The "YEAR 2000" problem, commonly referred to as "Y2K," has implications for employers in the administration of their employee benefit plans. To understand how Y2K affects plan administration, it is helpful to know something about computer history. In the infancy of computer development, memory was both scarce and expensive. To conserve it and to keep costs down, programmers adopted a two-digit format for entering year dates, for example "01\01\98." The Y2K problem will arise on January 1, 2000, when computers, confronted with "01\01\00" may respond as if the date were January 1,1900.

Because benefit plan functions are extremely date-sensitive, the potential effects of Y2K are significant. Virtually every calculation and determination of benefits under an employee benefit plan are dependent upon certain dates. For example, the calculation of a 401(k) plan participant's vested account balance uses the participant's dates of hire and termination. If one of these dates falls after December 31, l999, the potential for plan mismanagement because of Y2K is possible.

Even if benefit plan administration software is Y2K compliant, the plan sponsor may still use hardware (such as telephones) with microchips containing data with two-digit year fields. This could wreak havoc on benefit plan administrative functions dependent on telephone usage, such as a pharmacy's verification of eligibility for prescription benefits or a 401(k) plan participant's voice-activated investment elections. Other Y2K problems may arise. Benefit plan administration is frequently out- sourced to third-party administrators. While these TPA's may or may not themselves be plan fiduciaries, the plan sponsor retains ultimate responsibility for plan administration. Accordingly, Y2K noncompliance by TPA's raises fiduciary issues for the plan sponsor.

The investment of employee benefit plan assets also has Y2K implications. Plan fiduciaries are responsible for reimbursing the plan for losses resulting from, among other things, imprudent investment decisions. If a plan's assets are heavily concentrated in entities that suffer losses as a result of Y2K problems, the prudence of the fiduciary's investment judgment may be questioned.

Plan administrators bear compliance burden

Under Title I of the Employee Retirement Income Security Act, fiduciaries are responsible for the operation and administration of benefit plans and must understand the potential implications of Y2K on the plan. Accordingly, they must determine the best course of action to take and carry out a program designed to minimize any adverse impact. The Department of Labor has authority for interpreting and enforcing ERISA through the Pension and Welfare Benefit Administration. Recently, the DOL issued two statements clearly expressing its position with respect to Y2K issues. The first emphasized that plan administrators are responsible for addressing Y2K issues and that while service providers may have legal responsibility under existing contracts to participate in solving the problem, the ultimate responsibility for Y2K compliance falls with the plan administrator. The second statement reaffirmed the warning to plan administrators that they have a fiduciary responsibility to address the Y2K problem and announced a posting on the PWBA web site with the most frequently asked Y2K questions and answers. See "Fiduciary-Related Questions and Answers About the Year 2000 (Y2K) Computer Problem," available at http://http://www.dol.gov/pwba/welcome.html.

In the Spring of 1998, S. 2000 was introduced in the Senate to ensure that "businesses, financial markets and the federal government are taking adequate steps to resolve the year 2000 computer problem." Among other things, the bill would require every fiduciary to consider the implications of Y2K with respect to investment and trading of plan assets. It has been roundly criticized as disruptive, ill-conceived and unfair to employers.

While some fiduciaries have protection through liability insurance, few policies directly address the Y2K issue, and most carriers have adopted a wait and see approach. However, most insurers likely will attempt to exclude Y2K losses under various theories.

Preventive Y2K compliance strategies for plan sponsors

In anticipation of potential Y2K problems, employers that are employee benefit plan sponsors should consider the following preventive strategies:

1. Prepare an inventory and an assessment for Y2K compliance of all internal and external benefit computing systems.
   
2. Review all benefit plans to identify potential Y2K problem areas.
   
3. Determine whether outside technical assistance is required.
   
4. Test all systems for Y2K compliance, including any independent company technology with which the benefit computing systems interact (payroll, for example).
   
5. Upgrade or replace any system as necessary.
   
6. Test all systems after revisions are made to ensure that the interface and exchange of data with outside vendors (i.e, TPA's) are still compatible.
   
7. Review plan documents to determine whether the cost of Y2K compliance can be charged to the plan as a reasonable and necessary administrative expense.
   
8. Clearly document all steps taken to address the ~Y2K problem, keeping in mind that these documents may discoverable in a litigation.
   

As noted above, the ultimate responsibility for outside service providers Y2K compliance rests with the plan fiduciary. To address these issues, consider the following:

1. Determine which service providers are maintaining or processing benefits data and sharing data-dependent information with the plan sponsor's computer systems.
   
2. Review all contracts with service providers, paying particular attention to representations, warranties or indemnification provisions that implicate Y2K, disclaimers, cost allocations and confidentiality provisions.
   
3. Prepare a written questionnaire and distribute it to all service providers identified above inquiring as to their Y2K readiness. The plan sponsor should seek written certification from each 'service provider that it is Y2K compliant. Written responses that thoroughly address the questions raised should be required.
   
4. Benefits, information systems, human resources and legal staff should review the responses submitted to determine if answers are satisfactory.
   
5. Follow-ups and all other communication should either be done in writing or documented internally.
   
6. The information technology personnel of the sponsor and the vendor should ensure their systems are compatible both before and after the year 2000.
   
7. If service to produce satisfactory assurance of Y2K compliance or if timely progress is not made, the plan fiduciary should explore alternative service providers who are Y2K compliant. Any contract with such service provider should include warranties and representations concerning both the Y2K compliance of the service provider and similar provisions with respect to the interface with the plan sponsor's information technology.
   
8. Review Contracts with service providers to determine who is responsible for paying for Y2K compliance.
   

In addition to these strategies for in-house and outside Y2K compliance, plan administrators and sponsors are urged to carefully review their fiduciary liability insurance policies for Y2K related coverage. To the extent the policy does not address this, the insurer should be contacted for clarification. If coverage will not be available, alternative insurers should be explored, as some carriers are offering to expressly cover Y2K risks for an additional premium. Another alternative would be to request a premium reduction in exchange for an express Y2K exclusion and subsequently to use those savings to fund a policy expressly covering Y2K risks.

For additional information on employee benefit plans Y2K compliance, you may contact Michael Jacobster of the Jackson Lewis Benefits Group, at (212) 697-8200.