In EBSA Disaster Relief Notice 2020-01, “Guidance and Relief for employee Benefit Plans Due to COVID-19 (Novel Coronavirus) Outbreak” ( “Notice”), the DOL provided sponsors of defined contribution plans subject to ERISA relief from DOL enforcement action for failure to timely forward participant contributions and loan repayments to the plan during the period from March 1, 2020, and to the 60th day following the announced end of the National Emergency. This DOL relief, however, appears to be limited to ERISA violations and does not appear to provide protection from the excise taxes under the Internal Revenue Code (“Code”).
This article summarizes the relief provided by the Notice and highlights legal risks that remain for plan sponsors.
The Notice and the Plan Asset Regulation
The Notice states that the DOL will not, “solely on the basis of a failure attributable to the COVID-19 outbreak”, take enforcement action for a temporary delay in forwarding participant contributions and loan payments to the plan. To rely on the relief, plan sponsors and their service providers must act, “reasonably, prudently, and in the interest of employees to comply as soon as administratively practicable under the circumstances.”
Unfortunately, the Notice does not include any detail regarding the types of failures that would be solely attributable to the COVID-19 outbreak, or state what factors will be considered in making that determination. Thus, for example, it is unclear whether a delay due to a system outage or lack of internet access because of increased usage, unavailable personnel, or closure order would be a failure attributable to the COVID-19 outbreak or whether the failure must be due directly to a specific employee of, or service provider to, the plan sponsor testing positive for COVID-19. Similarly, the Notice does not specify what length of temporary delay is acceptable, or at what point a delay would be deemed no longer temporary.
The Notice is intended to provide relief from the requirements of DOL Regulation Section 2510.3-102 (“Plan Asset Regulation”), which requires employers to pay the contributions and loan repayments to the plan withheld from participants’ wages, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets (i.e., the “Contribution Date”). Although the Plan Asset Regulation provides a seven-business-day safe harbor Contribution Date for plans with fewer than 100 participants, there is no safe harbor for larger plans. Rather, for larger plans, the Plan Asset Regulation requires that the Contribution Date be no later than the 15th business day of the month following the month in which the participant contributions or loan repayments are received by the employer or would otherwise have been payable to the participant.
Failure to Forward Contributions and Payments by the Contribution Date
There are potential consequences under the fiduciary obligations of ERISA and prohibited transaction rules of Section 406 of ERISA and Section 4975 of the Code for plan sponsors that fail to forward participant contributions and loan repayments to a plan by the Contribution Date. The required corrective actions, penalties, and excise taxes that may arise out of a failure to comply with the Contribution Date can be significant, as summarized below.
- Plan sponsors that breach their fiduciary duty by failing to forward employee contributions and loan repayments by the Contribution Date generally must make the plan whole by contributing an amount equal to the plan’s lost earnings for the period between the Contribution Date and the date on which the contributions and loan repayments are forwarded to the plan.
- In the case of such a breach of fiduciary duty, the DOL is required to assess a civil penalty under Section 502(l) of ERISA (codified at 29 U.S.C. Code § 1132) against the fiduciary in an amount equal to 20% of the amount recovered by the DOL in a settlement or adverse court decision. The DOL will, however, reduce the penalty by the amount of any excise tax that the plan sponsor must pay because of a prohibited transaction under Section 4975 of the Code, as discussed below.
- If the DOL becomes aware that a plan sponsor has committed a prohibited transaction in violation of Section 406 of ERISA (codified at 29 U.S. Code § 1106), the DOL is required to advise the IRS.
- Section 4975 of the Code imposes an excise tax on plan sponsors that do not forward participant contributions and loan repayments by the Contribution Date. The excise tax is equal to 15% of the “amount involved” in such prohibited transaction, which is generally the missed earnings on the contributions and repayments discussed above. If the transaction is not timely corrected, however, the excise tax increases to 100% of the amount involved.
For plan sponsors that experience a temporary delay attributable to the COVID-19 outbreak in forwarding participant contributions and repayments to the plan, the Notice provides relief from the corrective actions and penalties described in items 1 and 2 above, provided the plan sponsor complies with the requirements of the Notice.
The Notice does not address whether the DOL must still notify the IRS of prohibited transactions (described in item 3) for which the Notice provides relief. Furthermore, the Notice does not provide relief from the potential liability for excise taxes under Section 4975 of the Code, as described in item 4.
Considerations for Plan Sponsors
To the extent possible, plan sponsors should forward participant contributions and loan payments to the applicable plan by the Contribution Date. If that course of action becomes infeasible and the IRS continues not to provide relief under Section 4975 of the Code, reliance on the Notice may become necessary. In that case, plan sponsors should endeavor to make sure that (1) the delay can be shown to be solely attributable to the COVID-19 outbreak, and not due to unrelated reasons (even partially), and (2) any delay is short, so that it will be plainly deemed temporary. In addition, such plan sponsors and their service providers will need to act reasonably, prudently, and in the interest of employees to ensure that contributions and payments are contributed to the plan as soon as administratively practicable under the circumstances.