ERISA subjects employers, plan sponsors, plan administrators and insurers to a variety of reporting and disclosure requirements, and the failure to comply with those requirements may result in monetary penalties. In an effort to increase the deterrent impact of these penalties, the Employee Benefits Security Administration of the U.S. Department of Labor (DOL) recently published an interim final rule that increases, and in some cases doubles, these penalties. The new penalties became effective on August 1, 2016 and apply to any assessments after August 1, 2016 where the associated violation occurred after November 2, 2015.
Below, the penalties have been categorized based on their application to the type of plan: (i) penalties applicable to all types of employee benefit plans, (ii) penalties applicable to group health plans, (iii) penalties applicable to multiemployer welfare arrangements, (iv) penalties applicable to multiemployer pension plans, and (v) penalties applicable to retirement plans.
I. Penalties Applicable to All Types of Employee Benefit Plans
Employee Records and Benefit Statements
Employers generally must maintain records that are sufficient to allow a determination of benefits due. When a plan participant requests a benefit statement, terminates his or her service with the employer, or has a one-year break in service with the employer, the plan administrator is supposed to produce a report to the participant of benefits that are due or will be due. Failure to maintain these records and/or furnish such reports is punishable by a fine of up to $28 per employee. The penalty had been up to $11 per employee.
Plan administrators are required to file with the DOL annual reports (Form 5500) containing certain actuarial and financial information about the plan, as well as terminal and supplementary reports when a benefit plan is winding down. Failure to timely file such reports is subject to a penalty of up to $2,063 per day past the filing deadline. Notably, if the DOL rejects a filing as insufficient, it is considered to have not been submitted so as to trigger these penalties. The penalty had been up to $1,100 per day. Notably, plan administrators can limit the amount of this penalty by filing delinquent reports through the DOL's Delinquent Filer Voluntary Correction Program. This program allows unlimited correction of missed filings for a flat fee (usually $4,000)—a significant savings relative to the cost of non-compliance if the DOL discovers a delinquency.
Plan Documents Requested by the DOL
Upon request by the DOL, a plan administrator must provide any document relating to an employee benefit plan. This includes plan and trust documents, summary plan descriptions, and collective bargaining agreements. Failure to comply is punishable by fines up to $147 per day, not to exceed $1,472 per request. The prior penalty was up to $110 per day with a maximum of $1,100 per request.
II. Penalties Applicable to Group Health Plans
Summary of Benefits and Coverage
A group health plan's insurance issuer and plan administrator are required to provide to plan sponsors and participants/beneficiaries, respectively, a written summary of benefits and coverage, in four situations: (i) upon application to the issuer or administrator for coverage, (ii) by the first day of coverage under the plan if any changes are made after application, (iii) during open enrollment periods or upon reissuance of coverage in certain cases, and (iv) upon request. Failure to provide an SBC as required can result in penalties of up to $1,087 per failure, up from up to $1,000 per failure.
An employer that maintains a group health plan must provide notice to its employees of potential Children's Health Insurance Program, or CHIP, coverage. CHIP programs are state-run health insurance programs that provide low-cost health care for uninsured children who are not eligible for Medicaid. Additionally, a plan administrator of such a plan must provide the State in which the plan is maintained information about the benefits offered under the plan, to allow the State to determine the cost-effectiveness of premium assistance and supplemental CHIP benefits. Failure to provide proper notice and information can now be fined at a rate of up to $110 per day per employee, up $10 from the former penalty.
Genetic Testing and Information
The Genetic Information Nondiscrimination Act of 2008 amended ERISA to generally prohibit discrimination based on genetic information. As such, a group health plan sponsor or insurer may not seek, purchase, or require testing of participants' genetic information. Moreover, a plan sponsor and/or insurer may not determine eligibility for coverage or raise premiums based on genetic information. Sponsors and insurers who fail to comply may be fined up to $110 per day during any non-compliance period. Repeated and/or uncorrected failures to comply result in higher penalties: a minimum of $2,745 per violation per day for de minimis failures to meet these requirements that are not corrected prior to notice by the Secretary of Labor and a minimum of $16,473 per violation per day for failures that are not de minimis and that are not corrected prior to notice by the Secretary of Labor. Additionally, the maximum penalty for unintentional failures was raised from $500,000 to $549,095.
III. Penalties Applicable to Multiemployer Welfare Arrangements
Multiemployer welfare arrangements that provide medical benefits, but that are not group health plans (welfare plans that provide health benefits directly or through insurance, reimbursement, or otherwise), are required to register and timely file reports not less frequently than annually concerning compliance with regulations governing such plans. Failure to timely file the required reports is now fined at a rate of up to $1,502 per day, up from $1,100 per day.
IV. Penalties Applicable to Multiemployer Pension Plans
Endangered or Critical Status of Multiemployer Plans
Each year, a multiemployer plan's actuary must certify to the Secretary of the Treasury and the plan sponsor whether or not the plan is in endangered or critical status with respect to funding and provide certain actuarial data supportive of the certification. If the plan already has been so designated and is subject to a funding rehabilitation or improvement plan, the actuary must certify whether or not the plan is making funding progress as provided in the plan. Plan administrators may be penalized up to $2,063 per day that the certification is late, up from $1,100 per day.
Plan Document Requests
Contributing employers, participants, beneficiaries and employee representatives of a multiemployer defined benefit pension plan may request certain documents, including: the current plan and trust document, financial statement, summary plan description, and annual report. Upon a written request for such documents, the plan administrator must generally comply within thirty days. Failure to timely and properly provide any of the following is now subject to a fine of up to $1,632 per day of violation, rather than the prior penalty of up to $1,000 per day. Notably, this requirement is different than ERISA Section 104(b)(4)'s requirement that plan administrators for all types of employee benefit plans supply similar documents upon request, and only applies to multiemployer plan administrators, as described in ERISA Section 101(k). This distinction is important because a violation of Section 104(b)(4) permits a participant or beneficiary to hold the plan administrator liable for monetary penalties, whereas a violation of Section 101(k) only allows the DOL to fine the plan administrator.
Withdrawal Liability Calculations
Contributing employers to a multiemployer plan may request, and the plan sponsor or administrator must provide, a notice of the estimated amount of an employer's withdrawal liability and an explanation of how such liability was determined. Failure to timely and properly provide any of the following is now subject to a fine of up to $1,632 per day of violation, up from the prior penalty of up to $1,000 per day.
Failure to Adopt Funding Improvement/Rehabilitation Plans
Multiemployer plans in endangered or critical status must adopt funding improvement and rehabilitation plans, respectively. A plan sponsor who fails to timely adopt the required plan may be fined up to $1,296 per day, up from up to $1,100 per day.
V. Penalties Applicable to Retirement Plans
Single Employer Defined Benefit Plans with Liquidity Shortfalls and/or Funding Limitations
The plan administrator of a single-employer defined benefit plan must provide notice to participants and beneficiaries if the plan becomes subject to a funding-based limitation on benefits, e.g., when a plan is barred from making accelerated benefit distributions because the plan is less than 60% funded. Failure to provide notice is now penalized at a rate of up to $1,632 per day of violation, rather than the former $1,000 per day penalty.
Additionally, if such a plan sponsor is required to make accelerated contributions due to a funding shortfall and fails to do so, the plan's fiduciary may be penalized if it authorizes certain distributions, including certain amounts in excess of monthly single life annuity payments to participants and beneficiaries and payments for purchases of an irrevocable commitment from an insurer to pay benefits. Any distribution made in violation of these provisions shall be penalized at a rate of up to $15,909 per distribution, up from $10,000 per distribution. Significantly, while the other penalties discussed herein are discretionary, ERISA requires the DOL to assess a penalty for such improper distributions.
Automatic Contribution Arrangements
When a plan contains an automatic contribution arrangement, meaning that plan participants automatically defer or contribute part of their compensation to the plan unless they opt out, the plan administrator must provide a notice of certain rights and obligations under the arrangement. Failure to timely and properly provide any of the foregoing is now subject to a fine of up to $1,632 per day of violation, rather than the former penalty of up to $1,000 per day.
Notice of Blackout Periods
The plan administrator of an individual account plan must give participants and beneficiaries notice of any blackout period. The penalty for such failures increased from up to $100 to up to $131 per participant or beneficiary per day.
Divestment of Employer Securities
Plan administrators must give participants and beneficiaries notice of their right to direct proceeds coming from the divestment of employer securities. The penalty for such failures increased from up to $100 to up to $131 per day.
Cooperative and Small Employer Charity Act Plans
CSEC plans are benefit plans maintained by groups of cooperatives and/or charities. The failure of a CSEC plan sponsor to establish or update a funding restoration plan is penalized at a rate of up to $110 per day (up from $100).
The penalties imposed by the Interim Final Rule are paid to the DOL in all cases, meaning a participant or beneficiary does not have a right to sue to enforce such penalties. Given the increased exposure due to noncompliance, plan administrators and plan sponsors are well-advised to ensure that they provide all required notices. While the penalties in some cases may be waived or reduced, the potential for substantial penalties for noncompliance exists, particularly where penalties are assessed per participant or beneficiary. Notably, in some cases, noncompliance can also give rise to excise taxes levied under the Tax Code, or even loss of a plan's qualified status. It is therefore essential that plan administrators and sponsors remain vigilant with respect to these notice and disclosure requirements.