Legislative updates

Representatives Brad Schneider (D-IL) and Ron Estes (R-KS) have introduced HR 9252, Advancing Auto-Portability Act, to reduce retirement leakage by allowing automatic rollovers of certain accounts to follow workers to another employer plan.

The Securities and Exchange Commission (SEC) has released a final rule to amend requirements for shareholder reports for mutual funds and exchange-traded funds (ETFs) and rules for investment company advertisements. The SEC has identified in its press release several highlights of the final rule.

Shareholder Reports Tailored to the Needs of Retail Shareholders

The Commission’s final rule amendments will require mutual funds and ETFs that are registered on Form N-1A (“open-end funds” or “funds”) to transmit to shareholders concise and visually engaging annual and semi-annual reports that highlight information that is particularly important for retail shareholders. The final rule amendments also facilitate funds’ ability to make electronic versions of their shareholder reports more user-friendly and interactive.

Availability of Additional Information on Form N-CSR and Online

The new rules will require that funds make available online certain information that may be more relevant to investors and financial professionals who desire more in-depth information. This information also must be delivered free of charge upon request and filed on a semiannual basis on Form N-CSR. This information includes, for example, a fund’s schedule of investments and other financial statement elements.

Amendments to the Scope of Rule 30e-3 to Exclude Open-End Funds

The SEC adopted amendments to exclude open-end funds from the scope of rule 30e-3, which generally permits certain registered investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports’ online availability, instead of directly providing the reports to shareholders.

Fee and Expense Information in Investment Company Advertisements

The final rule amendments require that presentations of investment company fees and expenses in advertisements and sales literature by registered investment companies and business development companies be consistent with relevant prospectus fee table presentations and be reasonably current. The rule amendments also address representations of fees and expenses that could be materially misleading.

The final rule amendments will become effective 60 days after publication in the Federal Register. The SEC is providing an 18-month transition period after the effective date of the final rule amendments to allow open-end funds adequate time to adjust their shareholder reports and comply with the rule 30e-3 changes. The SEC is also providing an 18-month transition period after the effective date to comply with the final rule amendments to the advertising rules. The final rule amendments that address representations of fees and expenses that could be materially misleading apply on the effective date.

The Securities and Exchange Commission (SEC) has released a proposed rule to prohibit investment advisers from outsourcing certain services or functions without first meeting due diligence and ongoing monitoring requirements related to the “covered function”. A covered function is a function or service that is

• necessary to provide advisory services in compliance with federal securities laws, and
• if not performed or performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients or on the adviser’s ability to provide investment advisory services.

The SEC is providing examples of potential covered function categories an adviser may wish to consider in the amendments they are proposing to Form ADV, Section 7.C of Schedule D. Covered functions listed would include: Adviser/Subadviser; Client Services; Cybersecurity; Investment Guideline/Restriction Compliance; Investment Risk; Portfolio Management; Portfolio Accounting; Pricing; Reconciliation; Regulatory Compliance; Trading Desk; Trade Communication and Allocation; and Valuation.

The proposal would also require advisers to obtain reasonable assurances that a third party recordkeeper will meet four standards which address the third party’s ability to

• adopt and implement internal processes for making and/or keeping records that meet recordkeeping rule requirements applicable to the books and records being maintained on behalf of the adviser;
• make and/or keep records that meet all of the requirements of the recordkeeping rule applicable to the adviser;
• provide access to electronic records; and
• ensure the continued availability of records if the third party’s relationship with the adviser or its operations cease.

Comments should be received on or before 30 days after publication in the Federal Register or December 27, 2022, whichever is later.  

Representative Greg Murphy (R-NC), along with co-sponsor Representatives Carol Miller (R-WV), David Schweikert (R-AZ), and Lloyd Smucker (R-PA) have introduced HR 9198, the Safeguarding Investment Options for Retirement Act.

The bill would require plan fiduciaries to base investment decisions on only pecuniary factors. A fiduciary is not prohibited from considering an investment option that promotes nonpecuniary benefits so long as participant interests are not subordinated to other objectives or additional financial risks related to nonpecuniary factors. Additionally, such investment cannot be a default investment for the plan. The term pecuniary factor means a factor that a fiduciary prudently determines is expected to have a material effect on the risk and return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy established under ERISA.

The bill would further amend the Internal Revenue Code to require that if a trust contains investment options with nonpecuniary factors, such trust shall also include investment options based solely on pecuniary factors in order to be qualified.

H. R. 7780, the Mental Health Matters Act, introduced by Representative Mark DeSaulnier (D-CA) in May, has passed the House and has been referred to the Senate Committee on Health, Education, Labor & Pensions. As previously announced, the bill contains a group health plan provision that would amend ERISA Section 502(a) to expand the type of remedy permitted by a civil action brought by the Secretary, a plan participant or beneficiary, or a plan fiduciary to include readjudication of claims and payment of benefits in accordance with plan terms.

Included in the Mental Health Matters Act is a proposal to amend ERISA to provide that any mandatory predispute or coerced postdispute arbitration clause, class action waiver, representation waiver, or discretionary clause with respect to a plan is unenforceable. The bill would also amend ERISA to prohibit any such clause or waiver from being included in a plan document or other agreement with participants. These provisions were originally introduced under H.R. 7740 and announced.

The Social Security Administration has announced the 2023 adjustments for benefits and certain other limitations that are subject to annual cost-of-living adjustment (COLA) indices. One of these includes the Social Security taxable wage base (TWB), which identifies the maximum amount of an individual’s annual earnings that are subject to withholding for Social Security-administered benefits. The TWB is sometimes also used in retirement plan contribution allocations that use so-called “integrated” formulas, providing additional retirement plan benefits on income above the TWB, income for which the recipient will not receive Social Security benefits. For 2023, the TWB will rise from $147,000 to $160,200.

The Department of Treasury has issued a final rule amending the affordability determination used to determine a family’s eligibility for the premium tax credit. The final rule provides that employer-sponsored health coverage is affordable based on the cost of coverage for the employee and related individuals, not just on the cost of coverage of the employee. In addition, the final rule requires the plan to provide a minimum value coverage for related individuals of 60 percent, similar to the existing rule for employees. An employer plan that provides minimum value to an employee also provides minimum value to related individuals if the scope of benefits and cost sharing under the plan are the same for employees and family members.

The final rule does not require employers to compute minimum value separately for employee and related individuals. The final rule also does not

• affect reporting required under Code section 6055 and 6056 (i.e.,1094 and 1095),
• affect affordability calculations for individual coverage health reimbursement arrangements or qualified small employer health reimbursement arrangements, or
• affect affordability calculations for employees offered multiple offers of coverage.

Finally, employers that offer coverage through a cafeteria plan may permit an employee to disenroll from coverage to enroll in Exchange coverage beginning January 1, 2023. Coincident with this final rule, the IRS has issued Notice 2022-41, which allows a non-calendar year cafeteria plan to permit an employee to revoke an election of family coverage to enroll in Exchange coverage under two conditions.

• the individual qualifies for a special enrollment period and
• the revocation corresponds with the intent to enroll in Exchange coverage no later than the day immediately following the last day employer coverage is revoked.

An employer choosing to amend the cafeteria plan may amend the plan retroactively to the first day of the plan year and must adopt the amendment before the last day of the plan year that begins in 2024. The final rule becomes effective on December 12, 2022.      

The Pension Benefit Guaranty Corporation (PBGC) is proposing to provide interest rate assumptions that may be used by a plan actuary in determining a withdrawing employer’s liability under a multiemployer plan. Under ERISA, an employer that withdraws from a multiemployer plan may be liable to the plan for withdrawal liability, which generally represents the employer’s share of any unfunded vested benefits that the plan may have at the end of the plan year immediately preceding the plan year in which the employer withdraws. The plan actuary determines the present value of the plan’s nonforfeitable benefits using actuarial assumptions and methods.

The proposed rule clarifies that it is reasonable to base the interest assumption used to calculate an employer’s withdrawal liability on the market price of purchasing annuities from private insurers, such as by use of settlement interest rates prescribed by PBGC under Section 4044 of ERISA (4044 rates). The proposed rule would specifically permit the use of 4044 rates either as a standalone assumption or combined with funding interest rate assumptions, to determine withdrawal liability.

PBGC indicates the rule will be published in the Federal Register on October 14, 2022, and comments may be submitted by November 14, 2022.

The IRS has announced the postponement of certain tax-related deadlines for victims of Hurricane Ian in South Carolina. The tax relief postpones various tax filing deadlines that began on September 25, 2022. Affected individuals and households who reside or have a business anywhere in the state of South Carolina, as well as taxpayers with records located in the covered area that are needed to meet covered deadlines, qualify for relief.

In addition to extending certain tax filing and tax payment deadlines, the relief includes completion of many time-sensitive, tax-related acts described in IRS Revenue Procedure 2018-58 and Treasury Regulation 301.7508A-1(c)(1). Affected taxpayers with a covered deadline on or after September 25, 2022, and before February 15, 2023, will have until February 15, 2023, to complete the acts. This includes filing Form 5500 series returns that are required to be filed on or after September 15, 2022, and before February 15, 2023.

“Affected taxpayer” automatically includes any individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Those who reside or have a business located outside the covered disaster area, but have been affected by the disaster, may contact the IRS to request relief.

The Senate has confirmed Lisa Gomez as Assistant Secretary of Labor for the Employee Benefits Security Administration by a 49 to 36 vote. Ms. Gomez was nominated by President Biden in July 2021, and an initial attempt at confirmation in June failed by a 49-51 vote.