Like death and taxes, benefit plan audits happen, and that remains the case at the Department of Labor despite shrinking personnel levels. Gathering information from department records under the Freedom of Information Act, BNA Bloomberg reports that the Department of Labor’s benefit plan branch, the Employee Benefits Security Administration (EBSA) has lost approximately 17 percent of its staff between 2012 and 2017, However, its dollar recoveries on audit climbed 58% between 2015 and 2017 (from $696 million to $1.1 billion). During that same two-year period, the number of investigations that EBSA opened also remained relatively stable, at between 589 and 662 per year.
What this means for benefit plan sponsors and the professionals who advise them is that compliance with plan reporting and disclosure rules, and with the plan documentation duties that underpin them, must remain a priority. This is particularly the case with regard to health and welfare plans offering group medical, dental, vision, life, disability and similar forms of coverage, as opposed to 401(k) and other retirement plans.
That is because retirement plan service providers supply plan documentation to employers who engage their services, whereas insurance companies only provide benefit summaries designed to comply with state insurance laws rather than with the disclosure duties mandated under ERISA.
It is often left to benefit brokers and other third parties to the insurance (or self-funding) relationship, to bridge the gap, by drafting Summary Plan Descriptions and/or “wrap” documentations containing required ERISA disclosures, and by ensuring that they are properly delivered to plan participants and beneficiaries under Department of Labor protocols for hard copy and electronic distribution.
If you or your clients have any questions on what ERISA requires around plan documents and their delivery to the folks that they cover, please don’t hesitate to give me a call.
California and four other states (Connecticut, Illinois, Maryland and Oregon) have passed legislation requiring employers that do not sponsor employee retirement plans to automatically withhold funds from employees’ pay, and forward them to IRAs maintained under state-run investment programs. Provided that these auto-IRA programs meet safe harbor requirements recently defined by the Department of Labor in final regulations, the programs will be exempt from ERISA and employers cannot be held liable for investment selection or outcome. The DOL has also finalized regulations that would permit large cities and other political subdivisions to sponsor such programs where no statewide mandate exists; New York City has proposed its own such program, tentatively dubbed the New York City Nest Egg Plan.
In light of this growing trend, what do employers need to know about auto-IRA programs? Some key points are listed below:
Some Lead Time Exists. Even for state auto-IRA programs that become effective January 1, 2017 (e.g., in California and Oregon), actual implementation of employee contributions is pushed out to July 1, 2017 (in Oregon) and, in California, enrollment must wait until regulations governing the program are adopted. The California program, titled the California Secure Choice Retirement Savings Program, also phases in participation based on employer size. Employers with 100 or more employees must participate within 12 months after the program opens for enrollment, those with 50 or more within 24 months, and employers with fewer than 50 employees must participate within 36 months. These deadlines may be extended, but at present the earliest round of enrollment is anticipated to occur in 2019.
Employer Involvement is Strictly Limited. The DOL safe harbor prohibits employer contributions to auto-IRAs and requires that employers fulfill only the following “ministerial” (clerical) tasks:
forwarding employee salary deferrals to the program
providing notice of the program to the employees and maintaining contribution records
providing information to the state as required, and
distributing state program information to employees. Note that in California, the Employment Development Department will develop enrollment materials for employers to distribute, and in addition a state-selected third party administrator will collect and invest contributions, effectively limiting the employer role to forwarding salary deferrals.
Employers Always Have the Option of Maintaining their Own Plan. Generally the state auto-IRA programs established to date exempt employers that maintain or establish any retirement plan (401(k), pension, SEP, or SIMPLE), even plans with no auto-enrollment feature or employer match used to encourage employee salary deferrals. Therefore employers need not be significantly out of pocket (other than for administrative fees) to avoid a state auto-IRA mandate. Employers should bear in mind that an employer-sponsored retirement program, even if only a SEP or SIMPLE IRA, helps to attract and retain valued staff, and should consider establishing their own plan in advance of auto-IRA program effective dates for that reason.
Penalties May Apply. California’s auto-IRA program imposes a financial penalty on employers that fail to participate. The penalty is equal to $250 per eligible employee if employer failure to comply lasts 90 or more days after receipt of a compliance notice; this increases to $500 per employee if noncompliance extends 180 or more days after notification. The Illinois auto-IRA program imposes a similar penalty.
Voluntary Participation in Auto-IRA Program May Create an ERISA Plan. One of the requirements of the DOL safe harbor is that employer participation in auto-IRA programs (referred to as “State payroll deduction savings programs” be compulsory under state law. If participation is voluntary, an employer will be deemed to have established an ERISA plan. In theory, this rule could be triggered when an employer that was mandated to participate later drops below the number of employees needed to trigger the applicable state mandate (for instance, a California employer that drops below 5 employees), but continues to participate. The DOL leaves it to the states to determine whether participation remains compulsory for employers despite reductions in the number of employees. The DOL also notes that, under an earlier safe harbor regulation from 1975, an employer that is not subject to state mandated auto-IRA programs can forward employees’ salary deferrals to IRAs on their behalf without triggering ERISA, provided that the employee salary deferrals are voluntary and not automatic. The DOL final regulations can be read to suggest that a payroll-to-IRA forwarding arrangement that is voluntary and that meets the other requirements of the 1975 safe harbor will constitute a pre-existing workplace savings arrangement for purposes of exempting an employer from a state-mandated auto-IRA program.
The Trump Administration Will Likely Support Auto-IRA Programs. Early and necessarily tentative conclusions are that the Trump Administration will continue to support the DOL’s safe harbor regulation exempting auto-IRA programs from ERISA, as well as other state-based efforts to address the significant savings gap now known to confront much of the country’s workforce. One unknown variable is the degree to which the Trump Administration will be influenced by opposition to the programs mounted by the financial industry. Until the direction of the Trump Administration becomes clearer, employers that do not currently maintain a retirement plan should track auto-IRA legislation in their state or city and otherwise prepare to comply with a state or more local program in the near future, ideally by adopting their own retirement plan for employees.
Please join Christine Roberts and former DOL investigator David Kahn for a free, one-hour webinar on Wednesday, Aug 24, 2016 at 10:00 AM PDT which will provide tips on how to reduce the risk of audit, and how to survive an audit if one occurs. We will cover investigation triggers and issues that the DOL targets once an audit is underway. This no-charge webinar qualifies for continuing education credits for California CPAs and ASPPA. Join us for a webinar. Register now! https://lnkd.in/b-58niA
For those of you who missed the event, the PowerPoint and audio file are found here.
Changes in the law and continued advances in technology have made benefits compliance a constantly shifting landscape. As one of many potential sources for your own path towards benefits compliance, E for ERISA would very much appreciate your participation in the following poll, which asks a few simple questions about where you currently get your benefits compliance services and what you may still need in that regard. Thank you in advance for (anonymously) sharing your thoughts and experiences.
The Department of Labor recently published a final regulation defining a “fiduciary” for purposes of investment advice rendered for a fee with regard to “retirement accounts.” The final regulation marks the first change in the regulatory definition of this type of fiduciary since the regulation originally was published in 1975. Retirement accounts under the new rule include those held under qualified plans (e.g., 401(k), pension plans), which have always been subject to ERISA, and now for the first time with regard to IRAs, which formerly were subject only to Internal Revenue Code rules governing self-dealing and other forms of prohibited transactions that the Internal Revenue Service enforced through audits. The new rule – together with new and amended prohibited transaction exemptions related to the rule – becomes applicable on April 10, 2017, with full implementation required on and after January 1, 2018.
Recently I was interviewed about the new definition of an investment advice fiduciary for an episode of Money Talk that KZSB (1290 AM) will broadcast a 2:00 p.m. PDT on June 20, 2016. The interview provides a broad overview of the rule and how it will likely impact IRA investors, employers, and the investment industry. Joining me were program hosts Dianne Duva, Partner at Arlington Financial Advisors, and Neil Kriesel, who worked in finance for many years, has taught at SBCC as an adjunct faculty member and serves on the SBCC Foundation Board and various other non-profit organizations. Click below to listen.
The Department of Labor’s Employee Benefits Security Administration (EBSA) announced on September 19th that it was withdrawing, and would re-propose, its draft regulation defining a “fiduciary” for purposes of qualified plans and IRAs. The proposed regulation is in “turnaround” mode as a result of significant pressure from the financial services industry and members of Congress, who objected to the way the proposed regulation expanded the definition of a fiduciary, without articulating clear exceptions to fiduciary status for a number of common financial transactions including IRA rollovers and swap transactions. Most recently, on September 15, 2011, Rep. Barney Frank (D. Mass.), the ranking member of the House Financial Services Committee, sent a letter to Labor Secretary Hilda Solis urging that the Department revisit the regulation in light of these concerns.
It is expected that EBSA will release a re-proposed regulation early in 2012.