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Beneficiaries of retirement savings have been in limbo for the past 4½ years because the SECURE Act of 2019 (1.0) radically changed the beneficiary distribution rules and the Treasury/IRS proposed an interpretation of those rules that was unexpected and never finalized. That uncertainty ends now, as the IRS finalized its regulations on the required minimum distribution (RMD) and beneficiary distribution rules under SECURE 1.0. The final regulations primarily confirm the proposed interpretations and apply beginning January 1, 2025. 

The question

SECURE 1.0 changed the rules so that most types of beneficiaries inheriting a retirement plan account or IRA in 2020 or later must deplete the inherited account by the end of the 10^th year after the account holder’s death. (The only beneficiaries who can stretch payments over their life expectancy are spouses, and those who are less than 10 years younger than the account holder, disabled or chronically ill,) The wording in SECURE 1.0 led many in the industry to believe the 10-year rule would apply in the same way as the old 5-year rule so that beneficiaries could take distributions at any time, including waiting until the 10^th year.

The IRS’s proposed regulations, however, indicated that beneficiaries whose only option is the 10-year rule and who inherit from an account holder who died after they had reached the beginning date for taking RMDs must take a life expectancy payment each year in addition to depleting the account by the end of the 10^th year. But because that interpretation wasn’t published until 2022 and has since remained just a proposal, it hasn’t been clear whether those beneficiaries need to take a payment each year. Due to this confusion, the IRS has waived the excise tax for beneficiaries in this category who did not take a required payment in 2021, 2022, 2023 or 2024.

The answer

The final regulations confirm the proposed interpretation of the 10-year rule for beneficiaries whose only option is the 10-year rule:

• If the account holder died BEFORE their required beginning date for RMDs, the beneficiary may take distributions at any time so long as the inherited account is depleted within 10 years.
• If the account holder died AFTER their required beginning date for RMDs, the beneficiary must take annual distributions based on the longer of their life expectancy or the account holder’s remaining life expectancy AND deplete the inherited account within 10 years.

The preamble to the regulations also confirms that beneficiaries affected by this issue don’t have to go back and take any missed distributions, but they must still count the years 2021–2024 in their 10-year countdown. For example, if an IRA owner died in 2020, the beneficiary’s 10-years to deplete the account expires at the end of 2030.

Financial advisors and financial institutions can now confidently assist clients with investment and tax strategies surrounding the timing of beneficiary distributions under the 10-year rule.

Stay tuned

The final regulations are lengthy and include other notable clarifications. The IRS also published proposed regulations to implement the additional changes for RMDs and beneficiaries made by SECURE 2.0.  IRALOGIX will continue analyzing both sets of regulations and will provide more details in the coming months.

Two federal courts in Texas have granted plaintiffs’ requests to delay the effective date of the DOL’s new fiduciary rule, pending further court action. As a result, the DOL’s most recent final regulations to re-define an “investment advice fiduciary” to cover more investment professionals, retirement accounts, and types of investments will not become effective September 23, 2024 – or possibly ever.

While one court’s ruling provides a stay of the fiduciary rule and PTE 84-24, the other court’s ruling includes the fiduciary rule and all accompanying PTE amendments, including PTE 2020-02.

Reasons for the stay

One lawsuit, filed in the Eastern District of Texas by the Federation of Americans for Consumer Choice and others, requested the court to stay the effective date and vacate the DOL’s final rule and PTE 84-24. Plaintiffs claim these pieces conflict with ERISA in several ways, including

• treating as fiduciaries those who engage in one-time recommendations to roll over assets from an ERISA plan to an IRA, and
• treating IRA fiduciaries as subject to the fiduciary duties under ERISA Title I.

On July 25, the court granted a stay of the effective date for the rule and PTE 84-24, stating the rule was too close to the DOL’s fiduciary rule that was vacated by the U.S. 5^th Circuit Court of Appeals in 2018, which also eliminated the “regular basis” and “primary basis” elements of the 1975 Five-Part test.

Another lawsuit, filed in the Northern District of Texas by the American Council of Life Insurers and others, requested a stay of the effective date of the DOL’s new fiduciary rule and all PTE amendments released with the rule. On July 26, this court granted plaintiffs’ request, citing the court order from the Eastern District and agreeing that the DOL’s new fiduciary package conflicts with ERISA and exceeds the DOL’s statutory authority.

Both court rulings state that plaintiffs are likely to succeed on the merits of their claim, with the Northern District stating that “plaintiffs are virtually certain to succeed” with their request for the new rule to be vacated.

Status Quo for now

Investment professionals providing advice to retirement savers should continue operating under the 1975 Five-Part test for determining non-discretionary fiduciary status under ERISA. If an advisor meets all five criteria of that test, the advisor will be deemed to be a fiduciary under ERISA and would need to meet the conditions of the existing PTE 2020-02 (or another exemption) to receive compensation that would otherwise be prohibited.

A federal court in Texas has granted plaintiffs’ request to delay the effective date of the DOL’s new fiduciary rule that would have assigned ERISA fiduciary status to more investment professionals, including insurance agents. The DOL’s new definition of fiduciary will not become effective September 23, 2024 and is stayed until further order of the Court. The Court also stayed the effective date of the amended PTE 84-24, which the DOL had amended to apply solely to independent insurance agents.

Reasons for the stay

Although the Court order includes details on several reasons for granting the stay, the Court summarizes as such:

“Plaintiffs are likely to succeed on the merits of their claim because the 2024 Fiduciary Rule conflicts with ERISA in several ways, including by treating as fiduciaries those who engage in onetime recommendations to roll over assets from an ERISA plan to an IRA. DOL’s related amendments to Prohibited Transaction Exemption 84-24 are also unreasonable and arbitrary and capricious.”

What about PTE 2020-02?

The DOL’s regulatory package changing the definition of an “investment advice fiduciary” included amendments to expand PTE 2020-02 and to eliminate the availability of several other PTEs.  These were not included in the Court’s stay order because the plaintiffs, an insurance industry trade association and others in the insurance industry, did not include them in their request.

Now what?

Pending clarification from the DOL, presumably the amendments to PTE 2020-02 and the other PTEs will still become effective on September 23, 2024, along with the one-year transition period for full compliance with PTE 2020-02. The DOL stated in its preamble to the amended PTE 2020-02 that each of the PTEs “operates independently and should continue to do so if any component of the rulemaking is invalidated.”

This means that PTE 2020-02 would still be the primary PTE available to most providers of non-discretionary fiduciary investment advice that need a PTE to receive compensation that would otherwise be prohibited.  The big difference now is that only non-discretionary investment advice fiduciaries under the existing rules would need a PTE.  And one-time rollover recommendations do not typically trigger fiduciary status under existing regulations.

Until we have more guidance, only investment professionals and financial institutions whose service models trigger fiduciary status under the existing rules may need to prepare to comply with the amended PTE 2020-02 by September 23, 2024.

Right now, investment professionals are deemed to be an ERISA fiduciary if their actions meet all factors of the 1975 Five-Part Test, which include providing advice to a retirement investor on a regular basis.¹ But soon, the Department of Labor’s (DOL) new definition of “fiduciary” for nondiscretionary investment advice on retirement plan, IRA and HSA assets will take effect. (See our previous articles, DOL Finalizes New Fiduciary Rule and What is Not Fiduciary Advice Under the DOL’s New Rule? for the details on the new definition.)

Beginning September 23, 2024, more investment professionals will be deemed fiduciaries when providing personalized recommendations to retirement investors, including one-time rollover advice.

If you’ll be a fiduciary, you’ll probably need a PTE to get paid

Investment professionals providing fiduciary investment advice (under the old or the new rule) are prohibited from receiving compensation that varies based on their investment advice and compensation from third parties, unless they meet the conditions in a prohibited transaction exemption (PTE). The DOL amended many of the existing PTEs so that PTE 2020-02 is the primary path to compliance.² Under the new fiduciary rule, PTE 2020-02 is expanded to, among other things, cover any investment product and can be used by robo-advice arrangements, pooled plan providers, and HSA financial institutions. The DOL states that financial institutions that already have robust policies and procedures to comply with the SEC’s Regulation Best Interest for broker-dealers should be in a strong position to comply with the “closely aligned revised conditions of PTE 2020-02.” Here are the effective dates and the PTE conditions that will be required.

Until 9/22/2024: Comply with existing PTE 2020-02

Investment professionals and their financial institutions who meet the definition of a nondiscretionary fiduciary under the 1975 Five-Part test must comply with the existing PTE 2020-02 (or other applicable exemption) to receive prohibited compensation for their recommendations. Providing one-time rollover advice to a retirement investor does not typically meet the old definition of fiduciary advice.

9/23/2024 – 9/22/2025: Meet Impartial Conduct standards & acknowledge fiduciary status

Beginning September 23, 2024, those who meet the DOL’s new definition of a nondiscretionary fiduciary must meet the conditions of the amended PTE 2020-02. But the DOL has provided a one-year transition period for compliance. During this period, investment professionals and their financial institutions relying on PTE 2020-02 must meet these conditions:

1. Satisfy the Impartial Conduct standards when giving fiduciary investment advice
   • Meet the care obligation (give prudent, expert advice based on the needs of the retirement investor)
   • Meet the loyalty obligation (never put the interest of the investment professional, financial institution, or affiliate ahead of the investor’s interests)
   • Make no misleading statements, including omissions of relevant information (e.g., about investments, conflicts, or fees)
   • Receive no more than reasonable compensation

2. Provide a written acknowledgement of fiduciary status under ERISA and/or the Code to the investor by the later of the date the recommendation is made or the date the professional or their financial institution is entitled to compensation for the recommendation. Model language is included in the expanded PTE 2020-02 – and it is different from what was acceptable under the existing PTE 2020-02.

Beginning 9/23/2025: Full compliance with amended PTE 2020-02

Beginning September 23, 2025, investment professionals and their financial institutions relying on PTE 2020-02 must meet these conditions:

1. Satisfy the Impartial Conduct standards.
2. Provide a written acknowledgement of fiduciary status.
3. Provide written disclosures to the investor:
   • The care and loyalty obligations owed to the investor (model language in PTE)
   • All material facts relating to the scope and terms of the relationship with the investor, including fees and any limitations on recommendations (similar to Reg BI requirements under the SEC)
   • All material facts relating to conflicts of interest related to the recommendation (similar to Reg BI requirements under the SEC)
   • The investor’s right to obtain additional information
   • The bases for rollover recommendations for ERISA Title I plan assets or how to invest those assets post-rollover

4. The financial institution must develop, follow, and enforce policies and procedures designed to
   • Ensure compliance with PTE 2020-02, and
   • Mitigate conflicts of interest so there are no incentives to put the investment professional’s or financial institution’s (or an affiliate’s) interests ahead of the investor’s interests.

5. The financial institution must conduct an annual retrospective review to detect and prevent violations of PTE 2020-02 and submit a report to a senior executive.
6. The senior executive must certify the report, that the institution has corrected violations and filed Form 5330 and paid any excise tax for nonexempt prohibited transactions, and that the institution has policies and procedures in place and a prudent process for updating them.

More on rollovers

If a fiduciary recommendation is made to roll over funds from an ERISA Title I retirement plan or how to invest those assets post-rollover, the investment professional must analyze the investor’s rollover options by comparing certain factors for each option. The analysis must be documented and provided to the investor. The relevant factors that must be analyzed include

• The alternatives to a rollover, including leaving money in the current plan,
• The fees and expenses associated with the plan and the recommended investment or account,
• Whether the employer pays for any of the plan’s administrative expenses, and
• The different levels of services and investments available under the plan and the recommended investment or account.

Although PTE 2020-02 does not require a rollover disclosure for a recommendation to roll over IRA assets, the other conditions of the PTE must still be met and, in the DOL’s view, should include documentation of a rollover analysis to prove compliance with the care and loyalty obligations.

Compliance Insights

• The amended PTE does not apply to ongoing compensation, including through a systematic purchase payment or trailing commission, received for a recommendation that was made before September 23, 2024. The amended PTE applies to new fiduciary investment advice provided on or after September 23, 2024.
• Financial institutions complying with the existing PTE 2020-02 may reduce their compliance efforts to what is required during the one-year transition period but should consider whether it would be more challenging to temporarily reduce compliance if they are already doing most of what will be required after the transition period.
• Although financial institutions are not required to have policies and procedures in place to comply with amended PTE 2020-02 until September 23, 2025, they may need to implement some by September 23, 2024, to ensure that advisors are complying with the Impartial Conduct standards and fiduciary acknowledgment requirement.

IRALOGIX will continue to provide insights on the DOL’s fiduciary rule and PTE 2020-02, including whether pending litigation is successful in delaying the implementation date or vacating all or part of the new rule. In the meantime, investment professionals and financial institutions whose service models will trigger fiduciary status under the new rule should prepare to comply by September 23, 2024.

Footnotes

¹ ERISA Sec. 3(21)(A)(ii) regulations: 29 CFR 2510.3-21(c)(1)

² An amended PTE 84-24 is available for independent insurance agents. Also, the existing statutory exemption under ERISA §408(b)(14) for participant or IRA holder investment advice provided through a level-fee or computer model arrangement meeting certain conditions is still available. See 29 CFR 2550.408g-1.