ERISA, the Employee Retirement Income Security Act of 1974, doesn’t require employers to offer a retirement plan, but it does set strict rules for those that do. Given the responsibility of safeguarding employee retirement savings, plan sponsors are accountable for adhering to ERISA, and face significant consequences for failures.
Avoid Costly ERISA Mistakes
Sponsoring an employee retirement plan, like a 401k, comes with the inherent responsibility of shouldering compliance with the high fiduciary standards of ERISA. Failure can lead to significant penalties, including fines, and even the loss of tax benefits. Lawsuits are also a possibility–and have posed a rising risk in recent years, as the precedence set by the large, headline making cases has spawned copy cat cases affecting smaller companies and plans. As attorney Phillip Tatlow urges:
ERISA compliance may seem puzzling at times, but it’s critical for protecting employees and employers alike….For peace of mind and a smooth operation, it’s worth the effort to understand and follow ERISA’s requirements.…..ERISA was created to ensure employers responsibly handle their employees’ benefits. It’s there to protect workers, making sure they get the benefits they were promised….Failing to follow ERISA regulations doesn’t just affect employees; it can result in fines and legal action for employers, damaging a company’s reputation and finances…..Staying on top of ERISA requirements can feel overwhelming, especially for small businesses, but there are ways to remain compliant. First, understand ERISA’s requirements or hire someone who does, like an experienced benefits manager or HR professional. Keep detailed records,…as documentation can be invaluable if questions arise. Finally, working with a legal professional experienced in ERISA can simplify compliance and help prevent potential issues.
To support plan sponsors in their duties, the Employee Benefits Security Administration (EBSA), provides resources, including the Getting It Right education tools. Among the most common plan sponsor oversights EBSA addresses in detail is failure to deposit participant contributions to the plan “as soon as they reasonably can be segregated from the company’s general assets.” To prevent this error, plan sponsors need to dig into the details of how and when the company payroll system and retirement plan service providers ensure “participant contributions are forwarded to the plan on the earliest possible date in compliance with the law.” EBSA’s resource booklet, Meeting Your Fiduciary Responsibilities, provides further pointers related to timely submission of participant contributions.
Another frequent fiduciary failure of plan sponsors is associated with not taking the time to actually confer with the plan document. Avoid this breach by carefully referencing the plan document vis a vis the day to day administration of the plan. For example, EBSA stresses making sure activities such as custody of plan assets, recordkeeping, benefit decisions and directing investments are actually carried out by the responsible parties as designated in the plan document.
Understanding The Consequences
Under the high standards of ERISA, plan sponsors are fiduciaries, and can be held personally responsible for paying the plan for losses in the event of a breach—-a failure to properly fulfill obligations. Additionally, both the Department of Labor and the Internal Revenue Service can impose civil penalties and excise taxes, which cannot be paid by the plan.ERISA attorneys offer this summary of consequences for failures related to ERISA compliance:
- Penalties and Fines – The Department of Labor (DOL) and IRS enforce ERISA rules and can issue fines for violations. For instance, if a company fails to provide required documents like a Summary Plan Description (SPD), the DOL may impose daily fines, which can add up fast and financially impact the business.
- Employee Lawsuits – Employees can sue if their benefits aren’t appropriately managed. Denying valid claims or mishandling retirement plans can lead to costly, time-consuming lawsuits and strain employer-employee relationships.
- Back Payments or Reimbursements – Mishandling benefits can require employers to make back payments….
- Loss of Tax Benefits – Non-compliance with ERISA can result in the loss of valuable tax benefits for retirement plans, leading to costly penalties.
- Audits and Investigations – Failure to follow ERISA rules can lead to audits from the IRS or DOL. These audits can be time-consuming and require extra resources, making compliance important to avoid this hassle.
Plan sponsors should also be aware that they have an obligation to mitigate cybersecurity threats, so even a relatively small cybersecurity incident can result in a fiduciary breach allegation. Colonial Surety Company offers one, efficient and affordable solution to meet DOL expectations—and protect the personal assets of sponsors. For a few dollars a day, our Fiduciary+Cyber Liability Insurance Combo:
- Reduces the personal risks of plan sponsors, by providing defense costs and penalty limits up to $1,000,000, in the event of alleged or actual breaches of duty in connection with the employee retirement plan
- Addresses Department of Labor cybersecurity recommendations;
- Explicitly covers the business and the plan in the event of a cyber breach; and,
- Provides expert response and notification services following a cyber breach.
Remember, fiduciary liability insurance is the only form of protection that shields business owners against the inherent personal risks of sponsoring an employee retirement plan.
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