Preparing for a DOL Audit

1. Preparing for a DOL Audit What to Expect and How to Survive an EBSA Benefit Plan Investigation Chris Allesee, August 13, 2015

2. When to Start NOW! ALWAYS BE AUDIT-READY • Due diligence • Stay abreast of fiduciary issues • http://www.graydonhead.com/news/blog-benefits-insight • Make sure plan-related documents are readily available or easily accessible • Identify fiduciaries

3. Phases of an Audit • Introduction and Appointment Letter • Onsite Investigation • Interviews • Ingoing Investigation • Closing or Compliance Letter • Discussions and Resolution • If Necessary: • Settlement • Litigation • Penalty Assessment

4. Scope • All ERISA-covered benefit plans are subject to DOL jurisdiction • ERISA §504 - U.S. Department of Labor authorized to investigate plans for any or no reason, to request documents, and to discuss the investigation with affected participants • Current Focus: • Group Health Plans • Major Cases/Criminal Cases

5. Upside of an Audit • Free audit! • Clean bill of health from the DOL • Repeat audits of the same sponsor are rare • Corrections go to plan participants

6. Downside of an Audit • Time, energy, and expense • Likelihood of multiple plans being audited at the same time • Cost of corrections and potential excise tax • Potential litigation and penalties • Ineligible for DOL self-correction program

7. Why My Plan? • Indicators on Form 5500 • Participant Complaints • National Projects • Health Benefit Security Project • Fiduciary Service Provider Fees • ESOP • REACT • News Reports and Court Filings • Location • Random (SIP Project)

8. Phase 1: Introduction and Request Letter • The Call: • To inform you of the audit and arrange dates for onsite visit and document production • Contact ERISA counsel, but verify availability quickly and consider proposing alternate locations • The Letter: • Confirm the dates of the onsite visit • List of documents to be produced

9. Phase 1: Introduction and Request Letter • Make three important calls: • ERISA counsel • The investigator • Clarify the scope and dates for documents to produce • Sample sets • Produce documents electronically • Desk audit • Current and past service providers

10. Phase 1: Introduction and Request Letter After you receive the letter and before the onsite begins: • Review all documents to be produced • Work with ERISA counsel to identify potential issues and determine whether to take corrective action prior to the start of the onsite • DOL looks very favorably on proactive fiduciaries • May accept corrections, even when they may not be “perfect” • Designate a “point-person” for the investigation • Make copies and organize documents to coordinate with the request letter

11. Phase 2: Onsite Agenda: • Day 1 – • Introductions and preliminary questions • Discuss interview schedule • Review and catalog documents and request additional information • What you should do – • Introduce the key players • Get to know your investigator – build rapport • Provide a quiet place to work • Make point person accessible

12. Phase 2: Onsite • Days 2 and 3 – • Document review and request additional information • Interviews • What you should do – • Listen closely to requests • Push service providers to produce documents • Review all documents before producing them • Prep for interviews

13. Phase 3: Interviews • Format: • Interview format varies dramatically based on plan type, potentially issues, and investigator style • Checklist or conversation • May be 15 minutes or multiple hours • What will they cover? • Background of the interview subject • General plan information • Specific details for potential issues (listen for “odd” questions or non-checklist questions) • IDENTIFY FIDUCIARIES

14. Phase 3: Interviews Preparing for interviews – key points to remember: • RELAX! You know more about your plan than the investigator • Each interview subject should be able to clearly explain their responsibilities and who directs their actions • Answer the questions…but “I don’t know” is a perfectly acceptable answer • Documents make the case, not interviews • A wrong answer is not a violation of ERISA, but don’ make confident guesses • Know in advance how long the investigator expects each interview to last

15. Phase 4: Ongoing Investigation • After the onsite, the investigator will review the information, complete reports, and will likely have follow-up or outstanding document requests • What you should do: • BE PATIENT – but don’t be afraid to ask for updates • From onsite to closing, investigations often take more than a year • Prompt responses to follow-up requests and gentle “prodding” can shorten the timeframe • Inform the investigator of any changes to the plan or relevant personnel

16. Phase 4: Ongoing Investigation During this time, the primary issues identified by the investigator should become clear: • Retirement Plan: • Untimely contributions • Utilize a well defined remittance process and ensure that the process is followed • Fees –settlor fees, excessive or unreasonable fees, duplicate payments, or inappropriate allocations • Review invoices, provider contracts, and plan trust statements, and maintain a clear record of fee reviews • Investments • Record due diligence efforts and maintain clear record of analysis and action

17. Phase 4: Ongoing Investigation • Retirement Plan (continued): • Forfeitures • Know how they may be used, and apply within the appropriate timeframe • Distributions • Make sure plan is properly applying force out and rollover distribution provisions • DB Plan – plan is appropriately calculating distributions and responding to claims • Loans/Hardships • Make sure the plan’s policies are being followed • Fidelity Bond • Sufficient coverage, particularly for policies covering multiple plans

18. Phase 4: Ongoing Investigation • Group Health Plans • Missing SPD • Part 7 – HIPAA • Special Enrollment Rights/Notice • Nondiscrimination • Mental Health Parity • Wellness Plans • Part 7 – ACA Mandates for ALL plans • Waiting Periods • Annual/Lifetime Limits • Dependent Coverage to Age 26 • Rescissions • Pre-Existing Conditions

19. Phase 4: Ongoing Investigation • Group Health Plans (continued): • Part 7 – ACA Mandates for Non-GF Plans • Preventive Services • Coverage for Emergency Services • Choice of Provider • Updated Claims and Appeals Procedures • Newborns Act, WHCRA, GINA, Michelle’s Law • Substantive Provisions (when applicable) • Notices • Fees • When plan assets are involved, prohibited transaction rules are applicable

20. Phase 4: Ongoing Investigation • ALL PLANS • Form 5500 and Audited Financial Statements (when necessary) • Office of the Chief Accountant assesses penalties, but a plan is ineligible for the DOL’s delinquent filer program if EBSA cites untimely or missing Form 5500s during an investigation • OCA may assess penalties of up to $1,100 per day for a missing or incomplete Form 5500 • Disclosures to Participants and Beneficiaries • ERISA Claims Procedures • Consistent application and compliance with applicable timeframes • Appropriate Electronic Disclosure Method

21. Phase 5: Closing or Compliance Letter • Less than one-third of investigations cite no violations of ERISA • Letter will simply note the investigation is closed and thank you for your assistance • The other two-thirds receive a voluntary compliance letter (“VC Letter”) • Identifies alleged fiduciaries • Details factual findings of the investigation that DOL believes support a violation of ERISA • Asks for a response within 10 business days

22. Phase 5: Closing or Compliance Letter • Forward the VC Letter to ERISA counsel immediately • Most investigators will accept an informal notice of receipt of the letter and comment that it is under review as an initial response within 10 business days • Discuss an appropriate timeframe for a full response • Additional extensions may be allowed as long as there is substantive progress towards a resolution • Discuss the factual and legal findings with the investigator to frame your response

23. Phase 6: Discussions and Resolution • DOL’s Role: • Correcting a breach is a fiduciary decision • The DOL is not a fiduciary, and will only comment on the reasonableness of a corrective action • HOWEVER, resolving an issue through voluntary compliance is still a very interactive process: • After discussing the VC Letter with ERISA counsel, express factual or legal concerns with the investigator directly • If no concerns, ask the investigator for correction recommendations

24. Phase 6: Discussions and Resolution • Discuss with investigator: • Actual loss • Acceptable lost earnings calculation methods • Participant allocations • Procedural changes • Correction timeframe • Documents that will verify proof of correction NOTE that these are not negotiations, just discussions that help the fiduciary understand his or her obligations to the plan – negotiations imply a settlement, and settlements may result in penalties (ERISA §502(l) for all plans and §502(i) for welfare plans).

25. Phase 6: Discussions and Resolution • After discussing with investigator, promptly take corrective action and provide proof documents • Generally, DOL requires confirmation of receipt by the plan • Providing sufficient proof may not be easy and may take several attempts • Upon receipt of proof of a sufficient correction, the DOL will send a closing letter to the fiduciary • DOL will take no further action • Notes potential excise tax liability and mandatory referral of prohibited transactions to IRS • Notes referral to OCA (if citing Form 5500 violations)

26. Phase 6: Discussions and Resolution • Benefits of resolution through voluntary compliance • Quick • Cheap(er) • Penalties generally do not apply • §502(l) and §502(i) penalties only apply if there is a settlement or court order • Do NOT ask for signed confirmation of proposed corrective action in advance • Begins to look more like a settlement than a voluntary fiduciary action • 20% penalty under both sections

27. Phase 7: Settlement, Litigation, Penalties Overwhelming majority of cases do not require a formal settlement or litigation • Settlement: • Most common scenario is a fiduciary that has insufficient funds to make a full correction within a reasonable timeframe • Prohibited transaction exemption allows for repayment plans • Requires the fiduciary enter into a tolling agreement, if necessary • 502(l) penalty will apply

28. Phase 7: Settlement, Litigation, Penalties • Litigation Referrals • Most common scenarios are abandoned plans or consent decrees to reallocate a fiduciary’s personal account to affected participants • For disputed or unresolved issues: • Investigators generally warn in advance that a case will be forwarded to the Solicitor of Labor True litigated issues are very rare • VERY slow - Solicitor of Labor requires DOJ approval to file a complaint (up to 6 months) • Solicitor’s attorneys are likely to negotiate • 502(l) penalties will likely apply

29. Phase 7: Settlement, Litigation, Penalties • Penalty Assessment • DOL will mail letter citing “applicable recovery amount” and the amount of the penalty • Penalty generally allocated among liable fiduciaries based on amount paid • Good faith waiver or hardship waiver • Limited regional discretion to decrease penalty • Full waiver rarely approved • If not paid after waiver is denied, will be referred for collection

30. Conclusion • Always be audit ready • Be proactive and get ERISA counsel involved early • Be organized and responsive • Know your fiduciaries • Let the investigator do the heavy lifting: • Ask for clarification and updates • Ask for suggestions regarding corrections • It’s never too late to avoid litigation

31. Questions? • Thank you for your attention, and please feel free to call or email if you have any questions: • Chris Allesee – callesee@graydon.com • (513) 629-2727