Benefits Monthly Minute

Relief for Safe Harbor Plans | New DOL ESG Investment Rules | SCOTUS Upholds ACA Contraceptive Coverage Exemptions | New DOL Fiduciary Rule For Investment Advice

Notice 2020-52 Spells Relief (for Safe Harbor Plans)

Safe harbor plans now have temporary, and in some cases ongoing, relief from mid-year amendment requirements under IRS Notice 2020-52. Safe harbor plans are generally only permitted to make mid-year amendments to reduce or suspend safe harbor contributions if the employer is operating at an economic loss or if the safe harbor notice includes a special statement that the plan may be amended to suspend or reduce safe harbor contributions. However, under the newly issued IRS Notice 2020-52, an amendment that reduces or suspends safe harbor matching or safe harbor nonelective contributions which is adopted between March 13, 2020, and August 31, 2020, will not be treated as failing to satisfy the economic loss or special statement requirement. IRS Notice 2020-52 also explains that contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. It follows that a mid-year amendment that reduces only contributions made on behalf of HCEs is not a reduction or suspension of safe harbor contributions, although an updated notice and election opportunity must still be provided to affected HCEs. Notably: the Notice’s HCE contribution clarification is not limited to the COVID health crisis period.

KMK Comment: This new relief facilitates employers’ ability to free up funds from safe harbor contributions to be put towards other pressing business expenses which may arise particularly in the current pandemic context.

Focus on Financial Interest: ERISA Trumps ESG

How do ERISA’s fiduciary duties interact with pension plan investments selected with non-financial objectives? The DOL recently released a proposed rule which seeks to clarify its position that ERISA plan fiduciaries may not invest in environmental, social and governance (ESG) vehicles when an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives. Specifically, the proposal --

  • Codifies the Department’s position that ERISA requires plan fiduciaries to select investments based on financial considerations.
  • Provides that ERISA’s exclusive-purpose rule prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits to non-pecuniary goals.
  • Includes a new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA, but acknowledges that ESG factors can be pecuniary factors under certain circumstances.
  • Contains provisions on required investment analysis and documentation requirements when fiduciaries are choosing among economically “indistinguishable” investments.
  • Provides guidance on selecting designated investment alternatives for 401(k) plans which reiterates that ERISA’s prudence and loyalty standards apply to the selection of investment alternatives and describes requirements for selecting investment alternatives purporting to pursue ESG objectives.

KMK Comment: The DOL’s proposed rule seeks to eliminate ambiguity about the application of ERISA’s fiduciary requirements to ESG investing, and will likely push plan sponsors seeking to support ESG initiatives to do so outside of their ERISA benefit investments.

SCOTUS Upholds ACA Contraceptive Coverage Exemptions

On July 8, 2020, in a 7-2 decision, the United States Supreme Court upheld the religious and moral exemptions to the ACA’s contraceptive mandate. As background, guidelines issued under the ACA include the contraceptive mandate, requiring plans to provide coverage for FDA-approved contraceptive methods and sterilization procedures. Regulations issued in 2018, however, permit employers to avoid the mandate on moral or religious grounds. After several years of protracted litigation, the Supreme Court’s holding rejects the procedural and substantive objections directed at the exemptions, and paves the way for many employers to exclude birth control coverage from health plans by upholding the exemptions. However, as noted in Justice Kagan’s concurring opinion, the exemptions may still be susceptible to legal challenges given “[o]ther aspects … may also prove arbitrary and capricious.”

KMK Comment: The case is a win for employer groups who view the decision as a shield protecting religious freedom; however, additional challenges may be forthcoming from those who instead view the ruling as an attack on women’s rights.

The Saga Continues With New DOL Fiduciary Rule

In its recently released Final Rule, the DOL has proposed new rules for financial institutions and individuals giving investment advice to retirement plan participants.  As background, ERISA § 3(21)’s definition of a fiduciary generally includes, among others, a person who provides investment advice for a fee with respect to plan assets. The original DOL regulations (from 1975) limited fiduciary status based on rendering investment advice for a fee to persons who, “on a regular basis,” rendered individualized advice that was the “primary basis” for investment decisions. However, over 30 years later, the DOL did away with this limiting criteria, casting a wider net around would-be fiduciaries in accordance with its 2016 fiduciary rule. This newly expanded definition was challenged and ultimately rejected by the Fifth Circuit in a 2018 ruling which vacated the DOL’s 2016 regulations and reinstated the 1975 regulations. The new Final Rule, which is framed as a technical amendment, restores the “regular basis” and “primary basis” criteria from the 1975 regulations and invokes a multi-part test for determining when a person is rendering investment advice within the meaning of ERISA § 3(21)’s definition of a fiduciary.

KMK Comment: The new DOL proposal is quite different from the 2016 rule and attempts to simplify ERISA compliance for financial institutions and individuals giving investment advice to retirement plan participants. KMK Law will continue to monitor the status of this proposed fiduciary rule.

The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.

Lisa Wintersheimer Michel

John F. Meisenhelder

Helana A. Darrow

Antoinette L. Schindel

Kelly E. MacDonald

KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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