures for Plan Loans and Distributions
The Notice provides limited relief in the event that a plan fails to follow its verification procedures and other plan procedural requirements when approving plan loans and distributions during the Outbreak Period. Specifically, the DOL will not treat such deviations from plan procedures as an ERISA violation if three requirements are met:
- The failure is solely attributable to the COVID-19 outbreak.
- The plan administrator makes a good-faith, diligent effort under the circumstances to comply with the applicable procedural requirements.
- The plan administrator makes a reasonable attempt to correct any procedural deficiencies, such as assembling any missing documentation, as soon as administratively practicable.
Importantly, the relief applies only to requirements within the DOL’s interpretive and regulatory authority. This means that it does not extend to failures under IRS jurisdiction. For example, if a plan requires a participant to utilize certain forms or follow specific timing requirements related to plan loan or distribution requests, the relief would presumably apply if the plan deviates from these types of procedures due to the COVID-19 pandemic. However, the relief would not apply to a failure to comply with a loan or distribution requirement imposed by the Code (e.g., the requirement to obtain spousal consent to waive a qualified joint and survivor annuity, which consent must be witnessed in the physical presence of a plan representative or notary1).
No ERISA Violation for Loans Made in Compliance With CARES Act Changes
The DOL also addressed ERISA requirements and changes to participant loan provisions pursuant to the terms of the CARES Act. As discussed in more detail in our prior alert the CARES Act made two temporary changes to the plan loan requirements under Code Section 72(p) for “qualified individuals.”2 First, the CARES Act provides that the maximum loan amount to a qualified individual is 100% of the participant’s vested account balance up to $100,000, reduced by the highest outstanding loan balance during the preceding 12 months, for a loan taken between March 27, 2020 through September 22, 2020. Second, the CARES Act permits a delay in loan repayments due between March 27, 2020 and December 31, 2020.
Per the Notice, the DOL will not treat any person as having violated ERISA solely because: (1) the person made a plan loan to a qualified individual during the loan relief period in compliance with the CARES Act and any related IRS guidance; or (2) a qualified individual delayed making plan loan repayments in compliance with the CARES Act and any related IRS guidance.
Important Note: This relief clears up two issues that were left open by the plan loan relief provisions in the CARES Act, related to ERISA’s “adequate security” and “reasonably equivalent basis” requirements for plan loans.
- Adequate Security Requirement. ERISA’s “adequate security” requirement provides that no more than 50% of a participant’s accrued benefit may be considered as security for a loan. Prior to the guidance in the Notice, it was not clear if ERISA would require a retirement plan to obtain additional collateral from a participating seeking to borrow more than 50% of his or her account balance as a plan loan pursuant to the CARES Act.
- Reasonably Equivalent Basis Requirement. ERISA requires that, if a retirement plan offers plan loans, the loan policy must ensure that plan loans are made available to all plan participants on a “reasonably equivalent basis,” taking into consideration only those factors that would be considered in a normal commercial setting by an entity in the business of making loans. The Notice confirms that a plan will not violate ERISA’s “reasonably equivalent basis” requirement by making loans with the increased limits available only to qualified individuals in accordance with the CARES Act.
Plan Amendments for CARES Act Loan and Coronavirus-Related Distribution Provisions
ERISA requires retirement plan loans and distributions to be made in accordance with specific plan provisions. This means that a plan’s governing documents must accurately reflect the terms of the plan’s loan program and the plan’s distribution rules, and loans and distributions should be administered in accordance with those written terms. The Notice clarifies that the DOL will not view a retirement plan as operating out of compliance with its terms if the plan implements the CARES Act loan relief provisions and/or coronavirus-related distributions before the plan’s governing documents are amended to align with these administrative changes. Specifically, the Notice permits retroactive plan amendments to reflect the CARES Act loan and distribution changes, as long as: (1) the amendment is adopted on or before the last day of the first plan year beginning on or after January 1, 2022; and (2) the plan has been operating as though the amendment was in effect as of the amendment’s effective date, as required under the CARES Act.
Temporary Non-Enforcement Policy for Certain Late Transfers of Participant Contributions
Amounts withheld from a participant’s wages as participant deferrals or loan repayments are considered plan assets that must be remitted to a retirement plan’s trust on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets. The DOL regularly reviews the timeliness of transfers of participant contributions as part of its plan investigations and has been known to take an aggressive approach to enforcement.
In the Notice, the DOL announced a non-enforcement policy with respect to employers that experience a temporary delay in remitting participant contributions to a plan, as long as the delay is attributable solely to the COVID-19 outbreak. This non-enforcement policy is in effect only during the Outbreak Period. The Notice also cautions that employers and services providers must act reasonably, prudently, and in the interests of employees to comply as soon as administratively practicable under the circumstances.
Important Note: Plan sponsors and plan administrators should continue, to the extent possible during the COVID-19 pandemic, to follow their normal procedures for remitting participant deferrals and loan repayments to the plan’s trustee or custodian in a timely fashion. Given the DOL’s historically aggressive position on late transfers of participant contributions and the limitations of the non-enforcement policy, a plan sponsor that discovers untimely transfers of participant contributions may still want to consider corrective actions.
The Notice leaves open the possibility of additional relief, stating that the DOL will continue to monitor the effects of the COVID-19 outbreak and may provide additional relief as warranted.
Look for additional upcoming client alerts covering the Extension Guidance, which will focus on how the Extension Guidance impacts health and welfare benefit plans and the implications of the Extension Guidance for benefit claim litigation. If you have questions about the how the Extension Guidance may affect your obligations as an employer, plan sponsor, plan fiduciary, your benefit plan’s administrative practices or any other aspect of the Extension Guidance, please don’t hesitate to contact your Faegre Drinker attorney for assistance.