Pension Payback Program

DEPARTMENT OF LABOR

Pension Payback Program

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of adoption of voluntary compliance program for

restoration of delinquent participant contributions.

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SUMMARY: This document announces the adoption of a voluntary compliance

program which will allow certain persons to avoid potential Employment

Retirement Income Security Act civil actions initiated by the

Department of Labor, the assessment of civil penalties under section

502(l) of ERISA and Federal criminal prosecutions arising from their

failure to timely remit participant contributions and the failure to

disclose such non-remittance. The program also includes relief from

certain prohibited transaction liability. The program is designed to

benefit workers by encouraging employers to restore delinquent

participant contributions to employee pension

[[Page 9204]]

benefit plans covered by Title I of ERISA.

DATES: The program applies to certain delinquent participant

contributions that are restored to pension plans no later than

September 7, 1996. Restorative payments must relate to amounts paid by

participants or withheld by an employer from participants' wages for

contribution to a pension plan on or before April 5, 1996. Written

notification of intention to participate in the program must be

received by the Department no later than September 7, 1996.

ADDRESSES: Notification of intention to participate in the program must

be sent in writing to: Pension Payback Program Pension and Welfare

Benefits Administration, U.S. Department of Labor, P.O. Box 77235,

Washington, DC 20013-7235.

FOR FURTHER INFORMATION CONTACT:

Jeffrey Monhart, Pension Investigator, Office of Enforcement, Pension

and Welfare Benefits Administration, U.S. Department of Labor,

Washington, DC (202) 219-4377. (This is not a toll-free number).

SUPPLEMENTARY INFORMATION: Under a current regulation, issued by the

Department of Labor in 1988, assets of an employee benefit plan include

amounts (other than union dues) that a participant or beneficiary pays

to an employer, or amounts that a participant has withheld from his or

her wages by an employer, for contribution to the plan as of the

earliest date on which such contributions can reasonably be segregated

from the employer's general assets, but in no event to exceed 90 days

from the date on which such amounts are received by the employer (in

the case of amounts that a participant or beneficiary pays to an

employer) or 90 days from the date on which such amounts would

otherwise have been payable to the participant in cash (in the case of

amounts withheld by an employer from a participant's wages). 29 CFR

2510.3-102.

Except as provided in ERISA Sec. 403(b), plan assets are required

to be held in trust by one or more trustees.\1\ ERISA Sec. 403(a), 29

U.S.C. 1103(a). In addition, ERISA's fiduciary responsibility

provisions apply to the management of plan assets. Among other things,

these provisions make clear that the assets of a plan may not inure to

the benefit of any employer and shall be held for the exclusive purpose

of providing benefits to participants in the plan and their

beneficiaries, and defraying reasonable expenses of administering the

plan. ERISA Secs. 403-404, 29 U.S.C. 1103-1104. They also prohibit a

broad array of transactions involving plan assets. ERISA Secs. 406-408,

29 U.S.C. 1106-1108.

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\1\ ERISA Sec. 403(b) contains a number of exceptions to the

trust requirement for certain types of assets, including assets

which consist of insurance contracts, and for certain types of

plans. In addition, the Secretary has issued a technical release,

T.V. 92-01, which provides that, with respect to certain welfare

plans (e.g., cafeteria plans), the Department will not assert a

violation of the trust or certain reporting requirements in any

enforcement proceeding, or assess a civil penalty for certain

reporting violations, involving such plans solely because of a

failure to hold participant contributions in trust. 57 FR 23272

(June 2, 1992), 58 45359 (Aug. 27, 1993).

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Employers who fail to transmit promptly participant contributions,

and plan fiduciaries who fail to make diligent efforts to collect those

amounts in a timely manner, will violate the requirement that plan

assets be held in trust; in addition, such employers and fiduciaries

may be engaging in prohibited transactions.

As was noted in the preamble to the final regulation published in

1988, the Department of Justice takes the position that, under 18

U.S.C. 664, the embezzlement, conversion, abstraction, or stealing of

``any of the moneys, funds, securities, premiums, credits, property, or

other assets of any employee welfare benefit plan or employee pension

benefit plan, or any fund connected therewith'' is a criminal offense,

and that under such language, criminal prosecution may go forward in

situations in which the participant contribution is not a plan asset

for purposes of Title I of ERISA. 53 FR 17628 (May 17, 1988). The final

regulation defined when participant contributions become ``plan

assets'' only for the purposes of Title I of ERISA and the related

prohibited transaction excise tax provisions of the Code. The

Department reiterates that this regulation may not be relied upon to

bar criminal prosecutions pursuant to 18 U.S.C. 664.

Recent investigations conducted by the Department have revealed

numerous violations related to employers' delay in transmitting or

failing to transmit to employee benefit plans amounts that a

participant or beneficiary pays to an employer, or amounts that

employers withhold from participants' wages, for contribution to the

plans. Although the Department believes that in the vast majority of

contributory employee benefit plans, participant contributions are

handled with integrity, evidence uncovered in ongoing investigations

indicates that such delays are not uncommon.\2\ The recent enforcement

activities, which focused on participant contributions, indicate a

significantly higher frequency of violations for such investigations

than the Department encounters in general.\3\

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\2\ In the Spring of 1995 PWBA began a project to investigate

misuse of employee contributions to employee benefit plans and in

particular in 401(k) plans. As of October 31, 1995 there were 417

employee contribution investigations open and 130 cases were closed

during the year. More than $3,7 million has been recovered through

voluntary compliance in situations where employee contributions were

not placed in trust for participants.

\3\ Of the 130 closed employee contribution cases, 44, or 33.8

percent of closed cases, resulted in findings of violations of

ERISA's fiduciary provisions. This compares to a finding of

fiduciary violations in 12 percent of all other closed cases in FY

95.

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In addition, the Department, in responding to requests for

technical assistance from employers and participants, has received

information that many employers who receive participant contributions

are under the misimpression that the current regulation permits a delay

of up to 90 days in segregating such contributions, even if the

participant contributions can reasonably be segregated much sooner. The

Department has also received similar information from a variety of

other sources. Such delays deprive participants of earnings on their

contributions and increase the risk to participants and their

beneficiaries that their contributions will be lost due to the

employer's insolvency or misappropriation by the employer.

In order to better protect the security of participant

contributions to employee benefit plans, on December 20, 1995, the

Department of Labor published in the Federal Register a notice of

proposed rulemaking to revise the regulation at 29 CFR 2510.3-102 (60

FR 66036). The Department's proposal would change the maximum period

during which participant contributions to an employee benefit plan may

be treated as other than ``plan assets'' to the same number of days as

the period in which the employer is required to deposit withheld income

taxes and employment taxes under rules promulgated by the Internal

Revenue Service (IRS). The proposed regulation also solicited comments

on the advisability of other measures that the Department might

consider to address the problem of delays in transmitting participant

contributions to plans. The comment period for this proposal expired on

February 5, 1996. The Department held a public hearing on the proposal

on February 22 and 23, 1996, in Washington, DC.

[[Page 9205]]

The Pension Payback Program

In order to encourage persons who have been delinquent in remitting

participant contributions to pension plans, the Department has

determined to announce a voluntary compliance program to be known as

the Pension Payback Program. The program applies only to the

restoration of participant contributions and lost earnings to employee

pension benefit plans as defined in section 3(2) of ERISA. As described

in the following notice, the Pension Payback Program contains two

principal elements.

1. The Program will permit certain persons who are delinquent in

the remittance of participant contributions to pension plans to avoid

civil actions brought by the Department of Labor and Federal criminal

prosecutions for such delinquencies if the conditions of the Program

are met.

2. A final class exemption under section 408(a) of ERISA that is

being published in proposed form today will govern these transactions.

However, persons who participate in the Program transaction. However,

persons who participate in the Program may rely on the proposed

exemption notwithstanding any subsequent modifications made in issuing

the final exemption. Thus, on a temporary basis, pending promulgation

by the Department of the final class exemption setting forth the

condition for retroactive relief, the Department will not pursue

enforcement against persons who comply with the conditions of the

Program with respect to any prohibited transaction liability which may

have a risen as a result of a delay in forwarding participant

contributions. The Internal Revenue Service has advised the Department

of Labor that it will not seek to impose the Internal Revenue Code

section 4975 (a) and (b) sanctions with respect to any prohibited

transaction that is covered by the proposed class exemption

notwithstanding any subsequent changes to the proposed exemption when

it is finalized, provided that all the requirements of the proposed

class exemption are met.

The conditions for each of the two elements are the same and are

set forth in the following notice. In particular, the Program is

available to a person only if the delinquent participant contributions

withheld or received by an employer, excluding earnings, do not exceed

the aggregate amount of participant contributions that were received by

the employer for the calendar year 1995. The purpose of this limitation

is to prevent the Program from being available to persons involved in

particularly serious delinquencies.

The program applies only to delinquent participant contributions

that are restored to pension plans no later than September 7, 1996.

Restorative payments must relate to amounts paid by participants or

withheld by an employer from participants' wages for contribution to a

pension plan on or before April 5, 1996. Written notification of

intention to participate in the Program must be received by the

Department no later than September 7, 1996.

Under the proposed exemption, all delinquent participant

contributions must be restored to the pension plan plus earnings from

the date on which such contributions were paid to, or withheld by, the

employer until such money is restored to the plan. The earnings are

calculated at the greater of: (1) The amount that would have earned on

the participant contributions during such period if applicable plan

provisions had been followed, or (2) the amount that would have earned

on the participant contributions during such period using an interest

rate equal to the underpayment rate defined in section 6621(a)(2) of

the Internal Revenue Code during such period. In the Department's view,

this condition requires that the earnings be calculated on an account

by account basis in order to mirror the earnings the participants would

have otherwise accrued. The underpayment rate defined in section

6621(a)(2) is based on the Federal short-term rate determined quarterly

by the Secretary of the Treasury and is designed to reflect market

rates of interest rather than serve as a penalty. Courts have applied

rates determined under section 6621 in awarding prejudgment interest in

cases under Title I of ERISA. Martin v. Harline, No. 87-NC-115J (D.

Utah Mar. 31, 1992) 15 Emp. Ben. Cases (BNA) 1138, 1153; Whitfield v.

Cohen, 686 F. Supp. 188, 193 (E.D.N.Y. 1988); Whitfield v. Tomasso, 682

F. Supp. 1287, 1306 (E.D.N.Y. 1988).

Except as provided in the final class exemption, the Program does

not afford relief from civil actions that may be filed by persons other

than the Departments of Labor and Justice, and the Internal Revenue

Service. Upon finalization of the class exemption, persons who have

complied with its conditions will not be subject to the restrictions of

sections 406(a)(1) (A) through (D), 406(b)(1) and 406(b)(2) of ERISA

and the sanctions resulting from the application of section 4975 (a)

and (b) of the Code, by reason of section 4975(c)(1) (A) through (E) of

the Code, for transactions that result from such person's failure to

transmit participant contributions to pension plans in accordance with

the time frames described in the participant contribution regulation at

29 CFR 2510.3-102. The Program does not apply to criminal prosecutions

brought by State governments, although the Department has determined

not to affirmatively refer information to the States for criminal

prosecution concerning persons who voluntarily restore participant

contributions in accordance with the terms of the Program.

Notice of Adoption of Voluntary Compliance Program for Restoration of

Delinquent Participant Contributions

Pension Payback Program

The Department of Labor (the Department) today announced adoption

of the Pension Payback Program which is designed to benefit workers by

encouraging employers to restore delinquent participant contributions

plus lost earnings to pension plans. This program is targeted at

``persons'', as that term is defined at section 3(9) of the Employee

Retirement Income Security Act (ERISA), who failed to transfer

participant contributions to pension plans defined under section 3(2)

of ERISA, including section 401(k) plans, in accordance with the time

frames described by the Department's regulations, and thus violated

Title I of ERISA.

The conditional compliance program is available to certain persons

who voluntarily restore delinquent participant contributions to pension

plans. Those who comply with the terms of the Program will avoid

potential ERISA civil actions initiated by the department, the

assessment of civil penalties under section 502(l) of ERISA and Federal

criminal prosecutions arising from their failure to timely remit such

contributions and non-disclosure of the non-remittance. The Department

of Justice has indicated its support for the Program. The Department of

Labor will not pursue enforcement against persons who comply with the

conditions of the Program with respect to any prohibited transaction

liability which may have arisen as a result of the person's delay in

forwarding the participant contributions until promulgation by the

Department of a final class exemption setting forth the conditions for

retroactive exemptive relief. A notice of proposed exemption is being

published today in the Federal Register. Participation in the Program

will be available to persons who rely on the

[[Page 9206]]

proposed exemption notwithstanding any subsequent modifications to the

final exemption. The Department has further determined not to

affirmatively refer information to the states for criminal prosecution

concerning those persons who voluntarily restore participant

contributions in accordance with the Program. The Internal Revenue

Service has advised the Department of Labor that it will not seek to

impose Internal Revenue Code section 4975 (a) and (b) sanctions with

respect to any prohibited transaction that is covered by the proposed

class exemption notwithstanding any subsequent changes to the proposed

class exemption when it is finalized, provided that all the

requirements specified in the proposed class exemption are met.

The Program only applies to certain delinquent participant

contributions plus earnings that are restored to pension plans no later

than September 7, 1996. Such restorative payments must relate to

amounts paid by participants or withheld by an employer from

participants' wages for contribution to a plan on or before thirty days

following the date of this announcement. Specifically, the Program

applies to delinquent participant contributions plus earnings, provided

that the delinquent contributions outstanding on the effective date of

the Program, excluding earnings, do not exceed the aggregate amount of

participant contributions that were received or withheld from the

employees' wages for calendar year 1995. Provided that the contribution

limitation described in the previous sentence is not exceeded, the

Program will also apply, without limit, to the restoration of any

earnings on delinquent participant contributions that have been

restored to the plan prior to the effective date of this announcement.

The Program is available only if the following conditions are met:

(1) All delinquent participant contributions are restored to the

employee benefit plan plus the greater of (a) or (b) below.

(a) The amount that otherwise would have been earned on the

participant contributions from the date on which such contributions

were paid to, or withheld by, the employer until such money is fully

restored to the plan had such contributions been invested during such

period in accordance with applicable plan provisions, or

(b) Interest at a rate equal to the underpayment rate defined in

section 6621(a)(2) of the Internal Revenue Code from the date on which

such contributions were paid to, or withheld by, the employer until

such money is fully restored to the plan,

provided that the total of all outstanding delinquent contributions on

the effective date of the Program, excluding earnings, does not exceed

the aggregate amount of participant contributions that were received or

withheld from the employees' wages for calendar year 1995.

(2) The Department is notified in writing no later than September

7, 1996 of the person's decision to participate in the Program and

provided with: (a) Copies of cancelled checks or other written evidence

demonstrating that all participant contributions and earnings have been

restored to the employee benefit plan; (b) the certification described

in paragraph (6) below; and (c) evidence of such bond as may be

required under section 412 of ERISA.

(3) The person informs the affected participants within 90 days

following the notification of the Department described in paragraph (2)

above, that prior delinquent contributions and lost earnings have been

restored to their accounts pursuant to the person's participation in

the Program and, thereafter, provides a copy of such notification to

the Department. If a statement of account or other scheduled

communication between the plan or its sponsor and the participants is

scheduled to occur within this time period, such statement may include

the notification required by this paragraph.

(4) The person has complied with all conditions set forth in an

exemption proposed by the Department today.

(5) At the time that the Department is notified of the person's

determination to participate in the Program, neither the Department nor

any other Federal agency has informed such person of an intention to

investigate or examine the plan or otherwise made inquiry with respect

to the status of participant contributions under the plan.

(6) Each person who applies for relief under the Program shall

certify in writing, under oath and pain of perjury, that it is in

compliance with all terms and conditions of the Program and, to its

knowledge, neither it nor any person acting under its supervision or

control with respect to the operation of an ERISA covered employee

benefit plan:

(a) Is the subject of any criminal investigation or prosecution

involving any offense against the United States; \4\

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\4\ For purposes of this paragraph, an ``offense'' includes

criminal activity for which the Department of Justice may seek civil

injunctive relief under the Racketeer Influenced and Corrupt

Organizations statute (18 U.S.C. 1964(b)). A ``subject'' is any

individual or entity whose conduct is within the scope of any

ongoing inquiry being conducted by a Federal investigator(s) who is

authorized to investigate criminal offenses against the United

States.

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(b) Has been convicted of a criminal offense involving employee

benefit plans at any time or any other offense involving financial

misconduct which was punishable by imprisonment exceeding one year for

which sentence was imposed during the preceding thirteen years or which

resulted in actual imprisonment ending within the last thirteen years,

nor has such person entered into a consent decree with the Department

or been found by a court of competent jurisdiction to have violated any

fiduciary responsibility provisions of ERISA during such period; or

(c) Has sought to assist or conceal the non-remittance of

participant contributions by means of bribery, graft payments to

persons with responsibility for ensuring remittance of plan

contributions or with the knowing assistance of persons engaged in

ongoing criminal activity.

Signed at Washington, D.C., this 4th day of March 1996.

Olena Berg,

Assistant Secretary for Pension and Welfare Benefits, U.S. Department

of Labor.

[FR Doc. 96-5391 Filed 3-6-96; 8:45 am]

BILLING CODE 6510-29-M