A version of this article previously appeared in the March/April 2019 issue of Employee Benefit Plan Review.
The Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) oversees nearly 681,000 retirement plans, approximately 2.3 million health plans, and a similar number of other welfare benefit plans, such as those providing life or disability insurance.[1] As part of its assigned duties under the Employee Retirement Income Security Act of 1974, as amended (ERISA), the EBSA conducts civil and criminal investigations of employee benefit plans to ensure compliance with ERISA.
According to a fact sheet posted on the DOL website, during its 2017 fiscal year, the EBSA closed 1,707 civil investigations of employee benefit plans. Of the $682.3 million recovered by the EBSA in its investigations, $326.7 million involved collection of benefits due and owing to terminated vested participants in defined benefit plans.
This article will focus on lessons learned from recent EBSA investigations of defined benefit plans. While defined benefit plans are the focus, many of the lessons are equally applicable to investigations of other types of retirement plans, as well and health and welfare plans.
Lesson 1 - EBSA investigations are not random
The first lesson is that there are no random EBSA investigations. The fact that the EBSA is at an employer’s door does not necessarily mean that there is something wrong with its defined benefit plan. It could simply mean that the employer maintains a type of plan or a plan feature that the EBSA has chosen as a priority for investigations.
The following are four common triggers for an EBSA audit:
Participant complaints
It is estimated that 25% of EBSA investigations start with a participant complaint. While not all participant complaints end in an EBSA investigation, it is important to know that the EBSA will review participant complaints to determine if an investigation is warranted.
Form 5500 answers
The second type of investigation trigger is the responses on a plan’s annual Form 5500. If a Form 5500 discloses the potential for noncompliance, it will likely trigger an EBSA investigation. For example, if the Form 5500 indicates that a plan received non-cash contributions and their value was neither readily determinable on an established market nor set by an independent appraiser, an EBSA investigation may follow. Similarly, if the Form 5500 lists investments in the category of “Other,” the EBSA may want to investigate the plan further.
Service provider referrals
As part of its charge, the EBSA has authority to investigate third parties that provide services to ERISA plans. If the EBSA finds that a service provider is violating ERISA or ignoring plan terms, it may also conduct investigations of the plans that the service provider serves. This is because plan fiduciaries are responsible for selecting service providers and monitoring whether the providers are complying with the law and applicable plan terms.
EBSA targeting initiatives
Finally, an EBSA target initiative may trigger an audit of your plan. For example, in recent years, the EBSA has focused on excessive fees and alternative investments held by plan trustees.
Lesson 2 – An employer will not know the focus of the EBSA investigation
Unlike Internal Revenue Service audits, the initial notice of an EBSA investigation will not identify the focus of the audit. While it may be possible to glean the areas of interest from the questions in the initial notice, an employer will not know with certainty the areas of focus until the investigator identifies them in the results of the investigation.
Accordingly, it is important that employers refrain from raising issues or speculating about the focus of the investigation in the presence of the investigator.
Lesson 3 – The initial notice will include an extensive document request
An EBSA investigation starts with the initial notice of investigation which includes a request for documents. The standard list of requested documents and records is extensive. There may also be a non-standard list of requests that include things that are specific to the plan at issue, e.g., information disclosed on the plan’s Form 5500. For example, the EBSA may request information relating to alternative investments described under the heading “Other” on the Form 5500.
The requested documentation includes the following areas:
- Plan Governance – The EBSA will ask for all plan documents and information about the persons responsible for plan administration and the allocation of administrative responsibilities with respect to the plan.
- Fiduciary Obligations – The EBSA will ask about individuals identified as plan fiduciaries, the training for such persons, and specific questions about compliance with fiduciary duties, e.g., whether there have been any prohibited transactions, whether the plan administrator has timely deposited employee contributions, and whether fee disclosure requirements have been satisfied. The EBSA will also ask about compliance with the ERISA reporting and disclosure requirements.
- Plan Administration – The EBSA will make inquiries designed to determine whether the plan has been administered in accordance with applicable law and plan terms. The timing of distributions to plan participants will be scrutinized. The EBSA will determine whether loans and hardship distributions have been made in accordance with regulations. Another area of particular interest to the EBSA is “lost participants.” The investigator will determine whether the plan administrator has taken adequate steps to find missing participants so that distributions can be made. This area of inquiry has involved some controversy because EBSA investigators have been inconsistent regarding the administrative process that should be followed in dealing with lost participants.
Lesson 4 - The onsite visit is not a formal deposition
Once the EBSA has reviewed the information provided, there is an onsite visit. The interview is not recorded and interviewees are not under oath. Typically, in addition to the EBSA interviewer, there is a recorder who will take notes of all of the interviewees' responses. There is no time limit on the interviews. The investigator will conduct interviews of plan fiduciaries and other individuals who are familiar with plan administration. Depending on the EBSA’s information requested, may also include individuals responsible for the investment of plan assets or choosing the vendors that assist with this task.
An employer is permitted to have legal counsel present. While an attorney can’t stop the investigator from asking a question, he or she may be able to assist interviewees by asking for clarification of the question and advising the interviewee on the scope of the question. The interviewee should not answer until the interviewer has finished the question. The interviewee should be truthful in their responses and not guess or assume answers. The interviewee should not answer questions that have not been asked.
Lesson 5 – Be prepared to hurry up and wait
After the onsite visit, EBSA investigators will submit follow-up questions and likely send follow-up document requests. There will be long periods of time between contacts with the EBSA investigator. In a recent EBSA investigation there was an 18-month gap between the onsite visit and the date the investigator first revealed the expected results of the investigation. Keep in mind that EBSA investigators will be conducting multiple investigations at the same time. In addition, an investigator may need to seek review and approval by a supervisor with respect to recommended action.
Lesson 6 – All closing letters are not equal
Most investigations close with a letter from the EBSA. The closing letter can take many forms. The best result is a “no findings” letter. However, given all of the requirements applicable to qualified retirement plans, it is more likely that the EBSA will find some set of circumstances that needs correction. The next best closing letter is a “findings but no action” letter. A “findings but no action” letter means that some correction is required but there is no formal settlement with the EBSA. A less favorable result is a 10-day letter that recommends the voluntary compliance process and a formal settlement. In the case of a settlement, ERISA requires assessment of a 20% penalty on amounts recovered by the settlement. The worst result would be a referral for litigation by the investigator. However, this is rare and voluntary compliance is almost always offered to employers.
Lesson 7 - An employer’s cooperation with the EBSA investigation can affect the outcome of the investigation
The final lesson is perhaps the most important. An employer’s cooperation can affect the outcome of the investigation. Cooperation may be the difference between a “findings but no action” letter or a settlement that results in penalties. An employer that demonstrates a willingness to cooperate with document requests and immediately commences actions to fix errors discovered by the EBSA is more likely to receive a favorable closing letter from the EBSA. The lesson is to work with the investigator to correct issues.
Being prepared for an EBSA investigation
If an employer has a qualified retirement plan or another plan subject to the jurisdiction of the EBSA, there are steps it can take now to reduce the impact of an EBSA investigation.
- First, the employer can conduct a thorough review of all plan documents including summary plan descriptions, loan policies, and hardship distribution policies.
- Second, the employer can review plan administration to ensure that the plan terms are being followed.
- Third, an employer should review procedures for dealing with lost participants. What steps have been taken to date? The employer must recognize that one attempt to locate lost participants will not be sufficient. The employer should conduct fiduciary training regularly and document the training and attendance. The employer should also carefully review the plan’s annual Form 5500 and resist the temptation to pick up last year’s form without a careful review of the questions on the form. If an employer finds any problems, it should take steps to fix them.
- Finally, an employer should respond to participant complaints in a timely and respectful manner.
The above steps will not necessarily avoid an EBSA investigation but could help mitigate the impact of such an investigation.
Lori Jones is the chair of Thompson Coburn’s Employee Benefits practice.
[1] https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/ebsa-monetary-results.pdf