The March Monthly Minute highlights new proposed deadlines for use of retirement plan forfeitures, unsuccessful efforts to overturn the final ESG rule, and ACA penalty increases for 2024.
Sorry Not Sorry: Biden Vetoes Resolution to Block ESG Rule
On March 20, Biden announced his veto of a congressional resolution that would disapprove of the DOL’s final rule titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” As reported in the November Monthly Minute, on November 22, 2022, the DOL released a new final rule clarifying how ERISA’s fiduciary duties of prudence and loyalty apply to selecting investments and exercising shareholder rights such as proxy voting. Under the new final rules, plan fiduciaries are given more leeway to consider ESG factors and participant preferences when making investment decisions. Not surprisingly, Congress voted to overturn the final rule earlier this month, and just a few weeks later President Biden made quick work of vetoing the resolution. Shortly thereafter, there was an effort to override the President’s veto, but the override efforts were not successful.
KMK Comment: Despite the veto upholding the final rule, guidance in this area is still not set in stone. This political ping-pong match could continue as long as the administration experiences a changing political tide. Accordingly, plan fiduciaries will want to work closely with their investment advisor and proceed with caution in considering ESG funds as an investment option.
New Deadlines for Use of Forfeitures
The IRS recently set forth proposed regulations providing rules relating to the use of forfeitures in qualified retirement plans, including a deadline for the use of forfeitures in defined contribution plans (e.g., 401(k) plans). The proposed regulations would clarify that forfeitures arising in any defined contribution plan may be used for one or more of the following purposes, as specified in the plan: (1) to pay plan administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants’ accounts in accordance with plan terms. The proposed regulations would generally require that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred. The deadline in the proposed regulations is similar to the deadline for a section 401(k) plan to correct excess contributions by making corrective distributions, which is 12 months after the close of the plan year in which the excess contributions arise. Although these regulations are proposed to generally apply for plan years beginning on or after January 1, 2024, plan sponsors may rely on them for periods preceding this date.
KMK Comment: The proposed regulations formalize largely informal guidance that previously addressed the deadline to use forfeitures. The clarity will come as welcomed news for plan administrators that struggle to apply forfeitures that are generated late in a plan year.
Going Up! IRS Announces ACA Penalty Increases for 2024
This month, the IRS announced indexed adjustments for the employer shared responsibility (a) and (b) penalties for calendar year 2024. The adjusted annualized (a) penalty is $2,970 ($247.50/month) and the adjusted annualized (b) penalty is $4,460 ($371.67/month). This is an increase from 2023 which called for a $2,880 (a) penalty and a $4,320 (b) penalty.
KMK Comment: While the 2024 increases may seem nominal when compared to 2023, it’s important to remember the (a) penalty, if triggered by a failure to satisfy the 95% test, applies with respect to each full-time employee of the employer (minus an up-to-30 employee reduction). Thus, these penalties quickly balloon if coverage mandates are violated (or, potentially, if ACA reporting fails to accurately reflect satisfaction of the 95% test). Employers should be vigilant to make sure their ACA reporting is done correctly.
