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On August 31, the Department of Labor (DOL) proposed a rule that would set forth specific standards fiduciaries must satisfy when deciding whether and when to exercise shareholder rights, including voting proxies, with respect to any corporate stock held by a plan. Significantly, the proposed rule would bar a fiduciary from voting any proxy unless the fiduciary prudently determines that the matter being voted on would have an economic impact on the plan considering certain factors and the costs involved. The proposed rule is part of a flurry of recent activity from the DOL related to fiduciary duty and plan investments that has included an information letter regarding the use of private equity investments in designated investment alternatives included within 401(k) and other individual account plans and a <a href="https://www.thompsonhine.com/publications/dol-releases-proposed-rule-for-financial-factors-in-selecting-plan-investments" target="_blank" rel="noopener">proposed rule regarding fiduciary duties when considering economically targeted investments or those that incorporate environmental, social and governance (ESG) factors</a>. Fiduciaries of plans that hold corporate stock directly or indirectly, such as through a common trust, master trust or pooled separate account, would be affected by the new proposed rule.

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Similar to the proposed ESG rule, the new proposed rule would place a heavy emphasis on fiduciaries acting solely in the economic interest of the plan and require that plan fiduciaries not subordinate the interests of the participants and beneficiaries to any non-pecuniary objective when deciding whether and when to exercise shareholder rights. Fiduciaries would be required to maintain records on exercises of shareholder rights, including records that demonstrate the basis for a particular proxy vote or other exercise of shareholder rights, and would not be permitted to adopt a practice of following the recommendations of a proxy advisory firm or other service provider without appropriate supervision and a determination that the service provider’s guidelines are consistent with the economic interests of the plan and its participants and beneficiaries. Other requirements include that the fiduciary must consider the likely impact of the exercise of rights on plan investment performance and the costs involved in exercising those rights. According to the preamble, “fiduciaries must be prepared to articulate the anticipated economic benefit of proxy-vote decisions in the event they decide to vote.”

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The proposed rule would also provide fiduciaries with options intended to reduce their need to consider proxy votes that are unlikely to have an economic impact on the plan in response to DOL’s concern that “the costs for fiduciaries to prudently exercise proxy voting rights often will exceed any potential economic benefits to a plan.” These options include that a fiduciary may adopt proxy voting policies that adopt certain permitted practices. Such permitted practices include that a proxy voting policy may state that the plan fiduciary will ordinarily follow the recommendations of a corporation’s management, will focus its resources only on certain types of proposals that the fiduciary has determined are likely to have a significant impact on the value of the plan’s investment, and/or will refrain from voting when the plan’s holding of the issuer relative to the plan’s total investment assets is sufficiently small enough that the matter being voted on is unlikely to have a material impact on the investment performance of the plan. The proposed rule also addresses plan fiduciaries’ duties when the authority to vote proxies or exercise shareholder rights has been delegated to an investment manager. The rule is proposed to be effective 30 days after the date of publication of the final rule.

The IRS issued guidance in Notice 2020-68 (Notice) implementing the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). The Notice includes guidance on qualified birth or adoption assistance distributions, participation of long-term part-time employees in 401(k) plans and the timing of related plan amendments.

The SECURE Act provides, effective January 1, 2020, that individuals adopting children can take special distributions of up to $5,000, if the distribution is made during the one-year period beginning on the date on which an eligible adoptee is born or the date on which the legal adoption of an eligible adoptee is finalized. These specialized distributions escape the excise tax for early distributions on distributions from tax-preferred accounts; however, the amounts are includible in an individual’s gross income.

The guidance details that an “eligible adoptee” is an individual who has not attained age 18 or is physically or mentally incapable of self-support but excludes a child of the taxpayer’s spouse. It also details that each parent is entitled to receive a $5,000 distribution for the same child. In addition, if there are multiple births, each parent is entitled to receive a $5,000 distribution for each child.

The SECURE Act also details that a participant taking such a distribution may recontribute the distribution to an eligible retirement plan of which the individual is a beneficiary and to which a rollover can be made. The Notice indicates that the Treasury Department will issue regulations relating to the recontribution rules, including an issue not addressed in the SECURE Act, namely, the timing of recontributions. It does note, however, that an applicable eligible retirement plan must accept the recontribution of a qualified birth or adoption distribution from an individual if:

It is important to note that these adoption distributions don’t require an amendment to an employer plan unless the employer desires to add this special in-service distribution. In general, a distribution can be implemented immediately, but the amendment setting forth the distribution need not be adopted until the last day of the first plan year beginning on or after January 1, 2022.

The SECURE Act also contains a provision that effectively requires that long-term part-time employees be able to participate in 401(k) plans. While the first implementation of this requirement is a bit away, in the 2024 plan year, counting part-time employees’ hours must begin in 2021. Thus, beginning in 2021, employees who have three consecutive 12-month periods with at least 500 hours of service (and who satisfy the plan’s minimum age requirement) generally must be allowed to make elective deferrals to an employer’s 401(k) plan. It is important to note that this requirement does not extend beyond elective deferrals. More restrictive eligibility rules may continue to be applied to other contribution sources (such as profit-sharing contributions and matching contributions).

The more interesting portion of the Notice pertains to the application of vesting rules. An employer must generally consider each 12-month period for which an employee has at least 500 hours of service starting from the employee’s date of hire – including periods of service incurred before January 1, 2021. If implemented in this form, there would be an apparent disincentive to include these employees in employer contributions (e.g., profit sharing and matching contributions) because determinations of vesting of these contributions may well include periods during which the employer does not maintain records.

As required by the SECURE Act, amendments generally must be adopted by the end of the first plan year beginning on or after January 1, 2022. Thus, for calendar year plans, the due date for adoption of amendments implementing these changes is December 31, 2022. However, because the amendments for long-term part-time employees will not be applicable until later than the 2022 plan year, those amendments should generally be adopted by the end of the 2024 plan year – but this is not explicit in the IRS guidance.

Dominic DeMatties 202.973.2744 <a href="mailto:Dominic.DeMatties@ThompsonHine.com">Dominic.DeMatties@ThompsonHine.com</a>

David Whaley 513.352.6681 <a href="mailto:David.Whaley@ThompsonHine.com">David.Whaley@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

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DOL and IRS Issue New Employee Benefits Guidance

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