Assessment of Civil Penalties Under Section 502(c)(5) of ERISA [04/09/2003]
Volume 68, Number 68, Page 17503-17506
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2560
RIN 1210-AA64
Assessment of Civil Penalties Under Section 502(c)(5) of ERISA
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final rule that describes procedures
relating to the assessment of civil penalties under section 502(c)(5)
of the Employee Retirement Income Security Act of 1974, (ERISA) as
amended by the Health Insurance Portability and Accountability Act of
1996 (HIPAA). Section 502(c)(5) authorizes the Secretary of Labor (the
Secretary) to assess a civil monetary penalty against any person from
the date of the person's failure or refusal to file the information
required to be filed under section 101(g) of ERISA. The final rule
clarifies the manner in which the Secretary will assess penalties under
ERISA section 502(c)(5) and the procedures for agency review. Separate
documents containing a final rule on the reporting requirement under
section 101(g) of ERISA and a final rule relating to procedures for
administrative hearings and appeals on assessments of penalties under
ERISA section 502(c)(5) appear separately in this issue of the Federal
Register.
EFFECTIVE DATE: This final rule is effective January 1, 2004.
FOR FURTHER INFORMATION CONTACT: Amy J. Turner or Deborah S. Hobbs,
Employee Benefits Security Administration, U.S. Department of Labor,
Room C-5331, 200 Constitution Avenue, NW., Washington, DC 20210
(telephone (202) 693-8335).
SUPPLEMENTARY INFORMATION:
A. Background and Overview of Changes in the Final Rule
This document contains a final rule that provides guidance relating
to the assessment of civil penalties under section 502(c)(5) of ERISA
for the failure or refusal to file a report pursuant to section 101(g)
of ERISA. This regulation is designed to parallel the procedures set
forth in Sec. 2560.502c--2 regarding civil penalties under section
502(c)(2) of ERISA.
An interim final rule relating to the assessment of civil penalties
under section 502(c)(5) of ERISA was published in the Federal Register
on February 11, 2000 at 65 FR 7181. In the February 11, 2000 interim
rule, the Department sought comments from affected parties. No comments
were received.
On October 21, 2002, the Department published interim final rules
relating to notice of blackout periods to participants and
beneficiaries (during which their right to direct or diversify
investments, obtain a loan, or obtain a distribution under a pension
plan may be suspended) and related civil penalties under ERISA section
502(c)(7). Those rules also made conforming changes to the penalty
assessment regulations under this section. Specifically, this section
was amended to provide an additional five days in which to file a
statement of reasonable cause or a request for hearing and answer, as
applicable, when the Department serves a notice of intent to assess a
penalty or a notice of penalty determination by certified mail, and to
provide that service of a notice by the Department by regular mail is
complete upon receipt. In addition, conforming amendments were made to
provide that statements of reasonable cause are treated as filed on
mailing or on transmittal under certain circumstances. Finally,
amendments were made to accommodate those changes in the filing and
service rules. No comments were received with respect to these
conforming amendments.
This regulation finalizes the interim final regulations published
February 20, 2000, as amended by the interim final amendments published
October 21, 2002. Only one modification was made, involving
applicability dates. Specifically, the interim final rule contained a
transition safe harbor period under which no civil penalty was assessed
against an administrator that had made a good faith effort to comply
with a Sec. 2520.101-2 filing that was due in the Year 2000. This
transition rule was created because, during the first year in which a
report was required to be filed under section 101(g) in particular, the
Department was focused on educating administrators about this filing
requirement. Because the dates during which the transition rule was
applicable have passed, this rule has been deleted from the final rule.
The Department remains committed to working with administrators to
help them comply with the Form M-1 filing requirement. Filers who have
questions or who need assistance in completing a filing may call the
EBSA Help Desk, at 202-693-8360.
[[Page 17504]]
B. Regulatory Impact Analysis
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f) of the Executive
Order, a ``significant regulatory action'' is an action that is likely
to result in a rule (1) having an annual effect on the economy of $100
million or more, or adversely and materially affecting a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or tribal governments or communities
(also referred to as ``economically significant''); (2) creating
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order. On the
basis of these criteria, it has been determined that this regulatory
action is significant under section 3(f)(4) of the Executive Order.
Accordingly, OMB has reviewed this regulation.
Paperwork Reduction Act
The rule being issued here is not subject to the requirements of
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) because it
does not contain a ``collection of information'' as defined in 44
U.S.C. 3502(3).
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
requires each Federal agency to perform a regulatory flexibility
analysis for all rules subject to the notice and comment requirements
of section 553(b) of the Administrative Procedure Act (5 U.S.C 551 et
seq.) unless the head of the agency certifies that the rule will not,
if promulgated, have a significant economic impact on a substantial
number of small entities. Small entities include small businesses,
organizations, and governmental jurisdictions.
Because these rules were issued as interim final rules and not as a
notice of proposed rulemaking, the RFA does not apply and the
Department is not required to either certify that the rule will not
have a significant economic impact on a substantial number of small
entities, or conduct a regulatory flexibility analysis. The Department
does not anticipate that this final rule will impose a significant
impact on a substantial number of small entities, however, regardless
of whether one uses the definition of small entity found in regulations
issued by the Small Business Administration (13 CFR Sec. 121.201) or
one defines small entity, on the basis of section 104(a)(2) of ERISA,
as an employee benefit plan with fewer than 100 participants.
Small Business Regulatory Enforcement Fairness Act
The final rule being issued here is subject to the provisions of
the Small Business Regulatory Enforcement Fairness Act of 1996 (5
U.S.C. 801 et seq.) and has been transmitted to Congress and the
Comptroller General for review. The rule is not a ``major rule'' as
that term is defined in 5 U.S.C. 804, because it is not likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers, individual
industries, or federal, State, or local government agencies, or
geographic regions; or (3) significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in domestic or export markets.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, this final rule does not
include any Federal mandate that may result in expenditures by State,
local, or tribal governments, and will not impose an annual burden of
$100 million or more on the private sector.
Federalism Statement Under Executive Order 13132
Executive Order 13132 outlines fundamental principles of
federalism, and requires the adherence to specific criteria by federal
agencies in the process of their formulation and implementation of
policies that have substantial direct effects on the states, the
relationship between the national government and the states, or on the
distribution of power and responsibilities among the various levels of
government. Agencies promulgating regulations that have these
federalism implications must consult with state and local officials,
and describe in the preamble to the regulation the extent of their
consultation and the nature of the concerns of state and local
officials, as well as the agency's position supporting the need to
issue the regulation, and a statement of the extent to which the
concerns of state and local officials have been met.
In the Department's view, these final regulations do not have
federalism implications because they do not have substantial direct
effects on the states, the relationship between the national government
and the states, or on the distribution of power and responsibilities
among various levels of government. Not only do these regulations not
reduce state discretion, the reports they require will facilitate state
enforcement of their own laws as they apply to MEWAs since the reports
will be available to the states and will identify MEWAs operating in
each state.
Although the Department concludes that these final regulations do
not have federalism implications, in keeping with the spirit of the
Executive Order that agencies shall closely examine any policies that
may have federalism implications or limit the policy making discretion
of the states, the Department of Labor engages in extensive efforts to
consult with and work cooperatively with affected state and local
officials.
For example, the Department attends quarterly meetings of the
National Association of Insurance Commissioners (NAIC) to listen to the
concerns of state insurance departments. The NAIC is a non-profit
corporation established by the insurance commissioners in the 50
states, the District of Columbia, and the four U.S. territories that,
among other things, provides a forum for the development of uniform
policy when uniformity is appropriate. Its members meet, discuss, and
offer solutions to mutual problems. The NAIC sponsors quarterly
meetings to provide a forum for the exchange of ideas, and in-depth
consideration of insurance issues by regulators, industry
representatives, and consumers. In addition to the general discussions,
committee meetings, and task force meetings, the NAIC sponsors standing
HIPAA meetings for members during the quarterly conferences, including
a Centers for Medicare and Medicaid Services (CMS)/Department of Labor
(DOL) meeting on HIPAA issues. (This meeting provides CMS and DOL the
opportunity to provide updates on regulations, bulletins, enforcement
actions, and outreach efforts regarding HIPAA.) In these quarterly
meetings, issues relating to MEWAs and the implementation of the Form
M-1 filing requirement are frequently discussed and, periodically,
entire sessions are scheduled that are dedicated exclusively to MEWA/
Form M-1 issues.
[[Page 17505]]
The Department also cooperates with the states in several ongoing
outreach initiatives, through which information is shared among federal
regulators, state regulators, and the regulated community. For example,
the Department has established a Health Benefits Education Campaign
with more than 70 partners, including CMS, the NAIC, and many business
and consumer groups. In addition, the Department Web site offers links
to important state Web sites and other resources, facilitating
coordination between the state and federal regulators and the regulated
community.
The Department also coordinates with state insurance departments to
freeze assets when a MEWA operator is committing fraud or operating in
a financially unsound manner. In these situations, typically, a state
will obtain a cease and desist order to stave off further action by the
MEWA in that state. In certain situations, the Department will then
obtain a temporary restraining order (TRO) to freeze assets of the MEWA
nationwide. In one case this year, the Department obtained a TRO to
freeze assets of a MEWA whose operators were committing fraud and not
paying benefits. This case affects more than 23,000 participants and
beneficiaries in 50 states and the amount of unpaid claims could exceed
$6 million. In a similar case last year, the Department obtained a TRO
to freeze assets of a MEWA that was diverting plan assets for personal
use of the MEWA's operators. That case affected at least 1,500
participants and $2.8 million in unpaid claims. A court order was also
issued in that case appointing an independent fiduciary to manage the
MEWA.
In conclusion, the Department has stayed in contact with state
regulators and considered their concerns in developing these
regulations. These regulations should help the states enforce their own
laws as they apply to MEWAs since the reports they require will be
available to them and will identify MEWAs operating in each state.
Statutory Authority
29 U.S.C. 1132(c)(5) and 1135 and Secretary of Labor's Order 1-
2003, 68 FR 5374 (Feb. 3, 2003).
List of Subjects in 29 CFR Part 2560
Claims, Employee benefit plans, Employee Retirement Income Security
Act, Law enforcement, Penalties, Pensions, Reporting and recordkeeping
requirements. ?
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For the reasons set out in the preamble, Part 2560 of Chapter XXV of
Title 29 of the Code of Federal Regulations is amended as follows:
PART 2560--[AMENDED]
0
1. The authority for part 2560 continues to read:
Authority: 29 U.S.C. 1132, 1135, and Secretary of Labor's Order
1-2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2560.503-1 also issued under
29 U.S.C. 1133.
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2. Part 2560 is amended by revising Sec. 2560.502c-5 to read:
Sec. 2560.502c-5--Civil penalties under section 502(c)(5).
(a) In general--(1) Pursuant to the authority granted the Secretary
under section 502(c)(5) of the Employee Retirement Income Security Act
of 1974, as amended (the Act), the administrator of a multiple employer
welfare arrangement (MEWA) (within the meaning of section 3(40)(A) of
the Act) that is not a group health plan, and that provides benefits
consisting of medical care (within the meaning of section 733(a)(2)),
for which a report is required to be filed under section 101(g) of the
Act and 29 CFR 2520.101-2, shall be liable for civil penalties assessed
by the Secretary under section 502(c)(5) of the Act for each failure or
refusal to file a completed report required to be filed under section
101(g) and 29 CFR 2520.101-2. The term ``administrator'' is defined in
29 CFR 2520.101-2(b).
(2) For purposes of this section, a failure or refusal to file the
report required to be filed under section 101(g) shall mean a failure
or refusal to file, in whole or in part, that information described in
section 101(g) and 29 CFR 2520.101-2, on behalf of the MEWA, at the
time and in the manner prescribed therefor.
(b) Amount assessed--(1) The amount assessed under section
502(c)(5) shall be determined by the Department of Labor, taking into
consideration the degree and/or willfulness of the failure to file the
report. However, the amount assessed under section 502(c)(5) of the Act
shall not exceed $1,000 a day, computed from the date of the
administrator's failure or refusal to file the report and, except as
provided in paragraph (b)(2) of this section, continuing up to the date
on which a report meeting the requirements of section 101(g) and 29 CFR
2520.101-2, as determined by the Secretary, is filed.
(2) If, upon receipt of a notice of intent to assess a penalty (as
described in paragraph (c) of this section), the administrator files a
statement of reasonable cause for the failure to file, in accordance
with paragraph (e) of this section, a penalty shall not be assessed for
any day from the date the Department serves the administrator with a
copy of such notice until the day after the Department serves notice on
the administrator of its determination on reasonable cause and its
intention to assess a penalty (as described in paragraph (g) of this
section).
(3) For purposes of this paragraph, the date on which the
administrator failed or refused to file the report shall be the date on
which the report was due (determined without regard to any extension of
time for filing). A report which is rejected under 29 CFR 2520.101-2
shall be treated as a failure to file a report when a revised report
meeting the requirements of this section is not filed within 45 days of
the date of the Department's notice of rejection. If a revised report
meeting the requirements of this section, as determined by the
Secretary, is not submitted within 45 days of the date of the notice of
rejection by the Department, a penalty shall be assessed under section
502(c)(5) beginning on the day after the date of the administrator's
failure or refusal to file the report.
(c) Notice of intent to assess a penalty. Prior to the assessment
of any penalty under section 502(c)(5), the Department shall provide to
the administrator of the MEWA a written notice indicating the
Department's intent to assess a penalty under section 502(c)(5), the
amount of such penalty, the period to which the penalty applies, and a
statement of the facts and the reason(s) for the penalty.
(d) Reconsideration or waiver of penalty to be assessed. The
Department may determine that all or part of the penalty amount in the
notice of intent to assess a penalty shall not be assessed on a showing
that the administrator complied with the requirements of section 101(g)
of the Act or on a showing by the administrator of mitigating
circumstances regarding the degree or willfulness of the noncompliance.
(e) Showing of reasonable cause. Upon issuance by the Department of
a notice of intent to assess a penalty, the administrator shall have
thirty (30) days from the date of service of the notice, as described
in paragraph (i) of this section, to file a statement of reasonable
cause explaining why the penalty, as calculated, should be reduced, or
not be assessed, for the reasons set forth in paragraph (d) of this
section. Such statement must be made in writing and set forth all the
facts alleged as reasonable cause for the reduction or nonassessment of
the penalty. The statement must contain a declaration by the
administrator that the statement is made under the penalties of
perjury.
[[Page 17506]]
(f) Failure to file a statement of reasonable cause. Failure of an
administrator to file a statement of reasonable cause within the thirty
(30) day period described in paragraph (e) of this section shall be
deemed to constitute a waiver of the right to appear and contest the
facts alleged in the notice of intent, and such failure shall be deemed
an admission of the facts alleged in the notice for purposes of any
proceeding involving the assessment of a civil penalty under section
502(c)(5) of the Act. Such notice shall then become a final order of
the Secretary, within the meaning of 29 CFR 2570.91(g), forty-five (45)
days from the date of service of the notice.
(g) Notice of the determination on statement of reasonable cause--
(1) The Department, following a review of all the facts alleged in
support of no assessment or a complete or partial waiver of the
penalty, shall notify the administrator, in writing, of its
determination to waive the penalty, in whole or in part, and/or assess
a penalty. If it is the determination of the Department to assess a
penalty, the notice shall indicate the amount of the penalty, not to
exceed the amount described in paragraph (c) of this section, and a
brief statement of the reasons for assessing the penalty. This notice
is a ``pleading'' for purposes of 29 CFR 2570.91(m).
(2) Except as provided in paragraph (h) of this section, a notice
issued pursuant to paragraph (g)(1) of this section, indicating the
Department's intention to assess a penalty, shall become a final order,
within the meaning of 29 CFR 2570.91(g), forty-five (45) days from the
date of service of the notice.
(h) Administrative hearing. A notice issued pursuant to paragraph
(g) of this section will not become a final order, within the meaning
of 29 CFR 2570.91(g), if, within thirty (30) days from the date of the
service of the notice, the administrator or a representative thereof
files a request for a hearing under 29 CFR 2570.90 through 2570.101,
and files an answer to the notice. The request for hearing and answer
must be filed in accordance with 29 CFR 2570.92 and 18.4. The answer
opposing the proposed sanction shall be in writing, and supported by
reference to specific circumstances or facts surrounding the notice of
determination issued pursuant to paragraph (g) of this section.
(i) Service of notices and filing of statements--(1) Service of a
notice for purposes of paragraphs (c) and (g) of this section shall be
made:
(i) By delivering a copy to the administrator or representative
thereof;
(ii) By leaving a copy at the principal office, place of business,
or residence of the administrator or representative thereof; or
(iii) By mailing a copy to the last known address of the
administrator or representative thereof.
(2) If service is accomplished by certified mail, service is
complete upon mailing. If service is by regular mail, service is
complete upon receipt by the addressee. When service of a notice under
paragraph (c) or (g) of this section is by certified mail, five (5)
days shall be added to the time allowed by these rules for the filing
of a statement, or a request for hearing and answer, as applicable.
(3) For purposes of this section, a statement of reasonable cause
shall be considered filed:
(i) Upon mailing, if accomplished using United States Postal
Service certified mail or Express Mail;
(ii) Upon receipt by the delivery service, if accomplished using a
``designated private delivery service'' within the meaning of 26 U.S.C.
7502(f);
(iii) Upon transmittal, if transmitted in a manner specified in the
notice of intent to assess a penalty as a method of transmittal to be
accorded such special treatment; or
(iv) In the case of any other method of filing, upon receipt by the
Department at the address provided in the notice of intent to assess a
penalty.
(j) Liability--(1) If more than one person is responsible as
administrator for the failure to file the report, all such persons
shall be jointly and severally liable with respect to such failure.
(2) Any person against whom a civil penalty has been assessed under
section 502(c)(5) pursuant to a final order, within the meaning of 29
CFR 2570.91(g), shall be personally liable for the payment of such
penalty.
(k) Cross-reference. See 29 CFR 2570.90 through 2570.101 for
procedural rules relating to administrative hearings under section
502(c)(5) of the Act.
Signed at Washington DC, this 31st day of March, 2003.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 03-8116 Filed 4-7-03; 8:45 am]
BILLING CODE 4510-29-P
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