FEDERAL AGENCIES ANNOUNCE A COORDINATED PROGRAM FOR CORRECTING
DELINQUENT BENEFIT PLAN FILINGS
Prepared by: Jeffrey R. Capwell
McGuireWoods LLP
Charlotte, North Carolina
The U.S. Department of Labor ("DOL") has announced an enhancement of its popular Delinquent Filer Voluntary Correction ("DFVC") program. Like the old program, the new DFVC program permits plan sponsors and administrators to correct late annual report filings (as made on the 5500 series of forms) and avoid the highest range penalties that that are assessable under ERISA for late or missing reports. However, the revised DFVC program provides a number of new enhancements to the old program, including a reduction in some cases of the amounts that plan sponsors or administrators will need to pay to correct late or missing filings.
On the same day, the Internal Revenue Service ("IRS") announced that it would begin a program of automatically waiving applicable penalties for plan administrators who utilize the DFVC program. This was a welcome development because the DFVC program only provides relief from the penalties that can be assessed under ERISA, and does not apply to those penalties that can be assessed under the Internal Revenue Code by the IRS.
Delinquent Filer (DFVC) Program
ERISA generally requires that plan administrators file an annual report (Form 5500) by the end of the seventh month after the close of each plan year. The DOL has the authority to assess a penalty of up to $1,100 per day against a plan administrator who files a late annual report or fails to file a report. The DOL has had an enforcement policy of assessing a penalty of $50 per day for filing a late annual report, and $300 per day (up to $30,000 per year) for failing to file an annual report altogether. Even at these reduced rates, the associated penalties could be substantial enough to discourage plan administrators from filing overdue annual reports.
The DFVC program was initiated in 1995 to encourage voluntary compliance by plan administrators with ERISA’s annual reporting requirements. Generally, the DFVC program permits plan administrators to file late annual reports and pay a reduced penalty, provided that the plan administrator follows certain administrative procedures. The penalties under the old DFVC program were $50 per day, up to a maximum of $2,500 per year, for plan administrators of large plans (i.e., plans with 100 or more participants) who filed an annual report within twelve months of its original due date. For annual reports filed by large plans more than twelve months after the report’s due date, the penalty was $5,000 per year for each overdue filing. Small plans were subject to a $1,000 maximum for returns filed within twelve months, and a $2,000 maximum for returns filed more than twelve months late. Top hat plans were subject to a $2,500 penalty for failing to file the required one-time top hat plan registration statement.
The major change under the new DFVC program is a reduction in the penalties for late or missing annual reports. The daily penalty for both small and large plans is now $10 per day for each overdue report. The maximum yearly penalty for a small plan is $750, while the maximum yearly penalty for a large plan is $2,000. The penalty for a top hat plan is $750.
In addition to the daily and yearly maximum penalties, the DOL has established "per plan" maximum penalties, so that a single plan with more than one overdue annual report is subject to one overall maximum penalty, regardless of how many delinquent reports are filed. The maximum penalty for a small plan is $1,500 per plan, while the maximum penalty for a large plan is $4,000 per plan.
The new DFVC program also establishes a separate maximum penalty for small plans sponsored by organizations exempt from tax under Section 501(c)(3) of the Internal Revenue Code. The penalty for such plans is $10 per day, up to a maximum of $750 per DFVC submission, regardless of the number of delinquent reports being filed in one submission.
In addition to these changes, the DOL has updated and
simplified the administrative procedures that plan administrators must follow
to qualify for relief under the program. The new DFVC program became effective
on March 28, 2002. Additional
information concerning the program can be obtained on the following DOL
webpage: http://askpwba.dol.gov/faq-dfvc.html
Waiver of Penalties
Assessable under the Internal Revenue Code
In addition to ERISA’s penalties, the IRS has the authority to impose a host of separate penalties upon plan administrators who fail to file timely annual reports. Until now, compliance with the DFVC program had no effect on the IRS’s ability to impose penalties for late annual reports. Plan administrators with delinquent annual reports were required to separately request relief from IRS penalties by filing a "reasonable cause" statement with the IRS.
To coordinate its enforcement with the new DFVC program, and to further encourage plan administrators to file delinquent annual reports, the IRS has announced that a plan administrator who satisfies the requirements of the DFVC program need not file a separate request for relief with the IRS. Instead, the IRS will waive the applicable penalties for any plan administrator that is eligible for and satisfies the requirements of the DFVC program. The IRS relief is available for filings made under the 1995 DFVC Program, or the newly modified version of the DFVC Program.
However, the new IRS position has an important limitation – it applies strictly to plans that are eligible for the DFVC program. Only plans that are subject ERISA can utilize the DFVC program. Therefore, plans that are not subject to ERISA but which are subject to other annual reporting requirements under the Internal Revenue Code will not qualify for the penalty waiver program. Such plans could include, among others, those that only cover non-employees (such as partners of a partnership). Such plans must continue to file a "reasonable cause" statement if they wish to seek relief from applicable penalties for delinquent annual reports.