Guest Article

(From the April 2, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

GAO Does Follow Up EBSA Evaluation; Calls for More EBSA Enforcement

Be more like the IRS and the SEC, the U. S. Government Accountability Office (GAO) told the Labor Department's Employee Benefits Security Administration in a recent review. But the GAO also acknowledged to some degree that EBSA has a slightly different mission and faces other barriers than those agencies. See Employee Benefits Security Administration, Enforcement Improvements Made but Additional Actions Could Further Enhance Pension Plan Oversight, GAO-07-22, January 2007.

This latest report, which builds on an earlier GAO report released in March 2002, was produced for Senator Michael Enzi (R-WY) by the federal government's watch-dog over agencies and their enforcement operations, continues to urge EBSA to build on employer benefits enforcement improvements. GAO has urged the EBSA to conduct "routine compliance examinations," ongoing risk assessments, coordinate with the U.S Securities Exchange Commission, and evaluate the effect of EBSA's high attrition rate on its operations. But the GAO stressed "it is critical that EBSA take steps to employ a more assertive enforcement approach..."

GAO specifically urged that EBSA improve its compliance efforts by establishing a "comprehensive risk assessment function," similar to those conducted by the Securities and Exchange Commission and IRS, to assess "the nature and extent of ERISA noncompliance." Currently, EBSA limits its annual risk evaluation to reviewing frontline investigators' case loads to determine risks and depends on the "audits" reviewing the efforts of the Employee Benefit Security Administration within the U.S. Department of Labor.

In the GAO's March 2002 review of EBSA, the GAO found EBSA was acting to strengthen its enforcement program for employer plans, especially in its management of enforcement strategy and in its human capital management policies. At the request of Senator Michael Enzi (R-WY), who chaired the Senate Committee on Health, Education, Labor and Pensions when he requested the report and is now the ranking member of that Committee, GAO reviewed that work and updated its findings in this latest report.

In light of GAO's findings, it recommended that EBSA:

As standard procedure, the GAO provides its draft report to the entity being reviewed or otherwise affected for comments on GAO's findings. In EBSA's comments it agreed with each of the GAO's recommendations, except that of evaluating EBSA's enforcement strategy by comparing EBSA's enforcement function with that of the SEC and the IRS. As would be expected, EBSA noted that comparing its functions with other "law enforcement agencies," such as the SEC and the IRS, is simply not compatible with EBSA's role as regulator of an activity that is purely optional for the regulated entity. In addition, EBSA cited the tension between enforcement and EBSA's required functions to encourage and support the creation and maintenance of employee benefit plans, a challenging role for an agency also charged with enforcement duties.

Benefits Are Voluntary -- Taxes and Securities Regulation Aren't

One major flaw in the GAO report and in EBSA's response is the failure to discuss the vastly different mission of the IRS and the SEC. The organizations regulated by the IRS and the SEC have no choice but to deal with the agencies' rules and examinations. But EBSA regulates plans that are in most cases an auxiliary and to some extent a nonessential part of the plan sponsor's business -- employee benefits. Rather the plan sponsors of the EBSA-regulated plans view employee benefits as an important part of the workforce costs, that should be considered as part of the employer's overall allocation of business costs. Employers can avoid the reach of EBSA's rules -- and the IRS rules that apply to employee benefits -- simply by not offering benefits.

Nearly all other federal regulatory departments and agencies regulate core businesses. By contrast, filing tax returns with the IRS -- even if the entity ultimately has no tax liability for the year -- is required and failure to do so can lead to imprisonment. And virtually every investment offered in the U.S. must be registered with the SEC. Thus the comparison between EBSA's regulation of an important but ultimately nonessential business area -- benefits -- cannot be compared with the duties and enforcement results of the IRS and the SEC.

EBSA Regulates Far More Entities and Has Less Power Over Them

A comparison of GAO's own data reveals the vastly greater scope of EBSA's regulated entities as compared with the IRS and SEC. EBSA regulates 3.2 million employer-provided plans; broken down between 733,000 retirement plans and 2.5 million health plans. By contrast, the IRS regulates 1.3 million pension plans, including 724,000 Form 5500 filers. The SEC regulates a mere 17,337 registered securities entities.

EBSA is further constrained by ERISA's requirement that the agency must coordinate with Treasury, the IRS and the PBGC on many regulatory and enforcement issues. If the activity is considered a criminal violation, EBSA must coordinate with the Justice Department.

EBSA Does Not Have Enforcement Authority Equal to the IRS or SEC

A further complication for EBSA is its limited enforcement authority. The GAO report recognizes that while EBSA can impose penalties for failure to file required disclosures and impose a 20 percent penalty for fiduciary violations, it does not have other enforcement authorities enjoyed by the IRS and the SEC. For example, the report acknowledges, "... EBSA does not have the enforcement authority to disband, suspend, or take any effective action against a plan auditor for substandard audits of employee benefit plans, because plan auditors are not considered fiduciaries under ERISA." By contrast under both the tax laws and the securities laws, auditors and attorneys can be denied the right to practice their professions if they are found to violate relevant federal laws.

In addition, the IRS has the authority to approve plan designs and deny favorable tax treatment to plans that do not comply with IRS rules and assess fees. Likewise the SEC has broad authorities to impose penalties for both illegal the sale of securities and violation of disclosure rules, including penalties up to $500,000 per violation or the full amount of any financial gain.

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, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879-5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.