The prospect of a U.S. Department of Labor (“DOL”) investigation or Internal Revenue Service (“IRS”) examination of an employee benefit plan can be daunting for any plan sponsor. Understanding the process and adopting best practices, however, can make the experience less intimidating and improve the results for all parties.

Enforcement actions can be triggered by several things, most notably:  participant complaints, special enforcement initiatives, random selection, and “red flag” responses on or failing to file annual reports. DOL and IRS agents, however, regularly assure plan sponsors and administrators that voluntary correction does not expose a plan to investigation.

If your plan is selected for enforcement action, the plan sponsor (not a third party service provider) will receive a notice in the mail from the DOL or IRS identifying the plan(s) being examined, the period(s) under review, the agent handling the matter, and information that must be provided. Alternatively, the sponsor may simply receive a notice that a penalty is being assessed. Once you have received notice of an investigation, the following steps should be taken to ensure a smooth process:

Promptly respond to requests

First, do not ignore the notice; the discretion of the enforcing agency to waive penalties or provide extensions is limited if you miss a deadline to respond. Promptly begin to gather copies of the requested documents. Some documents may be maintained by a third party administrator or possessed by a former plan vendor, which can create challenges. Engage vendors early to allow adequate time to gather requested materials.

Prepare staff and fiduciaries for interviews

Ensure appropriate staff and plan fiduciaries are available and prepared for interviews by the agent. They should be familiar with the current terms of the plan and its operations. DOL investigations tend to focus on a plan’s fiduciary procedures and compliance, while IRS examinations generally focus on operational compliance with plan terms and applicable law. If plan errors were previously identified and self-corrected, the staff will need to be prepared to explain them, provide documentation of the correction, and address how similar errors have been avoided. During interviews, attorneys can be present, but answers must come from plan fiduciaries and staff. Attorneys may ask for clarification of questions if needed to help their client appropriately respond.

Take appropriate follow-up action

Once an investigation has been completed, promptly take and document any required corrective action. In addition, review and update the plan’s internal controls to prevent recurrence of the issues identified.

There are best practices you can adopt to avoid an investigation, or at least, limit the issues identified during an investigation, including:

  • Perform periodic self-audits. The IRS and DOL websites provide tools to allow plan sponsors to review the compliance of retirement and health and welfare plans with legal requirements. These guides are helpful for determining whether your plan documents meet current legal requirements and whether your plan is being operated in accordance with its terms and applicable law. If you discover an error has occurred, both the IRS and the DOL have voluntary correction programs that allow correction of many plan failures with limited or no financial penalties.
  • Maintain and retain appropriate plan documents. The general rule under ERISA is to retain plan documents for six years. This is appropriate for many of the reporting and disclosure documents, such as Form 5500 annual returns and required participant notices. Additionally, records related to a participant’s account under a qualified plan should be retained for six years following complete distribution of the account. During an investigation, the agent may ask for documentation of plan loans, timely deposits of plan contributions, or records of voluntary corrections. If this documentation is retained by your plan’s third party administrator, review the vendor’s document retention policies and their responsibilities to transfer plan records if you switch vendors.
  • Document fiduciary actions. Plan sponsors should document any delegation of fiduciary responsibilities to a committee or specified staff members. Fiduciaries should meet regularly, and minutes and records from those meetings should be retained. A committee charter and investment policy statement should be adopted and reviewed regularly to help guide ‎fiduciary actions. Regular fiduciary training should also be performed and documented to keep responsible parties up to date on their duties. The selection and on-going monitoring of vendors that provide services to the plan are fiduciary actions and documentation of the vendor selection process, including a comparison of fees, should be retained.

Employee benefit plans are subject to a web of statutory and regulatory requirements that fall within the jurisdiction of numerous governmental agencies, and notices of investigations, non-compliance, and penalty assessments can be intimidating and confusing. Above, we have identified some best practices for responding to and managing plan enforcement actions and top ways to avoid having your plan targeted for investigation.

Stefan P. Smith is a Partner, and Katy Z. Skattum is a Senior Counsel, at Locke Lord LLP.  They can be reached at [email protected] and [email protected], respectively.