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By Lisa Rhein Carrasco, Esq., and Quinn Baker, Esq.
A Department of Labor (DOL) official recently stated that the DOL is now specifically investigating retirement plans to determine whether their plan sponsors have timely begun paying vested benefits to retirement-eligible participants. While the investigation is in its early stages, it is still expanding, and the DOL has not indicated whether, and to what extent, it will continue to expand this investigation.
As background, the Internal Revenue Code of 1986, as amended (the "Code"), and the Employee Retirement Income Security Act of 1974 (ERISA) have a number of provisions requiring that retirement benefits be paid to participants and former participants by a particular date (e.g., by age 70 1/2, normal retirement age, etc.).
The DOL investigation has found that (1) some retirement plan sponsors do not have procedures in place to ensure the timely payment of retirement benefits to participants and (2) other investigated plans have procedures, but the plan sponsors and plan administrators have not been following them. Failure to put procedures in place – and, more importantly, the failure to follow them – may be seen as a breach of fiduciary duty in the eyes of the DOL. According to the DOL, fiduciaries who fail to maintain, and follow, procedures for ensuring payment of retirement benefits to participants (including lost participants) may have personal liability for any tax consequences to those participants.
Many plan sponsors and plan administrators rely upon their third party administrators (TPAs) to perform this duty. However, they still need to ensure that their TPAs have a copy of their procedures and monitor their TPAs' activities to ensure that their Plan is compliant with the Code and ERISA. The TPA contract should also include language requiring the TPA to make diligent efforts to timely commence benefit payments and locate any lost participants, along with indemnification provisions.
Since we have also seen a heightened review of the timely commencement of retirement plan benefit payments and the timely payment of required minimum distributions in recent Internal Revenue Service (IRS) and DOL audits of our own clients, we recommend that all plan administrators and plan sponsors: (1) perform an internal review of their own plans; (2) make sure that they have procedures in place to ensure the timely payment of benefits to retirement-eligible participants and to locate missing participants with vested benefits; and (3) ensure that they and their TPA are following those procedures. If issues are found, plan sponsors and plan administrators should take affirmative action to correct such issues themselves because that is generally less costly than when an issue is discovered during a plan audit.
For more information, in the Tax Management Portfolios, see Horahan and Hennessy, 365 T.M., ERISA — Fiduciary Responsibility and Prohibited Transactions, and in Tax Practice Series, see ¶5530, Fiduciary Duties and Prohibited Transactions.
© 2016 Smith, Gambrell & Russell, LLP.
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