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Guiding Clients Through DOL Benefit Plan Probes: Part 1

April 1, 2020Articles Law360

This article is part one of a two-part series that discusses what employee benefit plan sponsors and their counsel can do to prepare for and navigate a U.S. Department of Labor investigation or audit of an employer-sponsored employee benefit plan.

Investigations often focus on a retirement plan that is subject to the Employee Retirement Income Security Act, and its compliance with the statute, particularly ERISA’s fiduciary obligations and reporting and disclosure requirements. The article is intended to provide techniques and strategies for helping clients (and their counsel) smoothly and efficiently navigate through DOL investigations that are civil in nature, rather than criminal.

While investigations can also apply to employee welfare benefit plans, including a group health plan’s compliance with the Patient Protection and Affordable Care Act, the article’s focus is on DOL investigations, and, to a lesser degree, investigations of retirement plans performed by the Internal Revenue Service.

Part one of this article focuses on preparing for an investigation. Part two will discuss how to manage DOL (and plan sponsor) expectations and will discuss issues related to closing the investigation.

Preparing for an Investigation/Audit

No client likes receiving a DOL notice that the employer’s employee pension benefit or welfare benefit plan is being investigated. Because the majority of DOL investigations are prompted by participant complaints or Form 5500 filings, it’s natural for clients who receive notices of an investigation to experience anxiety about their level of plan compliance.

Clients worry about whether they have sufficient control over benefit department employees, and their ability to act promptly and deliberately in responding to DOL document requests. The question of whether an employee secretly complained to the DOL may arise.

Clients wonder, similarly, if the vendors responsible for administering their benefit plans are delivering the value promised. Ultimately, clients are concerned about the cost of responding to and defending against any proposed DOL enforcement action.

That concern may include the cost of representation from counsel. In sum, when clients call counsel to assist in these matters, they are typically not having a good day.

Counsel can provide value for the client by making the process of being investigated less anxiety-producing and time-consuming, and by placing the client in the position most likely to mitigate the financial impact of any negative findings.

Review Fiduciary Insurance Coverage

Don’t forget that fiduciary insurance policies generally pay for the cost of defending plan fiduciaries, the plan sponsor, and the plans themselves, even in an agency investigation, particularly when there are allegations of a fiduciary breach. These policies commonly cover liability resulting from errors and omissions discovered upon a DOL investigation. Once your client receives notice of the investigation, advise the client to review (or undertake a review of) its fiduciary policy to understand the extent of coverage.[1]

Review Internal Controls

The IRS and the DOL each commence their respective investigations by surveying the plan sponsor/administrator’s internal controls over plan operation.[2] Where internal controls are found lacking it is common for the IRS and DOL to expand the scope of their investigation, either by (1) including additional plan years in the audit; (2) expanding the substantive focus of the investigation; or (3) both.

You can positively impact your client’s experience in a DOL investigation by helping your client develop and maintain policies and procedures assuring that internal controls are in place. Doing this in advance of any agency investigation of the client’s employee benefit plans is obviously the better position to be in. This advanced preparation not only creates a favorable impression upon investigators that the plan sponsor is properly exercising its fiduciary duties, but also makes responding to document requests easier.

As an example, the following foundational practices are critical to the early establishment of the fact that internal controls exist in your client’s plan administration.

Adopt, Maintain and Update Written Plan Documents

The first thing the DOL does in an investigation is review whether an employee benefit plan has been properly established.[3] ERISA requires that an employee benefit plan is set forth in a written document.[4]

Surprisingly, many clients may have difficulty producing their written plan document. For example, a plan sponsor that uses a third-party administrator may fail to maintain plan documents in its corporate records. The plan document(s) then becomes difficult to obtain when the third-party administrator learns a government entity is investigating the plan.

For example, employers who sponsor fully insured group health plans sometimes rely upon the certificates and benefit summaries provided by the insurance company to document the employer’s official plan. Such arrangements fail to fulfill ERISA’s requirement that a plan be described in a written plan document. This can leave the employer with an arrangement that fails to contain certain ERISA-required notices or rights, such as those provided under ERISA, Consolidated Omnibus Budget Reconciliation Act, Health Insurance Portability and Accountability Act, or even medical child support orders.[5]

The DOL is not impressed when a simple request for plan documents cannot be fulfilled by the client who sponsors the plan.

In addition, many employers forget to formally adopt their plans and keep necessary plan amendments. A properly adopted written plan document or amendment is one that is considered by a company board of directors, managing members or partners, discussed, and then adopted by formal action or by written consent.

You should help the client demonstrate the soundness of its internal controls by assuring corporate records contain documentation that corporate formalities were followed. The client should always have copies of all plan documents, from the plan’s initial adoption through its termination, in its files. As an aside, a recent memo from the U.S. Department of the Treasury indicated that a plan sponsor must retain a validly executed plan document and, upon audit, produce such document to the exam agent to support the plan’s qualified status.[6]

An employer who, in a short period of time following a DOL request, produces all relevant plan documents, with evidence that corporate formalities were followed, demonstrates its good internal controls to that agency. This may curb further probing by the agency (or its expansion of the investigation).

Establish and Maintain Good Record Retention Policies

Maintain foundational plan documents (i.e., master plan, adoption agreement, wrap plan, etc.) and summary plan descriptions, or SPDs, for the tenure of the plan’s existence. ERISA requires that administrators retain plan documents, like Form 5500s, for six years from the date they were reported or filed.[7]

Subject to state laws, HIPAA also mandates that private health information, as is contained in benefit claim records, be maintained for six years by any group health plan that is a covered entity.[8] For retirement plan participants, ERISA requires that the plan sponsor maintain records sufficient to permit plans to determine benefits due to each participant.[9] Practically speaking this means employers must maintain benefit-related participant records for the duration of the time during which the plan owes a participant benefits.

The plan sponsor or administrator that maintains organized records and has in place the proper document retention policy will find answering requests for documents very easy. As a quick aside, the integrity of the information should be safeguarded if the plan sponsor changes the method by which it retains this information or switches third-party administrators or record-keepers. Having an agency investigation begin soon after a merger or other corporate event, and a consolidation of record-keepers, can intensify the level of a plan sponsor’s worry that the investigation will yield negative results.

Additionally, DOL investigators almost always ask for relevant compliance-related records, such as annual plan coverage and discrimination (like ADP/ACP for a 401(k) plan) testing results, documents showing how highly compensated employees were identified, payroll records, and independent contractor agreements. Retain these documents for at least six years from the date a Form 5500 is filed for the year to which these records apply. This allows the agency to see the client’s compliance efforts.

Maintain SPDs that Reflect Current Plan Terms

SPDs are an essential element of plan administration because they are the primary document for communicating plan terms and conditions to employees.[10] ERISA requires that SPDs be supplemented by a summary of material modification when material plan terms are changed.

Additionally, SPDs must be updated (generally) every five years.[11] DOL regulations require certain plan sponsors and administrators to have SPDs or notices of assistance for translation of participant rights and obligations under the plan, published in languages reflecting the primary language of employed workers.[12] Employers who maintain SPDs with current plan document terms, in appropriate languages, demonstrate to the agency that the employer, as plan sponsor, cares about having their employees understand their rights and benefits.

Obtain Written Waivers for Eligible Employees Choosing Not to Participate

In the group health plan world, for applicable large employers, written waivers are virtually the only way that the employer can avoid penalties for failing to make an offer of coverage to those full-time employees that do not enroll in the plan. In the retirement plan world, where waivers are not as common, a written waiver supports the employer’s position that an eligible employee was provided the opportunity to enroll in the retirement plan — but chose not to do so.

This proof of waiver prevents an agency from determining that an eligible employee is entitled to a corrective contribution because the employee was not offered an opportunity to enroll in the plan in a timely manner. Recommend to your clients that they obtain written waivers from those employees who wish to forgo benefits, and that these waivers be renewed each plan year.

Open enrollment is the obvious time to do this for health plans. Retain the waivers in a similar fashion to individual participant administration documents.

Adopt and Maintain Written Policies and Procedures

Written policies and procedures are necessary for plan loans, hardship distributions, qualified medical child support orders, national medical support notices, qualified domestic relations orders, tax liens, and garnishments.

It’s common for plan third-party administrators or insurers to handle claims and benefit disbursements for both retirement plans and health and welfare plans. Many plan sponsors and administrators also outsource plan loan administration, including loan repayments. They may also outsource orders for spousal or child support, tax liens and garnishments.

Sponsors may also adopt missing participant policies in order to timely pay plan benefits. The presence of policies and procedures for these transactions, and review of governing vendor contracts, supports the position that the plan sponsor has thought about compliance given the applicable legal environment and has developed appropriate responses to them. Review these procedures (or governing contracts) to see that a process exists and is followed. Review how special situations are resolved.

For example, how is a military leave handled when the participant has an outstanding loan or what happens if a participant defaults on a 401(k) plan loan? Being clear that operations follow the plan and policies is assuring when the investigator asks the same question.

Demonstrate That Vendors Are Diligently Selected and Vendor Agreements Contain Essential Terms

The requirements for exemption from ERISA’s prohibited transaction provisions, as well as ERISA’s fiduciary provisions, compel plan sponsors and administrators to choose vendors via a due diligence process.[13] Vendor agreements must call for the vendor to be paid reasonable compensation to fall within the exemption to the prohibited transaction rules.[14]

Your client’s files concerning retention of vendors should evidence both a due diligence effort in choosing the plan vendor and some research into competing vendors, and vendor prices, in the marketplace. Vendor agreements must address the production of plan records in the event of an agency investigation, the return of records to the employer as plan sponsor at the close of the agreement’s term, and the vendor’s obligations regarding the privacy and security of the participants’ private information.

Conduct Periodic Internal Audits or Due Diligence Surveys

The IRS and DOL both state that periodic internal audits or reviews of plan operational aspects is an essential element of internal controls.[15] Through periodic self-audit or review of plan operations, plan administrators can discover errors quickly and correct them before the employer must avail itself of the DOL or IRS formal plan correction programs.

Where these audits or reviews identify discrepancies, use agency programs, like the IRS’ Employee Plans Compliance Resolution Program or the DOL’s Voluntary Fiduciary Correction Program, which can eliminate or reduce the greater fees that may be imposed on an agency investigation. Proof of the corrections provides the agency with evidence of the sponsor’s compliance efforts.

Early detection of errors involving welfare benefit plans facilitates the employer’s ability to protect employees from plan errors that may result in additional taxes or excise taxes being assessed as, for example, when a plan fails to meet the requirements that apply to high-deductible health plans. That error could result in having to communicate to employees that their pretax contributions to a health savings account are excessive and subject to taxation.[16] Of course, it would be better to discover and correct this error outside an agency investigation.

Reprinted with permission from Law360(c) 2020 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

A version of this article was also featured in LexisNexis Practical Guidance.