Employee Benefits Year-End Checklist 2024

Important Reminders for 2024

• Many contribution and benefit limits will increase for 2025, so your payroll and recordkeeping systems will need to be updated. A table setting forth the 2024 and 2025 IRS limits appears at the end of this newsletter.
• A number of notices are due 30 days before the start of each plan year, and plan administrators often like to provide other required communications at the same time. Most notably:

• • If you have participant-directed investments and utilize a “Qualified Default Investment Alternative” (“QDIA”) for “default” investments, you should provide your default investment informational notice by December 1, 2024, if you have a calendar year plan year. Your plan recordkeeper generally will assist you in preparing the notice and coordinating its distribution. 
  • If you have a “safe harbor” 401(k) or 403(b) plan or want to adopt a safe harbor structure for 2025, you must provide your annual notice in most cases by December 1, 2024, if you have a calendar year plan year. This applies regardless of whether you are using a traditional safe harbor or an automatic enrollment safe harbor. Make sure the notice includes a warning that the employer retains the right to reduce or eliminate safe harbor contributions on 30 days’ notice, in order to preserve this ability for you if you need it. 
    • The Setting Every Community Up for Retirement Enhancement Act of 2019, commonly called the “SECURE Act,” eliminated the notice requirement for plans providing safe harbor contributions as nonelective contributions (i.e., contributions made to all eligible participants regardless of whether those participants contribute from their own paychecks), rather than as matching contributions. However, if a plan does offer matching contributions in addition to the safe harbor nonelective contribution and wants those matching contributions to qualify for the safe harbor exemption from testing, the plan must issue a safe harbor notice.^[1] In addition, an employer needs to provide notice of its reservation of rights to reduce or eliminate the safe harbor contribution during the year on 30 days’ notice, or it will not be able to reduce or eliminate the contribution in the absence of a substantial business hardship or a qualifying plan termination in connection with a business merger, divestiture, or acquisition event. Accordingly, while the IRS has said that it is working on guidance to eliminate the notice requirement for nonelective contribution safe harbor plans, providing a safe harbor notice with a proper reservation of rights is advisable for 2025 even if you are using the nonelective safe harbor.^[2]
  • If you have an automatic enrollment 401(k) or 403(b) plan, regardless of whether it is a “safe harbor” plan, you must provide your automatic enrollment annual notice by December 1, 2024, if you have a calendar year plan year.
  • Participant-directed defined contribution plans must provide annual notices regarding plan expenses and investments. Plans should be sure they have met that obligation; the deadline will vary depending on the timing the plan has established. Disclosures must be provided no more than 14 months after the previous year’s disclosure.
  • The SECURE 2.0 Act allows defined contribution plans to reduce disclosures to individuals who are eligible to participate in the plan but have chosen not to contribute and do not have account balances. To qualify for this special rule, participants must have received the plan’s summary plan description and any other initial disclosures, and must receive an annual reminder notice of their right to participate which includes certain information about the plan and the contribution election process.
• If you want to make any amendments to your qualified retirement plan, you may need to adopt them before the end of the current plan year. Generally, an amendment to a qualified retirement plan that takes effect during a plan year must be adopted before the end of the plan year, unless Congress or the IRS has granted an extension.
  • As a general matter, some amendments must be in place before the desired effective date (for example, if you are making your contribution structure less favorable to some or all participants, an advance amendment is likely to be required).
  • Changing a 401(k) or 403(b) plan to or from a matching contribution “safe harbor” structure usually requires an amendment in advance of the start of the plan year.
    • The SECURE Act gave employers more flexibility if they opt instead to use a nonelective contribution safe harbor structure. The SECURE Act allows the safe harbor structure to be added at any point until 30 days before the end of the plan year, or even retroactively during the following year if the employer offers a 4% contribution instead of the usual 3% contribution. The contribution must be made for the entire plan year, regardless of when the safe harbor provisions are added. Employers also have the pre-SECURE Act option of issuing a contingent notice of possible intent to adopt a safe harbor nonelective contribution design with a supplemental notice to be provided at least 30 days before the end of the plan year if a safe harbor design is adopted.
    • If the plan also offers matching contributions as to which the employer seeks exemption from the ACP test, the IRS has said that the pre-SECURE Act additional notice and more restrictive timing requirements apply to amendments adopting a nonelective safe harbor contribution structure. In addition, IRS guidance still restricts employers’ ability to change provisions of safe harbor plans during the year.  
    • Ultimately, while the IRS has said it will be making updates to reflect the SECURE Act, employers with safe harbor plans should consider being proactive about approving changes before the beginning of the plan year, even if using the nonelective safe harbor. 
  • Adding an automatic enrollment feature to a 401(k) or 403(b) plan or making changes to an automatic enrollment feature may also require an amendment before the start of the plan year.
  • Individually designed qualified retirement plans and 403(b) plans (i.e., plans not using a document template preapproved by the IRS) generally are required to adopt amendments reflecting legal changes by the end of the second calendar year following the year the IRS issues the required amendment list containing the change. Qualified retirement plans and 403(b) plans using IRS-preapproved documents must adopt amendments reflecting legal changes by the end of the second calendar year after the calendar year in which the change in qualification requirements is effective with respect to the plan. 
    • Thanks to an amendment extension included in the SECURE 2.0 Act passed at the end of 2022 and a subsequent additional extension from the IRS, amendments reflecting changes made by the SECURE Act, the SECURE 2.0 Act, and the CARES Act of 2020 are now due by the end of 2026. Special deadlines apply to governmental plans.
• Benefit statements:
  • Remember that you must provide benefit statements for your participant-directed plans within 45 days of the end of the quarter, and for non-participant-directed defined contribution plans by the filing date for Form 5500 for the plan year.
  • If you sponsor a defined benefit plan, you must either provide employed participants with an annual notice of the availability of a benefit statement on request, or with an actual benefit statement once every three years. (Bear in mind that the statute does not exempt frozen plans from these requirements.) 
• Defined benefit plans sponsored by employers with intranet sites (or whose plan administrators maintain plan websites for them) generally are required to make certain information from Form 5500 available on their intranet sites. See the instructions to Form 5500 for details.
• Make sure that you or your insurer or other service provider have provided all notices required under your group health plan this year, which may include the Women’s Health and Cancer Rights Act notice, the Children’s Health Insurance Program notice, notice of availability of the Health Insurance Portability and Accountability Act (“HIPAA”) privacy notice, and/or the Medicare Part D notice, and that you or your insurer provide required Summary of Benefits and Coverage documents during your open enrollment period. 
• If you use a broker or consultant in connection with your group health plan (e.g., a broker to assist you in the selection of insurance products, or a consultant to assist in plan design) and you haven’t received a disclosure from them regarding the compensation (direct or indirect) that they receive in connection with their provision of services (e.g., commissions from insurance carriers), you should request such information from the broker or consultant before the next renewal of your agreement with the broker or consultant.
• Group health plan sponsors should ensure that they are in compliance with the Consolidated Appropriations Act, 2021 (“CAA”) anti-gag clause attestation requirement, which is due December 31, 2024. The CAA prohibits group health plans and issuers from entering agreements with “gag clauses” which (1) restrict provider specific price or quality of care information/data to referring providers, participants/beneficiaries/enrollees, individuals eligible to become participants/beneficiaries/enrollees, (2) restrict electronic access to de-identified claims and encounter information/data for each participant, beneficiary, or enrollee upon request or (3) restrict sharing the above information/data or directing the above information/data be shared with a business associate. These gag clauses are prohibited in agreements between plans/issuers and providers, networks/associations of providers, third party administrators (“TPAs”), and any other service provider offering access to a network of providers. In August 2021, the Departments of Labor (“DOL”), HHS, and the Treasury (the “Departments”) released a FAQ stating that until further guidance was issued, plans and issuers should implement a good faith, reasonable interpretation of the statute. But on February 23, 2023, the Departments issued further guidance imposing an annual requirement for plans and issuers to attest their compliance with the prohibition.  Attestations are due every December 31^st. A self-insured plan may enter into a written agreement with its TPA for the TPA to submit the attestation on behalf of the plan, but if the TPA does not submit the certification, the self-insured plan sponsor must submit it. Insurance carriers for fully-insured plans are independently required to submit the attestation, and the Departments have indicated that when the issuer of a fully-insured group health plan submits an attestation on behalf of the plan, the Departments will consider the plan and issuer to have satisfied the attestation submission requirement. Plan sponsors of fully-insured plans should ensure that the carrier submits the attestation, as the fully-insured plan must submit the attestation if the carrier fails to do so.  Instructions for submitting the attestation can be found here. 
• Most retirement plan participants are required to receive annual “required minimum distributions” after turning a specified age^[3] and terminating employment with the plan sponsor. (The requirement applies at the specified age regardless of employment status, in the case of a more-than-5% owner.)  Time limits also apply for payment to beneficiaries of deceased participants. Each year’s payment must be made by December 31^st, with the exception of a participant’s first required minimum distribution (due April 1^st of the year following the year in which the participant attains the specified age or terminates employment, as applicable). 
  • The CARES Act provided that defined contribution plans can disregard 2020 when calculating the five-year deadline that applies for payment to be completed to certain non-spousal beneficiaries of deceased participants.
  • The IRS and DOL have dedicated resources to enforcing these rules, and require plans to indicate on Form 5500 whether they failed to make required payments. The DOL, in particular, has developed an enforcement program focused on payment timeliness and participant outreach efforts generally. Therefore, in addition to checking in on required minimum distribution compliance, plan fiduciaries should confirm that their plans’ cash-out process for participants with small balances is operating properly, and make sure that the plan has appropriate follow-up protocols for returned mail, bounced e-mails and other indications of invalid addresses for participants and beneficiaries (whether or not currently required to commence payments). See our LEGALcurrents for more information.
• If you completed a plan merger in the 2023 plan year in connection with a business transaction in the 2023 or 2022 plan year and want to submit an application for an IRS determination letter in connection with that merger, you must do so by the end of the plan year that begins after the date of the merger (December 31, 2024, for calendar year plans that merged in 2023).
• If you expect to have assets remaining in your defined contribution plan’s forfeiture account at the end of the year, you should review your options and obligations under the plan document to determine whether you can (and whether you must) make arrangements to use up your forfeiture account this year. The IRS has emphasized that plans generally should not be carrying forfeiture balances over from year to year. As a corollary of this analysis, make sure that your recordkeeper is processing forfeitures in a timely fashion when former employees take distributions or complete five breaks in service, so that the forfeited money can be put to proper use. As discussed at more length below, proper use of forfeitures has become an increasing focus of litigation, so plan sponsors and fiduciaries should take a fresh look at their rights and responsibilities when determining how and when to use their forfeitures.
• It’s important to be sure that lists of plan signatories and fiduciaries, and other documentation enabling access to plan information and funds, are updated to reflect changes in employees and vendors at the time a change takes effect. However, the end of the year is a good time to do a final check and confirm that all your documentation has, in fact, been kept up to date. 
• Likewise, the end of the year may be a good time to take a look at your plan demographics and assets and assess the adequacy and cost-effectiveness of your fidelity bonding coverage and fiduciary liability insurance. Consider such factors as the maximum dollar amount of coverage relative to the size of your plans, the identity of the individuals and entities covered, the types of allegations covered, the extent to which coverage is available outside the litigation context (such as in connection with government audits and correction processes), and the alignment of coverage with contract indemnification rights with respect to vendors and employees.

A Look Ahead at 2025

There are some important action items to plan for as 2025 gets underway:

• Make sure your plans are in compliance with the requirements of the SECURE 2.0 Act (see our LEGALcurrents for details). The following items may call for particular attention:
  • The requirement created by the SECURE 2.0 Act that 401(k) and 403(b) plans automatically enroll participants who do not opt out of automatic enrollment takes effect in 2025. The requirement applies for plans adopted after December 29, 2022, unless an exception applies. Exceptions are available for businesses with 10 or fewer employees, new businesses that have been in existence less than 3 years (including any predecessor employers), church plans, SIMPLE Plans, and governmental plans.
  • Plan administrators of 401(k) and ERISA-governed 403(b) plans should confirm that their eligibility, enrollment, and vesting processes are in compliance with the reduced service requirement for “long-term part-time employees” to make elective deferrals.[4] The SECURE 2.0 Act further reduced the special service requirement established by the SECURE Act for these employees, and extended the requirement to ERISA-governed 403(b) plans.
  • Enhanced catch-up limits for employees ages 60-63 are available beginning in 2025. The IRS has yet to issue guidance on this feature of the SECURE 2.0 Act, and has not clarified whether it is mandatory or voluntary for plans which offer regular catch-up contributions. Employers should discuss the feasibility and desirability of implementation with their payroll vendors and plan recordkeepers, and consult counsel if they anticipate offering regular, but not enhanced, catch-up contributions in 2025.
• Under the Patient Protection and Affordable Care Act, larger employers can face a “shared responsibility” (a.k.a. “pay or play”) penalty if they fail to offer full-time employees affordable medical coverage. Larger employers are also subject to an information reporting requirement that requires them to track employees’ hours of service as well as information about their offers of coverage to their full-time employees during the year. The 2024 calendar year Forms 1095-C must be furnished to employees by March 3, 2025. Forms 1094-C and 1095-C are due to the IRS by February 28, 2025, for employers who do not file electronically, and March 31, 2025, for employers who do file electronically. Note that some states (e.g., New Jersey and Rhode Island), as well as the District of Columbia, have reporting requirements similar to the federal requirements. Employers subject to these state requirements should monitor state-specific reporting deadlines, as they will not necessarily align with the extended federal deadline. 
• If required, an employer with a self-insured medical plan may need to make a second request for a taxpayer identification number (“TIN”) (i.e., a Social Security Number) for employees who have not provided a requested TIN. As noted above, under the Affordable Care Act, larger employers are subject to information reporting requirements regarding employee full-time status and offers of coverage. The IRS Forms used for this purpose require that TINs be included on the Form.  Employers with self-insured medical plans are responsible for collecting (or attempting to collect) TINs for employees and their family members who enroll in the employer’s medical coverage. The IRS proposed regulations that provide a waiver from penalties if the employer is unable to obtain necessary TINs but has taken “reasonable steps” to collect such TINs, which consists of making a solicitation within the following timeframes:
  • upon enrollment;
  • within 75 days after the date of the initial solicitation; and
  • by December 31^st of the year following the year in which the individual applied for coverage or added an individual to existing coverage.

 

If an employee does not provide a TIN for a covered spouse or dependent, the employer may use that individual’s date of birth on Form 1095-C in lieu of a TIN.

• The Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) requires group health plans to notify the Department of Health and Human Services (“HHS”) of all breaches of unsecured protected health information. A group health plan must notify HHS within 60 days of discovering a breach affecting 500 or more individuals. For breaches involving fewer than 500 individuals, HITECH requires a group health plan to keep a log or other documentation of such breaches that occur within a calendar year and to notify HHS of such breaches within 60 days of the close of the calendar year.  This means that group health plans must notify HHS of all breaches affecting fewer than 500 individuals that occurred in 2024 by no later than March 1, 2025. Notifications must be submitted online at the HHS website here.
• Medicare Part D online disclosure to the Centers for Medicare & Medicaid Services (“CMS”) for group health plans offering prescription drug coverage to individuals eligible for Medicare Part D is due by March 1, 2025. 
• Group health plan fiduciaries will need to sign a certification that they have engaged in a prudent process to select qualified service providers to perform and document a comparative analysis of the nonquantitative treatment limitations (“NQTLs”) on mental health and substance use disorder benefits under the plan and have satisfied their duty to monitor those service providers. For calendar year plans, the certification requirement is applicable January 1, 2025. This certification requirement was imposed under final regulations published September 23, 2024 regarding the requirement for group health plans to perform and document a comparative analysis of their plan’s NQTLs (e.g., prior authorization requirements, medical necessity requirements, etc.).  See our October 9, 2024 LEGALcurrents for more details.
• Employers will need to review their group health plan HIPAA policies and procedures and notices of privacy practices to ensure that they comply with the final regulations regarding the treatment of protected health information (“PHI”) related to reproductive health care. A group health plan’s notice of privacy practices does not need to be updated to reflect the new requirements until February 16, 2026, but employers and plan administrators need to be prepared to comply with the new requirements beginning December 23, 2024.Practically, since most requests for disclosure of PHI are made to and handled by the HIPAA business associates of group health plans (e.g., third-party claims administrators), employers are not likely to have to apply the new requirements frequently.
• The IRS opened the determination letter application process for individually designed 403(b) plans whose sponsors had EINs ending in 1, 2, or 3 as of June 1, 2023 and extended the process to sponsors with EINs ending in 4, 5, or 6 effective June 1, 2024. If you have an individually designed 403(b) plan and your EIN ends in 8, 9, or 0, you can submit the plan for an initial determination letter beginning June 1, 2025. 
• If you are making a discretionary match for the 2024 plan year, your plan document may require you to notify your participants when the match is deposited. The IRS required such provisions in pre-approved plan documents during the last document update cycle. Check your plan document for details.
• Will you need a summary of material modifications to update one or more summary plan descriptions to reflect 2024 changes to plan terms, insurers, trustees, or other summary plan description content? Is your summary plan description due for replacement because it is more than five years old (ten years old, if there have been no changes)? For a calendar year plan, updated summary plan descriptions or summaries of material modifications will be due just before the end of July (210 days after the end of the plan year).
• Over the last few years, we have noticed an increase in questions and documentation requests from Form 5500 auditors, particularly with respect to late remittances and the correction of operational failures.  Additionally, auditors also need to review a draft of the Form 5500 before issuing the audit opinion. All of this means that a number of our clients have found that their annual audits require more time. Consider whether you need to adjust your audit timetable for the 2024 plan year audit that will take place in 2025.
• The IRS has provided for an “administrative transition period” that effectively extends until 2026 the deadline for employers to comply with the SECURE 2.0 Act requirement that employees with prior year FICA wages in excess of $145,000 make catch-up contributions as Roth rather than pre-tax contributions. The IRS has yet to issue guidance on this requirement, making it difficult for employers and vendors to begin advance planning. However, employers should monitor developments in this area, and be prepared to begin work on implementation as soon as the necessary information is available.

Important Developments in 2024

There have been a number of legal developments important to benefit plan sponsors and administrators. This segment of the newsletter summarizes the items we have found to be most relevant to our clients.

New Legislation

SECURE 2.0 Act
The IRS and DOL continue to issue guidance implementing provisions of the SECURE Act (passed at the end of 2019) and the SECURE 2.0 Act of 2022. Highlights for 2025 are discussed above, and more details are available in our SECURE Act and SECURE 2.0 Act LEGALcurrents. Significant pieces of guidance published in 2024 include:

• IRS Notice 2024-02 (released December 2023), which provided guidance on:
  • New automatic enrollment requirement taking effect in 2025
  • Enhanced tax credits for new employer retirement plans
  • Military spouse benefit tax credits
  • Offering employees small financial incentives for enrolling in 401(k) and 403(b) plans
  • SIMPLE plan contribution limits, plan terminations, and rollovers, as well as guidance on SIMPLE and SEP Roth IRAs
  • Tax-favored plan distributions for terminally ill individuals
  • Correction of failures to properly enroll individuals to make elective deferrals
  • Cash balance plan anti-backloading compliance
  • Optional treatment of employer contributions as Roth contributions, effectively aligning the administration of this feature with the process for in-plan Roth conversions
  • Extension of the plan amendment deadline to 2026
• An IRS Frequently Asked Questions guide on qualified disaster recovery distributions and plan loan relief
• IRS Notice 2024-22 and the DOL’s Frequently Asked Questions guide on Pension-Linked Emergency Savings Accounts
• IRS Notice 2024-55 on the rules for emergency personal expense distributions and eligible distributions to domestic abuse victims
• Final and additional proposed required minimum distribution regulations from the IRS
• IRS Notice 2024-63, which provides guidance on the rules for retirement plan matching contributions linked to student loan repayments rather than elective deferrals[5]
• IRS Notice 2024-73, providing information on applying the long-term part-time employees rules for ERISA-governed 403(b) plans (proposed regulations regarding the application of these rules to 401(k) plans were issued in 2023)
• IRS Notice 2024-77 on administration of the SECURE 2.0 Act’s restrictions on recoupment of pension overpayments
• The DOL’s request for voluntary reporting of missing participant information, to which employers have objected in light of the associated risk of liability for privacy and cybersecurity violations
• The DOL’s guidance on autoportability of retirement plan balances

Litigation Developments

Supreme Court Rulings on Agency Regulations
The Supreme Court’s decisions in Loper Bright Enterprises v. Raimondo and Corner Post, Inc. v. Board of Governors of the Federal Reserve System decisions respectively overturned the 40-year-old Chevron doctrine calling for deference to agency regulations and extended the time period for potential challenges to agency rules. While the cases themselves did not involve employee benefits, both of these decisions are expected to have a significant ripple effect on the highly regulated world of employee benefit plans. 

Under the Court’s holding in Chevron U.S.A. Inc. v Natural Resources Defense Council, Inc., courts were expected to defer to an agency’s construction of a statute administered by that agency if the agency’s construction was reasonable. For example, if a plaintiff sought to challenge a regulation issued by the DOL under ERISA, the court would defer to the DOL’s regulation if that regulation represented a plausible interpretation of the statute, even if there were also other plausible interpretations. In Loper, the Court overturned this long-standing position, holding that the court should instead independently interpret the statute and effectuate the will of Congress. (Under the Court’s still-standing Skidmore v. Swift & Co, Inc. ruling, however, a court can take the agency’s reasoning into account if it finds the agency’s rationale persuasive.[6])

While any benefits professional can readily identify regulations that create burdens without seeming to offer a corresponding level of advantage to plan participants, few people would dispute the need for some type of government oversight to ensure that plan fiduciaries conduct themselves appropriately. The Investment Company Institute reports that retirement plan assets totaled $40 trillion at the end of the second quarter of 2024, and to that dollar amount must be added the expenditures with respect to the health insurance, life insurance, disability insurance, and severance programs on which so many Americans rely. All of this is subsidized heavily by federal tax exemptions. A desire to ensure proper management of participants’ benefits and equitable access to tax-subsidized benefits gives the federal government a significant interest in benefit plans.  In addition, plan sponsors and plan fiduciaries have a significant interest in there being clear rules governing plan operation.

ERISA, the federal statute governing benefit plans, is both complex and flexible.  Congress tried to balance the need for rules that ensure that benefits-related tax incentives are used to support equitable, broad-based programs with employers’ need to be able to craft programs that meet the demands of their businesses. As a result, regulatory guidance has been essential to clarify the application of the statute’s provisions to a broad and complex array of plan designs and plan-related fact patterns. The statute itself could never have been drafted (or amended) to provide the requisite clarity that sponsors and fiduciaries need in an ever-evolving benefits marketplace.

Thus, a number of regulations set forth detailed standards not because the relevant agency or practitioners believe those standards are the only way to ensure plans are appropriately managed, but because plan fiduciaries need a reasonable level of certainty regarding government expectations, and need to be sure that courts reviewing a potential lawsuit will apply those same expectations. Otherwise, fiduciaries would be left to guess whether a particular course of action is appropriate or not, with millions or even billions of dollars potentially at stake. While certain things appear to be obvious, other things are less clear. For example, a fiduciary likely would assume without regulatory guidance that a participant must be informed in advance that contributions will be deducted from the participant’s paycheck and contributed to the plan, but would prefer to know how much advance notice is required rather than guess whether one week, one month, two days or some other period of time is legally adequate. 

As a result, most benefits professionals greeted Loper not with an expectation of more flexibility for plan operations, but with concern that it would spark more challenges to regulations that would ultimately result in less peace of mind for fiduciaries rather than less regulation. 

In particular, a number of practitioners have expressed concern regarding the impact of the loss of Chevron deference on the ESG and forfeiture litigation trends discussed below. The overruling of Chevron also will likely facilitate efforts to strike down the DOL’s regulatory guidance governing investment advice fiduciaries (see “Fiduciary Conflict of Interest Regulations” in “Department of Labor News” below). 

An additional obstacle for regulatory certainty arises from the Corner Post decision.  Historically, the deadline for challenging a regulatory action was measured from the time of the action. In Corner Post, however, the Supreme Court held that the deadline should be measured from the date the plaintiff was first injured by an action. Thus, if the DOL issued a regulation in 1978, and a business started its first benefit plan in 2024 and concluded that the regulation caused it an injury, the business could challenge that regulation, notwithstanding that it had been relied on by the regulated community for decades. Of course, a plaintiff would still have to have reasonable grounds to challenge a regulation. A plaintiff would not, for example, be able to assert that he was not required to act as a prudent fiduciary when making plan investment decisions, since that standard of conduct is clearly imposed by the statute itself.

401(k)/403(b) Fee Litigation
Plaintiffs’ firms continue to target the recordkeeping fee arrangements and investment options offered under defined contribution plans, with hundreds of lawsuits having been filed in the past several years. In the wake of early success for some efforts to challenge the application of forfeited amounts recouped from terminated employees’ non-vested plan benefits to pay for new employer contributions rather than to cover plan expenses (see “Forfeitures” below), some cases targeting fees and/or investment options have also taken aim at this practice.

The range of outcomes in cases challenging defined contribution plan fees and/or investment performance in 2024 indicates that courts continue to struggle to find a workable standard for how much information plaintiffs need to provide at early stages of the litigation in order to proceed past a motion to dismiss a claim into the discovery phase. Some courts have required plaintiffs to provide detailed comparators and benchmarking and demonstrate why those comparators and benchmarks do in fact represent plans, services, and/or investments (as applicable) similar to the plans, services, and/or investments at issue in the litigation.  Other courts have generally accepted plaintiffs’ assertions that the sufficiency of their benchmarks is an issue that must be resolved at trial. For example, plaintiffs in some cases have asserted successfully that recordkeeping services are largely similar across the industry and/or that the high-level coding available on Form 5500 is adequate to demonstrate that plans received similar services. Plaintiffs who have not yet been able to access discovery are often limited in their ability to assert specific facts, but plaintiffs who are allowed to survive a motion to dismiss have enhanced leverage to persuade defendants to settle, even if the plaintiffs’ claims lack merit, due to the time and expense required for defendants to navigate the discovery process. Courts have found it difficult to strike the right balance between these competing concerns. 

The Supreme Court has agreed to consider another topic on which courts have disagreed- namely, the nature of the allegations that plaintiffs must make when asserting that a service provider or investment relationship violates the “prohibited transaction” rules. A 2023 case in the Ninth Circuit involving AT&T raised concerns that plaintiffs would too easily be able to raise prohibited transaction claims, with the Ninth Circuit ruling that the reasonableness of the compensation challenged in that case could not be decided without additional factual findings from the district court, and rejecting holdings from the Third and Seventh Circuits that the prohibited transaction analysis did not apply to arm’s-length arrangements providing for basic plan services such as those at issue in the AT&T case. The Supreme Court has agreed to review a Second Circuit case on a similar topic against Cornell University. In that case, the Second Circuit attempted a middle path, requiring plaintiffs to allege as an initial matter that services were unnecessary or that total compensation was unreasonable (and thus to allege that arrangement falls outside the statutory prohibited transaction exemption for necessary services provided in exchange for reasonable compensation), while acknowledging that the burden to demonstrate the necessity of services and the reasonableness of compensation ultimately remains on the defendants in keeping with the normal rules for establishing an affirmative defense.

Forfeitures
In 2023, the law firm of Hayes Pawlenko LLP sued a number of large employers with respect to their usage of forfeitures to reduce employer contributions rather than to pay plan expenses for the benefit of plan participants, and additional plaintiffs’ firms have shown interest in these types of claims in the wake of mixed rulings on the early lawsuits. These claims have been brought both as stand-alone lawsuits and as adjuncts to more general lawsuits regarding plan recordkeeping and/or investment expenditures. The terms of the plans at issue in the bulk of the forfeiture suits to date allowed for either use, but the plaintiffs assert that the plan documents cast this as a fiduciary decision (i.e., by granting the authority to decide how to allocate forfeitures to the plan administrative committee). Thus, they allege that the fiduciary committee breached its fiduciary obligations by opting to reduce employer contributions (which benefited the company) rather than applying some (or all) of the forfeitures to pay expenses (which would have benefited the participants). 

The characterization of this forfeiture allocation decision as unequivocally fiduciary in nature ignores the long-established distinction between an employer’s role as “settlor” (i.e., sponsor) of the plan, in which capacity it can act in its own corporate interests, and the role of plan fiduciaries. Since many plans are written to identify the employer as a fiduciary as well as the sponsor, an employer often plays both roles, but an employer exercising its “settlor” authority is not subject to fiduciary duties in doing so.  Caselaw and DOL guidance make it clear that decisions about the design of plan features, such as the contribution formula, are “settlor” decisions not subject to fiduciary duties.  Since the employer has the right to amend the plan to eliminate or reduce contributions, decisions about permissibly using available forfeitures to fund those contributions also seem like “settlor” decisions. Indeed, the DOL acknowledged in a 2023 Advisory Opinion issued to Citigroup that, “Plan sponsor decisions on plan document provisions governing whether and under what circumstances the sponsor will pay fees and expenses that could otherwise appropriately be paid by the Plan are settlor decisions not subject to ERISA fiduciary standards.” Foregoing the right to apply forfeitures to contributions produces the same result as an employer decision to pay plan expenses. However, neither the IRS nor the DOL have issued final regulations directly addressing the respective roles of settlor and fiduciary in these decisions, and the Supreme Court’s decision in Loper to eliminate judicial deference to agency regulations has reduced hopes that this litigation trend could be stymied by finalization of pending IRS regulations confirming the permissibility of offsetting contributions by forfeitures.

Some courts have nonetheless recognized the problems posed by the claims, with lawsuits against HP and Thermo Fisher being dismissed, and one against Clorox having been dismissed with permission for plaintiffs to file an amended complaint. Unfortunately, other courts have allowed these claims to proceed. Given the uncertainty associated with litigation and the lack of expectation that there will be a regulatory solution, the best defense in at least the short term likely is for employers to exercise their settlor authority to amend their plans to clarify that the employer has the right, as sponsor of the plan, to apply forfeitures first to reduce contributions, with the plan fiduciaries then having the responsibility to ensure any forfeitures not used for contributions are properly applied to plan expenses within IRS-mandated timeframes. Employers should also consider clarifying their reliance on their settlor rather than fiduciary authority in documentation allocating forfeitures to contributions for a particular year, especially if the employer is using an IRS-preapproved plan document and cannot readily amend the document to clarify the “settlor” source of the authority to apply forfeitures against contributions. 

Of course, employers and fiduciaries alike should take care in the first instance to use forfeitures only in ways permitted by the plan document. Using forfeitures to offset contributions if the plan document requires that they be applied to expenses or reallocated to plan participants as additional contributions is definitively impermissible.

Annuitization Challenges
A number of large employers have transferred segments of their pension liabilities to insurance companies in recent years via the purchase of annuity contracts. Retirees from several plans whose pension liabilities were transferred to the insurance company Athene have sued to challenge those transactions as violations of ERISA’s requirement of fiduciary prudence, and of the associated regulatory requirement that a pension plan purchase annuities from the “safest available” provider. The plaintiffs acknowledge that the employers had the right to annuitize their pension liabilities, but assert that Athene’s offshore capitalization structure and association with private equity investors renders it too risky to qualify as a “safest available” pension annuity provider. 

Employers and plan fiduciaries considering a partial or complete transfer of pension liabilities to an insurer should be aware of the risks of a legal challenge. The plan sponsor should direct the termination or partial annuitization (as applicable) in its capacity as plan sponsor, so that those decisions are not subject to fiduciary challenge. However, the fiduciaries must remember that their decisions regarding how to implement a termination or annuitization decision and their selection of the annuity provider are fiduciary decisions. In making those decisions, fiduciaries must act prudently and undertake an appropriate investigation with the help of qualified experts. In addition, fiduciaries considering a purchase from Athene should take into account the allegations made by the plaintiffs in the recent cases. Even if they conclude after the requisite research that those allegations are unfounded and that Athene is an appropriate provider for their plans’ needs, common sense indicates that they should weigh the heightened litigation risk associated with an Athene purchase and consider whether one or more other providers might also satisfy the regulatory requirements for an annuity purchase so as to allow the purchase to proceed with less risk of a legal challenge.

Actuarial Equivalent Pension Litigation
After a few relatively quiet years, lawsuits challenging the actuarial assumptions used to calculate optional forms of payment from pension plans picked up in 2023, and 2024 saw some additional court rulings and settlements. It remains to be seen whether any courts will, in the end, determine that the actuarial provisions in question violate legal requirements, or what kind of relief they might grant if they do reach such a conclusion. Given the complications involved in changing actuarial assumptions without imposing impermissible benefit reductions on participants, employers who are concerned about a plan’s design should review their options with their actuaries and counsel before taking action.

Arbitration of ERISA Claims
Plaintiffs continued to claim court victories in 2024 when challenging the enforceability of arbitration clauses as a way of preventing class action claims alleging breach of fiduciary duty. While the provisions of a particular arbitration clause can be relevant in some cases, courts continue to be persuaded by the more fundamental position asserted by numerous plaintiffs (and supported by the DOL) that an arbitration clause barring access to plan-wide relief for fiduciary breach claims prevents plaintiffs from “effective vindication” of their rights under ERISA, and hence is unenforceable. The Supreme Court has turned down a number of opportunities to address the issue, including a petition from Argent Trust denied in November 2024. However, Tenneco has a petition pending that focuses on the validity of the “effective vindication” doctrine, and that issue may be attractive to the Court’s conservative majority. 

ESG Investing and American Airlines
Over the past several years, there has been a great deal of political and media attention to investment programs that incorporate review of “environmental, social, and governance” (“ESG”) factors, as well as to the role of “diversity, equity and inclusion” (“DEI”) initiatives in the financial industry in particular and the business world in general. Proponents argue for the economic merits of these efforts as well as their social value. Opponents assert that they are economically disadvantageous and in fact outright illegal in some cases. In the ERISA context, opposition has focused on ESG efforts that allegedly sacrifice investment returns for ESG goals. 

As noted above, the DOL has made efforts to clarify the regulatory standard for ESG-oriented decisions by ERISA plans. Its most recent regulations were upheld against a court challenge, but their fate is now in question again in the wake of the Supreme Court’s Loper decision and in light of the pending change in presidential administrations. Despite the political controversy, the regulations themselves primarily codify a long-standing interpretation of ERISA, stating first and foremost that decisions about investments and service providers must be economically prudent (see our LEGALcurrents for more information). ESG, DEI, or similar considerations can be taken into account only when economically relevant in their own right, or as “tie-breakers” when the economic standards for prudent investment or vendor selection (as applicable) have been met. The DOL has asserted that the regulations thus withstand scrutiny even under the Loper standard, but the court has yet to issue an opinion.

While numerous studies indicate that (i) plan fiduciaries generally have not made investment decisions based on “ESG” factors other than when economically relevant (e.g., considering the potential impact of a known environment clean-up liability when deciding whether to invest in a given company), and (ii) that most fiduciaries do not intend to start making ESG-motivated investment decisions,[7] fiduciaries are concerned that in today’s fraught political climate, politically motivated plaintiffs might seek to bring lawsuits based on allegations that certain decisions were impermissibly motivated by ESG factors, resulting in expensive and stressful litigation.

There has proven to be some foundation for these concerns, since one opponent of ESG investing sued American Airlines, alleging that the company impermissibly used its 401(k) plans to further its corporate ESG goals. The original lawsuit raised a number of claims, most of which were on questionable legal footing for a variety of reasons, but the eventual focus of the trial turned on specific voting decisions by BlackRock and certain other managers. A decision has not yet been issued. 

Class Action Litigation Regarding Pharmacy Benefit Manager Selection

Similar class action lawsuits were filed against Johnson and Johnson and Wells Fargo and the plan fiduciaries of their self-insured group health plans in 2024 alleging breach of fiduciary responsibility in connection with the plan fiduciaries’ retention of Express Scripts to serve as the pharmacy benefits manager (“PBM”) for the plans. The lawsuits allege that the plan fiduciaries breached their fiduciary duty by agreeing to contracts with the PBM that result in the plan (and plan participants) paying unreasonably high prices for certain drugs. The complaints contain a detailed description of PBM practices and the types of “pricing models” that are typically used in group health plan contracts with PBMs, including “spread pricing” models, where the amount the PBM charges the plan for drugs may be higher than the amount that is paid to the pharmacy by the PBM, with the PBM keeping the “spread” or difference as compensation for its services. Both Johnson and Johnson and Wells Fargo have filed motions to dismiss the complaints on the grounds that the plaintiffs do not have standing to bring the lawsuit because they have not suffered harm. We expect to see additional litigation regarding health and welfare plan costs in the future and plan fiduciaries should examine their practices regarding plan fiduciary oversight of the selection and monitoring of plan services providers such as PBMs and medical claims administrators.

Wellness Program Litigation

In the past several months, lawsuits have been filed against a number of large employers alleging that their wellness programs relating to tobacco usage do not comply with longstanding HIPAA wellness program regulations. Many employers maintain wellness programs that provide a reduced employee contribution for health insurance coverage or other reward for employees who certify that they are not tobacco users. Under longstanding HIPAA wellness regulations under this form of wellness program, employees must be offered a “reasonable alternative” to be able to qualify for the reward if they are tobacco users. Normally, the reasonable alternative is to complete a tobacco-use cessation program. HIPAA wellness program regulations contain specific requirements regarding notifying employees about the reasonable alternative and delivery of the reward when the employee has completed the reasonable alternative. The lawsuits generally allege that the employer did not satisfy the requirements for disclosure of the reasonable alternative or delivery of the reward when the reasonable alternative was completed. Employers should examine their wellness programs to ensure they are in compliance with the HIPAA regulations. 

Department of Labor News

Fiduciary Conflict of Interest Regulations
Following the Fifth Circuit’s invalidation of an Obama-era regulatory effort by the DOL to expand the definition of “fiduciary” under ERISA to cover a broader range of conduct (including provision of advice regarding distributions and rollovers from retirement plans), the Trump DOL largely reinstated the original 1970s-era regulatory provisions regarding the scope of fiduciary status. However, the Trump DOL attempted to reverse the agency’s previous position (expressed in non-regulatory guidance) that a financial professional providing advice with respect to a plan distribution or rollover is not a “fiduciary” by reason of offering that advice if the financial professional does not already have or anticipate an ongoing relationship with the plan. The DOL’s revised position on rollovers was successfully challenged in court.  Subsequently, the Biden DOL released a new set of regulations that would require safeguards against conflicted rollover advice and close other perceived gaps in the existing regulatory structure (more details about the new regulations are available in our LEGALcurrents). The new regulations were in turn enjoined by a Texas court during the pendency of legal challenges. Given the historic hostility of the courts in Texas and the Fifth Circuit to DOL regulatory efforts on this topic and the pending change in presidential administrations, it is doubtful that the Biden regulations will survive.

Missing Participant Database
The DOL has opened its voluntary reporting portal for plans with missing participants over age 65, and hopes to make a searchable database available to individuals looking for unpaid benefits by the end of December 2024. However, since the DOL was unable to obtain participant information from the IRS due to confidentiality rules, it is dependent on voluntary reporting by employers. Employers, in turn, are concerned about potential data security violations if they voluntarily disclose the information, as well as about potential use of the information in DOL investigations. Although the DOL reduced the information it is requesting in an attempt to ameliorate the latter concern, response to the DOL’s request is still expected to be limited.

Amended QPAM Exemption
The DOL finalized disputed amendments to the standards necessary for investment firms to qualify for the “qualified professional asset manager” exemption from the prohibited transaction rules. The new rules impose restrictions on the ability of entities associated with entities convicted of financial misconduct outside the U.S. (other than those convicted in countries listed as “foreign adversaries” by the U.S.  Commerce Department) to qualify for the exemption (aligning with existing prohibitions for entities convicted of financial misconduct in the U.S.), set higher net-worth and assets-under-management standards, buttress the requirement that the QPAM be responsible for covered transactions rather than merely providing a rubber stamp, and require entities seeking QPAM status to register with the DOL.

Prohibited Transaction Exemption Applications
The process for applying for an individualized prohibited transaction exemption has been revised. The application process allows potential parties to a transaction that would be prohibited under the “prohibited transaction” rules (restrictions on dealings between benefit plans and their sponsoring employers, fiduciaries, vendors, and other “parties in interest”) to seek an exemption for a particular arrangement from the DOL. The new regulations are intended to make the application process more efficient, but also require submission of more information than was necessary under the old process and enhance requirements for independent fiduciaries and appraisers.

Independent Contractor Rule
The DOL has issued a new regulation governing when a worker can be considered an “independent contractor” rather an “employee” for purposes of the Fair Labor Standards Act.[8] While employee benefit plans customarily look to the IRS’ standards for classification of workers as “employees” or “independent contractors,” the need to comply with the new FLSA rules may influence employers’ decisions about how to classify their staff and what sort of work arrangements to permit.

ESOP Stock Valuation Regulations
Privately owned employers whose benefit plans hold investments in employer stock have long wanted the DOL to provide greater certainty on the standards applicable to valuing that stock for purposes of plan transactions. The SECURE 2.0 Act required the DOL to issue final regulations on the subject. Reports are that proposed regulations have now been sent for final review and should be issued soon.

Abandoned Plans Regulations Finalized
The DOL issued an interim final regulation and a prohibited transaction exemption in connection with its “Abandoned Plans” program. The program was established to assist the custodians of plan assets seeking to close out retirement plans whose sponsoring employers are no longer available (for example, due to a business liquidation or bankruptcy). The new regulations extend the program to Chapter 7 bankruptcy trustees.  More information about the program and the new rules is available on the DOL’s Abandoned Plans website.

Internal Revenue Service News

SECURE Act/SECURE 2.0 Act Guidance
As noted above, the IRS issued guidance on a number of SECURE Act and SECURE 2.0 Act provisions in 2024.

Required Minimum Distribution/Rollover Regulations
The new final and proposed regulations on required minimum distributions and rollovers reflect changes made by the SECURE and SECURE 2.0 Acts and also make other updates and clarifications. More information about the required minimum distribution regulations is available here.

Section 417(e) Regulations
The IRS issued regulations providing additional clarity on the calculation of certain types of pension payments (such as social security level income options) and the payout of employee contributions under defined benefit plans.

Cybersecurity and Anti-Fraud Measures

Protection of participant data and prevention of fraudulent access to plan benefits remain key concerns for employers and plan vendors alike. Plan fiduciaries should be sure that both their in-house systems and those of their vendors maintain appropriate safeguards, and should be familiar with the contractual protections applicable to each vendor relationship. At a minimum, the fiduciaries should confirm that a plan’s arrangements align with the best practices cited by the DOL, absent good reasons why a given practice is not appropriate for a particular plan. 

In particular, plan fiduciaries should be aware that the DOL expects plans to maintain written cybersecurity procedures. These procedures should address both how the plan will protect against potential cyberattacks, and how the plan will respond in the event of a successful cyberattack. Further, the DOL has indicated that plan fiduciaries should maintain adequate cybersecurity insurance dedicated specifically to the plan. Plan fiduciaries should review this cybersecurity insurance to ensure it is comprehensive in scope, and that they are aware of any privacy and security practices that the policy requires the plan to follow in order to obtain coverage.

More information is available in our cybersecurity LEGALcurrents on cybersecurity policies and the DOL’s best practice recommendations.

Puerto Rico

Employers that maintain retirement plans for employees in Puerto Rico must satisfy the requirements of Puerto Rico’s tax laws, even if the plan also satisfies U.S. Internal Revenue Code requirements. If you have a retirement plan covering employees in Puerto Rico, regardless of whether it is a Puerto Rico only plan or a “dual qualified” plan that also covers U.S. employees, consult Puerto Rico counsel about your obligations.

Employee Benefits Year-End Checklist: Updated Internal Revenue Code and Other Statutory Limits

	2025	2024
IRA Contribution Limit	$7,000	$7,000
IRA Catch-Up Contributions	$1,000	$1,000
Joint Return	$126,000	$123,000
Single or Head of Household	$79,000	$77,000
SEP Minimum Compensation	$750	$750
SEP Maximum Contribution	$70,000	$69,000
SEP Maximum Compensation	$350,000	$345,000
SIMPLE Maximum Contributions	$16,500	$16,000
SIMPLE Catch-up Contributions	$3,500	$3,500
SIMPLE Catch-up Contributions (ages 60-63)	$5,250	n/a
Annual Compensation	$350,000	$345,000
Elective Deferrals	$23,500	$23,000
Catch-up Contributions	$7,500	$7,500
Catch-up Contributions (ages 60-63)	11,250	n/a
Defined Contribution Limits	$70,000	$69,000
ESOP Limits	$1,415,000 $280,000	$1,380,000 $275,000
Domestic Abuse Distribution Limit	$10,300	$10,000
HCE Threshold	$160,000	$155,000
Defined Benefit Limits	$280,000	$275,000
Key Employee	$230,000	$220,000
457 Elective Deferrals	$23,500	$23,000
Control Employee (board member or officer)	$140,000	$135,000
Control Employee (compensation-based)	$285,000	$275,000
Taxable Wage Base	$176,100	$168,600
Health Care FSA Salary Reduction Maximum	$3,300	$3,200
Individual Out-pocket Maximum Limit under the Affordable Care Act	$9,200	$9,450
Family Out-pocket Maximum Limit under the Affordable Care Act	$18,400	$18,900
High Deductible Health Plan and Health Savings Account (“HSA”) Limits
Min. Individual Deductible	$1,650	$1,600
Min. Family Deductible	$3,300	$3,200
Individual Out-pocket Maximum Limit	$8,300	$8,050
Family Out-pocket Maximum Limit	$16,600	$16,100
Individual HSA Contribution Limit	$4,300	$4,150
Family HSA Contribution Limit	$8,550	$8,300
HSA “Catch-up” Contribution Limit	$1,000	$1,000

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[1] A technical correction to the SECURE Act eliminated an exception to this rule for Qualified Automatic Contribution Arrangements.

[2] Alternatively, plans using the nonelective safe harbor have the ability to notify participants that the safe harbor may be used, without committing in advance, and to provide a follow-up notice at least 30 days before the end of the year if a safe harbor design is adopted.

[3] The relevant age is 70½ for individuals who attained age 70½ prior to January 1, 2020 (i.e., born before July 1, 1949), age 72 for individuals who attained age 70½ on or after January 1, 2020 but no later than December 31, 2022, and age 73 for individuals who had not attained age 72 by December 31, 2022. The age will increase to 75 effective in 2033, for participants attaining age 73 after December 31, 2032 (a statutory technical correction is needed with respect to the details of the 2033 transition).

[4] IRS Notice 2024-73 confirmed that 403(b) plans not covered by ERISA are not subject to the “long-term part-time employee” rules, although organizations offering these plans should bear in mind that the ability to exclude part-time workers from elective deferrals without violating the usual Section 403(b) “universal availability” rule is extremely limited.

[5] A recent federal crackdown on consumer data privacy enforcement has raised concerns about plan recordkeepers’ ability to access the data necessary to obtain verification of student loan repayments.

[6] The Court in Skidmore explained that an agency’s views, “while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance.”

[7] Some plans’ participants have requested ESG investment options.  The DOL’s regulations confirm that it is permissible for fiduciaries to take participant requests into account, but note that “plan fiduciaries may not add imprudent investment options to menus just because participants request or would prefer them.”

[8] A federal judge in Texas recently struck down the salary provisions of the regulations. It remains to be seen how the Trump Administration will proceed.