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Guiding Clients Through DOL Benefit Plan Probes: Part 2

April 2, 2020Articles Law360

This is the final of two articles that discuss 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 provides 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 discussed how to prepare for an agency investigation. Part two will discuss how to manage DOL and plan sponsor expectations during the investigation and discusses issues on closing the investigation.

Managing Agency and Plan Sponsor Expectations

Once your client receives a notice of investigation by a government agency, such as the DOL, take action to set the tone for the client's interactions with the investigator and vice versa.

Particularly if you have not been retained on benefit matters for the client on any prior occasion, as the plan sponsor's representative, it's vital that you explain to your client that the client has a fiduciary duty to administer the plan for the exclusive benefit of the plan participants.[1] This is true, even to the point where such administration may harm the company sponsor.[2]

Acting as the plan sponsor's counsel means that actions designed to obstruct the DOL investigation, such as hiding errors in plan administration, or stonewalling responses to requests for production of documents and information, are inappropriate. It is important that the client maintain a positive relationship with the investigator in DOL civil investigations. An aggressive, adversarial posture in response to a DOL investigation will raise the expense of defense for your client and is not likely to yield positive results.

Representing the Client Plan Sponsor or Plan Fiduciary

Another conversation that should take place with the client involves who you represent. Typically, counsel in plan audits represents the plan sponsor and plan administrator because the company frequently holds both titles. If, in the course of a DOL investigation, it becomes apparent there are serious issues, such as the misappropriation of employee contributions or serious delays in depositing 401(k) or other employee contributions, advise your client that the plan will need to retain separate counsel.[3]

Handling the Written Notice of Investigation

The written notice of investigation is the initial DOL communication that your client will receive. It sets forth the investigator's name and contact information, and typically comes with a request for documents and information that the DOL wants produced within 30 days. Typical documents requested are:

The plan and trust documents;
Plan policies and procedures;
The summary plan descriptions;
Investment or administrative committee meeting minutes; and
Form 5500 annual reports.

Customarily, the initial notice also contains a request for an in-person interview of your client's representative (the on-site visit). In response, you should call the DOL investigator, introduce yourself and your client, and set a tone which informs the investigator that your client takes plan administration seriously and wants to cooperate in the investigation.

In advance of this contact, you should have your client provide you with a letter written on company letterhead appointing you as the company's counsel for purposes of the DOL investigation. When you contact the DOL investigator, you can provide the authorization letter via facsimile or email. This will permit the DOL investigator to speak with you concerning the investigation.

In the same call where you promise cooperation, you should ask the DOL investigator if the in-person interview may take place following the response to requests for information and the production of documents. This tactic avoids you having to produce your client representative twice, once at the outset and again after the DOL has reviewed produced materials and developed questions.

The tactic also provides you the opportunity to conduct some of your own review of the client's internal controls in plan administration, which is particularly important if you have not been retained on employee benefit matters for the client prior to delivery of the investigation notice.

Agency Penalties

ERISA provides for a penalty that is currently in the amount of $156 per day if your client fails to produce documents within 30 days of the DOL's request.[4] However, the DOL customarily grants at least an additional 30 days to respond to requests for documents and information that are at all numerous.

Propose to the investigator that your client's response to requests for information and document production take place in segments of one or two weeks, over a period of 45 to 60 days or more (depending upon the number of DOL requests) commencing with the production of basic plan documents. Securing the DOL's agreement to this proposal is critical.

The segmented production gives the client time to identify and organize responses and documents and allows you time to review the client's responsive materials prior to production. If errors in plan administration, or plan document failures, become evident, the segmented production provides you time to strategize how you are going to present these errors and failures to the DOL.

Finally, in your initial communication with the DOL investigator, always ask whether the investigation was prompted by a participant or employee complaint, or whether your client was randomly picked for investigation. Not all DOL investigators will provide this information, but the content of the response may provide you with an indication about whether the DOL investigation is part of a specific enforcement proceeding.

Asking the DOL to provide you with a list of any third parties that the DOL is going to interview or approach for documents will also give you a sense of whether your client was randomly chosen for investigation or is the subject of a focused enforcement proceeding.

Being Proactive

Remember, your DOL investigator is human. The easier you make the investigator's job, the less likely the investigator is to go looking for something in the produced materials that make the investigator's life difficult. Documents that are produced should be organized and date stamped. Explanatory information should be provided when you determine it is needed, in advance of the DOL making a request.

If, as you review documents and information provided by the client, you discover plan document or operational errors, consider proactively communicating the errors to the DOL in advance of the production of documents and information that revealed the error to you. Proactive communications regarding errors discovered during the investigation facilitates a discussion about how the errors may be corrected.

Using Agency Correction Programs

Commitment to correction may involve a mere change in company procedures. The commitment may require you to take the client through the DOL's Voluntary Fiduciary Correction Program or the IRS' Employee Plans Compliance Resolution System.

All of these measures demonstrate to the DOL that your client is serious about fulfilling its fiduciary responsibilities and making sure that participants are receiving the benefits they are entitled to receive under the plan terms. Further, there is no question that a proactive commitment to correction, communicated to the investigator with a voluntary disclosure of an error, before the DOL investigator has found the error, has a significant mitigating impact on the DOL's decision whether or not to propose sanctions in an investigation, as well as the amount of the sanction.[5]

Consequences of Noncompliance

Some clients question why it is important to bring plan administration errors to a DOL investigator's attention. Some also ask why it is necessary that the client correct the errors at all.

The answer is that many of the most common errors in plan administration can involve prohibited transaction rules, expose the client or the client's employees to tax penalties, result in disqualification of the plan, and may constitute a breach of fiduciary duty for which ERISA provides redress. For example, the following common operational errors have the consequences shown below:

An unreasonable delay (generally, more than three business days where funds are transmitted electronically) in the deposits of employee elective deferral contributions constitutes a nonexempt prohibited transaction.[6] This must be reported to the IRS and DOL, and likely will result in the assessment of excise taxes.[7]

Failing to properly interpret and apply the plan's definition of "compensation" to employee elective deferral contributions in a 401(k) plan may result in eligible employees missing an opportunity to make elective deferrals on the portion of the compensation omitted. This results in a breach of fiduciary duty for failure to follow the plan document and, on occasion, a plan disqualification.[8]

Failing to account for contract or leased workers who render services to your client for 1,000 hours or more in a plan year may result in the plan appearing to pass coverage testing, when it does not.

Failing to include the current year minimum deductible amount in the group high-deductible health plan will result in the disqualification of participant health savings accounts and subjects employees to income taxes and penalties and results in a breach of fiduciary duty.[9]

Most importantly, it's highly unlikely the client's plan participants will remain unaware of any notable plan error. ERISA allows the DOL to provide information to any person who is affected by a plan error, including participants, beneficiaries and fiduciaries, unless such disclosure is prohibited by another federal law.[10]

Moreover, typical DOL investigations include interviews of participants, third-party administrators, trustees and custodians. The DOL may notify plan participants that operational failures have occurred in plan administration and that they may be entitled to additional benefits. The DOL may also file suit and litigate civil cases arising from errors that occur in plan administration.[11]

Serious errors in plan administration that a DOL investigator discovers during an investigation, and which the client is reluctant to correct, may result in the investigator making a referral of the matter to the IRS, the U.S. Department of Health and Human Services (group health plans) or, for very serious errors, the U.S. Department of Justice. These entities have entered into a memorandum of understanding with the DOL that permits them to refer cases to the other for investigation, and to share information between them.

The DOL, IRS, DOJ and HHS have joint and several authorities with regard to employee benefit plans that permits them to collaborate on a case or defer to one another in enforcement. A client is much better off getting ahead of a plan error and correcting an error during the investigation process than finding itself the subject of a multiagency investigation and enforcement action.[12]

Moreover, in serious cases, such as those involving misappropriation of plan assets or fraud relating to a plan, civil and criminal investigations may run concurrently, or a criminal investigation may be triggered by findings in the civil matter.[13] Should you discover evidence suggesting criminal activity has taken place in your review of the client's plan documents and information, advise the person or persons you believe might be the target of a criminal investigation to hire experienced counsel. You should also recommend to the client plan sponsor that it retain separate counsel to represent the employee benefit plan.

Closing the Investigation

When the investigation is coming to a close, discuss what closing document the DOL investigator intends to provide to your client. Most DOL investigations end with a closing letter. This may include a settlement agreement concerning certain violations or may be a mere letter giving notice that the DOL is not taking further action. The latter is obviously preferable.

If issues have been raised in the investigation, you should try to negotiate a closing letter, rather than a mere walk-away letter providing no action will be taken, even where some violations were discovered. Customarily, an investigator that believes ERISA violations exist, and who has not found the client to have volunteered a correction, will issue a voluntary compliance notice before issuing a determination letter.[14] That letter requires action within 10 days.[15]

The determination letter identifies the violations, proposes their method of correction, and sets forth a formal settlement of the investigation. If you require time to evaluate the DOL's findings and proposed action, consider requesting an extension or a tolling agreement.

In complex circumstances you may wish to elevate the settlement to the DOL regional office director or to the national office. If the DOL proposes sanctions, consider negotiating down the amount of the sanctions by promising that the client will implement additional plan administration controls to assure the same errors will not reoccur.

Avoid a Settlement Agreement if it Means the Sponsor Pays a 20% Penalty

Notwithstanding the discussion above, you may wish to avoid entering into a formal settlement agreement if the DOL investigation involves allegations of a breach of fiduciary duty. This is because a 20% penalty will likely apply, based on the applicable recovery amount.[16] The penalty may be avoided if you avoid entering into a formal settlement agreement, where the fiduciary agrees to take remedial action and informs the DOL that the fiduciary has done so (or will soon do so).

The risk is that the DOL will conclude that the remedial action is insufficient. There are limited provisions for waiver of the penalty: for example, if the DOL determines that the fiduciary or other person acted reasonably and in good faith or that payment of the penalty will result in a severe financial hardship.[17] Careful handling of the voluntary settlement process can avoid an offer and acceptance and thus the triggering of a settlement agreement.

Letter to Client Terminating Representation on the Matter

Finally, regardless of any commitment made to the DOL regarding efforts to establish greater internal controls, close your representation of the client with a debriefing about what you and the client learned from the investigation and discussing steps that need to be taken to avoid the DOL's future enforcement action. Prepare a letter that also confirms to the client that your representation is concluded.

In the event your client is audited or investigated regarding future plan operations, this correspondence will protect you, preventing any ambiguity that may arise whether the client intended you to continue to represent it in ongoing plan compliance, or that you are responsible for monitoring future plan operations.

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.