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Tell me about ERISA Penalties

Employers frequently ask us for an overview of the financial exposure and fee assessments related to ERISA compliance problems. The fact is ERISA penalties are not tied to a simple fee structure, so the potential penalties cannot be readily outlined in a table or chart. Although federal laws and regulations set some penalty parameters, most penalties are assessed on a case-by-case basis and depend on the severity of the infractions. In most instances, fines and penalties are imposed by the DOL, but they cross-refer any violations or suspected violations to the IRS for further review. The DOL has jurisdiction over ERISA, as well as the related areas of COBRA continuation and FMLA rules, including benefits continuation and reinstatement.

Secton 502 of ERISA allows an affected party to recover benefits, interest, and attorneys' fees. In other words, compliance failure opens the door to participant legal action for recovery of claims under the plan, plus all associated legal costs incurred by the individual. In addition, the participant's counsel may also attempt to add additional claims, such as failure to provide a SPD, or plan document. Other related damages suffered by the individual based on a failure may also be recoverable. Note: The good news is that because ERISA generally "preempts" state laws from applying, it limits total damages that a plan sponsor might otherwise be liable to pay under a plan. The ERISA "shield" limits a participant's recovery to legal fees, costs and payment of the disputed claims. 

The following offers a glimpse into ERISA's statutory penalty structure:

Key reporting and disclosure penalties under ERISA 

  • Plan document:  There is no specific penalty for failure to maintain a plan document, but pursuant to ERISA's general enforcement provisions, any plan participant can bring a lawsuit to require a plan sponsor to prepare a formal plan document where none exists. 
  • Summary Plan Description:  Failure to provide a plan participant with an SPD within 30 days of an employee request carries a maximum $110 per day penalty
  • Summary of Material Modifications:  ERISA requires notice to covered participants anytime there is a material modification in a plan's terms, or there is a change in the information required to be in the SPD. If there is a legal dispute over benefits, courts will often enforce the terms of an out-of-date or incomplete SPD rather than the terms of the plan document, in favor of the participant.
  • Summary Annual Report (SAR):  The SAR is a summary document of the Form 5500 that must be annually distributed to participants. Although there are no specific penalties for failure to distribute SARs, participants and beneficiaries also may bring suit to enforce any provision of ERISA. 
  • Criminal penalties:  In addition, criminal penalties may be imposed on any individual or company that willfully violates any ERISA disclosure requirement (e.g., plan document, SPD, SMM or SAR), the penalty per conviction could be $100,000 and/or imprisonment for up to 10 years. The fine can be increased to up to $500,000 if assessed against a company. Also, a plan administrator is potentially liable for $110 per day penalties if it does not provide a response to a participant or beneficiary request for a copy of a required document.  

Form 5500 Filing 

  •  Penalties are in place for noncompliance with the annual reporting requirements, including submitting incomplete Forms 5500 or not filing Forms 5500 by the due date. For example, the DOL has ERISA authority to assess penalties of up to $1,100 per day for each day an administrator fails or refuses to file a complete Form 5500. A delinquent filer program is available to enable voluntary compliance at a reduced cost when program conditions are satisfied. 

Continuation of health coverage (federal COBRA penalties) 

  • Notice failure:  COBRA generally imposes two sets of penalties - tax penalties assessed by the IRS of $100 per day (e.g.  for notice failure) + the person can recover an additional $110 per day through ERISA. (The individual may seek up to $200 per day if other family members were overlooked for COBRA.)  In addition, the person will recover the actual benefit he missed out on receiving and also recover all of his or her legal costs and fees. Some lawyers specifically hunt for cases centering on an employer's failure to correctly issue COBRA notices because the "per day" penalty accruing even over a few months can be a lucrative prize, especially when legal costs can be recovered in addition to the notice failure penalty. 
  • Stop loss / carrier exposure:  Perhaps most seriously, costs incurred by the plan due to an event deemed a COBRA failure are typically excluded by stop loss providers and insurance carriers. This could mean that an organization exposed to a COBRA judgment may be responsible for all plan costs payable from general assets. 

Family and Medical Leave Act (FMLA) 

  • Federal enforcement:  The DOL holds enforcement power for FMLA and will investigate complaints of FMLA violations. If a complaint cannot be resolved, the DOL may bring action in court to correct violations and recover damages. 
  • Civil enforcement:  An eligible employee may also bring a private civil action against an employer to recover damages (including employment, reinstatement, and promotion) for violation of the FMLA. These damages may include the amount of any employment benefits denied to the employee by reason of the violation. The FMLA provides that a court shall allow, in addition to any judgment awarded to the plaintiff, reasonable attorney's fees, reasonable expert witness fees, and other costs of the action to be paid by the defendant. 

The information presented in this article is only intended to offer a snapshot of possible compliance related exposures. Please contact your HUB International benefits advisor for additional information about ERISA compliance.