What Employee Benefit Plan Fiduciaries Need to Know about Year 2000 Compliance

From Employee Benefits Alert

February 1999

The year 2000 problem has received a great deal of attention recently, and most corporate officers and human resources executives already will have begun to consider and implement measures to ensure that the company's systems will not be compromised by computer glitches when year 2000 arrives. The purpose of this discussion is not to review the year 2000 ("Y2K") problem generally, but to point out specific issues that arise with respect to employee benefit plan administration.

The Y2K problem can have a substantial impact on plan investment, benefit payments and other plan operations. The Department of Labor ("DOL") has taken steps to ensure that all plan sponsors are aware of the Y2K problem and act to correct the problem. It has issued press releases and made materials available on its website (http://www.dol.gov/dol/pwba) to remind plan fiduciaries of their responsibilities in this regard.

Department of Labor Guidance

The DOL has stated that the usual fiduciary responsibilities must govern the actions of plan administrators, trustees, and investment managers ("fiduciaries") in responding to the Y2K problem. In order to fulfill these responsibilities, fiduciaries must establish and implement a prudent procedure for ensuring that the company's computers used in plan administration and computers of the plan's service providers are Y2K compliant. If the plan retains outside consultants to assist in analyzing and solving the Y2K problem, the selection of such outside consultants must be made with reasonable care, skill, prudence and diligence.

The DOL website includes a list of questions and answers relating to liability of fiduciaries and service providers in addressing the Y2K problem. The issues raised in the questions and answers include: identifying the Y2K problem and its effect on employee benefit plans; scope of fiduciary liability; prudent procedures for ensuring Y2K compliance; fiduciary liability for Y2K problems caused by third party service providers; charging Y2K compliance costs to the plan; DOL Y2K enforcement initiatives; Y2K compliance disclosure; and plan auditor responsibilities.

In December, the DOL also released a memorandum and sample questions used by the Pension and Welfare Benefits Administration's ("PWBA") civil investigators in evaluating Y2K compliance by benefits plans. The sample questions are available in the news room section of the DOL/PWBA website. Although the memorandum and questions are not intended to establish or identify specific requirements for plan fiduciaries, other than those already existing under ERISA, they can help to focus attention on specific facts that would be considered by the PWBA in determining whether fiduciaries have fulfilled their responsibilities.

Assessing the Problem

The first step is assessing the scope of the Y2K problem. The plan fiduciaries should establish a committee responsible for Y2K remediation efforts with respect to employee benefit plans (and if such a committee exists evaluate its progress). The DOL memorandum recommends that plan fiduciaries evaluate the computer systems of the plan, the plan sponsor, and plan service providers. Since benefit plan administration relies on the employer's personnel records, it is important to confirm that the computers maintaining those records are Y2K compliant. Plan administration is also highly dependent on the computer systems of third party service providers, who should be contacted in writing and asked about the status of their testing and remediation efforts for Y2K compliance. Existing agreements with service providers should be reviewed with respect to Y2K responsibility and liability. New agreements should include specific provisions regarding the service provider's obligations regarding Y2K compliance.

Remediation Efforts

After assessing the problem, plan fiduciaries must determine what action is appropriate to ensure that the plan and participants are protected. This includes developing a program for compliance of the plan's computers, and monitoring the employer and service providers to ensure that their compliance efforts are proceeding according to plan. Fiduciaries should ensure that sufficient time is available for testing Y2K solutions (testing and subsequent corrective measures can consume more than half of the budgeted time for remediation projects).

Plan fiduciaries also should consider how to pay the costs of remediation (i.e., what portion should be borne by the employer and what portion by the plan?). For example, a portion of the cost of updating an employer's payroll records may be charged to the plan (assuming that the plan permits reasonable costs to be charged to the plan) to the extent that it relates directly to plan administration.

Fiduciary responsibilities also include consideration of the Y2K exposure of investment assets. Finally, plan fiduciaries should ensure that the plan and participants are protected against the failure of the plan's systems by establishing a contingency plan.

Disclosure to Participants

The DOL is encouraging plan administrators to disclose to participants the extent of the plan's Y2K preparedness. Information disclosed should include: the plan's level of preparedness; the strategy for solving Y2K issues; timetable for when critical systems will become Y2K compliant; level of compliance for service provider companies; possible effects on participants should the plan become impaired due to Y2K problems; and contingency plans that have been prepared in the event that the plan is not Y2K compliant in time. If plan participants are making their own investment decisions with respect to their accounts, plan fiduciaries should ensure that participants receive timely information adequate to make investment decisions in the Y2K context. This would include, for example, statements from independent parties that a company's systems are Y2K compliant, and any other available information that fiduciaries are aware of relating to investment decisions. No specific model language has been released by the DOL for this disclosure.

In our last issue, we wrote about the new rules affecting rollovers of hardship distributions from 401(k) plans that were to become effective on January 1, 1999. The new rules provided that hardship distributions of elective deferrals were no longer eligible rollover distributions (i.e., could not be transferred or rolled over to another qualified plan or IRA). Last month the IRS published a notice granting transition relief. Under this notice, employers may begin complying with the new rule for distributions made after December 31, 1998, or they may delay the effective date of the new rules until January 1, 2000. Even if the employer chooses not to delay the effective date of the new rules, employees who receive a hardship distribution will not be barred from rolling the distribution tax-free to another plan or an IRA.

To learn more about Y2K compliance issues or for additional information about other employee benefits matters, please contact Paul J. Powers, Jr. or Kirk H. O'Ferrall at our New York office.