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Recent Trends DuringDOL Investigations
2016 ASPPA Annual ConferenceNicholas J. White, Esq.
Trucker Huss, APC
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Introduction
• Today’s Topics
–Employee Benefits Security Administration (EBSA): Charged with investigating ERISA violations –and it has subpoena power!
–National Enforcement Projects - Trends
–Regional Enforcement Projects - Trends
–The Investigative Process
–How Best to Prepare For and Participate in a DOL Investigation.
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EBSA
• National Office
– Various divisions with varying missions
• Regional Offices
– Regional Directors
– Pension Benefit Advisors – handle customer service calls
– Investigators – typically attorneys or accountants
– Supervisors – typically former investigators
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EBSA Regional Offices
Regional
Offices
Boston
New York
Philadelphia
Atlanta
CincinnatiChicagoKansas City
DallasLos Angeles
San
Francisco
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EBSA: Civil and Criminal Investigations
• EBSA has broad investigative authority
• Most EBSA investigations are civil, but EBSA also has authority to conduct criminal investigations
– Criminal cases go to the U.S. Attorney’s Office instead of DOL Solicitor’s
– Civil cases go to Office of the Solicitor of Labor –“in-house” DOL counsel
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The Investigative Authority of DOL
• Statutory grant of power
– ERISA section 504
– Comprehensive Crime Control Act of 1984
• Disclosure of information by the DOL
• Subpoena Authority
– ERISA Section 504(c)
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EBSA Enforcement Statistics
• For 2015 EBSA reports:
– Oversight extends to 681,000 retirement plans
– Over $696 million recovered for direct payment to plans, participants, beneficiaries
– Over $837 million in assets recovered and plan assets protected
– Over 2,400 civil cases closed
– 90 federal lawsuits filed
– 61 indictments
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Why is EBSA Investigating the Plan, the Employer, the Service Provider and/or Other Individual?
• The investigator won’t (isn’t supposed to) tell you
• Investigations occur as a result of:
– Employee/participant inquiries/complaints
– Targeted enforcement projects at the National and Regional Office levels
– Info on Form 5500s – large amount of “other assets” and numbers that don’t make sense
– Referrals from the IRS and/or other gov. agencies
– News and social media – notice of bankruptcy
– Are investigations ever random?
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Investigation: Targets, cont’d
• All Types of Employee Benefit Plans:
– Retirement
– Health
– Apprenticeship
– Legal
• Plan Sponsors
• Plan Trustees
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Investigation: Targets, cont’d
• Named Fiduciaries
• Functional Fiduciaries
• Plan Administrators
• Service Providers– Consultants
– Investment Advisors
– Custodians
– Directed Trustees
Investigations: Focus
• Potential breaches of ERISA fiduciary duty
• Violations of:
– ERISA §404 Fiduciary Duties
– ERISA §406 Prohibited Transactions
– ERISA §405 Co-Fiduciary Duties
– ERISA Part 7 Health Plan Requirements
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Investigations: What Are They Finding?
• Common Scenarios:– Delinquent Employee Contributions – still a BIGGIE!
– Excessive Service Provider Fees
– Imprudent Investments for all sorts of reasons
– Plan Sponsor Bankruptcies
– Part 7 Violations in Health Plans
– Abandoned Pension Plans
– Hard to Value Assets
– Fiduciaries that didn’t know/fulfill their duties – and many who didn’t know they are fiduciaries!
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National Enforcement Priorities
• Major Case Enforcement Priority – “EBSA continues to focus its enforcement resources on areas that have the greatest impact on the protection of plan assets and participants' benefits. In FY 2016, EBSA will remain dedicated to strategically focusing more investigative resources on professional fiduciaries and service providers with responsibility for large amounts of plan assets and the administration of large amounts of plan benefits. This continues to be accomplished by a national enforcement priority that directs investigative resources to the conduct of major cases.”
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National Enforcement Priorities, cont’d
• Employee Contributions Initiative – “Consistent with its long history of protecting employee contributions to 401(k), health care, and other contributory plans, EBSA designated the investigation of delinquent employee contributions, a previous national project, as a national enforcement priority. For more information, see the Employee Contributions Initiative webpage.”
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EBSA Enforcement Projects
• National Office Enforcement Projects:– Employee Contributions
– Plan Investments Conflicts
– Health Benefits Security (Part 7)
– ESOPs
– Bankruptcy (REACT)
– Service Providers
– Abandoned Plans
– Voluntary Fiduciary Correction Program (VFCP)
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Contributory Plans Criminal Project
• Target the most egregious and persistent violators
• Protect the most vulnerable populations
• Issues:– Employers convert employee payroll contributions
for personal or business use
– Third parties gain access and use funds for their own financial gain
– Identity theft or tampering with personal data records
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BK & Financially Distressed Plan Sponsors
• Rapid ERISA Action Team (REACT)
–Preserve plan assets
–Determine whether the sponsor has made all required contributions
–Ensure plan’s rights are protected
– Identify responsible fiduciaries
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Consultant/Adviser Project (CAP)
• Focus: Potential civil and criminal violations arising from the receipt of improper or undisclosed compensation by employee benefit plan consultants and investment providers
• Do plan fiduciaries understand the compensation and fee arrangements they enter into?
– Plan investment guidelines
– Proper selection and monitoring of service providers
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Consultant/Adviser Project (CAP), cont’d
• Project is intended to ensure that plan fiduciaries and participants receive comprehensive disclosure about service provider compensation and conflicts of interest
• EBSA will also conduct criminal investigations of potential fraud, kickback, and embezzlement involving advisers to plans and participants
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Consultant/Adviser Project (CAP), cont’d
• The Department of Labor is focusing on service providers because of:
– the observations of prohibited transactions by service providers;
– because of a growing awareness of the significant influence that service providers have over retirement plan operation; and
– concerns over conflicted advice that adversely impacts participants
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Consultant/Adviser Project (CAP), cont’d
• What is the DOL looking for?
• The DOL says that these investigations:
– seek to determine whether the receipt of such compensation, even if it is disclosed, violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself or its affiliates
– the CAP will also seek to identify potential criminalviolations, such as kickbacks or fraud [Emphasis added]
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National Office “Enforcement Project” Re Form 5500, Schedules H and I
• In reporting financial information, plan administrators must now indicate whether any participants failed to start benefits on time (“failed to provide any benefits when due”) and if so, the total amount paid late or still outstanding
– This new requirement is buried in instructions for Schedules H and I (line 4L)
– Administrators answering “Yes” should anticipate receiving a “compliance check” letter from the IRS’ Employee Plan Compliance Unit (EPCU)
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National Office “Enforcement Project” Re Form 5500, Schedules H and I, cont’d
• DB plan administrators reporting a large amount paid late may be targeted for investigations by the DOL
• Proposed posed changes to Form 5500 for 2019 would clarify that the plan administrator should not respond “Yes” to this question if the only benefits not paid are those owed to “missing” or “lost” participants and the plan fiduciaries have acted in compliance with FAB 2014-01 to attempt to locate the participants
• Query: What are the implications of this new requirement on an administrative errors that result in underpayments?
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National Office “Enforcement Project” Re Form 5500, Schedules H and I, cont’d
• The new Form 5500 requirements raise compliance issues regarding:
– Minimum Required Distributions under Code section 401(a)(9) — primarily an IRS concern and EPCU is sending out follow-up letters
– Underpayments of benefits — both an IRS and a DOL target
– Whether the correct forms of benefit are being provided per the plan’s terms (both and IRS and DOL target)
– FAB 2014-01 compliance — DOL target
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“Enforcement Project” Re Form 5500, Schedules H and I - Action Steps for Plan Sponsors & Plan
Administrators:
• Review plan terms and administrative practices regarding:
– When the plan requires terminated participants to start taking benefits
– When the plan requires actively employed participants to start taking benefits, once they’ve reached NRA or beyond April 1 of the year following the year they attain 70.5
– In what form must terminated DC plan participants take their benefits? (lump sum or RMD only?)
– What steps are taken to ensure benefits start at RBD?
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“Enforcement Project” Re Form 5500, Schedules H and I - Action Steps, cont’d
• How are participant ages being tracked?
– Is the process sufficient? (Notices being given timely re retirement and RBD?)
– Do holes in employee data need to be plugged?
• What are the procedures for addressing missing participants?
– FAB 2014-01 compliance?
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“Enforcement Project” Re Form 5500, Schedules H and I - Action Steps, cont’d
• Does the plan provide for deemed forfeitures? If not, should it be amended to do so?
• Does the plan provide for a default IRA option or escheat?
• How is the issue of uncashed checks addressed?
– What’s the procedure?
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Regional Office Enforcement Projects –Trends
• Late deposit of elective deferral contributions & loan repayments noted on Form 5500– Letter “invitation” to correct under VFCP: there are
“nice” and “not-so-nice” versions of this letter, depending on the Regional Office involved
– When this initiative first rolled out (in Philadelphia), it was focused on large plans – now plan size doesn’t appear to matter
– Initiative spreading to at least Boston and San Francisco
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Regional Office Enforcement Projects –Trends, cont’d
• Large Defined Benefit Plan Project (started in Philadelphia, but it’s spreading)
– Focus is on procedures in three areas:
• (i) locating missing participants;
• (ii) informing deferred vested participants that a retirement benefit is payable; and
• (iii) commencing benefit payments when the participants reach age 70.5
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Regional Office Enforcement Projects –Trends, cont’d
• Large Defined Benefit Plan Project, cont’d
– How should this initiative be addressed?
– Review plan procedures for locating plan participants and filling in gaps in plan records
– Approach the issues more comprehensively as part of a plan compliance review, including fiduciary training
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Regional Office Enforcement Projects –Trends, cont’d
• Excessive Fees Initiative– Started in Philadelphia, but it has really become a
national initiative now
– Reviewing disclosures and records to determine whether participants are paying higher than average fees
– Are the fees justified?
– If not, who is at fault? Service provider? Named fiduciary?
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Regional Office Enforcement Projects –Trends, cont’d
• Benefit Distributions Initiative (primarily Boston, but spreading)– Established to determine whether plan administrators
are following the terms of the plan document related to form and timing of distributions upon death, disability or termination of employment and whether plan administrators are monitoring to ensure that checks are cashed and not stale
– Goal of the Initiative: To ensure that plan fiduciaries are acting in accordance with FAB 2014-01
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Investigative Process
• EBSA Investigative Procedure– See EBSA Enforcement Manual - on website
• Start of the investigation– Typically a phone call from the Investigator,
followed by confirmation letter setting forth• Date & time of visit
• Plan(s) to be reviewed
• Request for records / documents needed– Varies depending on issue
– If don’t cooperate, anticipate a subpoena
– You may even want an accommodation subpoena
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Document & Information Requests, cont’d
• Typical Requests
– Required Reporting – 5500s, Annual Funding Notices, SBCs, Participant Statements, SARs
– CPA Audits
– Fidelity Bond/Fiduciary Liability Policy
– Service Provider Contracts
– Governing Plan Documents – Plan, Trust, Amendments, SPDs and SMMs
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Document & Information Requests, cont’d
– Plan Contribution Records
– Meeting Minutes
– Participant Loan Records
– Income/Expenses/Journals
– Appraisals
– ACA Related Information
– COBRA/HIPAA/Other Notices
– Correspondence/E-mails
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Document and Information Requests, cont’d
– Bank Accounts/Statements
– Investment Accounts/Statements
– Real Property Records
– Securities/Bonds
– Claims Adjudication Records
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Investigation Location and Process
• Most investigations will include an on-site review of documents
– Usually at primary place of business
• Can last days or weeks – or many months!
– May split up retirement plan and H&W plan investigations
• Investigator may (will likely) conduct interviews
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Investigation Interviews
• Typically held on-site
– Voluntary
– Not recorded
– Not under oath
• Can the plan’s/the Employer’s attorney be present?
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Investigation Interviews, cont’d
• Typical interview subjects:
– Plan Administrator
• May interview several people who perform different functions
– Trustees
• If board usually designee or officers; could interview all
– Fiduciaries
– Plan Sponsor
– Human Resources Personnel
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Potential Areas of Investigation
• Fiduciary Duties – roles and fulfillment of various duties
• Co-fiduciary Liability
• Plan Expenses and Operations
• Plan Investments
• Prohibited Transactions
• Employer Securities
• Real Estate Holding
• Claims Procedures
• Bonding, Reporting, Disclosure
• Were required notices provided
• 510 Violations: “Whistleblower”
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Document Requests
• Plan Document, SPD and Trust Agreement
• Form 5500 (last 3 years)
• Payroll/contribution records
• Accountant’s Records
• Service Provider Agreements and Contracts
• Benefit Statements and Benefit Payment Records
• Minutes of Meetings
• Plan Asset Records, including appraisals
• Fidelity Bond and Fiduciary Liability Insurance Policy
• IRS Determination Letter
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Interviews with Plan Fiduciaries
• Explain fiduciary decisions
• Describe processes– Forwarding employee contributions
– Benefit payments
– Expenses
– Investments
• Identification of service providers
• Be sensitive to the issue of making false statements
– 18 USC Section 1001
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Resolution of the Investigation
• In most cases there will be a letter from EBSA reporting the results:
– No action: no findings and issuance of closing letter
– No action: findings, but issuance of closing letter
• Voluntary Compliance Request
• Civil money penalties
• Referral to Solicitor’s Office for civil litigation
• Referral to U.S. Attorney’s Office for potential Criminal prosecution
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Correction of Violations
• General Rule
– The Plan must be made whole
– Prohibited Transactions corrected
• Civil Penalties
– ERISA Section 502(l) – DOL to assess 20% penalty on amounts recovered through settlement agreement or court order
– EBSA has discretion to waive or reduce penalty
– Penalty offset by PT excise tax paid
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Voluntary Compliance
• Offered and encouraged in most investigations
• Work with the investigator to correct identified issues– Be receptive to changing fiduciary processes and
administrative procedures
– Be receptive to adopting policies and procedures reasonably geared to facilitate compliance
– Actually enforce relevant policies and procedures
– Restore assets as necessary
– Repay monies as necessary
– Correct prohibited transactions ASAP
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Voluntary Compliance, cont’d
• Fully and respectfully respond to any VC letter
– Address all issues raised by the EBSA
– Include and relevant and reasonable defenses
– Describe voluntary compliance actions taken and to be taken
– Include all relevant exhibits
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Voluntary Compliance, cont’d
• If the issues are addressed to EBSA’s satisfaction, it will issue a No Action letter
• Are voluntary compliance actions taken in response to a VC letter a “settlement” in nature, such that the 502(1) penalties apply?
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Voluntary Compliance Guidelines
• Full correction
• Paid within one year
– Any repayment schedule requires use of PTE 94-71
• Use of appropriate interest rate
• Commitment for future compliance
Correction of Violations
• Depending upon the circumstances, EBSA may seek– Correction of prohibited transactions– Restoration of losses– Payment of penalties– Removal of fiduciaries– Removal of service providers– Appointment of independent fiduciary– Implementation of new internal controls– Supplemental benefit distributions– Final accounting
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Referrals
• IRS Coordination Agreement and Statute requires:– referral of prohibited transactions to IRS
• IRC § 4975 excise tax
– referral of potential issues affecting tax qualified status
• Office of Chief Accountant• PBGC• SEC• Perhaps other agencies
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Voluntary Fiduciary Correction Program
• VFCP is not available if the plan is already under review by EBSA
• Covers specific transactions, such as–delinquent employee contributions
–purchase or sale between the plan and a party in interest
– loan between the plan and a party in interest
–excess fees paid
• Must meet specific correction requirements
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So, How Do You Best Prepare For An Investigation?
• Conduct a pre-investigation, investigation (sort of a mocked investigation)– Note: You should be conducting regular compliance
reviews regardless of whether you’re facing a DOL investigation or and IRS examination
• Conduct mocked interviews of those likely to be interviewed
• If it’s been a while since those in charge of the plan have undergone fiduciary training, get them trained!
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So, How Do You Best Prepare For An Investigation? cont’d
• Carefully review all documents to be presented --- and only provide what has been requested
• To the extent reasonably possible, fix errors before the active investigation begins --- or ASAP thereafter– Note: You should be (as part of your regular compliance reviews) self-
correcting problems ASAP in any event. Self-correction is your most powerful compliance tool, regardless of whether the issue arises under Title I or Title II of ERISA. Why? Oh, let me count the reasons!
• Consider whether and how to voluntarily disclose problems that have been fixed
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• Consider whether and how to voluntarily disclose problems that have not yet been fixed
• Assess whether the amount/type of information can be negotiated
• Consider whether an accommodation (administrative) subpoena would be prudent
• Always be mindful of the potential application of ERISA §501(l) penalties if there is a “settlement.”
So, How Do You Best Prepare For An Investigation? cont’d
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Issues to Keep in Mind
• Internal Revenue Service Has Its Separate Job to do
– DOL only acts on its own behalf
– Issues identified in connection with DOL investigation could raise tax qualification and excise tax concerns
– Excise tax and tax qualification issues are referred to IRS
– In DOL Inv., always be preparing for an IRS exam!
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Issues to Keep in Mind, cont’d
• Participant Complaints
– DOL actions do not necessarily resolve Plan participants’ ERISA rights or prevent them from filing a lawsuit
– But, participants can’t get same recovery twice
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Helpful EBSA Publications• Understanding Your Fiduciary Responsibilities Under a Group
Health Plan
• Understanding Retirement Plan Fees and Expenses
• Automatic Enrollment 401(k) Plans for Small Businesses
• Selecting an Auditor for Your Employee Benefit Plan
• Meeting Your Fiduciary Responsibilities
• Reporting and Disclosure Guide
• Selecting & Monitoring Pension Consultants – Tips for Plan Fiduciaries
• Tips for Selecting and Monitoring Service Providers for Your Employee Benefit Plan
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Contact Points
• EBSA website: www.dol.gov/ebsa
• Technical Assistance nationwide:1-866-444-EBSA (3272)
• Publications: 1-800-998-7542
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