May 17, 2024

At Align, we remain vigilant in monitoring both present regulations impacting the retirement plan industry and foreseeing future developments. This commitment allows us to provide consistent, long-term strategic guidance to our plan clients. Our goal is to help you maintain a plan design that enhances your competitiveness in the talent market. Additionally, our proactive approach aims to create more opportunities for retirement plan savers to achieve a secure financial future.

We hope you enjoy this edition of our Regulatory Update.

DOL and IRS Guidance on Pension-Linked Emergency Savings Accounts (PLESA)

SECURE 2.0 (2022) authorized the creation of PLESAs to provide a savings opportunity for lower income employees who might need more access to emergency funds. While most recordkeepers have yet to make PLESAs available, the IRS and DOL recently issued guidance around implementation and anti-abuse policies that provides more clarity for employers considering this feature.

A PLESA is an optional, short-term savings account within a defined contribution plan. Eligible, non-highly compensated employees can make after-tax contributions that can be withdrawn for short-term, unpredictable emergency expenses. Eligible employees can take a distribution from the PLESA without reducing their retirement savings or incurring tax penalties associated with early withdrawal.

IRS Notice 2024-22 provides initial guidance to help employers with the following aspects of this feature:

  • If offered in the plan, employees eligible to participate may contribute to the PLESA even if they do not participate in the available defined contribution plan.
  • Plans that include a PLESA may stop offering this feature at any time.
  • Maximum balance of $2,500 is limited to the value attributable to contributions, employers may set a lower limit.
  • PLESAs are designated Roth accounts and contributions are not tax deductible.
  • PLESA withdrawals are generally tax free and not subject to early withdrawal penalty.
  • Withdrawals can be made at least once a month for emergencies.

At Align, we recognize employees face an array of financial challenges. Without emergency savings, many raid long-term retirement savings to meet a short-term need. We believe PLESAs offer an opportunity to help savers better prepare for today…and tomorrow.

We also recognize the complexity of adding new provisions to recordkeeping platforms. We hope this guidance offers detail providers need to build PLESA capability on their platforms.

Talk to Align about how the addition of PLESAs could offer flexibility your employees need to face challenges today without sacrificing their retirement future. Learn more here.

Important Changes in DOL’s Final Fiduciary Rule

The Department of Labor (DOL) recently released the Retirement Security Rule, also known as the fiduciary rule. Here is a summary of some key points:

  • New Definition of Investment Advice Fiduciary: The final rule defines an investment fiduciary as someone providing investment advice for a fee and either (1) representing they are an ERISA fiduciary or (2) meeting the regular basis test. Changes to this test clarify that only those providing “professional” investment advice on a regular basis qualify as fiduciaries, helping clarify that most normal actions by a TPA or HR professional of the employer do not result in fiduciary status.
  • Sophisticated Investors: The rule does not categorize plan sponsors as “sophisticated investors” recognizing that even large sponsors may need assistance.
  • ‘Hire Me’ Conversations: The final rule includes a clarifying paragraph addressing “hire me” conversations, stating that they may not always result in fiduciary status.
  • Timing of Disclosure: Disclosures required for recommendations made during “hire me” conversations must be delivered at or before the time of the transaction.
  • Effective Date: The final rule is effective September 23, 2024 and has a phase-in implementation of one year from the effective date for certain requirements.

Part-Time Employees: Can You Still Exclude Them?

Previously, plan sponsors could require employees work at least 1,000 hours during a plan year to be eligible to enter the plan. Under SECURE Act (2019), eligibility requirements were reduced allowing those who work at least 500 hours during three consecutive plan years (known as long-term part-time employees or LTPTEs) to participate. The rule change was effective for plan years beginning January 1, 2021, so the first group of employees who qualify under this updated eligibility definition are eligible to defer starting in 2024.

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Additional considerations:

  • Employer contributions are not required.
  • LTPTEs may be excluded from coverage and nondiscrimination testing.
  • If a plan has an age requirement, employees must attain age by the close of the last year in the three-year period.

Additional changes coming: for plan years beginning after January 1, 2025, SECURE 2.0 reduces the LTPTE rule from a three-year period to a two-year period.

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Things We Are Watching…

The Tax Cuts and Jobs Act expires in 2025. This will lead to a major tax policy debate regardless of whether Joe Biden or Donald Trump wins the election and whether Democrats or Republicans control the House or the Senate, according to Brian Graff, American Retirement Association (ARA) CEO.

A highlight of this year’s National Association of Plan Advisors (NAPA) 401K Summit, was a panel discussion on D.C. tax-policy and potential legislation impacting retirement plans. Panelists included Jamie Cummins, Senior Tax Counsel with the Senate Committee on Finance; Shannon Finley, Founding Partner at Capitol Counsel; and Preston Rutledge, former Assistant Secretary for EBSA and Founder/Principal of the Rutledge Policy Group.

Graff concluded the panel with the following remarks, “The attacks on the retirement plan system have ranged from getting rid of 401(k)s to pay for Social Security to replacing it with a government-run plan. At a recent hearing of the Senate HELP [Health, Education, Labor and Pensions] Committee, Senator Bernie Sanders said our retirement system is a disaster for working people…and he suggested bringing back defined benefit plans.”

While Graff added that no one is seriously considering these ideas currently, “the real concern is, as the larger tax debate begins, the negativity around 401(k)s makes it easier for Congress to tap into the retirement savings tax incentives to pay for all that stuff.”

Align strongly supports the important belief that company -sponsored retirement benefit plans are vital to helping working Americans prepare financially for retirement and have been the only effective way of getting workers to meaningfully save. We believe the tax incentives associated with retirement saving is a key component of motivating employees to engage in disciplined savings habits in preparation for a secure financial future. We will continue to join advocacy efforts, such as those led by ARA and NAPA, to communicate the value of our company-sponsored retirement plan system.

We Can Help

Your Align team is ready to provide you with the ideas, guidance, and foresight to position your company for success. If you would like to review your plan’s features or operations, or industry developments that may affect your plan, we’re here to assist you.