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Employee Benefits Security Administration

EBSA Final Rule

Amendments to Civil Penalties Under ERISA Section 502(c)(7) [08/10/2007]

[PDF Version]

Volume 72, Number 154, Page 44970-44972


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2560

RIN 1210-AB23

 
Amendments to Civil Penalties Under ERISA Section 502(c)(7)

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Direct final rule.

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SUMMARY: This document contains a direct final rule amending the civil 
penalty regulation under section 502(c)(7) of the Employee Retirement 
Income Security Act of 1974 (ERISA or the Act) to reflect recent 
amendments to this section in the Pension Protection Act of 2006, 
Public Law 109-280, 120 Stat. 780 (PPA). These amendments authorize the 
Secretary of Labor to assess civil penalties not to exceed $100 per day 
for each violation of section 101(m) of ERISA. Section 101(m) of ERISA 
requires plan administrators of individual account plans to notify 
participants and beneficiaries of their right to sell the company stock 
in their accounts and reinvest the proceeds into other investments 
available under the plan. The notice must also inform the recipients of 
the importance of diversifying the investments in their accounts.

DATES: The amendments made by this rule are effective October 9, 2007, 
without further action or notice, unless significant adverse comment is 
received by September 10, 2007. If significant adverse comment is 
received, the Employee Benefits Security Administration will publish a 
timely withdrawal of the rule in the Federal Register.

ADDRESSES: To facilitate the receipt and processing of comments, the 
Department encourages interested persons to submit their comments 
electronically by e-mail to e-ORI@dol.gov, or by using the Federal 
eRulemaking portal at http://www.regulations.gov (follow instructions 

for submission of comments). Persons submitting comments electronically 
are encouraged not to submit paper copies. Persons interested in 
submitting comments on paper should send or deliver their comments (at 
least three copies) to the Office of Regulations and Interpretations, 
Employee Benefits Security Administration, Room N-5669, U.S. Department 
of Labor, 200 Constitution Avenue, NW., Washington, DC 20210, Attn: 
502(c)(7) Civil Penalty. Comments received will be posted without 
change, including any personal information provided, to http://www.regulations.gov and http://www.dol.gov/ebsa, and also available for 

public inspection at the Public Disclosure Room, Employee Benefits 
Security Administration, Room N-1513, U.S. Department of Labor, 200 
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Stephanie L. Ward, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

Pension Protection Act of 2006

    On August 17, 2006, the Pension Protection Act (PPA) amended the 
Internal Revenue Code (the Code) and ERISA to provide diversification 
rights to plan participants and beneficiaries with respect to 
investments in company stock in their accounts. Section 401(a)(35) of 
the Code, as added by section 901 of the PPA, provides that, to remain 
qualified under section 401(a) of the Code, a defined contribution plan 
(other than certain employee stock ownership plans) must provide 
applicable individuals with the right to divest employer securities in 
their accounts and reinvest those amounts in certain diversified 
investments. Section 901 of the PPA also added a parallel provision, 
section 204(j), to ERISA.\1\
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    \1\ Under section 101 of Reorganization Plan No. 4 of 1978 (43 
FR 47713), the Secretary of the Treasury has interpretive 
jurisdiction over section 204(j) of ERISA.
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    Section 507(a) of the PPA amended section 101 of ERISA by adding 
subsection (m) which requires a plan administrator to provide 
applicable individuals with a notice of diversification rights under 
section 204(j) of ERISA. Plan administrators must provide this notice 
not later than 30 days before the first date on which the individuals 
are eligible to exercise their rights. The notice must set forth the 
diversification rights provided under section 401(a)(35) of the Code 
(and parallel section 204(j) of ERISA) and describe the importance of 
diversifying the investment of retirement account assets. Section 
101(m) of ERISA is effective for plan years beginning after December 
31, 2006.
    Section 507(b) of the PPA amended section 502(c)(7) of ERISA to 
provide that the Secretary of Labor may assess a civil penalty of up to 
$100 a day from the date of the plan administrator's failure or refusal 
to provide notice to an applicable individual in accordance with ERISA 
section 101(m).

I.R.S. Notice 2006-107

    Section 507(c) of the PPA directed the Secretary of the Treasury to 
create a model notice of diversification rights that would satisfy the 
requirements of section 101(m) of ERISA.\2\ On December 18, 2006, the 
IRS published Notice 2006-107, which provides transitional guidance on 
section 401(a)(35) of the Code (and parallel section 204(j) of ERISA). 
Notice 2006-107 describes the notice requirement of section 101(m) of 
ERISA and provides a model notice for plans to comply with this 
requirement.\3\ The Notice states that, although some plans will be 
required to comply with section 401(a)(35) as early as January 1, 2007, 
the Department has advised Treasury and the IRS that section 101(m) of 
ERISA does not require plans to furnish notices before January 1, 2007. 
The Notice states that, accordingly, plans with plan years beginning on 
or after January 1, 2007, but before February 1, 2007, are not required 
to furnish the model notice (or a notice otherwise meeting the 
requirements of section 101(m) of ERISA) earlier than January 1, 2007. 
Notice 2006-107 also states that the Department encourages plans to 
furnish notice on the earliest possible date.\4\ The IRS Notice and 
model are available at http://www.irs.gov/irb/2006-51_IRB/ar09.html.

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    \2\ Section 101(m) of ERISA is under the jurisdiction of the 
Department of Labor.
    \3\ I.R.S. Notice 2006-107, 2006-51 I.R.B. 1114.
    \4\ For additional information, see the Employee Benefits 
Security Administration Field Assistance Bulletin No. 2006-03 
(December 20, 2006) at http://www.dol.gov/ebsa/regs/fabmain.html.

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B. Overview of Amendments to Sec.  2560.502c-7

    The direct final rule being published today as part of this notice 
makes conforming changes to 29 CFR 2560.502c-7, reflecting changes 
required by ERISA section 502(c)(7), as amended by the PPA. The 
conforming amendments do not change the existing penalty assessment 
procedures or the related procedures for contesting penalty 
assessments. Rather, the changes merely extend the Secretary's existing 
procedures for assessing civil penalties for violations of section 
101(i)

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of ERISA, relating to blackout notices, to include violations of the 
notice requirements in section 101(m) of ERISA, relating to 
diversification rights. These conforming changes primarily add 
references to section 101(m) next to existing references to section 
101(i) throughout the regulation. For an overview of the provisions of 
Sec.  2560.502c-7, see the preamble to that regulation published on 
January 24, 2003, at 68 FR 3729.

C. Good Cause Finding That Proposed Rulemaking Unnecessary

    Rulemaking under section 553 of the Administrative Procedure Act (5 
U.S.C. 551 et seq.), ordinarily involves publication of a notice of 
proposed rulemaking in the Federal Register and the public is given an 
opportunity to comment on the proposed rule. However, an agency may 
issue a rule without prior notice and comment procedures if it 
determines for good cause that public notice and comment procedures are 
impracticable, unnecessary, or contrary to the public interest for such 
rule, and incorporates a statement of the finding with the underlying 
reasons in the final rule issued. For the reasons mentioned in section 
B of this preamble, the Department finds that publishing a proposed 
rule and seeking public comment is unnecessary.
    Notwithstanding the foregoing, in the ``Proposed Rules'' section of 
today's Federal Register, the Department is publishing a separate 
document that will serve as a notice of proposal to amend part 2560 as 
described in this direct final rule. If the Department receives 
significant adverse comment during the comment period it will publish, 
in a timely manner, a document in the Federal Register withdrawing this 
direct final rule. The Department will then address public comments in 
a subsequent final rule based on the proposed rule. The Department will 
not institute a second comment period on this rule. Any parties 
interested in commenting must do so during this comment period.

D. Regulatory Impact Analysis

Executive Order 12866

    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. 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.
    The principal benefit of the statutory penalty provision and the 
direct final rule is greater adherence to the new disclosure 
requirement. The implementation of orderly and consistent processes for 
the assessment of penalties and the review of such assessments also 
will be beneficial. The civil penalty provisions of the statute and 
this direct final rule impose no mandatory requirements or costs, 
except where a plan administrator has failed to provide the notice as 
required. Therefore, the Department finds that the benefits of the 
direct final rule justify its costs. The Department invites comments on 
this assessment and its conclusion.

Paperwork Reduction Act

    This direct final rule regarding the Secretary's authority to 
assess civil penalties under ERISA section 502(c)(7) is not subject to 
the requirements of the Paperwork Reduction Act of 1995 (PRA 95) (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). Information otherwise 
provided to the Secretary in connection with the administrative and 
procedural requirements of this direct final rule is excepted from 
coverage by PRA 95 pursuant to 44 U.S.C. 3518(c)(1)(B), and related 
regulations at 5 CFR 1320.4(a)(2) and (c). These provisions generally 
except information provided as a result of an agency's civil or 
administrative action, investigation, or audit.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA), 
imposes certain requirements with respect to federal rules that are 
subject to the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Because these amendments are being published as a direct 
final rule, without prior notice and comment, the RFA does not apply. 
Moreover, compliance with the procedures in this rule is not likely to 
impose a significant additional cost on a substantial number of small 
employers or plans. Accordingly, the Department believes that no 
regulatory flexibility analysis would be required in any case under the 
RFA.

Congressional Review Act

    The direct final rule being issued here is subject to the 
Congressional Review Act provisions of the Small Business Regulatory 
Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and will be 
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 does not 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 and export markets.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), the direct final rule does not include any Federal mandate that 
may result in expenditures by State, local, or tribal governments, or 
impose an annual burden exceeding $100 million on the private sector.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires Federal agencies to adhere to 
specific criteria in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This final rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of

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power and responsibilities among the various levels of government. 
Section 514 of ERISA provides, with certain exceptions specifically 
enumerated, that the provisions of Titles I and IV of ERISA supersede 
any and all laws of the States as they relate to any employee benefit 
plan covered under ERISA. The requirements implemented in the final 
rule do not alter the fundamental provisions of the statute with 
respect to employee benefit plans, and as such would have no 
implications for the States or the relationship or distribution of 
power between the national government and the States.

List of Subjects in 29 CFR Part 2560

    Employee benefit plans, Employee Retirement Income Security Act, 
Law enforcement, Pensions.


0
For the reasons set forth in the preamble, the Department amends 29 CFR 
part 2560 as follows:

PART 2560--RULES AND REGULATIONS FOR ADMINISTRATION AND ENFORCEMENT

0
1. The authority citation for part 2560 is revised to read as follows:

    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. Sec. 2560.502(c)(7) also issued under sec. 507(b) of 
Pub. L. 109-280, 120 Stat. 780.

0
2. Amend Sec.  2560.502c-7 by revising paragraphs (a), (b), (d) and 
(j)(1) to read as follows:


Sec.  2560.502c-7  Civil penalties under section 502(c)(7).

    (a) In general. (1) Pursuant to the authority granted the Secretary 
under section 502(c)(7) of the Employee Retirement Income Security Act 
of 1974, as amended (the Act), the administrator (within the meaning of 
section 3(16)(A) of the Act) of an individual account plan (within the 
meaning of section 101(i)(8) of the Act and Sec.  2520.101-3(d)(2) of 
this chapter), who fails or refuses to provide notice of a blackout 
period to affected participants and beneficiaries in accordance with 
section 101(i) of the Act and Sec.  2520.101-3 of this chapter, or the 
administrator (within the meaning of section 3(16)(A) of the Act) of an 
applicable individual account plan (within the meaning of section 
101(m) of the Act), who fails or refuses to provide notice of 
diversification rights to applicable individuals in accordance with 
section 101(m) of the Act, shall be liable for civil penalties assessed 
by the Secretary under section 502(c)(7) of the Act.
    (2) For purposes of this section, a failure or refusal to provide a 
notice of blackout period shall mean a failure or refusal, in whole or 
in part, to provide notice of a blackout period to an affected plan 
participant or beneficiary at the time and in the manner prescribed by 
section 101(i) of the Act and Sec.  2520.101-3 of this chapter, and a 
failure or refusal to provide a notice of diversification rights shall 
mean a failure or refusal, in whole or in part, to provide notice of 
diversification rights to an applicable individual at the time and in 
the manner prescribed by section 101(m) of the Act.
    (b) Amount assessed. (1) The amount assessed under section 
502(c)(7) of the Act for each separate violation shall be determined by 
the Department of Labor, taking into consideration the degree and/or 
willfulness of the failure or refusal to provide a notice of blackout 
period or notice of diversification rights. However, the amount 
assessed for each violation under section 502(c)(7) of the Act shall 
not exceed $100 a day (or such other maximum amount as may be 
established by regulation pursuant to the Federal Civil Penalties 
Inflation Adjustment Act of 1990, as amended), computed from, in the 
case of a notice of blackout period under section 101(i) of the Act, 
the date of the administrator's failure or refusal to provide a notice 
of blackout period up to and including the date that is the final day 
of the blackout period for which the notice was required, or in the 
case of a notice of diversification rights under section 101(m) of the 
Act, computed from the date that is 30 days before the first date on 
which rights are exercisable under section 204(j) of the Act up to the 
date such a notice is furnished.
    (2) For purposes of calculating the amount to be assessed under 
this section, a failure or refusal to provide a notice of blackout 
period or a notice of diversification rights with respect to any single 
participant or beneficiary shall be treated as a separate violation 
under section 101(i) of the Act and Sec.  2520.101-3 of this chapter or 
section 101(m) of the Act.
* * * * *
    (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 applicable requirements of 
section 101(i) or section 101(m) of the Act or on a showing by the 
administrator of mitigating circumstances regarding the degree or 
willfulness of the noncompliance.
* * * * *
    (j) Liability. (1) If more than one person is responsible as 
administrator for the failure to provide a notice of blackout period 
under section 101(i) of the Act and its implementing regulations (Sec.  
2520.101-3 of this chapter), or the failure to provide a notice of 
diversification rights under section 101(m) of the Act, all such 
persons shall be jointly and severally liable for such failure.
* * * * *

    Signed at Washington, DC, this 3rd day of August, 2007.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E7-15567 Filed 8-9-07; 8:45 am]

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