DOL Expands Abandoned Plan Regulations and Related Prohibited Transaction Exemption | Practical Law

DOL Expands Abandoned Plan Regulations and Related Prohibited Transaction Exemption | Practical Law

The Department of Labor's (DOL's) Employee Benefits Security Administration (EBSA) has issued interim final regulations (IFRs) that expand the scope of the abandoned plan program to encompass plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code and related amendments to Prohibited Transaction Exemption 2006-06. The IFRs and PTE amendments, which adopt with modifications the proposed regulations from 2012, are effective July 16, 2024. The DOL has requested comments on numerous aspects of the IFRs. Comments are due by July 16, 2024.

DOL Expands Abandoned Plan Regulations and Related Prohibited Transaction Exemption

Practical Law Legal Update w-043-3499 (Approx. 6 pages)

DOL Expands Abandoned Plan Regulations and Related Prohibited Transaction Exemption

by Practical Law Employee Benefits & Executive Compensation
Published on 22 May 2024USA (National/Federal)
The Department of Labor's (DOL's) Employee Benefits Security Administration (EBSA) has issued interim final regulations (IFRs) that expand the scope of the abandoned plan program to encompass plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code and related amendments to Prohibited Transaction Exemption 2006-06. The IFRs and PTE amendments, which adopt with modifications the proposed regulations from 2012, are effective July 16, 2024. The DOL has requested comments on numerous aspects of the IFRs. Comments are due by July 16, 2024.
The DOL's Employee Benefits Security Administration (EBSA) has issued:
The IFRs and PTE amendments, which adopt with modifications the proposed regulations from 2012, are effective July 16, 2024. The DOL has requested comments on numerous aspects of the IFRs. Comments are due by July 16, 2024.
For more information on abandoned plans, see Practice Note, Abandoned Individual Account Plans.

Abandoned Plan Program

In 2006, the DOL established the abandoned plan program through three regulations (collectively, abandoned plan regulations) and a related exemption (PTE 2006-06) establishing a program to facilitate the termination of and distribution of benefits from abandoned individual account plans.
Under the abandoned plan regulations, certain financial institutions are eligible to serve as qualified termination administrators (QTAs) in order to terminate and distribute benefits from abandoned individual account plans. To be a QTA for a plan, the entity must:
  • Be eligible to serve as the trustee or issuer of an individual retirement plan within the meaning of the Internal Revenue Code (26 U.S.C. § 7701(a)(37) (defining an individual retirement plan as an individual retirement account or individual retirement annuity (collectively, IRA))).
  • Hold assets of the abandoned plan.
Examples of entities that might serve as QTAs include banks, insurance companies, and other similar financial institutions. The abandoned plan regulations currently do not apply to Chapter 7 plans because bankruptcy trustees generally do not qualify as QTAs.
The DOL also issued a class exemption from certain prohibited transactions under ERISA for QTAs providing services to abandoned plans. PTE 2006-06 permits a QTA to:
  • Select itself or an affiliate to provide services related to winding up the plan.
  • Pay itself or an affiliate for providing services as a QTA.
  • Receive fees related to establishing and maintaining an individual retirement account or other account.
In 2012, the DOL issued proposed amendments to the abandoned plan regulations that would permit bankruptcy trustees to serve as QTAs and terminate and wind up plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code (77 Fed. Reg. 74063 (Dec. 12, 2012); see Legal Update, DOL Issues Proposed Amendments to Abandoned Plan Regulations and PTE 2006-06).

IFRs Expand Abandoned Plan Regulations

The IFRs expand the abandoned plan regulations to cover plans whose sponsors are in liquidation under Chapter 7 of the Bankruptcy Code. Because more than ten years have passed since the close of the comment period for the 2012 proposed regulations, the DOL issued IFRs with a request for comments.

Chapter 7 ERISA Plans

The IFRs expand the abandoned plan regulations to cover Chapter 7 ERISA plans. Under the IFRs, the bankruptcy trustee in a case may elect to serve as the plan's QTA. In addition, the IFRs provide that:
  • Chapter 7 ERISA Plans are considered abandoned when the bankruptcy court enters an order of relief in the plan sponsor's bankruptcy proceeding.
  • The bankruptcy trustee or a designee is eligible to:
    • terminate and wind up Chapter 7 ERISA Plans using "streamlined procedures" similar to those provided under the program; and
    • use plan assets to pay itself reasonable compensation for the services.

Bankruptcy Trustees and Eligible Designees as QTAs

The IFRs allow bankruptcy trustees to appoint an eligible designee to serve as the QTA. To be an "eligible designee," the entity must either:
  • Be a person or entity who otherwise qualifies as a QTA under the regulations (for example, the abandoned plan asset custodian).
  • Have served as a Chapter 7 bankruptcy trustee in the last five years (referred to as an independent bankruptcy trustee practitioner).
In either case, the person or entity must acknowledge in writing that they accept the designation to qualify as an eligible designee. The DOL added this requirement in response to comments on the proposed regulations expressing concerns that bankruptcy trustees could force entities into being eligible designees merely by designating them as such.
While the IFRs generally permit a bankruptcy trustee to appoint an eligible designee, they require that an eligible designee be appointed if a non-de minimis amount of delinquent contributions are owed to the plan. The IFRs define "de minimis" as $2,000 or less and set out two tests for determining whether the amount of delinquent contributions is de minimis. The DOL made this change from the proposed regulations in response to a commenter's concern about potential conflicts of interest. The bankruptcy trustee, however, retains responsibility under ERISA for selecting and monitoring the eligible designee (see Practice Note, ERISA Fiduciary Duties: Overview: Duty of Loyalty and Duty of Prudence).
Before designating an eligible designee, the IFRs require the bankruptcy trustee to make "reasonable and diligent efforts" to determine:
  • Whether any employer or employee contributions are owed to the plan.
  • The amount of the delinquent contributions (which, in turn, determines whether the trustee must appoint an eligible designee and whether the designee must attempt to collect the delinquent contributions).
Under the IFRs, the bankruptcy trustee must also:
  • Notify the eligible designee of its findings concerning delinquent contributions.
  • Establish procedures for providing the eligible designee access to plan records in its possession (for example, payroll records, participant lists, and plan documents).
  • Notify the DOL of any evidence of a fiduciary breach by a prior plan fiduciary.

Winding Up a Plan

Under the IFRs, the process for winding up a Chapter 7 ERISA plan are generally the same as other abandoned plans, except that:
  • If non-de minimis amounts of delinquent contributions are owed to the plan, the eligible designee generally must take reasonable steps to collect the contributions.
  • A QTA must report any evidence of a fiduciary breach by a prior plan fiduciary.
Regarding fees, the IFRs permit a bankruptcy trustee or eligible designee serving as a QTA to pay itself for winding up services from the assets of the plan under an industry rate standard for ERISA plan administration. In a change from the proposed regulations, the IFRs added a limited exception to the industry rate standard for eligible designee's fees related to collecting delinquent contributions (for example, fees tied to filing proof of claims, asset tracing, and litigation). In this situation, eligible designees may charge rates similar to the rates charged for collection services for estates in Chapter 7 proceedings.
The IFRs also adopt the proposed rule of accountability, which precludes bankruptcy trustees and eligible designees from seeking a release from liability under ERISA.

Notices and Reporting Requirements

Regarding notices and reporting, the IFRs:
  • Update the model notices to reflect the IFR changes.
  • Change the special terminal report from being filed as part of the plan's Form 5500 to a stand-alone report.
  • Create an optional online filing system for filing the special terminal report and other notices that must be submitted to the DOL.

Continuation of Nonenforcement Policy in Field Assistance Bulletin 2021-01

The IFRs also continue the temporary enforcement policy announced in Field Assistance Bulletin (FAB) 2021-01. In FAB 2021-01, the DOL stated that it would not pursue violations under ERISA Section 404(a) (29 U.S.C. § 1104(a)) against plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans in connection with the transfer of a missing or non-responsive participant's or beneficiary's account balance to the Pension Benefit Guaranty Corporation (PBGC) (rather than to an IRA, certain bank accounts, or to a state unclaimed property fund), if the plan fiduciary or QTA met certain requirements (see Legal Update, DOL FAB 2021-01 Provides Temporary Enforcement Policy for Terminating Defined Contribution Plans' Use of the PBGC's Missing Participants Program).

Technical changes

The IFRs also adopt with modifications the proposed technical changes to the abandoned plan regulations that are unrelated to Chapter 7 ERISA Plans.

Amendments to PTE 2006-06

In connection to the IFRs, the DOL issued related amendments to PTE 2006-06 that expand the definition of QTA to allow Chapter 7 trustees and eligible designees serving as QTAs to rely on the PTE. As a result, bankruptcy trustees and eligible designees may provide services, such as terminating and winding up a Chapter 7 plan, and pay themselves for these services from the assets of the plan under an industry rate standard for ERISA plan administration (except for eligible designees providing services related to collecting delinquent contributions for which the designee may charge rates similar to the rates charged for collection services for estates in Chapter 7 proceedings). In addition, the amended PTE permits:
  • An eligible designee serving as QTA to pay the designating bankruptcy trustee for services it provided to the plan.
  • A QTA to pay itself for "non-QTA services" provided before it was the QTA, subject to additional conditions.
The amendments clarify that once a bankruptcy trustee selects an eligible designee, the trustee is no longer the QTA for purposes of the PTE.

Practical Implications

The long awaited rules make it easier to distribute assets from retirement plans of bankrupt companies and also improve the process for winding up retirement plans. Comments are due by July 16, 2024.