DOL Drops Off Proposed Auto-Portability Exemption at OMB

Proposed guidance implementing the SECURE 2.0 Act’s provision providing an exemption for certain automatic portability transactions has moved one step closer to being publicly released. 

The Department of Labor on Dec. 5 submitted to the White House Office of Management and Budget for review a Notice of Proposed Rulemaking to implement a statutory exemption under Section 4975 of the Internal Revenue Code (IRC) allowing for the receipt of fees and compensation by an automatic portability provider for services provided in connection with automatic portability transactions. 

The guidance addresses Section 120 of the SECURE 2.0 Act, which amended IRC Section 4975 to provide the statutory exemption. 

Beginning in 2024, an employer is permitted to distribute a participant’s account balance without participant consent if the balance is under $7,000 (up from $5,000)[1] and the balance is immediately distributable (e.g., after a termination of employment). Current law also requires an employer to roll over this distribution into a default IRA if the account balance is at least $1,000 and the participant does not affirmatively elect otherwise. 

Section 120 permits a retirement plan service provider (i.e., Retirement Clearinghouse) to provide employer plans with automatic portability services, allowing for the automatic transfer of a participant’s default IRA (established in connection with a distribution from a former employer’s plan) into the participant’s new employer’s retirement plan, unless the participant affirmatively elects otherwise. Section 120 is effective for transactions occurring on or after the date which is 12 months after the date of enactment (which was Dec. 29, 2022).

The proposal will now undergo a review at OMB before being released for a public comment period, which shows a target release date of December 2023. The OMB generally has up to 90 days to vet the request and either approve it for release or send it back for modifications, but there is no minimum period for review. 

Footnote

[1] Section 304 of SECURE 2.0 updated the dollar limit for mandatory distributions from $5,000 to $7,000, effective for distributions made after Dec. 31, 2023.