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DOL Proposes Rules on Automatic Portability Transactions Under SECURE 2.0
Practical Law Legal Update w-042-0226 (Approx. 4 pages)
DOL Proposes Rules on Automatic Portability Transactions Under SECURE 2.0
by Practical Law Employee Benefits & Executive Compensation
| Law stated as of 19 Jan 2024 • USA (National/Federal) |
The Department of Labor (DOL) has issued proposed regulations on automatic portability transactions under the SECURE 2.0 Act of 2022 (SECURE 2.0). The proposal would implement the statutory prohibited transaction exemption for automatic portability providers in connection with an automatic portability transaction.
The DOL has issued proposed regulations to implement the statutory prohibited transaction exemption for automatic portability providers in connection with an automatic portability transaction, as enacted under SECURE 2.0. Automatic portability refers to the process where a retirement plan's benefits that are held in a default or safe harbor IRA are automatically transferred to the participant's active account with a new employer.
For details on SECURE 2.0 provisions that are effective in 2024, see Article, SECURE 2.0 Changes Effective in 2024. For more information on SECURE 2.0, see SECURE 2.0 Act Provisions Affecting Retirement Plans Toolkit.
Background
If a participant's vested benefit in a defined contribution plan does not exceed $7,000 (for distributions made beginning January 1, 2024), plans may require an immediate distribution without that participant's consent after the participant separates from service. If the participant does not affirmatively elect to receive the benefit, and the distribution is more than $1,000, the plan must roll over the involuntary distribution to an IRA established for the participant (26 U.S.C. § 401(a)(31)(B)).
Section 120 of SECURE 2.0 created a new statutory prohibited transaction exemption for retirement plan service providers that provide plan sponsors with automatic portability services, effective for transactions beginning December 29, 2023. Automatic portability refers generally to the process in which assets that were distributed in the default IRA are moved to a new employer's plan. The process is intended to be helpful for missing or unresponsive participants, or employees who lose contact with plans after changing jobs.
The DOL first issued guidance on automatic portability transactions in Advisory Opinion 2018-01A (see Article, Expert Q&A on IRA Automatic Portability in Retirement Plans).
Proposed Regulations
According to the proposed regulations, automatic portability includes three components:
- A "transfer-out" plan that initiates a mandatory distribution.
- A default IRA that receives the rollover distribution under Code Section 401(a)(31)(B) (26 U.S.C. § 401(a)(31)(B)).
- A "transfer-in" plan that receives a roll-in distribution from the default IRA when an IRA owner is determined to have an account in a plan with a new employer.
Automatic portability providers query recordkeepers' systems to find out whether the default IRA owners are participants in a new plan. The automatic portability provider then rolls the IRA assets into the account in the transfer-in plan. The individual must be given advance notice of the transfer and not affirmatively opt out of the transfer.
SECURE 2.0 allows an automatic portability provider to receive a fee in connection with executing an automatic portability transaction if certain conditions are met, as defined in Code Section 4975(f)(12) (26 U.S.C. § 4975(f)(12)).
The proposed regulations detail the conditions that must be satisfied for an automatic portability transaction to be covered by the new statutory exemption, which include:
- The automatic portability provider acknowledges its fiduciary status in writing with respect to the IRA.
- That the automatic portability provider's fees:
- do not exceed reasonable compensation; and
- are disclosed to and approved in writing by the employer-sponsored plan fiduciary.
- Restrictions on the use of plan participant and IRA owner data by the automatic portability provider and its affiliates.
- That participation in the automatic portability program must be available on the same terms for all eligible transfer-in plans.
- Notices that the automatic portability provider must provide to the DOL, plan administrator, and IRA owner at various points in the transaction.
- That the automatic portability provider must conduct at least monthly searches for transfer-in plan accounts.
- The automatic portability provider timely executes automatic portability transactions.
- That the automatic portability provider's discretion to affect the timing or amount of the transfer pursuant to an automatic portability transaction must be limited.
- That the automatic portability provider must retain records demonstrating it is complying with the exemption conditions, conducting an annual audit, and maintaining a website with a list of participating recordkeepers and the automatic portability provider's fees.
- That automatic portability providers establish procedures for correcting failures to comply with the Code and regulations.
Practical Implications
Comments on the proposed regulations are due 60 days after publication in the Federal Register. Until finalization, the proposed regulations instruct automatic portability providers and plan fiduciaries to comply with the Code sections using a reasonable, good faith interpretation of the law taking into account the conditions and requirements of SECURE 2.0.