Recently, we have become aware of what appears to be a new approach in the US Department of Labor’s (DOL’s) Form 5500 Annual Report (Form 5500) penalty program, including increased penalties and faster enforcement actions. This development could impact the sponsors and administrators of any Employee Retirement Income Security Act (ERISA) plan that is required to make a Form 5500 filing, particularly when a filing is late or deficient, or has the potential to be late or deficient.
DOL Enforcement Powers Under ERISA
In addition to the DOL’s enforcement powers and program related to breaches of fiduciary duty under ERISA (for more details regarding recent developments in the DOL’s enforcement program, please refer to our May 7, 2024 blog post), the DOL has the power to impose penalties—and file actions to enforce those penalties—against ERISA plan sponsors/administrators that fail to file a Form 5500 or that file a late or deficient Form 5500.
Under the DOL’s enforcement program, plan sponsors/administrators are provided a notice of deficiency and then a stated window of time to correct the error, and if necessary, identify mitigating factors that contributed to the filing deficiency. If the filing remains outstanding and/or there is a lack of mitigating factors, the DOL may assess penalties for each day the Form 5500 remains incomplete.
Form 5500 failures, particularly those involving late and deficient filings, often arise in connection with a failure to obtain and file an Independent Qualified Public Accountant Report (IQPA). Whether such failure is the result of a plan becoming subject to the large-plan filing requirements for the first time (the IQPA generally is required only for funded plans with more than 100 participants, subject to a brief transition rule for a small plan exceeding the 100-participant threshold by a small number for the first time) or because of an unanticipated change to the IQPA, plan sponsors/administrators should be aware of the increased penalties and faster enforcement that can accompany any untimely or incomplete Form 5500.
Increased Penalties and Faster Enforcement Action
At the time of this update, applicable regulations permit the DOL to assess a penalty of up to $2,670 per day. See Federal Civil Penalties Inflation Adjustment Act Annual Adjustments for 2024, 89 Fed. Reg. 1810 (January 15, 2024). The dollar amount of the per-day penalty has increased over the last several years and is subject to annual adjustments in subsequent years. For example, the per-day penalty was $2,259, $2,400, and $2,586 in 2021, 2022, and 2023, respectively.
Historically, the DOL has taken the position that it has discretion regarding the total penalty to assess (using these per-day penalties). In our experience, absent egregious violations, the DOL has typically assessed penalties in amounts ranging from $35,000 to $75,000 per plan year.
However, based on evidence of recently assessed penalties, it appears that the DOL has been exercising its authority to impose higher penalties, much closer to the maximum per-day penalty for run-of-the-mill violations, such as a failure to file an IQPA, that exceed $100,000 per plan year. In addition, we have observed that the DOL appears to be assessing penalties faster than ever. For example, for a calendar year plan, a Notice of Rejection historically was not issued until the February, March, or April following the October 15 Form 5500 filing due date. By contrast, the DOL appears to be issuing some Notices of Rejection for a missing IQPA or deficient Form 5500 as early as two months after the filing due date.
These recent developments appear to signal a change in the DOL’s approach to enforcing its Form 5500 penalty program.
Plan sponsors and plan administrators should note these recent developments and strive to file complete and timely Form 5500s including, where required, a complete IQPA. Failure to do so could prove more costly than in the past and harder to mitigate or avoid.
How We Can Help
As a reminder, the extended deadline for Form 5500 filings for the 2023 plan year is October 15, 2024.
Morgan Lewis lawyers stand ready to assist plan sponsors and administrators in navigating the challenges of Form 5500 filings and, should a filing failure occur, assist in responding to DOL notices and penalty assessments.
If you need assistance with any of the above, please contact the authors, or your Morgan Lewis contact(s).