Procedures for Assessing Civil Penalties under ERISA §502(c)(4) Are Finalized

Guest Article

(From the January 12, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
Procedures for Assessing Civil Penalties under ERISA §502(c)(4) Are Finalized

Effective March 3, 2009, procedures go into effect by which the Secretary of Labor can assess civil penalties against a plan administrator for the failure to provide certain PPA-required notices. Penalties are based on the �degree or willfulness� of the failure, but may not exceed $1,000 per day for each violation. Administrators should be aware that, if served notice of assessment, they have a fixed 30-day period to show �reasonable cause� and explain why the penalty should be reduced. Failure to respond within the 30-day period will foreclose further proceedings and cause the notice to become final and binding.
Brief History
The Pension Protection Act of 2006 (PPA) added new disclosure requirements to Title I of ERISA, and amended ERISA § 502(c)(4) to allow the Secretary of Labor to assess a civil penalty of up to $1,000 per day for the failure to provide those notices. In December 2007, the Department of Labor (�DOL�) proposed regulations to establish a process by which the penalties under § 502(c)(4) would be assessed.
DOL reported receiving only two written comments from representatives of plans and plan sponsors concerning the proposed regulations. The regulations were recently adopted without change as final. Published at 74 Federal Register 17, January 2, 2009, the final regulations reference an effective date of March 3, 2008 -- however, DOL representatives have stated that this date will be corrected to March 3, 2009, making the final regulations effective 60 days after publication.
Disclosures Subject to the Civil Penalty
Under ERISA § 502(c)(4), the Secretary of Labor can assess a civil penalty �of not more than $1,000 a day for each violation by any person� of the duty to disclose the following information:
Funding-based Limits on Distributions or Benefits. Effective for plan years beginning on or after January 1, 2008, the plan administrator of a single-employer defined benefit plan is required to provide written notice to participants and beneficiaries within 30 days after the plan becomes subject to certain:
Funding-based limits on distribution -- such as where payments from the plan are limited because the plan's adjusted funding target attainment percentage (�AFTAP�) is less than 80 percent or the plan sponsor is a debtor-in-bankruptcy; or
Funding-based limits on benefits -- such as where benefit accruals cease because the plan�s AFTAP is less than 60 percent.

See ERISA §§ 502(c)(4), 101(j) & 206(g).
Multiemployer Plan Information. Effective for plan years beginning on or after January 1, 2008, each administrator of a multiemployer plan must provide, within 30 days after a request by a participant, beneficiary, employee representative, or an employer that has an obligation to contribute to the plan, various information (e.g., copies of periodic actuarial reports, of financial reports, and of any application for extension of the plan's amortization schedule under ERISA § 304). See ERISA §§ 502(c)(4) & 101(k).
Potential Withdrawal Liability. Effective for plan years beginning on or after January 1, 2008, the plan sponsor or administrator of a multiemployer plan must provide, generally within 180 days after a request by an employer who has an obligation to contribute to the plan, the estimated amount of the employer��s withdrawal liability along with an explanation of how the liability was determined. See ERISA §§ 502(c)(4) & 101(l).
Automatic Contribution Arrangements. Effective August 17, 2006, the plan administrator of an automatic contribution arrangement (�ACA�) must provide, generally no later than 30 days before the date of plan eligibility, each participant with notice of his or her rights and obligations under the ACA (including the right to elect not to have elective contribution made on his or her behalf, or to have them made at a different percentage), that he or she has a reasonable time after receipt of the notice to make such election, and how the contributions will be invested in the absence of any investment election. See ERISA §§ 502(c)(4) & 514(e)(3), and DOL Reg. § 2550.404c-5.

Final Regulations under ERISA § 502(c)(4)
The regulations lay out a straightforward process for assessment of civil penalties by the Secretary of Labor. DOL determines the amount of the penalty and notifies the plan administrator in writing of its intention to assess the penalties. The administrator is then allowed 30 days to show reasonable cause why the penalty should be reduced or waived. After it reviews the administrator's statement of reasonable cause DOL provides a final written determination. The determination becomes a final order 45 days after it is served on the administrator -- unless the administrator makes a request for administrative hearing within 30 days.
Key factors for plan administrators to note are:
Culpability a Factor in Determining Amount Assessed: In determining the amount to be assessed, DOL is required to consider �the degree or willfulness of the failure or refusal to furnish the items.� The amount assessed for each violation cannot exceed $1,000 per day. § 2560.502c-4(b)(1)
Separate Violation Occurs with Respect to Each Person Entitled to Disclosure. In calculating the amount to be assessed, a separate violation is deemed to occur with respect to each person who is entitled to receive the disclosure. As a result of this definition, a plan administrator who provides a defective notice to the plan participants (e.g., provides an ACA notice that does not fully describe the time period in which the participants can opt out of automatic contributions) could face exponentially greater penalties than would be the case if the notice defect was itself deemed to constitute a single violation. § 2560.502c-4(b)(2)
30-Day Window to Show Reasonable Cause. After DOL serves notice of its intent to assess penalties, the plan administrator is allowed 30 days to present any mitigating circumstances. It will be absolutely critical for the administrator to file a statement within that 30-day period showing �reasonable cause� why the penalty should be reduced or waived. Failure to do so will be deemed to be an admission of the facts alleged by DOL in its notice, and the notice will automatically become final and binding. § 2560.502c-4(e)&(f)
Joint and Several Liability. Any person against whom the penalties are assessed is personally liable for the payment. If more than one person is responsible as the plan administrator for the failure to disclose, all such persons are jointly and severally liable. § 2560.502c-4(j)

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.
If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.
Copyright 2009, Deloitte.

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