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Starting this year, most Chicago benefit plans are subject to higher penalties for violations. The annual penalty increase has been in place since 2016, so plan sponsors of existing plans likely already know that ERISA indexes its penalties for violations. However, plan sponsors of newly established plans may be unaware of the range of potential non-compliance fees. The increasing penalties underscore the importance of maintaining compliance with ERISA regulations throughout the year. Failure to do so can not only result in unwanted fines, but in the end could lead to plan disqualification all together. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.

Which Plans are Subject to ERISA Violations?

The benefit plans that fall under ERISA regulations are also the ones at risk of penalties for violations. That means the following types of plans must adhere to ERISA requirements.

  • Defined contribution plans, like 401(k), 403(b), and ESOPs
  • Defined benefit plans
  • Health and welfare plans, like medical, dental, disability, group life, vacation, supplemental unemployment benefits, and others
  • Health reimbursement accounts (HRAs)
  • Flexible spending accounts (FSAs)

Some employers mistakenly believe that welfare plans, like medical or dental coverage, are not subject to ERISA rules, or that small plans with only a handful of participants are not governed by ERISA. Both of these beliefs are incorrect. Any group-sponsored health and welfare plan usually falls under ERISA requirements, and whether an employer group has two participants or 200 only impacts the Form 5500 filing, not ERISA compliance.

ERISA exemptions are available to church and government benefit plans as well as those that exist to comply with specific laws, like worker compensation or disability.

ERISA Requirements for Benefit Plans

ERISA requires plans to provide participants with plan information including plan features and funding. In addition, the law sets minimum standards for participation, vesting, benefit accrual, and funding. Plans must establish a grievance and appeals process for participants to obtain benefits from their plans and gives participants the right to sue for benefits and breaches of fiduciary duty.

Overall, plan sponsors must also exercise care and manage the plan with the best interest of the participants. Acting with fiduciary responsibility means ensuring fees are reasonable and there are no conflicts of interest, among other obligations.

When plans fail to meet ERISA requirements, the Employee Benefits Security Administration (EBSA) will enforce compliance and issue any violations. Most are the result of accidental mistakes or missed deadlines; however, even small errors can put participant retirement funds at risk.

According to the Government Accountability Office, some of the most common ERISA violations involve failure to act with the best interest of plan participants, failing to uphold fiduciary responsibility, and violations related to reporting and disclosures. Many plans also fail to ensure that anyone who handles plan funds must be properly bonded unless otherwise exempt.

When these and other ERISA violations are found, the plan may be subject to fees and penalties.

COVID-19 Impact on ERISA Compliance

Many employers and indeed the Department of Labor (DOL) and EBSA all found certain elements of plan compliance to be challenging during the pandemic. Multiple pieces of legislation that impacted benefit plans, lack of official guidance, and mail delays made the last two years especially difficult for plan sponsors.

Fees for ERISA Violations

With few exceptions, when a benefit plan fails to meet ERISA requirements, it may be subject to various fines and penalties from the DOL and/or IRS. Annual inflationary fee increases were first introduced in 2016 and are based off the consumer price index released every October.

The Federal Register releases the annual update of DOL federal civil penalties each January. It covers EBSA and several other DOL departments. For benefit plans, 16 fee increases were noted for various violations, ranging from filing and reporting, recordkeeping, financial, plan eligibility, and communication/disclosures.

The most notable fees are as follows:

  1. Failure to timely file Form 5500 has increased from $2,259 to $2,400 per day.
  2. Failure to furnish reports (e.g., pension benefit statements) to certain former employees has increased from $31 to $33 for each employee.
  3. Failure to provide a notice of blackout periods has increased from $143 to $152 per day, per affected participant.
  4. Failure to furnish an automatic contribution arrangement notice has increased from $1,788 to $1,899 per day, per affected participant.
  5. Failure to make a proper distribution from a defined benefit plan has increased from $17,416 to $18,500.

Additionally, the minimum penalty for an uncorrected violation that is not de minimis has increased from $18,035 to $19,157. The minimum penalty for an uncorrected de minimis violation has increased from $3,005 to $3,192.

Contact Us

The increased penalty amounts serve as an important reminder that careful consideration should be made when evaluating compliance with ERISA regulations. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Selden Fox can help.  For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Robert Zeman

Robert Zeman is an audit manager at Selden Fox. He handles the audit fieldwork for several of firm's clients across industries. Robert is a certified public accountant and earned both his bachelor’s and master’s degrees in accounting from the University of Illinois at Urbana-Champaign.