- Notice
Background: One of the principal requirements of the Program
is that written notice of the correction be provided to all plan participants. The notice
must state that correction was made pursuant to the applicant’s participation in the
Program, and that the participant may obtain a copy of the application and all supporting
documentation from the plan administrator upon request. There is no requirement to
describe the breach or specific correction method. No distinctions are drawn as to the
type of transaction being corrected or its materiality to the plan.
The Program release does not specifically indicate at what point the notice must be
provided, other than the statement that it must be provided no later than the date
required for distribution of the Summary Annual Report.
Comment: The notice requirement may pose a serious deterrent to use of the
Program by plan sponsors and service providers. The burden and cost of notice to each
participant could be significant for large plans. In addition, providing the notice may
create undue confusion and uncertainty for the plan participants where the transaction
being corrected affected only a few participants, or was relatively small in relation to
plan assets. The IRS voluntary compliance programs have worked successfully without
requiring these types of broad plan-wide notices, although, in practice, notices are
provided to all plan participants who are affected by the correction.
Notices should not be required to be furnished to participants prior to the Department
approving an application. In the event the application were rejected or additional
corrective action were required, the notices would become inaccurate and would need to be
supplemented, requiring a second round of notices and additional costs. Furthermore, it
should be possible to include the notices in the Summary Annual Reports as a means of
reducing the cost.
Recommendation: The purpose of the Program is for plan sponsors, fiduciaries and
other parties who may have potential fiduciary liability to correct the possible
violations on a voluntary basis and make the plans whole. The Program will work
effectively to accomplish this purpose only if its terms encourage parties to come forward
and take appropriate corrective action. The notice requirement in its present form,
however, will discourage applicants through the expenses and risks that it would involve.
The result would be to defeat what the Program is trying to accomplish.
In order to reduce the expenses and risks involved in providing notice, the Department
should make the following modifications: First, notice should be limited based on a
materiality standard, to create a balance between the costs and risks of providing notice
and the potential exposure of the correcting party. If the amount involved in the breach
were less than a certain percentage of plan assets—say, 5%—then the breach would
not be material to the plan’s financial condition, and notice to the plan
participants should not be necessary. Second, where the breach affected only certain
participants, notice should be limited to those participants. Third, the Department should
clarify when and how the notices have to be provided. They should not be required to be
sent to participants until after the Department has accepted the Program application, to
avoid the need for supplemental or corrective notices. In addition, the Department should
clarify that it would be permissible to include the notice in the Summary Annual Report.
Finally, the deadline for providing notice should be extended to the next date required
for distribution of a Summary Annual Report that is more than forty-five days after the
applicant has received the no action letter. This would avoid the problem of there being
insufficient time in advance of the Summary Annual Report distribution date to prepare and
print the notices.