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Employee Benefits Security Administration

EBSA Final Rule

Assessment of Civil Penalties Under Section 502(c)(5) of ERISA [04/09/2003]

[PDF Version]

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. ?

0
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.


0
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]

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