DOL Proposes New Proxy Voting Rule Affecting Retirement Plan Fiduciaries

On September 4, 2020, the Department of Labor (“DOL”) published a proposed regulation addressing the proxy voting responsibilities of retirement plan fiduciaries and exercises of other shareholder rights.  The proposed rule would affect any employee benefit plan that owns equity securities that require voting, which can include defined benefit plans, defined contribution plans, and even some welfare benefit plans.  If the proposed rule is promulgated in its current form, it would materially change the fiduciary practices and recordkeeping requirements for such plans.

The DOL’s longstanding view has been that proxy voting is a fiduciary obligation that is part of managing plan assets, and the general view has been that the plan fiduciaries may not simply choose to not vote proxies.  Under the proposed regulation, a fiduciary must vote a proxy when the issue could have an economic impact on the plan but must not vote a proxy where the matter would not have an economic impact on the plan.  The DOL’s rationale is that the expenditure of plan resources is generally warranted only when the proposals have a meaningful bearing on share value or when plan fiduciaries have determined that the interests of the plan are not aligned with the positions of a company’s management.  It is important to note that application of this new standard would have a significant impact on the voting of proxies on shareholder proposals dealing with economic, social and governance issues because it would be difficult to demonstrate that those types of proposals have an economic impact on the plan.

In order to assist fiduciaries to comply with the difficulty of determining a proxy vote’s economic impact on a plan, the proposed regulation would allow fiduciaries to establish certain “permitted practices” in their proxy voting policy.  For example, a permitted practice may include voting proxies only on specific types of proposals that the fiduciary has prudently determined are likely to have a significant impact on the value of the plan’s investment, such as corporate mergers and acquisitions, corporate repurchases of shares and contested elections for directors. If the plan fiduciary has delegated responsibility for voting proxies to an investment manager or other service provider, the proposed regulation would require the fiduciary to ensure and document that the investment manager or service provider satisfies the conditions of the rule.

Because the DOL’s proposal is not final, it does not require plan fiduciaries to take any action at this time.  However, we recommend that plan fiduciaries continue to monitor this issue for future developments.

Ask Your Consultant for Mental Health Parity Certification Each Year

If you only read this first paragraph, that is okay. One of the most common issues we face with DOL investigations of employer health plans involves mental health parity compliance.  For those of you who sponsor a qualified retirement plan like a 401(k) plan, you likely receive some kind of a compliance testing report each year from your recordkeeper or third-party administrator that tells you that your plan passed the relevant nondiscrimination tests.  I recommend that you ask your health plan consultant to start providing something like that for you every year – which confirms that your plan passes mental health parity, so that you (a) know your plan complies; and (b) have proof that your plan complies if you ever go through a DOL investigation/audit.  This may require the consultant to involve the network provider and/or the actuary.  Regardless, this is critically necessary, especially for those of you who are self funded.

Here is some background for you:

Group health plans are not required to provide benefits for mental health or substance use disorders, but if they do, the “mental health parity” rules require there to be parity between the plan’s (a) medical/surgical benefits (“Medical Benefits”); and (b) mental health or substance use disorder benefits (“Mental Health Benefits”).

Think of “parity” as generally requiring “equality.” In my opinion, these rules are unnecessarily complicated but they generally require:

  1. Parity as to Financial Requirements. Plans must provide parity between Medical Benefits and Mental Health Benefits as to financial requirements, such as deductibles, copays, coinsurance, and out-of-pocket maximums. For example, if a plan has a $25 copay for a typical doctor office visit but a $50 copay for a mental health office visit, this could violate the parity rules.
  2. Parity as to Quantitative Treatment Limitations. Plans must provide parity between Medical Benefits and Mental Health Benefits as to quantitative treatment limitations, such as number of visits, days, or treatments. Quantitative treatment limitations are limits that can be expressed numerically (e.g., number of covered visits per day, per episode, annually, or during the participant’s lifetime).
  3. Parity as to Nonquantitative Treatment Limitations. Plans must provide parity as to any nonquantitative treatment limitations, such as medical management standards (think non-financial requirements). For example, if a plan required a participant to go through some kind of a pre-certification process for treating anorexia (a mental health condition) that is stricter than the process required for Medical Benefits, this could be a violation of the parity rules. Or if a group health plan required participants to use employer-provided EAP benefits before accessing the plan’s Mental Health Benefits but did not require the same for Medical Benefits, that would likely violate the parity rules.

If you are not asleep yet and are interested in even more details, the parity rules as to the financial requirements and treatment limitations (#1 and #2 above) are particularly complex and often require a series of Wizard-of-Oz math calculations, which are probably impossible for you to run on your own. Generally, to run the testing, the benefits offered by a plan must first be divided into six separate classifications:

  1. inpatient, in-network;
  2. inpatient, out-of-network;
  3. outpatient, in-network (Note: office visits can be placed in a separate subclassification from all other outpatient items and services);
  4. outpatient, out-of-network;
  5. emergency care; and
  6. prescription drugs.

Within each of these classifications, the financial requirements and treatment limitations that apply to Mental Health Benefits must be compared to the financial requirements and treatment limitations that apply to Medical Benefits in that same classification so that they pass the following two tests:

  1. “Substantially All” Test. A financial requirement or treatment limitation must first be demonstrated to be applicable to “substantially all” of the Medical Benefits in a classification. This is a math test that means the requirement or limitation must apply to at least two-thirds of all Medical Benefits in the classification. This calculation is determined based on the dollar amount of all plan payments for Medical Benefits in the classification that are expected to be paid under the plan for the plan year.  For example, if we were looking at the copay structure of your health plan, we might need to determine if the plan requires a copay of any kind for at least two-thirds of the Medical Benefits in the outpatient, in-network classification, before a copay could be imposed on Mental Health Benefits in the outpatient, in-network classification.
  2. “Predominant Level” Test. If and only if a financial requirement or treatment limitation does apply to “substantially all” of the Medical Benefits in a classification, that financial requirement or treatment limitation may be applied to Mental Health Benefits in that classification, but only if the “level” of that requirement or limitation is no more restrictive than the “predominant level” of that requirement or limitation when applied to Medical Benefits. A good example of a “level” would be two copayment levels of $25 and $50.  A financial requirement or treatment limitation is considered to be “predominant” if it is the most common or frequent of such type of limit or requirement – that is, if it applies to more than one half of the Medical Benefits in the classification.  Carrying forward my example above involving a plan’s co-pay structure, if we determined that your plan does require a copay for at least two-thirds of the Medical Benefits in the outpatient, in-network classification (i.e., you pass the “substantially all” test), then we would need to determine what is the permitted/predominant copay level. This is easy if you only have one copay (e.g., $25 for everything). But if you have different copays within the outpatient, in-network classification (e.g., $25 for general and $50 for specialty), we would need to determine what copay level applies to more than half of the Medical Benefits in that classification – and only that copay level could be charged to Mental Health Benefits in that classification.

I have made a number of generalizations here to try to break down the rules and the testing for you, but to me this falls into the category of tasks that you should have someone else do for you (probably your consultant). I would ask them to give you something every year that clearly states that your plan passes mental health parity testing, preferably something signed off on by an actuary.  If they tell you that your plan “passes automatically” because of its design, please ask them to explain that to you (in part to make sure they understand) and put that in writing anyway.  This will save you a great deal of trouble and stress later.

Of course, please let us know if you have any questions.

Thank you,


New Guidance Regarding Birth or Adoption Distributions from Retirement Plans

You may recall that the SECURE Act was signed into law last December. The SECURE Act made a number of changes to the rules governing qualified retirement plans.  One change created a new type of a distribution from certain retirement plans, including 401(k) plans, following qualifying births or adoptions.  The SECURE Act allows a plan participant to take a distribution of up to $5,000 following a qualified birth or adoption (“Birth/Adoption Distribution”).

Even though plan sponsors were allowed to add the Birth/Adoption Distribution feature to their plan on or after January 1, 2020, most plan sponsors have not yet added this feature because there were initially too many unanswered questions. Fortunately, the Department of the Treasury and the Internal Revenue Service recently issued additional guidance (Notice 2020-68) that may make plan sponsors more likely to turn on this new feature.  Here is what we now know from the SECURE Act and the recent guidance:

  1. A Birth/Adoption Distribution must be made during the one-year period beginning on the date when a child is born or the legal adoption is finalized.
  2. A Birth/Adoption Distribution may be made from 401(k) plans, profit sharing plans, 403(b) plans, governmental 457(b) plans, IRAs, and certain other plans. They do not apply to defined benefit plans.
  3. An “eligible adoptee” includes any individual who has not attained age 18 or is physically or mentally incapable of self-support. However, an eligible adoptee does not include an individual who is the child of the taxpayer’s spouse.
  4. A Birth/Adoption Distribution is includible in gross income, but is not subject to the 10% excise tax.
  5. Even though a Birth/Adoption Distribution is includible in the participant’s gross income, the plan is not required to withhold the normal 20%.
  6. The individual must include the name, age, and the Taxpayer Identification Number (TIN) of the child or eligible adoptee on the individual’s tax return for the taxable year in which the distribution is made.
  7. Each parent may receive a Birth/Adoption Distribution up to $5,000 with respect to the same child. This means two parents may each take $5,000 from their qualifying retirement plan following the birth or adoption of the same child.
  8. An individual may receive a Birth/Adoption Distribution with respect to the birth of more than one child (e.g., twins). For example, Employee A gives birth to twins in October 2020. Employee A may take a $10,000 distribution from her 401(k) plan in January 2021, assuming she includes the TINs of her twins and other required information on her 2021 tax return.
  9. An individual generally may recontribute a Birth/Adoption Distribution to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.
  10. Plans are not required to permit Birth/Adoption distributions. It is an optional feature for the plan sponsor.
  11. If a plan permits a Birth/Adoption Distribution to a participant, the plan is generally required to accept a recontribution of that same amount from that individual.

Now that we have some additional guidance, I suspect many plan sponsors will turn on this feature and that it will be very popular with plan participants. You might consider discussing this with your recordkeeper and/or third-party administrator.

Please let us know if you have any questions.

IRS Provides Tax Filing Relief for Victims of Hurricane Laura

The IRS recently announced that victims of Hurricane Laura now have until December 31, 2020, to file various individual and business tax returns. This relief is available to any area designated by the Federal Emergency Management Agency (FEMA) as an area qualifying for individual assistance. A current list of designated areas is available on the disaster relief page on and

Pursuant to this relief, individuals and businesses who have a valid extension to file their 2019 income tax returns on October 15, 2020, will now have until December 31, 2020, to file. However, this relief does not extend the payment deadline for the federal tax payments related to these 2019 returns, which were due on July 15, 2020.

The December 31, 2020 deadline also applies to quarterly estimated income tax payments due on September 15, 2020, and the quarterly payroll and excise tax returns due on November 2, 2020.  Additionally, any penalties on payroll and excise tax deposits due after August 22, 2020, and before September 8, 2020, will be abated as long as the deposits are made by September 8, 2020.

The IRS will automatically provide this filing and penalty relief to taxpayers with an IRS address of record located in the disaster area. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS, the taxpayer should call the number on the notice to discuss having the penalty abated.

Visit the IRS disaster relief page for additional information: