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© Graydon Head & Ritchey LLP
Preparing for a DOL Audit
What to Expect and How to Survive an EBSA Benefit Plan Investigation
Chris Allesee, August 13, 2015
© Graydon Head & Ritchey LLP
When to Start
NOW! ALWAYS BE AUDIT-READY
Due diligenceStay abreast of fiduciary issues
o http://www.graydonhead.com/news/blog-benefits-insight
Make sure plan-related documents are readily available or easily accessibleIdentify fiduciaries
© Graydon Head & Ritchey LLP
Phases of an Audit
Introduction and Appointment Letter Onsite Investigation Interviews Ingoing Investigation Closing or Compliance Letter Discussions and Resolution If Necessary:
o Settlemento Litigationo Penalty Assessment
© Graydon Head & Ritchey LLP
Scope
All ERISA-covered benefit plans are subject to DOL jurisdiction
ERISA §504 - U.S. Department of Labor authorized to investigate plans for any or no reason, to request documents, and to discuss the investigation with affected participants
Current Focus: Group Health Plans Major Cases/Criminal Cases
© Graydon Head & Ritchey LLP
Upside of an Audit
Free audit!
Clean bill of health from the DOL
Repeat audits of the same sponsor are rare
Corrections go to plan participants
© Graydon Head & Ritchey LLP
Downside of an Audit
Time, energy, and expense
Likelihood of multiple plans being audited at the same time
Cost of corrections and potential excise tax
Potential litigation and penalties
Ineligible for DOL self-correction program
© Graydon Head & Ritchey LLP
Why My Plan?
Indicators on Form 5500 Participant Complaints National Projects
o Health Benefit Security Projecto Fiduciary Service Provider Feeso ESOPo REACT
News Reports and Court Filings Location Random (SIP Project)
© Graydon Head & Ritchey LLP
Phase 1: Introduction and Request Letter
The Call:o To inform you of the audit and arrange
dates for onsite visit and document production
o Contact ERISA counsel, but verify availability quickly and consider proposing alternate locations
The Letter:o Confirm the dates of the onsite visito List of documents to be produced
© Graydon Head & Ritchey LLP
Phase 1: Introduction and Request Letter
Make three important calls:o ERISA counselo The investigator
Clarify the scope and dates for documents to produce
Sample setsProduce documents electronicallyDesk audit
o Current and past service providers
© Graydon Head & Ritchey LLP
Phase 1: Introduction and Request Letter
After you receive the letter and before the onsite begins:
Review all documents to be produced Work with ERISA counsel to identify potential
issues and determine whether to take corrective action prior to the start of the onsiteDOL looks very favorably on proactive
fiduciariesMay accept corrections, even when they may
not be “perfect” Designate a “point-person” for the investigation Make copies and organize documents to
coordinate with the request letter
© Graydon Head & Ritchey LLP
Phase 2: Onsite
Agenda:o Day 1 –
Introductions and preliminary questions Discuss interview schedule Review and catalog documents and request
additional information
o What you should do – Introduce the key players Get to know your investigator – build rapport Provide a quiet place to work Make point person accessible
© Graydon Head & Ritchey LLP
Phase 2: Onsite
o Days 2 and 3 – Document review and request additional
information Interviews
o What you should do – Listen closely to requestsPush service providers to produce
documentsReview all documents before producing themPrep for interviews
© Graydon Head & Ritchey LLP
Phase 3: Interviews
Format:o Interview format varies dramatically based on
plan type, potentially issues, and investigator styleChecklist or conversationMay be 15 minutes or multiple hours
What will they cover?o Background of the interview subjecto General plan informationo Specific details for potential issues (listen for
“odd” questions or non-checklist questions)o IDENTIFY FIDUCIARIES
© Graydon Head & Ritchey LLP
Phase 3: Interviews
Preparing for interviews – key points to remember:RELAX! You know more about your plan than the investigatorEach interview subject should be able to clearly explain their responsibilities and who directs their actionsAnswer the questions…but “I don’t know” is a perfectly acceptable answer
Documents make the case, not interviews A wrong answer is not a violation of ERISA, but
don’ make confident guessesKnow in advance how long the investigator expects each interview to last
© Graydon Head & Ritchey LLP
Phase 4: Ongoing Investigation
After the onsite, the investigator will review the information, complete reports, and will likely have follow-up or outstanding document requests
What you should do:o BE PATIENT – but don’t be afraid to ask for
updates From onsite to closing, investigations often
take more than a yearPrompt responses to follow-up requests and
gentle “prodding” can shorten the timeframeo Inform the investigator of any changes to the
plan or relevant personnel
© Graydon Head & Ritchey LLP
Phase 4: Ongoing Investigation
During this time, the primary issues identified by the investigator should become clear:Retirement Plan:
o Untimely contributions Utilize a well defined remittance process and
ensure that the process is followedo Fees –settlor fees, excessive or unreasonable fees,
duplicate payments, or inappropriate allocations Review invoices, provider contracts, and plan trust
statements, and maintain a clear record of fee reviews
o Investments Record due diligence efforts and maintain clear
record of analysis and action
© Graydon Head & Ritchey LLP
Phase 4: Ongoing Investigation
Retirement Plan (continued):o Forfeitures
Know how they may be used, and apply within the appropriate timeframe
o Distributions Make sure plan is properly applying force out and
rollover distribution provisions DB Plan – plan is appropriately calculating
distributions and responding to claimso Loans/Hardships
Make sure the plan’s policies are being followedo Fidelity Bond
Sufficient coverage, particularly for policies covering multiple plans
© Graydon Head & Ritchey LLP
Phase 4: Ongoing Investigation
Group Health Planso Missing SPDo Part 7 – HIPAA
Special Enrollment Rights/Notice Nondiscrimination Mental Health Parity Wellness Plans
o Part 7 – ACA Mandates for ALL plans Waiting Periods Annual/Lifetime Limits Dependent Coverage to Age 26 Rescissions Pre-Existing Conditions
© Graydon Head & Ritchey LLP
Phase 4: Ongoing Investigation
Group Health Plans (continued):o Part 7 – ACA Mandates for Non-GF Plans
Preventive Services Coverage for Emergency Services Choice of Provider Updated Claims and Appeals Procedures
o Newborns Act, WHCRA, GINA, Michelle’s Law Substantive Provisions (when applicable) Notices
o Fees When plan assets are involved, prohibited
transaction rules are applicable
© Graydon Head & Ritchey LLP
Phase 4: Ongoing Investigation
ALL PLANSo Form 5500 and Audited Financial Statements (when
necessary) Office of the Chief Accountant assesses penalties,
but a plan is ineligible for the DOL’s delinquent filer program if EBSA cites untimely or missing Form 5500s during an investigation
OCA may assess penalties of up to $1,100 per day for a missing or incomplete Form 5500
o Disclosures to Participants and Beneficiarieso ERISA Claims Procedures
Consistent application and compliance with applicable timeframes
o Appropriate Electronic Disclosure Method
© Graydon Head & Ritchey LLP
Phase 5: Closing or Compliance Letter
Less than one-third of investigations cite no violations of ERISA Letter will simply note the investigation is closed
and thank you for your assistance
The other two-thirds receive a voluntary compliance letter (“VC Letter”) Identifies alleged fiduciaries Details factual findings of the investigation that
DOL believes support a violation of ERISA Asks for a response within 10 business days
© Graydon Head & Ritchey LLP
Phase 5: Closing or Compliance Letter
Forward the VC Letter to ERISA counsel immediatelyo Most investigators will accept an informal notice
of receipt of the letter and comment that it is under review as an initial response within 10 business days
o Discuss an appropriate timeframe for a full response Additional extensions may be allowed as long
as there is substantive progress towards a resolution
o Discuss the factual and legal findings with the investigator to frame your response
© Graydon Head & Ritchey LLP
Phase 6: Discussions and Resolution
DOL’s Role:o Correcting a breach is a fiduciary decisiono The DOL is not a fiduciary, and will only
comment on the reasonableness of a corrective action
HOWEVER, resolving an issue through voluntary compliance is still a very interactive process:o After discussing the VC Letter with ERISA
counsel, express factual or legal concerns with the investigator directly
o If no concerns, ask the investigator for correction recommendations
© Graydon Head & Ritchey LLP
Phase 6: Discussions and Resolution
Discuss with investigator:o Actual losso Acceptable lost earnings calculation methodso Participant allocationso Procedural changeso Correction timeframeo Documents that will verify proof of correction
NOTE that these are not negotiations, just discussions that help the fiduciary understand his or her obligations to the plan – negotiations imply a settlement, and settlements may result in penalties (ERISA §502(l) for all plans and §502(i) for welfare plans).
© Graydon Head & Ritchey LLP
Phase 6: Discussions and Resolution
After discussing with investigator, promptly take corrective action and provide proof documentso Generally, DOL requires confirmation of receipt
by the plano Providing sufficient proof may not be easy and
may take several attempts Upon receipt of proof of a sufficient correction, the
DOL will send a closing letter to the fiduciary o DOL will take no further actiono Notes potential excise tax liability and mandatory
referral of prohibited transactions to IRSo Notes referral to OCA (if citing Form 5500
violations)
© Graydon Head & Ritchey LLP
Phase 6: Discussions and Resolution
Benefits of resolution through voluntary complianceo Quicko Cheap(er)o Penalties generally do not apply
§502(l) and §502(i) penalties only apply if there is a settlement or court order
Do NOT ask for signed confirmation of proposed corrective action in advance
Begins to look more like a settlement than a voluntary fiduciary action
20% penalty under both sections
© Graydon Head & Ritchey LLP
Phase 7: Settlement, Litigation, Penalties
Overwhelming majority of cases do not require a formal settlement or litigation
Settlement:o Most common scenario is a fiduciary that has
insufficient funds to make a full correction within a reasonable timeframe
o Prohibited transaction exemption allows for repayment plans
o Requires the fiduciary enter into a tolling agreement, if necessary
o 502(l) penalty will apply
© Graydon Head & Ritchey LLP
Phase 7: Settlement, Litigation, Penalties
Litigation Referralso Most common scenarios are abandoned plans or
consent decrees to reallocate a fiduciary’s personal account to affected participants
o For disputed or unresolved issues: Investigators generally warn in advance that
a case will be forwarded to the Solicitor of Labor True litigated issues are very rare
VERY slow - Solicitor of Labor requires DOJ approval to file a complaint (up to 6 months)
Solicitor’s attorneys are likely to negotiate502(l) penalties will likely apply
© Graydon Head & Ritchey LLP
Phase 7: Settlement, Litigation, Penalties
Penalty Assessmento DOL will mail letter citing “applicable recovery
amount” and the amount of the penaltyo Penalty generally allocated among liable
fiduciaries based on amount paido Good faith waiver or hardship waiver
Limited regional discretion to decrease penalty
Full waiver rarely approvedo If not paid after waiver is denied, will be referred
for collection
© Graydon Head & Ritchey LLP
Conclusion
Always be audit ready Be proactive and get ERISA counsel
involved early Be organized and responsive Know your fiduciaries Let the investigator do the heavy lifting:
o Ask for clarification and updateso Ask for suggestions regarding
corrections It’s never too late to avoid litigation
© Graydon Head & Ritchey LLP
Questions?
Thank you for your attention, and please feel free to call or email if you have any questions:
o Chris Allesee – [email protected] (513) 629-2727