On October 16th, 2012, Drinker Biddle attorneys Fred Reish, Bruce Ashton and Brad Campbell sent a proposal to the Department of Labor’s Employee Benefits Security Administration outlining a correction program for service provider compliance mistakes under the new 408(b)(2) service provider disclosure rule. This proposal, modeled after the very successful correction programs DOL and IRS offer for other compliance errors, would be a “win win” for the Department and the regulated community, increasing compliance while allowing the agency to target enforcement resources on more significant violations.
Why Do Service Providers Need a Correction Program?
The new 408(b)(2) service provider disclosure rules affect about 750,000 retirement plans covering more than 125 million Americans. The more than 1 million service providers covered under the new rule face complex disclosure requirements. Well-intentioned service providers can easily make compliance mistakes, and some service providers likely have failed to make the required disclosures on time.
Unfortunately, these violations, even if technical failures of little practical significance, result in a prohibited transaction, an outcome that can subject the service provider to returning some or all of its fees, paying an excise tax, and possibly other penalties. While the rule has a narrow error correction provision for service providers, our experience is that it likely will not cover many common errors, even ones that could be minor technicalities.
How Would Drinker Biddle’s Proposed Correction Program Work?
The proposal is modeled after successful correction programs DOL and IRS have offered for many years. It would not let “bad actors” evade punishment—rather it would provide a streamlined process with reduced penalties by which service providers could come into compliance. The major features of the proposal include:
- Service providers would pay a fee to apply for correction to the Labor Department—the program would not be available to service providers under investigation by DOL or IRS.
- The application would explain the error or omission, and how it would be or has been corrected. DOL would review the information and approve or deny the application.
- Service providers could apply for a systemic failure (the same mistake made in disclosures to many plans) or individual errors (a mistake related only to one plan).
- In order to encourage use, service providers could apply anonymously.
- Approval would result in a “no action” letter indicating that there will be no further investigation, no additional penalties, exemption from excise tax under the Code, and no corrective action in the form of refund of reasonable compensation.