Employee Benefits Developments - January 2021

Hodgson Russ LLP

The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of January 2021.

U.S. Department of Labor Issues Final Prohibited Transaction Exemption Regarding Compensation for Fiduciary Investment Advisers of Retirement Plans and IRAs

Consolidated Appropriations Act, 2021 (CAA): Retirement Plan Relief

DOL Issues Proxy Voting Regulations for Plan Fiduciaries

Retirement Plan Elections/Consents: IRS Extends Temporary Relief From the Physical Presence Requirement for Participant Elections/Consents Witnessed by a Notary Public or Plan Representative

Court Dismisses COBRA Lawsuit


U.S. Department of Labor Issues Final Prohibited Transaction Exemption Regarding Compensation for Fiduciary Investment Advisers of Retirement Plans and IRAs

On December 15, 2020, the U.S. Department of Labor ("DOL") issued a final prohibited transaction exemption (“Final PTE”) defining the conditions under which fiduciary investment advisers are allowed to receive compensation for advice to ERISA-covered benefit plans, plan participants, and IRAs, and to engage in principal transactions.

The prohibited transaction provisions of ERISA and the Internal Revenue Code ("Code") prohibit fiduciaries of ERISA plans and IRAs from engaging in self-dealing. Such investment advice fiduciaries are generally prohibited from receiving compensation regarding transactions involving ERISA plans and IRAs. The prohibited transaction rules also prohibit purchasing and selling investments with ERISA plans and IRAs when the fiduciaries are acting on behalf of their own accounts (so-called “principal transactions”).

The relief afforded under the Final PTE represents the latest evolution in the rules under ERISA governing fiduciary investment advice that began with the DOL’s 1975 five-part test defining who is an investment advice fiduciary under ERISA and Section 4975 of the Code. The DOL issued a final rule in 2016 that would have replaced these prior regulations with a new prohibited transaction exemption. However, the 2016 rule was vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018, and the DOL issued a temporary non-enforcement policy under Field Advice Bulletin 2018-02, which provided relief from the prohibited transaction rules for investment advice fiduciaries who acted in good faith to comply with the ‘‘Impartial Conduct Standards’’ for transactions that would have been exempted under the vacated rule.

In the preambles, the Final PTE retains and interprets the five-part investment advisor test and updates its application for current market conditions. The regulatory provisions of the Final PTE then describe the conditions under which the new exemption is available.

The Final PTE applies to registered investment advisers, broker-dealers, banks and insurance companies (“Financial Institutions”) and their employees and agents (“Investment Professionals”) who provide fiduciary investment advice to “Retirement Investors.” The exemption defines “Retirement Investors” broadly to include plan participants, IRA owners, and retirement plan and IRA fiduciaries. Under the conditions specified in the Final PTE, investment advice fiduciaries are permitted to receive compensation that would otherwise violate the prohibited transaction rules of ERISA and the Code, including commissions, 12b–1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments. The exemption’s relief extends to prohibited transactions arising as a result of investment advice to roll over assets from a plan to an IRA, or from one IRA to another IRA. The exemption also allows Financial Institutions to engage in principal transactions with plans and IRAs in which the Financial Institution purchases or sells certain investments from its own account.

The Final PTE is intended to harmonize relief applicable to investment advice fiduciaries extended by other federal regulatory agencies. The DOL intends its Final PTE conduct standards to align with rulemaking regarding fiduciary conduct standards applicable to investment advisers under the SEC’s fiduciary interpretation of the Investment Advisers Act of 1940, the SEC’s Regulation Best Interest conduct standards for broker-dealers, and the NAIC’s Suitability in Annuity Transactions Model Regulation applicable to insurance agents and carriers.

The Final PTE departs in a few respects from the proposed exemption issued on July 7, 2020:

  1. The recordkeeping requirements have been narrowed to allow only the DOL and Department of Treasury to obtain access to a Financial Institution’s records, rather than allowing Retirement Investors and plan fiduciaries to have access;
  2. The disclosure requirements now include a special written disclosure to Retirement Investors regarding the reasons a rollover recommendation satisfies the best interest standard;
  3. The retrospective review provision now requires that certification be provided by a senior executive officer, rather than the CEO of the Financial Institution; and
  4. A self-correction procedure has been added to address violations of the Final PTE conditions and standards.

To obtain the relief offered under the Final PTE, Investment Professionals and Financial Institutions must comply with the following conditions:

Impartial Conduct Standards

  • Best Interest – The investment advice must be such that it “reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, and does not place the financial or other interests of the Investment Professional, Financial Institution or any affiliate, related entity, or other party ahead of the interests of the Retirement Investor, or subordinate the Retirement Investor’s interests to their own.”
  • Reasonable Compensation – A Financial Institution and its Investment Professionals, and their affiliates are not permitted to receive compensation for investment recommendations in that exceeds “reasonable compensation” within the meaning of section 408(b)(2) of ERISA and section 4975(d)(2) of the Code. The determination of reasonableness depends on the facts and circumstances, and requires consideration of the market value of the services, rights and benefits provided by the Financial Institution and Investment Professional delivering the advice.
  • Best Execution – The Financial Institution and its Investment Professionals must obtain the best execution of the investment transaction reasonably available under the circumstances, as required by federal securities laws.
  • Not Materially Misleading – Any statements made by the Financial Institution and its Investment Professionals to the Retirement Investor about the recommended investment transaction and other relevant matters must not be materially misleading.

Disclosure Requirements

The following disclosures must be made by the Financial Institution prior to entering the transaction with the Retirement Investor:

  • A written acknowledgment from the Financial Institution that it and its Investment Professionals are fiduciaries under ERISA and the Code with respect to the fiduciary investment advice it provides to the Retirement Investor.
  • A written description of the services to be provided, and identifying the Financial Institution’s and Investment Professional’s material conflicts of interest that is accurate and not misleading in all material respects.
  • Documentation of the specific reasons why any recommendation to rollover assets from a plan to another plan or IRA, or from and IRA to another IRA is in the best interest of the Retirement Investor.

Policies and Procedures

The Final PTE requires Financial Institutions to establish, maintain and enforce written policies and procedures to facilitate compliance with the exemption. The policies must be prudently designed to ensure that the Financial Institution and its Investment Professionals comply with the Impartial Conduct Standards. In addition, the policies must mitigate the Investment Professional’s and Financial Institution’s conflicts of interests, such that a reasonable person would not view the Financial Institution’s incentive practices as a whole as creating an incentive for the Financial Institution and Investment Professionals to place their interests ahead of the interests of the Retirement Investors.

Retrospective Review

The Final PTE requires Financial Institutions to conduct an annual retrospective review reasonably designed to assist in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the Financial Institution’s policies and procedures in place to facilitate compliance with the exemption. The results of the retrospective review must be reported in written form and delivered to a “Senior Executive Officer” of the Financial Institution, including the CEO, Chief Compliance Officer, Chief Financial Officer, President, or one of the three most senior officers of the Financial Institution.

The Senior Executive Office must certify within six months of the end of the annual respective review period that: (i) the officer reviewed the report; (ii) the Financial Institution has in place policies and procedures prudently designed to achieve compliance with the conditions of the Final PTE; and (iii) the Financial Institution has in place a prudent process to modify such policies and procedures as business, regulatory and legislative changes and events dictate, and to test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with the conditions of the Final PTE.

The Financial Institution must retain the report, certification, and supporting data for a period of six years. The documentation of the retrospective review must be made available to the DOL within 10 business days of DOL’s request.


Financial Institutions are able to self-correct violations of the conditions of the Final PTE that result in an investment loss. The self-correction action must make the Retirement Investor whole for any loss, and must be reported to the DOL within thirty days of the violation and correction. The Financial Institution must self-correct within 90 days of the date it learned of the violation, or should have reasonably learned of the violation. The self-correction must be documented and included in the retrospective review report.


The exemption is not available to Financial Institutions and Investment Professionals if the fiduciary is the employer of the employees covered by the ERISA plan, or a named fiduciary or plan administrator with respect to the plan. The Final PTE is not applicable to transactions undertaken by Retirement Investors where advice is generated through computer interactive models and applications (so-called “robo-advice”).

In addition, investment advice fiduciaries are barred from relying upon the exemption for ten years following conviction of any crime under ERISA Section 411 related to the provision of investment advice to Retirement Investors. However, the DOL may grant a petition to allow Financial Institutions to have continued reliance on the exemption to the extent granting such a waiver is not contrary to the purposes of the Final PTE.

Finally, the DOL may also impose a ten-year bar from reliance upon the exemption for Financial Institutions and Investment Professionals who are provided written notice of ineligibility by the DOL based on having: (i) engaged in a systematic pattern or practice of violating the conditions of the exemption in connection with otherwise non-exempt prohibited transactions; (ii) intentionally violated the conditions of the exemption in connection with otherwise non-exempt prohibited transactions; or (iii) provided materially misleading information to the DOL in connection with the Financial Institution’s or Investment Professional’s conduct under the exemption.


The Financial Institution has to maintain for a period of six years, records demonstrating compliance with the exemption, and it must make such records available to authorized representatives of the DOL or U.S. Department of Treasury.

Exemption for Principal Transactions

The Final PTE permits Financial Institutions to enter into certain principal transactions with Retirement Investors where the institution purchases or sells certain investments from its own account, including:

Riskless Principal Transactions – A transaction where a Financial Institution, after having received an order from a Retirement Investor to buy or sell an investment product, purchases or sells the same investment product for the Financial Institution’s own account to offset the contemporaneous transaction with the Retirement Investor.

Covered Principal Transactions – A transaction involving certain specified types of investments:

  • Purchases of any securities or investment property by the Financial Institution from an ERISA plan or IRA; and
  • Sales to an ERISA plan or IRA by the Financial Institution, the following: (i) corporate debt securities offered pursuant to a registration statement under the Securities Act of 1933; (ii) U.S. Treasury securities; (iii) debt securities issued or guaranteed by a U.S. federal government agency other than the Department of Treasury; (iv) debt securities issued or guaranteed by a government-sponsored enterprise; (v) municipal bonds; (vi) certificates of deposit; and (vii) interests in Unit Investment Trusts.

The Final PTE becomes effective February 16, 2021.

Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees, 85 Fed. Red. 82798 (December 18, 2020).


Consolidated Appropriations Act, 2021 (CAA): Retirement Plan Relief

On December 27, 2020, the President signed the Consolidated Appropriations Act of 2021 ("CAA") that included a number of COVID-related relief provisions for employee benefit plans. For retirement plans, the relief provisions include:

  • Partial Plan Termination Relief. There has been an ongoing concern that work force reductions in connection with the pandemic would trigger partial terminations of qualified retirement plans, which in turn would require full vesting for affected participants. For plan years that include the period from March 13, 2020 through March 31, 2021, the CAA includes provisions that offer temporary relief from the partial termination rules being invoked in cases where a plan’s number of active participants on March 31, 2021 is not less than 80 percent of the number of active plan participants on March 13, 2020.
  • New Qualified Disaster-Related Distribution/Loan Relief. The CAA does not extend the COVID relief enacted for retirement plans by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). But it does enact new disaster relief provisions that are similar to previous disaster relief provisions enacted in connection with natural disasters such as hurricanes and wildfires. The CAA disaster relief is available in connection with recent natural disasters (other than disasters that are solely coronavirus-related) with respect to which (1) the relevant incident periods began after December 27, 2019, and (2) the major disaster declarations were made during the period beginning January 1, 2020 and ending on February 25, 2021. The new forms of relief are optional and are available to qualified individuals whose principal place of abode during the relevant incident period was located in the qualified disaster area. Relief is available in three forms:
    • Qualified Disaster Distributions. Similar to CARES Act coronavirus-related distributions ("CRDs"), eligible retirement plans (including IRAs, qualified retirement plans, 403(b) plans and governmental 457(b) plans) may offer qualified disaster distributions ("QDDs") to qualified individuals. QDDs generally are limited to $100,000, are exempt from the 10% additional tax on early plan distributions, at the taxpayer’s option may be included ratably in taxable income over a three-year period, and may be (but are not required to be) repaid within three years of the distribution date.
    • Plan Loan Relief. Similar to the temporarily increased limits on plan loans under the CARES Act, eligible retirement plans may temporarily offer qualified individuals plan loans for which the limit on the loan amount generally is increased to the lesser of 100% of the qualified individual’s vested plan account balance or $100,000. The enhanced loan limits are available only for loans obtained during the period beginning on December 27, 2020 and ending on June 25, 2021.
      Under the CAA’s new relief rules, eligible retirement plans also may allow qualified individuals with outstanding loans to suspend loan repayments owed during the qualified disaster’s incident period and up to 180 days following the end of that incident period for one year (or until June 25, 2021, if later). Repayment amounts after the suspension period ends will need to be adjusted to account for payments missed during the suspension period, and the term of the loan may be extended by a period equal to the length of the suspension period.
    • Recontributions of Certain Hardship Distributions. For a hardship distribution that was received for the purpose of buying or building a primary residence in a qualified disaster area, and could not be used for that purpose because of the qualified disaster, a qualified individual may be able to avoid having to pay tax on all or a portion of the distribution that is recontributed to the plan, as long as –

      • The hardship distribution was received no earlier than the 180 days prior to the first of the qualified disaster’s incident period, and no later than 30 days after the end of that incident period; and
      • The recontribution is made in one or more payments during the period beginning on the first of the qualified disaster’s incident period and ending on June 25, 2021.
  • Money Purchase Plan Distributions Can Qualify as Coronavirus-Related Distributions (CRDs). A CAA provision that also provides limited relief amends the CARES Act so that distributions made by money purchase pension plans to qualifies individuals can qualify as CRDs. Because the CAA was enacted so late in 2020, and because the CAA did not extend the period for requesting CRDs beyond the original December 31, 2020 deadline, there would have been a narrow window period during which new CRDs could be requested and processed by a money purchase pension plan.
  • In-Service Distribution Relief for Select Multiemployer Plans. The Setting Every Community Up for Retirement Enhancement Act of 2019 ("SECURE Act") reduced the minimum age for pension plans to offer in-service distributions as part of a phased retirement provision from age 62 to age 59½. For a targeted group of multiemployer pension plans that cover employees in the building and construction industry, the CAA further reduces that minimum age limit from age 59½ to age 55. But the change, if available, is applicable only for individuals who were participants in the plan before April 30, 2013.
  • 420(f) Relief for Overfunded Pension Plans. For those relatively few overfunded defined benefit plans that are currently operating, there has been an available option under Code Section 420(f) to make qualified future transfers to fund retiree medical and life insurance obligations. For pension plans that meet certain requirements (e.g., funding requirements), the CAA includes a provision that allows a one-time election to be made by no later than December 31, 2021 to terminate the transfer period for an existing qualified future transfer election. The election is to be effective for any taxable year beginning after the election is made.

For plan sponsor that elect to adopt one or more of the CAA relief provisions, relevant plan amendments must be adopted on or before the last day of the first plan year beginning on or after January 1, 2022, unless a later is prescribed by the Secretary of the Treasury.


DOL Issues Proxy Voting Regulations for Plan Fiduciaries

The Department of Labor ("DOL") issued final regulations in December dealing with the fiduciary duties related to proxy voting of investments held within ERISA plans. Under the regulations, the DOL has confirmed that the fiduciary duty to manage assets held within a plan includes voting of proxies and exercising other shareholders rights. These duties lay with the plan trustee unless the trustee has delegated such authority. Consistent with other regulations issued in November 2020, the DOL indicates that non-pecuniary and social interests should not play a part in the fiduciary decision making process. This new regulation makes it clear that ERISA fiduciaries should not consider environmental, social, and corporate governance or other similar considerations in a manner that would subordinate the pecuniary factors being considered.

Under the regulations a fiduciary must:

  • Act solely in the economic interest of the plan and its participants.
  • Consider the costs involved when deciding to vote a proxy or exercise a shareholder right.
  • Not subordinate the financial interests of plan participants to non-pecuniary interests or promote non-pecuniary benefits or goals unrelated to plan participant financial interests.
  • Evaluate the material facts that form the basis for any vote or exercise of shareholder rights.
  • Maintain records on proxy votes and other exercise of rights.
  • Exercise prudence and diligence in the selection and monitoring of any persons selected to advise or assist with proxy votes or exercise of rights.

The new regulation became effective on January 15, 2021. The January 15 effective date is important because it pre-dates President Biden’s Executive Order advising agencies to consider delaying the effective date for new regulations for a period of 60 days from January 20. However, this regulation may be identified as an item to be further reviewed by the Biden Administration as a similar regulation directing fiduciaries to evaluate plan investments based solely on risk and return factors was identified as one that would be reviewed. DOL Regulation Section 2550.404a–1


Retirement Plan Elections/Consents: IRS Extends Temporary Relief From the Physical Presence Requirement for Participant Elections/Consents Witnessed by a Notary Public or Plan Representative

Under the qualified retirement plan rules, there are certain circumstances in which a participant election or a spousal consent must be witnessed by a notary public or a plan representative. For purposes of witnessing those elections and consents, Notice 2020-42 provided relief from the physical presence requirement through December 31, 2020 if certain conditions were met. In late December, the IRS-issued Notice 2021-03 extends until June 30, 2021 the temporary relief from the physical presence requirement.

For a plan election or consent witnessed by a notary public of a state that permits remote electronic notarization, the physical presence requirement will be deemed satisfied if the remote electronic notarization is executed via a live audio-video technology that otherwise satisfies the requirements of participant elections under the qualified plan rules and complies with the state’s notarization laws.

For a plan election or consent witnessed by a plan representative, four requirements must be met for the physical presence requirement to be deemed satisfied for an electronic system if the electronic system using live audio-video technology satisfies the following requirements:

  • The individual signing the participant election must present a valid photo identification to the plan representative during the live audio-video conference.
  • The live audio-video conference must allow for direct interaction between the individual and the plan representative.
  • The individual must send a legible copy of the signed document by fax or other electronic means to the plan representative on the same date it was signed.
  • After receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative in accordance with requirements described above and transmit the signed document, including the plan representative’s acknowledgement, back to the individual under a system meeting the following requirements:
    • The individual must have the effective ability to access the system.
    • The individual must be advised that he or she may request and receive a paper copy at no charge.

These procedures are intended to ensure that the electronic systems used for remote electronic notarization provide the same safeguards for participant elections as are provided by the physical presence requirement. Nonetheless, plan elections and consents may still be witnessed in the physical presence of a notary public and have that participant election.

This notice closes by asking for comments on whether the relief from the physical presence requirement should become permanent and, if so, what additional procedural safeguards are necessary to reduce the risk of fraud, spousal coercion, or other abuse in the absence of a physical presence requirement.


Court Dismisses COBRA Lawsuit

The U.S. District Court for the Middle District of Florida recently dismissed a class action lawsuit against Southwest Airlines. The plaintiff, on behalf of herself and other similarly situated individuals, alleged that the company violated the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") by failing to provide timely and proper notice of the right to continue health insurance coverage after her employment was terminated. In this case, although the plaintiff was terminated in May, she remained covered by the company’s health plan until early August when the union rejected her grievance and upheld her termination. Although the parties dispute whether a COBRA notice was furnished in May, it is undisputed that the plaintiff received a COBRA notice in early August. The plaintiff argued the August COBRA notice was late (beyond the 44 days from the date of termination of employment) and that the notice did not include certain statutorily required information such as the plan name and plan administrator contact information. The court dismissed the lawsuit largely based on standing, noting that the plaintiff failed to show that she was injured by the alleged deficiencies in the COBRA notice (Carter v. Sw. Airlines Co. Bd. Of Trs., M.D. Fla. December 2020).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Hodgson Russ LLP | Attorney Advertising

Written by:

Hodgson Russ LLP

Hodgson Russ LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.