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Washington Labor & Employment Wire » Employee Benefits Security Administration

Borzi Nominated as EBSA Assistant Secretary

On March 25, 2009, President Obama nominated Washington D.C. attorney Phyllis C. Borzi to serve as assistant secretary of labor for employee benefits security in the Employee Benefit Security Administration, a subdivision of the Department of Labor.

Borzi’s practice focuses on ERISA and employee benefits and is currently of counsel with the law firm of O’Donoghue & O’Donoghue LLP in Washington, D.C. She is also on the faculty of the Department of Health Policy in the George Washington University Medical Center’s School of Public Health and Health Services, conducting legal research and policy analysis in the area of employee benefits.

A graduate of Syracuse University and Catholic University Law School, Borzi worked as Pension and Employee Benefits Counsel from 1979 to 1995 for the Subcommittee on Labor-Management Relations of the Committee on Education and Labor in the U.S. House of Representatives. She has served on a number of health care and employee benefit-related advisory boards, including then-First Lady Hillary Rodham Clinton’s Presidential Task Force on Health Care Reform in 1993, and, in recent years, the Advisory Committee of the Pension Benefit Guaranty Corporation.


EBSA Issues New Civil Penalty Rule for Pension and Health Plans


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On January 2, 2009, the Employee Benefits Security Administration (EBSA) published a final rule which authorizes the Secretary of Labor to assess civil penalties of up to $1,000 per day for failures to disclose certain documents to participants, beneficiaries, and others as required by the Employee Retirement Income Security Act (ERISA), as amended by the Pension Protection Act (PPA) in 2006. The new rule, which becomes effective on March 3, 2009, will be codified at 29 C.F.R. § 2560. 

ERISA sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. Under ERISA, plans must provide participants with plan information including important information about plan features and funding.  The PPA set forth several new disclosure requirements, including: (1) plan administrators of single-employer defined benefit pension plans must provide written notice of limitations on benefits and benefit accruals to participants and beneficiaries within 30 days of a plan becoming subject to ERISA; (2) plan administrators of multiemployer pension plans must, upon written request, furnish certain documents to any plan participant, beneficiary, employee representative, or any employer that has an obligation to contribute to the plan; (3) a plan sponsor or plan administrator of multiemployer employee benefit plans must, upon written request, furnish to any employer with an obligation to contribute to such plan, notice of potential withdrawal liability; and (4) the plan administrator of a plan with an automatic contribution arrangement shall provide to each participant, to whom the arrangement applies, notice of the participant’s rights and obligations under such arrangement. The new civil damages provision will apply to any violation of these disclosure requirements.


Employee Benefits Security Administration Issues Final Rules Under Pension Protection Act


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On October 7, 2008, the Employee Benefits Security Administration (EBSA) released two final rules related to the selection of annuity providers.

The first rule limits the application of the “safest available” standard of Interpretive Bulletin 95-1 to defined benefit plans. Bulletin 95-1 states that plan fiduciaries must attempt to obtain the safest annuity available, unless it would be in the best interest of the participants and beneficiaries to do otherwise.  The Bulletin initially applied equally to both defined benefit plans and defined contribution plans. The final rule limits the scope of the bulletin to only defined benefit plans. 

The second rule establishes a safe harbor for the selection of annuity providers for benefit distributions from individual account plans. The proposed rule stated that fiduciaries should engage in an objective, thorough, and analytical search when identifying annuity providers, while avoiding self-dealing, conflicts of interest, or other improper influence.  The final rule clarified the proposed rule by noting (a) that the regulation does not establish a minimum requirement for satisfying the responsibilities of selecting an annuity provider; and (b) an independent expert is not required in all cases.


EBSA Announces Proposed Regulations on Investment Advice Exemption for 401(k) Plans and IRAs


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On August 21, 2008, the Employee Benefits Security Administration (EBSA) announced two proposed rules making investment advise more accessible for participants in 401(k) plans and individual retirement plans (IRAs).

Congress passed the Pension Protection Act (PPA) in 2006, amending the Employee Retirement Income Security Act (ERISA).  The PPA added a new prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice. Under the exemption, advice may be given through an unbiased computer model or through an adviser compensated on a flat-fee basis.  Furthermore, advisors must disclose their fees.

The proposed regulation provides guidance on certifying the unbiased computer models and provides a model form that advisors can use to disclose their fees.

EBSA is also proposing a class exemption from ERISA’s prohibited transactions rule allowing advisors to give individualized advice to participants after giving advice generated by use of a computer model.

Written comments on the proposed regulation should be received by the Department of Labor on or before October 6, 2008. To submit comments electronically, email e-ORI@dol.gov, or use the Federal eRulemaking portal at http://www.regulations.gov/.  Interested parties may also send comments to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Investment Advice Regulations, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.


EBSA Announces Proposes Regulations To Improve Disclosure Of Fees And Expenses To Participants Of 401(K)-Type Benefit Plans


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On July 23, 2008, the Employee Benefits Security Administration (EBSA) published a proposed rule making it easier for participants covered by 401(k)-type plans to make informed retirement savings decisions.

Currently, there are approximately 437,000 participant-directed individual account plans (e.g., 401(k) plans) that cover an estimated 65 million participants. Because participants and beneficiaries are increasingly responsible for making their own retirement savings decisions, there is a heightened concern that these individuals do not have the information necessary to make informed decisions. The proposed regulation contemplates the disclosure of certain plan and investment-related information, including fee and expense information, to these participants and beneficiaries. 

As part of the proposal, EBSA would require plan fiduciaries to make available basic information about the plan and its investment options on a regular basis, such as: (a) different options available under the plan; (b) how to give investment instructions; (c) information about investment returns and fees and expenses; and (d) how to obtain more detailed information. The agency has also developed a model chart to provide investment-related information in a user-friendly format, but the agency will also allow plan fiduciaries the flexibility to design their own charts or comparative formats.   

Written comments on the proposed regulation should be received by the Department of Labor on or before September 8, 2008. To submit comments electronically, email e-ORI@dol.gov (enter into subject line: Participant Fee Disclosure Project), or use the Federal eRulemaking portal at http://www.regulations.gov/. Interested parties may also send comments to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Participant Fee Disclosure Project, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.


EBSA Holds Webcast to Discuss Regulation Updates

On June 25, 2008, the Department of Labor’s Employee Benefits Security Administration (EBSA) held a webcast conference to help employers and plan administrators understand recent regulatory and interpretive guidance under the Employees Retirement Income Security Act (ERISA). During the webcast, EBSA provided updates regarding a number of regulations, including the default investment regulation, the delinquent contributions regulation, and the participant contribution safe harbor regulation. 

Default Investment Regulation. 29 CFR § 2550.404c-5 allows fiduciary relief for investments in qualified default investment alternatives, or QDIAs. Under this regulation, the plan fiduciary will not be liable for any loss that is a direct and necessary result of investing in a QDIA. In order to be protected, a few general requirements must be met. First, the participant must have had the opportunity to direct the investment of assets in his or her account, but failed to do so.  Second, the notice requirements in the regulation must have been complied with, including informing the participant of when the assets may be invested, their rights surrounding the investment, a description of the QDIA, and an explanation of where to find information on other investment alternatives. This notice must be made at least 30 days prior to the initial investment as well as 30 days before the beginning of each plan year. Finally, the investment must be one of the alternatives set forth in the regulation, which include both long-term and temporary QDIA alternatives. 

On April 30, 2008, three Correcting Amendments (73 FR 23349) were issued regarding this regulation. Correcting Amendment No. 1 identified who can manage a QDIA. A plan sponsor that is a named fiduciary of the plan can manage a QDIA. This includes a committee comprised primarily of employees of the plan sponsor, as long as the committee is a named fiduciary under the plan documents. 

Correcting Amendment No. 2 amended the provision discussing grandfather relief for stable value funds. Stable value products or funds which were default investments before the effective date of the final regulation (Dec. 24, 2007) may be QDIAs. The description originally used in the regulation could be construed to limit the availability of the grandfather relief. To rectify this problem and ensure broad application, the provision was amended and now reads “stable value products or funds must invest primarily in investment products that are backed by state or federally regulated financial institutions.” This means they can be issued directly by such institutions or the principal and accrued interest on the investment products may be backed by contracts issued by such institutions.   

Correcting Amendment No. 3 dealt with certain restrictions during the 90-day period that begins on the date of the participant’s first elective contribution or other first investment in a QDIA. Originally, the regulation prohibited all restrictions, fees or expense on transfers or withdrawals from a QDIA during this period. This was intended to avoid inhibiting transfers from or liquidations out of a QDIA. However, EBSA concluded that prohibiting all restrictions is too broad, particularly “round-trip” restrictions which restrict the ability to reinvest within a defined period of time. This amendment now allows for “round-trip” restrictions that generally affect only a participant’s ability to reinvest in the QDIA for a limited period of time. 

EBSA also issued a Field Assistance Bulletin (FAB 2008-03) regarding the default investment regulation. This FAB answers questions in six general areas of the regulation: (1) scope, (2) notice requirements, (3) limitation on fees and restrictions within the first 90 days, (4) management and asset allocation, (5) capital preservation investment option, and (6) grandfather relief for stable value products. 

Delinquent Contributions Regulation. EBSA issued a FAB regarding delinquent contributions.  This FAB covers when contributions become plan assets as well as whose responsibility it is to collect the delinquent contributions. Employer contributions become plan assets only when they have been received by the plan. If the employer fails to make contributions when due under the terms of the plan, the plan has a claim against the employer, and the claim is a plan asset. Employee, or participant, contributions become plan assets on the earliest date on which they reasonably can be segregated from the assets of the employer. Failure to collect these contributions may be a fiduciary breach by the responsible fiduciary. Failure to remit participant contributions to the plan also constitutes a prohibited transaction on the part of the employer. 

A plan must have one or more named fiduciaries who have authority to control and manage the operation and administration. Additionally, it is required that all plan assets be held in the trust and that one or more trustees have exclusive authority and discretion to manage and control the assets of the plan. There are two exceptions to the trustee’s exclusive authority to manage the assets of the plan. First, if the plan provides that the trustee is subject to proper directions of a named fiduciary, then that trustee is excepted from the exclusive authority requirement. Similarly, the trustee is also exempted when the authority to manage, acquire, or dispose of plan assets is delegated to one or more investment managers.

It is the responsibility of the named fiduciary to assure that all trustee responsibilities have been properly assigned. The general rule is that the named fiduciary may assign this duty to a discretionary trustee, a directed trustee, or may appoint an investment manager to take care of these duties. The named fiduciary can enter into a trust agreement that provides that a particular trustee is not responsible for monitoring or collecting contributions.  However, if no trustee or investment manager is given this responsibility, the named fiduciary will be liable for any losses due to failure to collect. If there is more than one trustee, the regulation also permits trustees to allocate responsibilities among themselves. In this case, a trustee is not liable for failure of another trustee to perform its allocated responsibilities. However, a trustee that is not responsible for collecting contributions still has an obligation to do so if (1) the trustee knows that no one has been assigned the responsibility to collect and (2) knows that delinquent contributions are not being collected.  

Participant Contributions Safe Harbor.  The general rule with respect to participant contributions is that they become plan assets on the earliest date that they can reasonably be segregated from the employer’s funds. The Proposed Amendment that was published on February 29, 2008 added a safe harbor for plans with fewer than 100 participants. Under this amendment, participant contributions are deemed to have been made to the plan on the earliest date on which contributions can reasonably be segregated from the employer’s general assets if they are received by the plan within seven business days of receipt of withholding by an employer. This is a way for small employers and their service providers to have the option of ensuring compliance.  EBSA has allowed small employers to rely on this safe harbor while it is still in proposed form.  Small plans can now look to the safe harbor and choose if they wish to forward, deposit, or remit the contribution to the plan. So long as this is done within seven days, EBSA will not take action with respect to the participant contribution requirements.


DOL Announces Semi-Annual Regulatory Agenda for EBSA


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On May 5, 2008, the DOL published its semi-annual regulatory agenda and highlighted two items to be undertaken by the Employment Benefits Security Administration (EBSA) in the remainder of 2008. 

First, EBSA intends to publish a final rule in November 2008 concerning when employee benefit plan contributions paid to or withheld by an employer constitute “plan assets” for ERISA and tax code purposes. Under the current Plan Assets-Participant Contributions regulation, all employers must forward employee contributions to pension plans as soon as they can reasonably be segregated from the general assets of the employer, but no later than the 15th business day of the month following the month in which the contributions are received or withheld by the employer.     

Under the proposed safe harbor amendment published on February 29, 2008, contributions to a “small” benefit plan (a plan with fewer than 100 participants) will be treated as having been made to the plan “on the earliest date on which such contributions can reasonably be segregated from the employer’s general assets” when contributions are deposited with the plan no later than 7 business days after the day on which the amount was received by the employer or withheld by the employer from the participant’s wages. The public comment period for this proposed regulation closed on April 29, 2008.  Public comments may be reviewed on the DOL website.

Second, EBSA intends complete by December 2008 a review of the existing Plan Assets-Participant Contributions regulation, 29 C.F.R. § 2510.3-102, to examine, among other things: (1) the continued need for the rule; (2) the nature of the comments received from the public regarding the rule; (3) the complexity of the rule; and (4) the extent to which the rule overlaps, duplicates or conflicts with other federal, state, and local rules. The review is being undertaken under section 610 of the Regulatory Flexibility Act, 29 U.S.C. § 1135, which requires periodic review by agencies of rules “which have or will have a significant economic impact upon a substantial number of small entities” to determine if a rule should be continued without change, amended, or rescinded.  EBSA’s review commenced in March 2006.


Employee Benefits Security Administration Publishes Technical Corrections and Guidance to Qualified Default Investment Alternatives Regulation


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On April 30, 2008, the Employee Benefits Security Administration (”EBSA”) published technical corrections regarding final regulations on qualified default investment alternatives (”QDIAs”) for 401(k) plans. One day earlier, EBSA also issued Field Assistance Bulletin No. 2008-03, which provides further guidance on the QDIA regulations in a question and answer format.

Published on October 24, 2007, the final regulations (1) provided conditions that must be satisfied for an employer to obtain safe harbor relief from fiduciary liability for investment outcomes; (2) identified four types of QDIAs; (3) provided a “grandfather” clause for investment plans in existence before the passage of the 2006 Pension Protection Act and the October 2007 rule; and (4) stated that ERISA supersedes any state law that would prohibit or restrict automatic contribution arrangements, regardless of whether such automatic contribution arrangements qualify for the safe harbor. For more information on the final regulations, see the Department of Labor’s Fact Sheet titled Regulation Relating To Qualified Default Investment Alternatives In Participant-Directed Individual Account Plans.

The technical corrections (1) clarify the preamble example on “roundtrip restrictions”; (2) expand the scope of who can manage a QDIA to include a committee that is named a fiduciary of the plan; and (3) correct the “grandfather” relief for stable value funds.

Finally, EBSA’s Field Assistance Bulletin No. 2008-03 provides further guidance regarding the scope of the final regulations, notice requirements, 90-day limitation on fees and restrictions, 120-day capital preservation qualified default investment alternatives, and grandfather relief for stable value funds.


Employee Benefits Security Administration Releases Field Assistance Bulletin on Collection of Delinquent Contributions


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On February 1, 2008, the Employee Benefits Security Administration (EBSA) released a Field Assistance Bulletin to guide field investigators on the responsibilities of plan fiduciaries and trustees to monitor and collect delinquent employer and employee contributions owed to employee benefit plans governed by ERISA. The bulletin was written after several EBSA investigations revealed arrangements purported to relieve the financial institutions serving as plan trustees of any responsibility to monitor and collect delinquent contributions.

The complete text of the Field Assistance Bulletin 2008-01 is available at: http://www.dol.gov/ebsa/regs/fab2008-1.html.


Use of Pension Plan Assets for Politics Violates the Employee Retirement Income Security Act (ERISA)


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The Employee Benefits Security Administration (EBSA) recently advised that the use of pension plan assets by plan fiduciaries to further policy or political issues violates fiduciary duties under Sections 404(a)(1)(A) and (B) of the ERISA. These ERISA sections require that plan fiduciaries act prudently, solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. EBSA has previously expressed strong concern about the use of plan assets to promote particular legislative, regulatory or public policy positions that have no connection to the payment of benefits or plan administrative expenses. EBSA made this announcement via an opinion letter made public on January 2, 2008.

The advisory opinion can be found at http://www.dol.gov/ebsa/regs/aos/ao2007-07a.html.