Y2K and ERISA Liability

Is the Year 2000 computer bug a concern when it comes to your employee benefit plans? Read on:

Employee benefit plan sponsors, trustees and administrators need to be concerned that the Y2K problem puts at risk the correct and timely delivery of pension and welfare benefits (including medical, life insurance and disability) to the plan’s participants and beneficiaries. Employee benefit plans are particularly vulnerable because of their reliance on data involving dates (including birth, hire, years of service and termination) and their use of date-dependent computations or comparisons (like interest computations, length of service determinations or retirement benefit calculations). Moreover, the ongoing administration of many plans depends on the interaction of many interdependent computer systems, such as employer payroll systems. Y2K not only threatens the maintenance of the simplest types of record-keeping necessary for accurate benefit administration, but also the plan’s obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to report and maintain accurate books and records.

Failure to address the Y2K problem may result in the imposition of liability on those individuals responsible for plans that fail to take prompt and remedial action. Trustees and administrators have fiduciary duties under ERISA to address Y2K, including understanding the Y2K problem and its potential impact on the plan, determining a course of action to address its impact, and taking steps to ensure that Y2K’s effect on the plan is eliminated, or at least minimized.

According to the United States Department of Labor’s Pension and Welfare Benefits Administration, these obligations are not limited to correcting the plan’s own computer systems, but also apply with respect to computers of its service providers. Moreover, a bill pending in Congress would amend ERISA to require plan fiduciaries when making investment decisions in order to consider the impact of Y2K on both the issuers of securities in which they are interested in investing and the markets where their securities are traded.

Lawsuits based on breach of fiduciary duty claims relating to failures affecting the calculation and provision of benefits—or even the performance of a plan’s investment portfolio—are an obvious potential threat. ERISA requires that a fiduciary “discharge his duties … with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use …”. This standard suggests that a “prudent person” would plan to be Y2K-compliant well in advance of the year 2000 (and September 9, 1999—or 9/9/99, another potential trigger-date for computer error) to allow adequate testing of computer systems.

It is crucial that administrators document their efforts to address the situation in order to prove their efforts in eliminating any adverse effect on the plans if confronted with governmental inquiries or lawsuits. Administrators should maintain a written record, not only with respect to audits of their own systems, but also regarding their review of the compliance efforts of any other entity’s operations which may impact plan administration. Because not all problems may be fixed or fixable before 2000, plan administrators may want to consider steps to lessen inevitable confusion by imposing blackout periods for 401(k) investment elections, and notifying plan participants and beneficiaries well in advance of possible delays in claims payments.

Source: Mark Brossman and Scott Gold, Schulte Roth & Zabel LLP, excerpted from the New York State Bar Association’s Labor & Employment Law Section Newsletter, Vol. 23, No. 3, pp. 4 (September 1998).