The Employee Benefits Security Administration (EBSA) is responsible for ensuring the integrity of private employee retirement plans. In 2010, the DOL conducted 3,112 civil investigations, with almost 75% of them resulting in findings of one or more violations. These findings led to the collection of $1.05 Billion through plan restorations, fines, and penalties.
A very small percentage of plans are true “bad guy situations.” The majority of violations generally come from oversight, errors, and omissions by plan sponsors.
Since DOL investigators are responsible for enforcement of fiduciary, reporting and disclosure requirements for employee benefit plans, you had better be following the letter of the law.
Here are nine ways to avoid a visit from your local “friendly” DOL investigator:
Deposit participant contributions as soon as possible.
The Form 5500 Annual Report asks whether the employer failed to transmit any participant contributions within the period described in the regulations. This question must be answered “yes” if there have been late deposits–even if the employer has corrected the violations. If there have been late deposits, very often the DOL will send the employer a follow-up letter requesting confirmation that the employer took appropriate corrective actions.
Failing to follow your plan document provisions
Your plan document describes who is covered under your plan, i.e., who benefits under your plan, and what contributions or benefits will be provided to those covered employees. As with anything that the government has oversight, ignorance is not an allowable excuse. You should be very familiar with the provisions listed in your Adoption Agreement, plan amendments, and any other plan documents and ensure that you are following what they state. If needed, changes to how your plan operates can be processed by your TPA and facilitated by your Investment Advisor.
Filing Forms 5500 late or not at all
The filing deadline for Form 5500 is no later than the last day of the seventh month following the end of the plan year (generally July 31st unless that date falls on a weekend or national holiday, then the date will be extended to the next business day). You can apply to extend the filing deadline up to two-and-a-half months by filing Form 5558 at or before the 7/31 deadline. Now that forms must be filed electronically, this is an easy non-compliance item to track.
Failing to ensure participant loans comply with plan provisions
Your plan may, but is not required to provide for loans. If a plan provides for loans, the plan may limit the amount that can be taken as a loan. The maximum amount that your plan can permit as a loan is (1) the greater of $10,000 or 50% of the vested account balance, or (2) $50,000, whichever is less. If your plan does permit loans, ensure that you follow the plan provisions on how someone applies and repays a loan, how defaulted loans are handled, and what happens when a terminated participant has an outstanding loan, etc.
Make sure your plan has a proper fidelity bond.
The Form 5500 asks whether the plan is covered by a fidelity bond and for what amount. Answering this question “no” would obviously tip off the DOL to an issue, as would a bond below the required level. Plan sponsors should know what level of coverage the plan has and answer the question accordingly. If the bond is inadequate, the plan administrator should seek to increase it immediately.
Promptly respond to participants’ inquiries or requests for information.
Certain plan documents must be made available for examination by any participant or beneficiary. The participant or beneficiary may complain to the DOL if the plan administrator does not comply with information requests. These complaints often trigger an inquiry from the DOL and, depending on the response, the DOL may investigate the plan. A large number of investigations are based on participant complaints.
Distribute regular, accurate participant statements.
Plans must distribute regular benefit statements to participants and beneficiaries, which is once each calendar quarter if the plan allows participant investment direction (for defined contribution plans).
Ensure that fees are reasonable.
The Form 5500 requires large plans to disclose service provider fees charged to the plan. Excessive plan fees have become another top investigative issue for the DOL, and investigators are likely to carefully review Schedule C to identify potential red flags.
Respond promptly to DOL letters requesting information.
No explanation is necessary for this one. Ignoring the DOL’s inquiries will do the opposite of making them go away, so please don’t try it! Form 5500 filings are a common source for investigators to select plans for investigation. Red flags include plans with a large percentage of assets in real estate, limited partnerships or the like, noncash contributions, loan defaults, low diversification ratios, unreasonably low rates of return, an adverse accountant’s opinion and notes or disclaimers on the financial schedules.
You could face severe monetary penalties if you fail to properly operate your plan. Even worse — your plan could lose its tax-favored status if certain defects exist.