Department of Labor Questions and Answers

American Society of Pension Actuaries
Annual Conference
October 24 to 27, 1999

Presented by

Alan Lebowitz
Deputy Assistant Secretary for Program Operations
Pension and Welfare Benefits Administration
U.S. Department of Labor
Washington, D.C.

Robert Doyle
Director of Regulations and Interpretations
Pension and Welfare Benefits Administration
U.S. Department of Labor
Washington, D.C.

R. Bradford Huss
Trucker F Huss
San Francisco, California

Michael Canan
Gray, Harris and Robinson
Orlando, Florida

1999 ASPPA Annual Conference

Department of Labor Questions & Answers

Introduction

Brad Huss and Mike Canan discussed with Alan Lebowitz and Robert Doyle of the Department of Labor a number of questions which were submitted by members of ASPPA. It is intended that the responses to the questions provide the basis for discussion at the 1999 ASPPA Annual Conference. The answers reflected in this presentation are Brad Huss' and Mike Canan's interpretation of Mr. Lebowitz's and Mr. Doyle's responses, and not direct quotes. The responses are intended to reflect as accurately as possible the statements made by the government representatives, but this material does not represent the official position of the Department of Labor, or any other government agency; nor has it been reviewed or approved by the Department of Labor.

It is intended that this written material will meet the requirements necessary to qualify for Continuing Education Credits.

ASPPA wishes to thank Messrs. Lebowitz and Doyle for their cooperation and assistance in preparing for this portion of the program.
1999 ASPPA Annual Conference

1. Does the Department see any problems with an ESOP repurchase floor by an employer at the higher of the appraised value for the employer stock or the price at which the stock was sold by a majority shareholder to the ESOP?

Response: Generally, no. One issue is whether the repurchase floor was a factor in valuing the stock when it was purchased by the ESOP, i.e., did it inflate the value to the selling shareholder. There could be a problem if the repurchase floor mainly benefits highly compensated employees and negatively impacts the participants who remain in the ESOP. For example, it may be that a disportionate number of highly compensated employees are receiving distributions from the ESOP.

2. What is the current view of the Department on whether a fiduciary has a duty to override plan voting instructions under an ESOP?

Response: This subject is considered in the attached letter to Ian Lanoff, dated September 28, 1995. Assuming that the Plan provides for pass through voting, the fiduciary should, with respect to allocated stock, vote by following the directions of participants. With respect to allocated stock for which participants have not indicated a vote, the fiduciary must exercise its fiduciary discretion in voting the shares. It should be noted that the court in the NationsBank case (Herman v. NationsBank Trust Company, 126 F.3d 1354 (11 Cir. 1997)) held differently. The court found, in essence, that silence by a participant can be construed as a direction if the participants are informed as to their options when the fiduciary requests direction and the fiduciary also informs the participants how it will treat non-responses. With respect to unallocated stock, the fiduciary has the fiduciary responsibility to vote the stock. If the provisions of the plan provide that the fiduciary shall vote unallocated shares in the same proportion as participants vote allocated shares, the fiduciary has to take the plan provisions into account in exercising its fiduciary duties. If voting in accordance with the plan provisions is considered to be prudent by the fiduciary, then the fiduciary has to follow the plan provisions. One issue that may come up is that it is not necessarily imprudent to follow the plan provisions as to voting even if the fiduciary might reach a different result based on its own analysis. In any event, the fiduciary should document the basis for its decision and, if it is not following the terms of the plan, document why not.

3. A number of health care providers, such as hospitals, HMO's, etc., provide services under health plans offered to their own employees. The Department issued PTE 93-62 to Emory University Clinic for such a plan in 1993. Would the Department consider a class exemption for such plans and, if so, when would it apply?

Response: It is not clear that this area is conducive to a class exemption. This may be a potential area for use of the Department's ExPro prohibited transaction exemption request procedure. This procedure allows for expedited processing based upon the application being substantially similar to previously granted exemptions. The ExPro substantially similar standard is applied fairly rigorously.

4. Are there ways in which the Department can encourage or require better communication between plan administrators and persons drafting a QDRO, such as requiring that a phone number and the person to contact on behalf of the plan administrator be provided to participants?

Response: The Department's booklet on QDROs should be reviewed. The booklet is intended to promote cost effective processing of QDROs and to provide information to plan administrators as to how to facilitate the processing of QDROs. One purpose of the booklet is to heighten administrators' comfort level concerning approval of QDROs and avoid having administrators routinely refer all QDROs out to counsel. Another goal of the booklet is to facilitate communication between the plan and participants and alternate payees. The booklet provides answers to questions concerning the disclosure of information. (see below) In general, information can be shared if it is reasonably needed to develop a qualified order where there is a good faith claim for a QDRO.

5. If a lawyer doesn't follow the QDRO procedure of a plan, can the lawyer or his or her client be charged the resulting costs?

Response: A plan should have QDRO procedures and it is required to follow them. If the processing of QDROS is causing significant problems, there may be a need to review the procedures. A plan can furnish model QDROs but a plan cannot require that these are the only ones that the plan will accept.

The Department's QDRO booklet provides as follows

Q 2-4 provides that a plan's QDRO procedures must be reasonable, including that:

It is the view of the Department that a plan's QDRO procedures would not be considered "reasonable" if they unduly inhibited or hampered the obtaining of a QDRO determination or the making of distributions under a QDRO. For example, any procedure that conditioned making a QDRO determination on the payment of a fee by a participant or alternate payee (either directly or as a charge against the participant's account) would not be considered a "reasonable procedure."
[ERISA § 206(d)(3)(G)(ii); IRC § 414(p)(6)]

Q 2-6: May a plan administrator charge a participant or alternate payee for determining the qualified status of a domestic relations order?

The Department has taken the position that pension plans may not impose a fee or charge on a participant or alternate payee (either directly or as a charge against a plan account) in connection with a determination of the status of a domestic relations order or the administration of a QDRO. [ERISA §§ 206(d)(3), 404(a); see Advisory Opinion 94-32A]

6. What information about the account of a participant can properly be given to someone (usually represented by a lawyer) who is seeking a QDRO against the participant (e.g., can the plan disclose the account balance or benefit amount or amount of vesting)?

Response: This issue is discussed in several questions in the Department booklet on QDROs as follows:

Q 2-1 What information is an administrator required to provide a prospective alternate payee before the administrator receives a domestic relations order?

Congress conditioned an alternate payee's right to an assignment of a participant's pension benefit on the prospective alternate payee's obtaining a domestic relations order that satisfies specific informational and other requirements. It is the view of the Department that Congress therefore intended prospective alternate payees -- spouses, former spouses, children, and other dependents of a participant who are involved in a domestic relations proceedings -- to have access to plan and participant benefit information sufficient to prepare a QDRO. Such information might include the summary plan description, relevant plan documents, and a statement of the participant's benefit entitlements.

The Department believes that Congress did not intend to require prospective alternate payees to submit a domestic relations order to the plan as a prerequisite to establishing the prospective alternate payee's rights to information in connection with a domestic relations proceeding. However, it is the view of the Department that a plan administrator may condition disclosure of such information on a prospective alternate payee's providing information sufficient to reasonably establish that the disclosure request is being made in connection with a domestic relations proceeding.

It is the Department's understanding that many domestic relations orders fail initially to qualify when submitted to the plan because they fail to take into account the plan's provisions or the participant's actual benefit entitlements. Affording prospective alternate payees access to plan and participant information in a timely manner will, in the view of the Department, help drafters avoid making such obvious errors in preparing orders and, thereby, facilitate plan administration. See Question 2-5.
[ERISA §§ 206(d)(3)(A) - (C), 404(a); IRC § 414(p)(1) - (3)]

Q 2-5: Are there other matters that should be addressed in a plan's QDRO procedures?

Yes. It is the view of the Department of Labor that a plan's QDRO procedures should be designed to ensure that QDRO determinations are made in a timely, efficient, and cost-effective manner, consistent with the administrator's fiduciary duties under ERISA. The Department believes that unnecessary administrative burdens and costs attendant to QDRO determinations and administration can be avoided with clear explanations of the plan's determination process, including:

• An explanation of the information about the plan and benefits that is available to assist prospective alternate payees in preparing QDROs, such as summary plan descriptions, plan documents, individual benefit and account statements, and any model QDROs developed for use by the plan;
  
  
• A description of any time limits set by the plan administrator for making determinations;
  
  
• A description of the steps the administrator will take to protect and preserve pension assets or benefits upon receipt of a domestic relations order (for example, a description of when and under what circumstances plan assets will be segregated or benefit payments will be delayed or suspended); and
  
  
• A description of the process provided under the plan for obtaining a review of the administrator's determination as to whether an order is a QDRO.

It is the view of the Department that the plan administrator's adoption and use of clear QDRO procedures, coupled with the administrator's provision of information about the plan and benefits upon request, will significantly reduce the difficulty and expense of obtaining and administering QDROs by minimizing confusion and uncertainty about the process.
[ERISA §§ 206(d)(3)(G), 206(d)(3)(H), 404(a); IRC §§ 414(p)(6), 414(p)(7)]

7. Does the Department have any plans to formulate a definition of "select group of highly compensated and management employees"? Because the Department views one factor to be whether the employee has the power to negotiate his or her compensation and benefits, how does the Department treat 401(k) plans, since the employee has the choice of participating or not?

Response: Not at the present. Electing to participate in a 401(k) plan is not the type of criteria envisioned in a top hat plan analysis. The focus in this analysis is on the ability of a plan participant to protect himself or herself in dealing with the employer.

8. What is the Department's view of the extent of ERISA Section 404(c) compliance? What problems has the Department seen in the 404(c) compliance area in conducting its investigations?

Response: In general, compliance with the ERISA Section 404(c) regulations is not reviewed by the Department as this is viewed as mainly a defense for the fiduciary. There may be an issue if a fiduciary is representing to plan participants that the plan is a 404(c) plan but the fiduciary is clearly not complying with the 404(c) regulations. In general, enforcement by the Department is focused on the mandatory requirements imposed by ERISA but not on the voluntary aspects, unless it rises to the level of misrepresentation to plan participants. The Department does have a concern with the broader issue of whether a 404(c) plan is appropriate given the nature of a particular employer's workforce.

One new issue in 404(c) compliance is that the SEC has now approved the use of "profile" prospectuses. The use of profile prospectuses appears to be consistent with the intent of the 404(c) regulations, but it is unclear whether a profile prospectus satisfies the requirements under the 404(c) regulations.

9. What are the Department's plans for Y2K enforcement? What will an enforcement program cover?

Response: This issue will be discussed from the podium.

10. What are the Department's views as to the status of members of LLCs or LLPs as to participant loans and for other purposes? Are they to be treated as partners or as shareholders? Do the tax elections of the participants affect their treatment for plan purposes? Should the analysis be made by looking to the substance of treatment under LLC or LLP law?

Response: The status for participant loans of members of LLPs and LLCs has not yet been determined. Individual exemptions can be granted approving plan loans to owner employees and S corporation shareholders but the plan account balances of these types of participants cannot be used to secure the loan.

11. Has the Department taken enforcement action against employers who deposited 401(k) funds by the 15th day of the following month? If so, can you give us some examples or guidelines?

Response: The Department has an ongoing enforcement initiative on 401(k) contributions. The 15th business day of the following month is not a safe harbor. If the plan sponsor could have segregated the employee contributions sooner, enforcement action will be taken. This issue will be discussed further from the podium.

12. Please clarify the timing of employer transmission of elective deferrals. Employer ABC sends its deposit information to the investment company electronically and writes out a check for the amount of the deposit at the same time. However, the employer holds the check until the employer receives a call back from the investment company letting the employer know whether or not the deposit information was in order. We have told employer ABC that the check should be mailed at the same time the deposit information is electronically transmitted to the Investment Company. What is your opinion on this?

Response: The employer needs to deposit the money as soon as it can be segregated and the employer should not hold the check. It is recognized that reconciliation of payroll data is part of the period permitted under the regulations during which the contributions cannot yet be segregated. It is further recognized there will be some reconciliation that will need to be done by the recordkeeper but the cash should be put in the plan during this period and not held out of the plan or held uncashed as a check.

13. Our understanding is that there is a program in the St. Louis office, and perhaps elsewhere, of subpoenaing the records of TPAs to see if any of their clients are failing to comply with the plan asset deposit requirements. Please comment on this.

Response: The Department will subpoena service providers nationwide with respect to the 401(k) contribution initiative, but the Department is not specifically targeting third party administrators. This issue will be discussed further from the podium.

14. Can a TPA be a fiduciary with respect to the deposit of 401(k) funds? If so, when?

Response: This will be discussed from the podium. See Advisory Opinion 92-94 attached to outline.

15. What is the Department's position on whether a trust is needed for cafeteria plan funds? Do employers have to have a trust for retirees even though they don't have to have a trust for current employees?

Response: Technical Release 92-01 addressed the issue of whether a trust is required for cafeteria plans. It is recognized that not all issues are answered by this release. For example, there are issues concerning COBRA contributions and retirees. The following discussion of COBRA contributions is in the preamble to the Department's plan asset regulations:

With regard to the continued application of T.R. 92-01, some commenters questioned whether the technical release extended relief to plans which receive COBRA contributions. It is the view of the Department that the mere receipt of COBRA contributions or other after tax participant contributions (e.g., retiree contributions) by a cafeteria plan would not by itself affect the availability of the relief provided for cafeteria plans in the technical release. Similarly, in the case of other contributory welfare plans, the mere receipt of after tax contributions by a plan would not affect the availability of relief under the technical release provided that such contributions are applied only to the payment of premiums in a manner consistent with 29 CFR 2520.104-20(b)(2)(ii) or (iii) or 2520.104- 44(b)(1)(ii) or (iii).

16. Is there a requirement of disclosure of receipt of commissions by third party administrators?

Response: Disclosure should be made in the described situation. For further reference, prohibited transaction class exemption 84-24 covers insurance commissions and the required disclosure of such commissions. In general, a fiduciary should be asking for information on fees and requiring service providers to disclose all fees. A fiduciary should know for what he or she is paying. For further reference, please see the "Frost" and "Aetna" opinion letters attached at the end of this outline.

17. What is the Department's view on surrender charges for termination of insurance agreements? When are they permissible and when not? What if the purpose of the surrender charge is to pay for prior commissions? Are these different than a market adjustment feature? ERISA section 408(b)(2) permits reasonable arrangements, but that implies the charge can't be in the nature of a penalty. Is there a cause of action against the fiduciary for signing the insurance agreement on behalf of plan? Is the contract enforceable against the fiduciary if signed?

Response: A fiduciary has to be prudent in buying an insurance contract, or any other investment product, for a plan. Fiduciaries must understand what they are buying and what are the charges. This is essentially a prudence issue.

18. An employer is merging two 401(k)/profit sharing plans. Plan A is invested at a new investment company and Plan B is invested at the old investment company. Plan B's assets are going to be transferred from the old investment company to the new investment company. When the assets are transferred, the old investment company is going to assess the assets with a back-end charge. Employer wants to make a payment equal to the amount of the back-end charge to the plan, so that participants' accounts are not reduced by the amount of the back-end charge. Do you see any problems with this?

Response: There may be tax issues here that are outside the province of the Department. One question, certainly, is whether there was a fiduciary breach involved at all.

19. What national initiatives does the Department have coming up?

Response: The Department's enforcement initiatives are set out in the attached outline.

20. Is the Department going to announce a HIPAA enforcement program?

Response: The HIPAA is part of the Department's group health plan disclosure initiative, but the initiative will be broader than just HIPAA.

21. What are the Department's concerns with orphan plans?

Response: With respect to orphan plans, it is intended to seek the appointment of an independent fiduciary. Steps are being taken to determine the scope of the problem and what alternative approaches are available to solve orphan plan issues. Discussions are being held with various interested organizations to get a sense of the scope of the issue. One of several concerns is the question of whether a fiduciary can keep collecting fees from a plan if the fiduciary knows there is a problem with the status of the plan due to the lack of a plan sponsor. In no event can a fiduciary simply abandon a plan.

22. What is the Department's view about whether ERISA preempts state law as to negative elections for 401(k) deferrals?

Response: This issue is currently under review. There are one or more advisory opinions pending. Some prior advisory opinions would suggest finding preemption, but there is no answer as yet. In addition, the preemption answer may vary on a state by state basis. Further, it is suggested that plan fiduciaries check as to the viewpoint of the appropriate state authorities as to whether preemption applies to the state's requirements.

23. Will the Department be publishing regulations pursuant to ERISA section 702 regarding rules for offering health coverage to individuals who have health problems?

Response: The Department is working on regulations to be issued under ERISA Section 702. The target date for the release is spring of next year, but this may change.

24. What is the Status of the Voluntary Fiduciary Correction Program?

Response: Work on the anticipated Voluntary Fiduciary Correction program is pretty much completed but the Department is working through the approval process. There are still some issues outstanding.

25. What is the status of the Department's consideration of the small plan audit exemption?

Response: The proposed regulation on the small plan audit exemption is basically completed and is going through the approval process. This regulation is further along on the approval process than the Voluntary Fiduciary Correction program.

26. What is the status of the Department's proposal for changes in the health care claims review procedures? Now that it appears legislation is likely, will it wait for the results of that legislation?

Response: The Department does not anticipate issuing the proposed health claims regulations in the near future because many of the current legislative bills address some of the same aspects of claim processing that the proposed regulations would address. If there is an undue delay in the enactment of legislation in this area, the Department may act by regulation to fill the gap.

27. What if there is a scrivener's error in revising a non-qualified deferred compensation plan which incorrectly provides for a different (and more favorable) vesting schedule or different (and higher) benefit amounts?

Response: A fiduciary is obligated to follow the terms of the plan. This question points out the need for a fiduciary to be careful in reviewing and adopting plan documents. The specific question addressed in the question has not come up yet, but such a situation could be corrected at least prospectively.

28. Will the Department mandate electronic filing of Form 5500s? If so, when? How will the filer keep a record of what was filed, and when, with electronic filing?

Response: Electronic filing will not be mandated for the 1999 plan year but there will be a new form 5500 and a new processing system for 1999. Forms 5500 were processed by the IRS prior to the 1999 plan year. Now they will be processed by a contractor under Department auspices. It is anticipated the contractor will find ways to encourage electronic filing. It is premature at this point to answer as to how records should be kept when forms are filed electronically. In some respects, this will be a systems question.

29. When will final forms 5500 and instructions be issued?

Response: It is hoped these will be issued in final in November.

30. How does the Department's national office monitor use of civil investigation of local cases which may be prolonged to gather additional information for criminal investigation? If someone suspects this is taking place, whom should they contact?

Response: This would be an abuse of process. If someone believes this is happening, they should contact the national office of the Department to discuss their concern, which will be taken seriously.

31. Can a plan charge to a participant's account an administrative charge for making a plan distribution? Does it matter if the benefit distribution is mandatory or optional, e.g. a distribution at normal retirement age or an in service early distribution under a profit sharing plan?

Response: The fiduciary and prohibited transaction aspects of charging expenses to plan assets will be discussed in a separate session.

32. Can plan administration expenses be charged to the overall plan even though these expenses may not be charged to a particular participant's account?

Response: Yes, if it is a proper plan expense in the first place.

33. Can a "flat" administrative charge (such as $25) be assessed against each participant account in a 404(c) plan? Can it be limited to terminated participants?

Response: See Response to Question 34.

34. For what services provided to a plan can charges be made against participant accounts? What, in the Department's view, is an acceptable level of charges? $25? $50? $100?

Response: These questions are too fact specific for the Department to respond. One issue is the nature of the services for which the charges are being assessed. Another issue is whether the charging of flat charges to accounts of different size is improper because the charges may not be reasonably related to the amounts held in the accounts.