The U.S. Department of Labor (DOL) has announced big news for plan administrators under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL proposed a change to its regulations to create a new safe harbor for the electronic delivery of mandatory plan documents. This proposed rule should reduce the time, effort, and cost of complying with ERISA’s disclosure requirements by recognizing the improvements in technology and internet access since it first addressed electronic delivery in 2002.
Let’s take a look at the future of ERISA and how businesses can be proactive and creative with 401(k) plan rules that seem so complex.
Forward to the Future of ERISA Through Technology
Plan administrators, participants, and beneficiaries are all too familiar with the volume of documents they must provide under ERISA (for all plans, including 401(k)s). Although the number of households with computers more than doubled from 1990 to 1997, plan administrators still had to physically mail plan documents. . . a huge burden.
In the late 1990s, the technology for e-signatures became more reliable and President Bill Clinton signed the Electronic Signatures Act in 2000.
The world, including thought leaders in the Retirement Plan Industry, looked for ways to use the many benefits of the Internet during the dot-com boom of the 1990s and early 2000s. In fact, I invented a computerized application (a method and apparatus) for delivering plan documents electronically and filed a patent application for it in 2001.
In this system, a computer application data mines and monitors for trigger events in the life of an employee (such as date of hire, reaching age 59 1/2, marriage, termination) and then automatically sends out the notifications and documents required to respond to the trigger. The system was intended to address a few needs within the Retirement Plan Industry:
- Automatic monitoring: The system monitors for the identified events in the 401(k) statutes and regulations on both a plan-wide basis and an individual basis that trigger a disclosure requirement of some federally-mandated document.
- Automatic electronic delivery: When a trigger occurs, the system automatically satisfies the 401(k) disclosure requirement by electronically sending documents to affected participants and beneficiaries.
- Automatic recordkeeping: The system maintains an electronic paper trail of the triggering events and actions taken in response.
This system I contemplated implements a straightforward approach to regulatory compliance: 1) know when action is required, 2) take the required action, and 3) record the action (should there be any future litigation that requires confirmation).
In this respect, my system was consistent with the state of the law at the time I filed it. In Williams v. Plumbers & Steamfitters Local 60 Pension Plan, 48 F.3d 923 (5th Cir. 1995), the court held that actual receipt of plan notices is not required for compliance with ERISA; only delivery is. That is, the plan administrator complies by using a delivery method that is reasonably calculated to provide actual notice.
The focus in Williams and other “no-receipt” complaints is on sending/delivering and not the fact of receipt. As a result, the plan administrator in Williams proved compliance through the testimony of an employee who prepared and mailed the notice to participants, notwithstanding the participant’s argument that he never received the notice.
As I saw in 2001, an electronic transmission satisfies the requirements for establishing compliance – a delivery method that is reasonably calculated to provide actual notice and provides proof that the notice was sent. My system would have provided exactly what the plan administrator’s employee in Williams did, without being subject to impeachment for bias in favor of his employer.
Electronic Safe Harbors: How ERISA Reaches For the Future
In 2002, the DOL created a safe harbor to permit the electronic delivery of these documents. However, the 2002 safe harbor was not easy for plan administrators to implement because it applied to only two groups: (a) employees who use the employer’s or plan sponsor’s electronic information system as an integral part of their job duties and (b) participants and beneficiaries who affirmatively consent to receipt of plan documents electronically.
As you can see, the default action was to mail paper documents unless participants opted-in to receive electronic documents. If a participant or beneficiary took no action, such as by ignoring a consent form, the plan administrator could not satisfy its regulatory obligations with electronic documents.
The proposed rule changes the default regulation. Acknowledging that technology and Internet access has become nearly universal, the DOL proposes adding a new safe harbor that flips the default rule in favor of electronic documents instead of paper documents.
Specifically, a plan administrator complies with the proposed regulation by providing a notice of Internet availability that identifies where the electronic documents can be found. The notice is provided to the e-mail address of record for the participant or beneficiary and includes instructions for the recipient to opt-out of receiving electronic documents. Thus, where the 2002 safe harbor required participants and beneficiaries to opt-in to receive electronic disclosures, the proposed rule requires them to opt-out of receiving electronic disclosures.
The proposed rule includes some additional proposals for implementing the regulation, such as the format of the initial notification of electronic delivery, the timing for providing subsequent notices of Internet availability, and the technical requirements for the website where the documents are provided. At this point, a comprehensive review of these requirements would be premature because the DOL may alter the proposed rule before it becomes a final rule. Under the Administrative Procedures Act, the proposed rule will be open for comments from the public for 25 days. After the comment period, the DOL will release a final rule (and effective date).
This proposed rule is a welcome addition to the 2002 safe harbor, which will be retained even after the DOL adopts the final safe harbor. Although the proposed safe harbor does not go as far (that is, the proposed rule is not as robust) as my contemplated Retirement Plan solution in 2001, it will help plan sponsors and administrators by simplifying compliance, reducing costs, and eliminating waste.
I also anticipate that electronic disclosures will be more useful to recipients since it will likely be easier store and search electronic documents than paper documents.
Let’s Lead the Charge: The Cannabis Industry and ERISA
My practice centers on thinking ahead and anticipating both the regulatory and commercial challenges for our clients. This approach is necessary when laws and public attitudes can undergo a revolution that takes place practically overnight. Lest we forget, Colorado legalized recreational cannabis in 2012 and Oregon legalized recreational cannabis in 2014 after rejecting it just two years earlier.
New products containing CBD derived from hemp reach the market every day. As a result, reaction, rather than action, can leave these businesses without guidance while they reach unexplored regulatory, tax, and financial territory.
In a presentation I gave recently, I provided two separate and independent legal grounds that allow hemp, CBD, and cannabis businesses to establish 401(k) plans. See my previous posts on these authorities here and here.
The Internal Revenue Service (IRS) has taken the position that statutes and regulations concerning the calculation of the cost of goods sold (COGS) apply to businesses in the cannabis industry just as they apply to every other business. The memorandum enunciating this position explicitly states that the regulations governing the treatment of employee benefit and pension plans apply to the calculation of COGS for these businesses.
In addition to this endorsement of 401(k) plans for hemp, CBD, and cannabis businesses, the IRS has rules governing “controlled groups” which prohibit a business from essentially dividing itself up so that some employees or owners participate in a retirement plan while others do not. Dividing a hemp, CBD, or cannabis business to separate activities that could be viewed as “trafficking” from the rest of the business would simply be ineffective to limit any 401(k) plan to those employees on the “non-trafficking” side.
Rather, once a business in the cannabis industry establishes a 401(k) plan, all the employees of the business must be given the opportunity to participate.
Even though these two legal grounds provide a solid basis for hemp, CBD, and cannabis businesses to establish 401(k) plans, there exists yet another route to creating retirement plans. The DOL’s rules establishing association health plans also benefit these enterprises by allowing them to join other businesses not involved in the cannabis industry to establish a health plan for the entire association.
The DOL’s rules also establish association retirement plans. These rules provide a clear path for businesses in the cannabis industry to associate with non-cannabis businesses to establish a retirement plan for the entire association. In fact, the path for association retirement plans may be even clearer than the rules for association health plans, due to potentially conflicting health insurance regulations.
Specifically, court decisions addressing the Affordable Care Act and the DOL’s rules have invalidated the DOL’s establishment of association health plans, at least for now. However, there are no such issues with the DOL’s establishment of association retirement plans.
What Is Holding the Industry Back from ERISA and Cannabis 401(k) Plans?
There is certainly a concern on the part of Retirement Industry service providers that doing business with hemp, CBD, and cannabis businesses will taint their own business and potentially expose them to legal liability. While I can sympathize with this concern, I believe that complacency and skittishness on the part of vendors in the Retirement Plan Industry (financial advisors, third party administrators, custodians, record keepers, and even lawyers) has allowed this apprehension to become overblown.
There are solid grounds for businesses to establish cannabis 401(k) plans for their entire employee base. Moreover, businesses in the cannabis industry can take advantage of association retirement plan rules by banding together with other businesses to offer retirement plans to their employees.
However, advisors -- perhaps more than the cannabis businesses themselves -- fear the legal liability that may arise if they advise clients in the cannabis industry to establish 401(k) plans. Their feeling is that it is safer to follow, allowing others to take the risks while their clients and employees miss out on the important tax benefits of 401(k) plans.
Being Disruptive When it Comes to ERISA
On the other hand, I -- myself -- am committed to finding solutions that benefit employers and their employees. It requires being disruptive and proactive with ERISA. By taking regulations as they are, but reading them in forward-thinking ways to help clients accomplish their goals, the cannabis industry can reach its full potential.
Financial advisors, financial institutions, lawyers -- that is, the Retirement Plan Industry -- and regulators can come together to provide legitimate solutions to the industry.
I end humbly with this point about prescience and creativity required in the ERISA field. Almost two decades ago, I predicted where the DOL just finally got to today (even if still a little shy of what's really needed) with its proposed safe harbor on electronic delivery.
Cannabis companies will also get the 401(k) plans to which they are entitled. Here's hoping it's not a wait of another 20 years or so.