Benefits Monthly Minute
The June Monthly Minute highlights recent DOL guidance on annuity provider selection for defined benefit plans and IRS Q&As that provide details on SECURE 2.0’s optional emergency and domestic abuse victim distributions for qualified retirement plans.
Status Quo on Pension De-Risking Guidance With Calls for Further Review
Late this month, the Department of Labor released its Report to Congress on Interpretive Bulletin 95-1. Interpretive Bulletin 95-1 provides guidance on the ERISA fiduciary duties that apply to the selection of an annuity provider for distributing defined benefit plan benefits. This is also known as a “pension risk transfer” or a “de-risking” transaction. The Report evaluated why plan sponsors engage in pension risk transfers and the related participant impact, as well as private equity involvement in the life insurance industry, an apparent increase in non-traditional/risky investments in the insurance industry and reinsurance practices, among other considerations. The Report also touched on the erosion of PBGC protections as risk is transferred to state guaranty associations (SGAs) rather than the PBGC. Overall, the Report concludes that Interpretive Bulletin 95-1 continues to identify broad factors that are relevant to a fiduciary’s prudent evaluation of an annuity provider’s claims paying ability and creditworthiness while also recommending further exploration into developments in the life insurance industry and pension risk transfer practices to determine whether additional guidance is needed.
KMK Comment: While the Department does not intend to propose amendments to the Interpretive Bulletin at this time, it emphasized the importance broad public input and acknowledged stakeholder concerns. Absent further guidance, both the Report and Interpretive Bulleting 95-1 should be carefully considered when choosing an annuity provider to ensure compliance with ERISA fiduciary duties.
Emergency and Domestic Abuse Victim Distribution Q&As
In Notice 2024-55, the IRS offers guidance on emergency personal expense distributions and domestic abuse victim distributions and the applicable exception to the 10% penalty on early distributions. As background, Section 72(t)(1) provides for a 10% additional tax on qualified retirement plan distributions unless the distribution qualifies for an exception listed in Section 72(t)(2). As reported in the January 2023 Monthly Minute, SECURE 2.0 amended Section 72(t) to add exceptions to the 10% additional tax for a distribution to an individual for emergency personal expenses and for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). Notice 2024-55 provides, in Q&A format, considerable information relating to both types of distributions.
Notably, with respect to emergency personal expense distributions, the guidance points out that –
- Whether an individual has an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses is determined by the relevant facts and circumstances. Factors to consider include medical care, accident or loss of property due to casualty, imminent foreclosure/eviction from a primary residence, burial/funeral expenses, auto repairs, or “any other necessary emergency personal expenses.”
- For purposes of determining whether an individual has an unforeseeable or immediate financial need, the administrator may rely on an employee’s written certification. Likewise, in determining whether an employee is eligible for an emergency personal expense distribution, an administrator is permitted to rely on an employee’s written certification.
- An individual is permitted to treat only one distribution per calendar year as an emergency personal expense distribution, subject to applicable dollar limits (generally, under $1,000) and repayment rules.
- An emergency personal expense distribution is not treated as an eligible rollover distribution.
Regarding domestic abuse victim distributions, the guidance notes –
- The term “domestic abuse” means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.
- The distribution limit is the lesser of $10,000 or 50% of the employee’s vested accrued benefit (subject to COLA adjustments).
- An individual is permitted to repay a domestic abuse victim distribution to an applicable eligible retirement plan.
- Any distribution that an employee/participant certifies in writing as a domestic abuse victim distribution will be treated as meeting the distribution requirements. In this regard, the employee/participant could check a box on the distribution request form to certify that (1) the individual is eligible for a domestic abuse victim distribution and (2) the distribution is made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse.
- A domestic abuse victim distribution is not treated as an eligible rollover distribution.
- A plan must accept the repayment of a domestic abuse victim distribution from an individual if: (a) the plan permits domestic abuse victim distributions; (b) the individual received a domestic abuse victim distribution from that plan; and (c) the individual is eligible to make a rollover contribution to that plan.
KMK Comment: It is optional for an applicable eligible retirement plan to permit emergency personal expense distributions and/or domestic abuse victim distributions. For plans that wish to include these distribution options, amendments will be discretionary and may be adopted by the end of the plan year to which the amendment relates. Keep in mind that if a plan does not permit either type of distribution, and an individual receives an otherwise permissible distribution that meets the requirements of an emergency personal expense distribution or domestic abuse victim distribution, the individual may still treat the distribution on the individual's federal income tax return as an emergency personal expense distribution or domestic abuse victim distribution, to the extent it satisfies the various requirements/limitations. The distribution, while includible in gross income, will not be not subject to the 10% additional tax.
The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.
Lisa Wintersheimer Michel
513.579.6462
lmichel@kmklaw.com
John F. Meisenhelder
513.579.6914
jmeisenhelder@kmklaw.com
Antoinette L. Schindel
513.579.6473
aschindel@kmklaw.com
Kelly E. MacDonald
513.579.6409
kmacdonald@kmklaw.com
Rachel M. Pappenfus
513.579.6492
rpappenfus@kmklaw.com
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.
