Regulatory & Statutory Developments

SECURE 2.0 Provisions: SECURE 2.0 applies a wide variety of effective dates to its various provisions. Some have already become effective, some kick in on January 1, 2025, and some will come later. Meanwhile, the Internal Revenue Service (IRS) and Department of Labor (DOL) have been slowly issuing interpretative guidance to help plan sponsors and service providers understand, examine, and potentially implement SECURE 2.0 mechanisms. Most recently, in Notice 2024-55, the IRS provided guidance on the special distribution provisions available for: (1) emergency personal expenses; and (2) domestic abuse victims. In general, those special provisions serve to exclude qualifying distributions from the 10% early penalty tax.

Prime Capital Retirement Commentary: As we enter the second half of the year, the most critical step may be to identify the specific “opt in” or “opt out” approach a plan’s recordkeeper will take in relation to various SECURE 2.0 provisions, including but not limited to the two provisions referenced above and federally declared disaster distributions, qualified birth or adoption distributions, and the “super” catch-up contribution provision for participants ranging from ages 60 to 63. We recommend that your organization address the following:

1. What SECURE 2.0 features will the recordkeeper support as of January 1, 2025?
2. For each feature, is the recordkeeper taking an “opt in” or “opt out” approach?
3. From a philosophical perspective, what does your organization desire to add?
4. To the extent your organization desires to add any SECURE 2.0 features, does your organization’s payroll process support those features? (This is particularly important for Roth employer contributions, matching student loan debt repayments, and the “super” catch-up contributions.)

Self-Corrections: For years, the IRS’s Employee Plans Compliance Resolution System (EPCRS) has permitted plan sponsors to correct some operational errors through the Self Correction Program or “SCP.” On average, employers prefer to fix errors through SCP (when possible) because it avoids the cost, time, and energy associated with filing a Voluntary Correction Program application with the IRS. Although in recent years the IRS has steadily expanded the availability of SCP, Congress took an even bigger step in SECURE 2.0 when it expanded SCP’s availability to “eligible inadvertent failures.” Note that SECURE 2.0 also imposed specific restrictions on efforts to recoup overpayments to participants or beneficiaries.

Prime Capital Retirement Commentary: The IRS has provided some guidance regarding SECURE 2.0’s correction and recoupment provisions (such as Notice 2023-43), we’ll need more to clarify some important issues. For example, we’ll need to better understand the ability to adopt retroactive amendments in the context of “eligible inadvertent failures.” In the meantime, as plan sponsors begin to rely more heavily on SCP, it’s important to be mindful that the relaxed SECURE 2.0 definition is only available if the plan sponsor has implemented “practices and procedures” that are “reasonably designed to promote and facilitate overall compliance in form and operation” with Internal Revenue Code requirements. This requires a look inside your organization’s plan operations and consideration of the practices and procedures in place.

Litigation Risks and Developments

Process, Process, Process (Silva v. Evonik Corp.): Former employees of Evonik filed a class action lawsuit asserting that various company fiduciaries failed to adequately monitor the company’s 401(k) plan to ensure its investment options and costs were financially prudent. More specifically, they alleged that imprudence was evident in the retention of allegedly underperforming investment options; allegedly excessive investment, administrative, and recordkeeping expenses; and their failure to negotiate lower recordkeeping expenses. The court disagreed with the plaintiffs. It granted the fiduciaries’ motion for summary judgment, describing the fiduciaries’ process as “diligent,” “deliberative and rigorous,” and “prudent.”

Prime Capital Retirement Commentary: The Evonik court’s opinion reminds us of the value of a prudent process . . . and keeping a good record of that process. The court closely examined each allegation separately and emphasized that the fiduciaries could offer evidence reflecting a prudent process in response to each allegation. The case also serves as a reminder that, to date, courts have not yet agreed to arguments that fiduciaries: (1) must have used passive investment options instead of active investment options; and (2) should have chosen a better-performing fund. As such, plan fiduciaries are well-served to implement an investment policy statement (IPS) setting forth a prudent and consistent process for reviewing the plan’s investment options, and to ensure they have meeting minutes and materials confirming their adherence to the IPS.

Forfeitures (the Saga Continues): We’ve written the last couple quarters about the recent litigation trend relating to plan forfeitures. In general terms, plaintiffs have filed several complaints alleging that plan fiduciaries improperly and imprudently used plan forfeitures – frequently to reduce employer contribution obligations, which plaintiffs assert should take a back seat to first offsetting plan expenses. Recent weeks have seen additional developments on different sides of the ledger:

• Case Proceeds (Perez-Cruet v. Qualcomm): In late May, a California Federal court declined to dismiss a suit alleging that Qualcomm and its fiduciaries had misused plan forfeitures. The court’s thoughtful, organized, and detailed opinion reflected careful consideration of each allegation. Ultimately, the court found the claims to be plausible and refused to dismiss.
• Case Dismissed (Hutchins v. HP Inc.): In June, a different California Federal court reached a different conclusion when it granted a motion to dismiss claims involving HP’s use of plan forfeitures.

Prime Capital Retirement Commentary: As we have discussed in recent quarters, the plan’s specific language will be key. We continue to recommend a review of the language, a conversation with the recordkeeper to confirm forfeitures are being used in a manner permitted by the plan language, and some sort of step (e.g., minutes, file memorandum, email string) to memorialize those findings. The review of the plan language needs to be performed with care. What are the options? Is there complete discretion? Is there an ordering rule? Is there a deadline for using some forfeitures? As is typically the case with plan language and operations, the devil is in the details.

Emerging Issues: We will be tracking further developments and implications in three additional areas:

1. Deference to federal agencies: In Loper Bright Enterprises v. Raimondo and Relentless, the United States Supreme Court overturned four decades of “Chevron deference” to federal agencies;
2. New Fiduciary (Retirement Security) Rule: We knew there’d be challenges. The Loper Bright case makes the court challenges potentially more interesting, and the upcoming Presidential election could have a major impact; and
3. ESG: To this date, no Federal court has agreed to strike down the DOL’s “Prudence and Loyalty in Selecting Plan Investments” rule, which some characterize as an ESG rule (though it is not). However, on a separate note, in June a Texas Federal court has allowed an ESG-driven class action suit to survive a motion for summary judgment and to proceed to trial. The ESG book remains open, with chapters yet to be written.