Archive for August, 2008

ERISA Fiduciaries – Could I Really Go to Jail?

August 20th, 2008

The Employee Retirement Income Security Act of 1974 (ERISA) governs the majority of employee benefits plans and includes penalty provisions .  The criminal penalties under ERISA are contained in § 501 of the Act. Originally under ERISA, criminal fines for individuals were $5,000 and potential imprisonment of up to one year.

However, the Sarbanes-Oxley Act (SOX) of 2002 dramatically increased these penalties.  Under SOX, the penalties for individuals were increased to a maximum of $100,000 and with potential imprisonment of up to ten years.  Criminal fines for entities other than individuals went from a maximum of $100,000 to a maximum of $500,000.  These increased penalties apply not only to black-out notices, but also to ERISA’s other plain-vanilla reporting and disclosure requirements.

While it is hard to picture the term “criminal penalties” in conjunction with mundane things like SPDs, SARs, Form 5500 filings and other run-of-the-mill benefit plan documents, there is potential liability when fiduciaries fail in their duties under the plan.

When the Department of Labor (DOL) uncovers egregious behavior involving benefit plans, they have historically brought criminal charges under three sections of ERISA and three sections of the United States Criminal Code.  ERISA’s three most common criminal provisions are aimed at the following:

  • Preventing Criminals from Overseeing Benefit Plans. This provision is aimed at preventing those convicted of certain crimes (robbery, bribery, extortion, embezzlement, perjury, murder, certain drug offenses, labor union violations, and other ERISA offenses) from serving as a fiduciary or service provider of an employee benefit plan.
  • Preventing Violations of Reporting and Disclosure Requirements.  This provision punishes those who commit willful violations of ERISA’s reporting and disclosure requirements in Part 1 of Title 1.  These reporting and disclosure requirements are designed to disclose significant information about the plan and its transactions, provide rights and benefits data to participants and detail the responsibilities for fiduciaries.
  • Preventing the Coercive Interference with Rights to Benefits. This provision is designed to keep employers from terminating or harassing employees to prevent them from getting their vested pension rights.  Criminal sanctions are available where such interference involves willful use of actual or threatened fraud, force, or violence.

In the past, the DOL has taken action and convicted plan administrators and others for failure to file the Form 5500, Annual Return/Reports, or to provide participants with summary plan descriptions, summary annual reports and accrued benefits statements.  Additionally, they have aggressively pursued those fiduciaries that have violated the prohibited transactions rules.

With the new higher criminal penalties which are available, the DOL may become even more aggressive in seeking criminal penalties.  Those that may be fiduciaries of a plan – plan sponsors, plan administrators, service providers and their advisors – need to understand these potential criminal penalties and should consider them when taking action.

Plan sponsors need to ensure they exercise care in the appointment of fiduciaries and ensure there are checks and balances put in place in operating and maintaining a plan.  Additionally, third-party administrators, advisors and other service providers need to be vigilant regarding the actions of their clients and the clients’ plans to which they provide service.

Benefits counsel can assist by discussing potential risks in current plan administration, reviewing compliance with respect to ERISA requirements, and providing training for plan fiduciaries.  Please contact our office for more information on fiduciary liability or other ERISA questions.

Has Your ERISA Defined Contribution Plan Been Updated for 2008 PPA Changes?

August 14th, 2008

The Pension Protection Act of 2006 (PPA) was originally created to effect change to defined benefit plans.  However, the final version of the more than 900 page statute also contains provisions that significantly impact defined contribution (DC) plans.

Among the provisions of the PPA that affect DC plans, some of the most significant changes are effective for the 2008 plan year.  Highlights of a few of the PPA provisions effective for the 2008 plan year include:

Testing Changes

  • Prior to the PPA, employers were required to calculate interest on the gap period for average deferral percentage (ADP) and annual contribution percentage (ACP) test failures. This requirement has been eliminated for ADP and ACP test failures, but is still required for excess deferrals.

Safe Harbor for Automatic Enrollment

  • The PPA provides a safe harbor which allows employers to avoid ADP, ACP and top-heavy testing through an automatic deferral provision and employer match.

Rollovers to Roth IRA

  • Prior to the PPA, Roth IRAs could only accept rollovers from a designated Roth account, a different Roth IRA or a non-Roth IRA (i.e. qualified rollover contributions). The PPA amended the definition of a qualified rollover contribution to Roth IRAs to include amounts distributed from other qualified plans under §401(a), §457(b), and §403(a) and (b) annuities.

Returned Contributions

  • If an employer chooses to institute an automatic enrollment provision, under certain circumstances an automatically enrolled participant may withdraw from participation by requesting withdrawal from the plan within 90 days of the first contribution. The normal penalty for early withdrawal (10% tax) would not be applicable to these withdrawals.

While some of the PPA changes are mandatory, a number of them are discretionary. Employers that sponsor DC plans need to review their plan documents to determine which, if any, of the mandatory changes are applicable and have their plan documents updated accordingly.  Additionally, employers should assess the discretionary provisions of the PPA to determine whether they wish to implement any of the allowed changes.  Benefits counsel can assist you by detailing the allowed and mandatory changes, reviewing plan documents to determine which apply to your specific situation, and preparing any necessary amendments to the plan.  Please contact our office for more information.