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Current Regulatory Outlook — September 2019

In this current outlook we review IRS’s recent extension of closed group relief for another year and the “statement of interest” filed by DOJ in the California Secure Choice litigation, and we note DOL’s transmission of its electronic communication proposal to OMB.

IRS extends relief for closed plans one year

On August 26, 2019, IRS published Notice 2019-49, extending through 2020 temporary relief from Internal Revenue Code nondiscrimination rules for closed groups.

We discuss the “closed group” issue, the temporary relief provided by IRS under prior Notices (previously extended under Notice 2018-69 through 2019), and IRS’s January 2016 proposed regulations providing permanent relief, in detail in our article Frozen plan update

To summarize the issue: where an employer closes a defined benefit plan to new participants (sometimes called a “soft freeze”), Internal Revenue Code nondiscrimination issues may over time arise with respect to the grandfathered benefits of the closed class, even where that class of participants is nondiscriminatory at the time of the freeze. This happens when lower paid members of the closed class subsequently leave, are terminated or become higher paid. In addition, over time, the number of participants in the “old plan” may shrink below the minimum participant requirements of Internal Revenue Code section 401(a)(26) (the “50 participant rule”). Finally, where, e.g., in connection with a “hard freeze” of all DB plan benefits, the sponsor establishes or enhances a defined contribution plan, the sponsor may provide for “make whole” benefits for a closed class of some or all of the participants in the “old” DB plan, and nondiscrimination issues may over time arise with respect to that class.

There were a number of problems (discussed in detail in our prior article) with IRS’s proposal for permanent relief. In that regard, in Notice 2018-69 IRS states:

Many comments have been submitted on the proposed regulations, including oral comments at a public hearing held on May 19, 2016. The Internal Revenue Service (IRS) and the Department of the Treasury (Treasury Department) expect that the final regulations will include a number of significant changes in response to those comments. However, it is anticipated that the final regulations will not be published in time for plan sponsors to make plan design decisions based on the final regulations before expiration of the relief provided under Notice 2014-5 (as last extended by Notice 2018-69). Accordingly, the IRS and the Treasury Department have determined that it is appropriate to extend the relief provided under Notice 2014-5 for an additional year.

We note that, in addition to IRS’s regulation project, there are proposals in Congress that would provide a legislative solution to the “closed group” problem, including the Setting Every Community Up for Retirement Enhancement (SECURE) Act

DOJ files “statement of interest” in California Secure Choice litigation

On August 2, 2019, the Department of Justice filed a Notice in Jarvis v. California Secure Choice Retirement Savings Program – litigation challenging the CalSavers program as preempted by ERISA. That notice requested that the court defer ruling on a pending motion to dismiss “in order to afford the United States an opportunity to complete the authorization process and determine whether to participate in this litigation.”

On September 13, 2019, the DOJ filed a “Statement of Interest” outlining its view that the California program was disallowed under ERISA’s broad preemption provision, on two alternative grounds:

The California program violates the Supreme Court’s “reference to” rule, because it makes specific reference to ERISA plans in “forc[ing] California employers who do not offer the State’s preferred types of ERISA plans … to adopt equivalent automatic-enrollment IRAs through CalSavers.”

And because it requires employers to maintain plans (under the CalSavers program) that are themselves ERISA plans. In this regard, DOJ argues that: (1) CalSavers IRAs are part of a “plan, fund, or program.” (2) These plans are “maintained by employers” because of requirements that employers set up payroll-deduction, ensure employee enrollment, deduct contributions from pay, send those contributions to CalSavers, and make ongoing determinations as to eligibility and coverage. And (3) DOL’s exemption for “completely voluntary” programs does not apply after Congress’s rescission of DOL’s 2016 “safe harbor.”

DOL Electronic disclosure regulations sent to OMB

On August 16, 2019, DOL sent proposed revised participant electronic communications regulations to the Office of Management and Budget.

The current DOL rules on the electronic provision of required ERISA disclosures are considered by many sponsors and practitioners to be restrictive. They generally provide a safe harbor for electronic disclosure in either of two situations:

If the participant has “the ability to effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee and with respect to whom access to the employer’s or plan sponsor’s electronic information system is an integral part of those duties.”

If the participant has “affirmatively consent[ed] to receiving disclosures through electronic media in the manner prescribed by the regulation.”

OMB has 60 days to review DOL’s proposal.

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We will continue to follow these issues.

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