Although the statutory exemption is an exemption under the Internal Revenue Code, the DOL has issued this proposed rule because the Secretary of Labor has interpretive authority over all prohibited transaction exemptions, pursuant to a 1978 agreement allocating duplicate authority between the agencies.

Background

The SECURE 2.0 statutory exemption from the prohibited transaction provisions for automatic portability transaction is based on an individual exemption that the DOL granted to Retirement Clearance House, which the DOL determined needed the exemption because it would be acting as a fiduciary in facilitating the portability.

The automatic portability transaction aims to facilitate the movement of the retirement benefits of an employee who separates from service with one employer to the DC plan of the individual’s eventual new employer when the separating employee does not elect a direct payment of the lump-sum benefit. In this case, the automatic portability provider would work in association with an IRA provider (either one they are affiliated with or an independent IRA provider) to receive the money from the former employer’s plan (transfer-out plan) and roll it into the employee’s new employer’s DC plan (transfer-in plan) when the employee finds a new job. In the meantime, it would be held in an IRA. These automatic portability rules generally apply only to automatic rollovers where there was more than $1,000 but not more than $7,000 in the employee’s account (or as a present value in a DB plan).

The automatic portability provider will generally enter into agreements with plan recordkeepers. The agreement will require the recordkeeper to provide account information to the automatic portability provider when the money is transferred out. If the individual attains a new job with an employer that maintains a DC plan, the DC plan’s recordkeeper, who also has signed an information agreement, would notify the automatic portability provider and the automatic portability provider would roll over the money from the IRA to the new employer’s DC plan.

The automatic portability transaction prohibited transaction exemption is aimed at the frequent situation where there is “leakage” because the departing employee does not accept a direct payment and does not inform the plan where to place the amount owed and, consequently, does not know where the money is held. This failure may reduce the money the individual will have available at retirement and negates the benefits of tax-free growth.

This prohibited transaction exemption only addresses the fee that the automatic portability provider can receive. Existing rules already govern the transfer-in and transfer-out plan’s fiduciary actions (including prohibited transaction exemptions).

Proposed rule

SECURE 2.0 includes a list of items that a proposed rule should address. The DOL rule addresses these and additional items.

Some of the items addressed include the requirements that automatic portability providers must:

• Acknowledge their fiduciary status
• Set fees that are reasonable and disclosed
• Not accept fee if the transfer-in or transfer-out plan is a plan of the automatic portability provider or one of its affiliates
• Protect data and restrict its use
• Allow transactions on the same terms to any transfer plan
• Provide the required information (a notice to DOL within 90 days of the establishment of the automatic portability provider, a disclosure in the SPD and several notices to IRA owners, including a notice allowing the IRA holder to opt out of the transfer)
• Search for owners of accounts on a regular basis
• Ensure transfers are timely and generally monitor them
• Establish policies and procedures
• Have a website
• Meet strong audit requirements
• Not include exculpatory provisions in any agreement

Request for comments

As noted above, comments are due by March 29, 2024. Within each of the topics, the DOL has included specific items on which they would like comments. The DOL also invites comments on any other germane topic.

One topic of specific interest to the DOL is whether it should expand the exemption to include not only participant funds but also beneficiary funds. The statutory prohibited transaction exemption does not include beneficiaries’ accounts even though the same concerns apply.

Comments are also requested on whether the prohibited transaction exemption should be expanded to cover lump-sum amounts that are $1,000 or less. The SECURE 2.0 prohibited transaction exemption is limited to amounts greater than $1,000.