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DOL Home > OALJ > ERISA > USDOL, PWBA v. USAirways, Inc., 1993-RIS-4 (ALJ June 9, 2000)
USDOL/OALJ Reporter USDOL, PWBA v. USAirways, Inc., 1993-RIS-4 (ALJ June 9, 2000)
U.S. Department of Labor Office of Administrative Law Judges
800 K Street, NW, Suite 400-N
Washington, DC 20001-8002
Date Issued: June 9, 2000 OALJ Case No: 1993-RIS-4
In the Matter of:
U.S. DEPARTMENT OF LABOR,
PENSION AND WELFARE BENEFITS
ADMINISTRATION,
Complainant
v.
USAIRWAYS, INC.,
Respondent
Appearances: Gail A. Perry, Esquire
Office of the Solicitor, U.S. Dept. of Labor
for Complainant
Peter A. Greene, Esquire
Thompson, Hine and Flory
for Respondent
Before: John M. Vittone, Chief Administrative Law Judge
DECISION AND ORDER This case arises under 29 C.F.R. Parts 2520, 2560, and 2570, which implement sections 502 and 505 of the Employee Retirement Income Security Act of 1974 (commonly known as ERISA; hereinafter "the Act"), 29 U.S.C. §§ 1132 and 1135, and the Secretary of Labor's Order 1-87, 52 Fed. Reg. 13, 139 (1987). The implementing regulations specifically at issue in this proceeding are published at 29 C.F.R. Part 2520, the rules of reporting and disclosure, and at 29 C.F.R. Part 2570, the procedures for assessment of civil penalties.
I. Statement of the Case
On January 1, 1985 the pension plans for both Piedmont Aviation, Inc. and USAirways, Inc.1 ("Respondent") became effective.2 (U-1; U-3). These plans were merged into one plan beginning September 5, 1989. (U-4). No break in coverage or interruption in accruals resulted from the merger of the plans. (U-2; U-4). Further, Respondent alleges no "short plan year" was created. Respondent filed an annual report for each of the plans on October 15, 1990. These reports were timely filed and covered the plan years ending on December 31, 1989. (J-2; J-4). Each report included the same independent qualified public accountant's report ("IQPA") for the merged assets and liabilities for the 1989 plan year for the merged plan.
[Page 2] The reports were first submitted to the Internal Revenue Service ("IRS") as required by the Act. In reviewing these reports, the IRS requested clarification of a number of issues. Of relevancy to this matter, the IRS specifically indicated that Respondent had failed to attach an IQPA for the Piedmont plan. (J-8). In its reply, Respondent admitted that the Piedmont plan was not exempt from the requirement of an IQPA. However, as the assets from the Piedmont plan were merged into the assets of the merged plan, it was Respondent's position that the single IQPA for the merged plan fulfilled this requirement, and thus included a copy of that IQPA with the report. (J-10). The IRS then forwarded these reports to the U.S. Department of Labor, Pension and Welfare Benefits Administration ("PWBA" or "Complainants").
PWBA rejected the filing pursuant to the Act on January 14, 1992. Specifically, PWBA found that Respondent had failed to attach an IQPA to the report for the Piedmont plan. (J-15). Again, Respondents replied that as the assets for the Piedmont plan were now included in the IQPA done for the merged plan, it had in fact attached an IQPA. Respondents attached another copy of this IQPA to be included with the report filed for the Piedmont plan (J-16). The next correspondence from PWBA was a notice of intent to assess a penalty in the amount of $50,000 pursuant to Section 502(c)(2) of the Act dated March 11, 1992.3 The notice stated again that no IQPA had been included as the report submitted was not an IQPA of the Piedmont plan itself. (J-17). After receiving the notice, Respondent contacted the PWBA by telephone on April 8, 1992. A telephone contact memorandum from the Division of Reporting Compliance indicates that Respondent was told that PWBA expected a separate IQPA for the Piedmont plan from January 1, 1989, until the date of the merger, September 1, 1989.4 (J-18).
Respondent filed a Statement of Fact and Reasonable Cause why Penalty Should not be Assessed on April 10, 1992. In this statement, Respondent detailed the fact that the Piedmont plan had been merged into the Respondent's plan, not terminated, and that the IQPA for the merged plan thus necessarily covered the assets for the Piedmont plan. Respondent further indicated the absence of specific regulations regarding merged plans and the acceptance of the explanation by the IRS contributed to its belief that filing the IQPA for the merged plan was sufficient to cover the Piedmont plan as well. Respondent thus asked that the proposed penalty not be assessed. (J-19). Respondent further stated that the filing of one IQPA for the merged plan is consistent with the Act and with "established industry practice" and that PWBA had consistently accepted similar reports for merged plans. Respondent thus felt that it had shown good faith in attempting to file a timely and complete report for both plans. (J-20).
[Page 3] PWBA rejected this statement of reasonable cause on November 24, 1992, as the "sole reasonable cause [is Respondent's] incorrect interpretation of the reporting requirements" and "the plan administrator appears to reject the Department's correct interpretation of the reporting requirements." Further, the rejection noted that Respondent had still failed to attach the separate IQPA for the Piedmont plan. Accordingly, PWBA assessed a $50,000 penalty against Respondent.5 (J-21).
Respondent submitted the requested report on December 30, 1992. (J-22). Respondent was again informed by the PWBA on May 5, 1993, that the report was deficient, as it ended on August 31, 1989 and showed that the Piedmont plan still had assets. The PWBA thus requested another report ending on September 1, 1989, the date of transfer, which would demonstrate that the Piedmont plan no longer contained any assets. (J-23). These changes were made and submitted as a draft to the PWBA on June 22, 1993. The draft was not signed. (J-24). An executed copy was submitted on July 13, 1993. (J-25).
II. Procedural History
After the Regional Administrator issued the Notice of Assessment on November 24, 1992, assessing a total of $50,000.00 in civil penalties against Respondent for violations under sections 406 and 502 of the Act. Respondents subsequently requested a hearing whereupon the case was referred to this Office.
The claim was originally assigned to Administrative Law Judge Lawrence Brenner. A hearing was scheduled for June 2, 1993. Prior to the hearing and after a request for a pre-hearing conference, a continuance was granted so that the parties could be referred to a settlement judge. This attempt to reach an amicable resolution was unsuccessful. Thus, on July 14, 1993, Respondent renewed its request for a pre-hearing conference. This conference was held on August 6, 1993.
On October 13, 1993, Respondent requested that Judge Brenner render a decision on the record. This request was granted. Since that time, Judge Brenner has retired from the Office. On June 22, 1998, this Office received a request from Respondent that the matter be set for a hearing and reassigned to another judge. The case was reassigned to the undersigned, however, the request for a hearing was denied as the parties had previously agreed to have the matter determined on the record.
The five year delay in reassigning the case cannot pass unnoted. This Office continually monitors "overage" cases; however, these procedures clearly failed in the present matter, as this case escaped notice until the parties informed this Office of the error. No excuse can justify this delay, and the undersigned will not exacerbate the issue by evading or ignoring the mistake. Accordingly, this Office sincerely apologizes to all parties for any inconvenience this delay may have caused.
[Page 4] III. Discussion
In 1974, Congress passed ERISA as a comprehensive federal law covering nearly all employee benefits plans. Congress' intent was to ensure that benefits promised by employers to their employees would in fact be paid. The ERISA provisions are a mix of both labor and tax law. In enacting this law, Congress provided for significant reporting duties on the part of plan administrators, in order to protect the pecuniary interests of the people covered under these plans. 29 U.S.C. § 1001(1999).
As such, ERISA requires administrators of employee benefits plans to file an annual report for each employee benefit plan covered including an IQPA for the plan year. 29 U.S.C. § 1023(1999). ERISA further requires administrators of plans that are "winding up ... affairs" to file terminal reports that may be required by the Secretary of Labor "in accordance with regulations promulgated by the Secretary." 29 U.S.C. § 1021(1999).
In order to determine whether Complainant's assessment of a fine against Respondent was proper, it must first be decided whether a short plan year was in fact created by the merger of the two plans, and whether Respondent should have been required to file a separate IQPA for the Piedmont plan. Once these issues are resolved, it can then be determined if any noncompliance was willful or to the degree as to require the maximum sanction.
A. Short Plan Year
According to ERISA, a plan year is "the calendar, policy, or fiscal year on which the records of the plan are kept." 29 U.S.C. § 1002(39) (1999). Nothing in the statute or regulation expressly defines a "short plan year." Despite having no express definitions, the instructions of the forms used to file these reports give a clear indication that a "short plan year" is a plan year which ended prior to its normal year end date. (J-1).
In the present case, the plan years of both of the pre-merger plans were based on the calendar year. Further, the merged plan has continued to use the calendar year under the terms of the original USAir plan. Respondent argues that, as the schedule for the plan years remained the same, the Piedmont plan "continued" on as the merged plan, and thus no short year was created by the September 1, 1989 merger.6
[Page 5] Respondent's characterization of the plan as a merger of two plans to become a new plan in which both plans continued is misleading, however. The two plans, were not merged together to become a new plan; rather, the USAir plan subsumed the whole of the Piedmont plan. This is illustrated by the amendment to the Piedmont plan which states:
Merger into USAir Plan: ... the [Piedmont] plan is merged into the [USAir Plan]. ... All liabilities with respect to participants, former participants, and their beneficiaries who become covered under the USAir Plan as of the merger date together with the assets of the plan are made a part of the USAir Plan and the plan fund[.]
(U-2).
The description clearly indicates that the Piedmont plan ceased to exist after the merger, leaving instead only the USAir plan. Further, the tax regulations relied on by Respondent state the same, that a merger of plans leaves a single plan, which, in this case is the USAir plan. 26 C.F.R. § 1.414(1)-1(b)(2). Accordingly, the merger did create a short plan year in regards to the Piedmont plan.
B. Requirement of Separate IQPA
The parties do not dispute that the statute and regulations require that each plan report should include an IQPA for the year. The dispute in this instance is whether the IQPA done on the USAir plan, including the assumption of the Piedmont plan's assets, is sufficient to meet this requirement. Specifically, Respondent argues that, since the IQPA of the merged plan reflected the assets of the Piedmont plan after the merger, this IQPA was sufficient to satisfy the reporting requirements.
ERISA provides in regard to the IQPA:
[T]he administrator of an employee benefit plan shall engage, on behalf of all plan participants, an independent qualified public accountant, who shall conduct such an examination of any financial statements of the plan, and of other books and records of the plan, as the accountant may deem necessary to enable the accountant to form an opinion as to whether the financial statements and schedules required to be included in the annual reports by subsection (b) of this section are presented fairly in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. ... The independent qualified public accountant shall also offer his opinion as to whether the separate schedules specified in subsection (b)(3) of this section and the summary material required under section 1024(b)(3) of this title present fairly, and in all material respects the information contained therein when considered in conjunction with the financial statements taken as a whole. The opinion by the independent qualified public accountant shall be made a part of the annual report.
29 U.S.C. § 1023(a)(3).
[Page 6] Respondent alleges that this language does not expressly state that a separate report for each plan prior to merger is necessary, nor does the corresponding regulation. Accordingly, the IQPA for a merged plan should be sufficient to satisfy the requirement. Respondent does have a colorable argument, as the IQPA does at least show the ultimate resolution of the assets of the merged plan. However, in reviewing the statute above, it is clear that such express language is not necessary, as the language demonstrates that a report is needed for each plan in order to verify the assets of the fund over the entire year. The regulations contain similar language. The statute and regulations clearly presume that each report for each plan will have its own IQPA for the plan on which the report is filed.
Under Respondents interpretation, the portion of the plan year prior to the merger would be left unaccounted. Such an interpretation could lead to situations where fraud, mismanagement or other breach of fiduciary duty could go undetected, circumventing Congress' intent in passing this legislation. Accordingly, where one fund has been completely absorbed into another plan and ceased existence, a report for the remaining fund is sufficient only for the annual report of that particular fund. The report for the Piedmont fund must thus have its own IQPA so that the entire financial picture of the fund prior to the merger can be assessed. Having no such report attached, Complainant properly rejected Respondent's non-compliant filing.
C. Appropriateness of Penalty Assessment
Having found that Respondent was in non-compliance with the reporting requirements of ERISA, the only remaining issue is whether the assessment of a fifty thousand dollar penalty was appropriate. ERISA invests broad discretion in Complainant in determining the extent of the penalty to be assessed for non-compliance. The Act states that Complainant "may assess a civil penalty against any plan administrator of up to ,000 a day from the date of such plan administrator's failure or refusal to file the annual report required to be filed[.]" 29 U.S.C. § 1132(c)(2). The statute itself does not discuss the correct application of this penalty. However, the Conference Report states that the language is added "with the clarification that the penalty is to reflect the materiality of the failure." 4 U.S.C.C.A.N. 1987, 2313-1635.
After this amendment, Complainant promulgated regulations pertaining to the assessment of fines. The final rule was published on June 26, 1989. 54 FR 26894. This final rule provided that in assessing these penalties, Complainant will "tak[e] into consideration the degree or willfulness of the failure to file the annual report." 29 C.F.R. § 2560.502c- 2(b). The regulations further provide a process to be followed in the assessment of these penalties.
[Page 7] First, Complainant is required to serve written notice of intent to assess a penalty ("NOI"). This NOI must indicate "the amount of such penalty, the period to which the penalty applies, and the reason(s) for the penalty." 29 C.F.R. § 2560.502c- 2(c). Next, the regulations allow the plan administrators thirty days in which to file a written showing of reasonable cause as to why the penalty should not be assessed as calculated. 29 C.F.R. § 2560.502c-2(e). After this period, Complainant is to issue a notice of the determination on the statement of reasonable cause ("NOD"), in which Complainant may either completely waive the penalty, partially waive the penalty, or assess the full amount of the penalty against the plan administrators. 29 C.F.R. § 2560.502c-2(g).
Generally, an administrative law judge will not disallow a penalty assessed by Complainant for failing to timely correct its IQPA unless Complainant has acted in an arbitrary, capricious, or unreasonable manner. U.S. Dept. of Labor, PWBA v. Sociedad Para Assistencia Legal Money Purchase Plan, 1994-RIS-62 (ALJ Mar. 29, 1995). In the present matter, however, arbitrary, capricious, and unreasonable are terms that accurately describe Complainant's penalty assessment.
It is well settled that "[a]gencies are under an obligation to follow their own regulations, procedures, and precedents, or provide a rational explanation for their departures." Nat'l Conservative Political Action Comm. v. Federal Election Commission, 626 F.2d 953, 959 (DC Cir. 1980). In the record in the present case, there is no documentation of an NOI indicating that Complainant ever considered the degree or willfulness of the violation, in direct violation of the regulations. While Complainant may consider the instant case a clear cut example of a violation of such a degree that would require the maximum violation, it is unclear from the record provided how that determination was made, if in fact such a determination was made at all. Specifically, Complainant merely stated that Respondent, having relied on its own incorrect interpretation of the regulations and thus rejecting Complainant's own correct interpretation, was in non-compliance and thus the full penalty must be assessed. No further information was presented to show the degree of the violation or the willfulness of the violation.
Further, it is extremely troubling that the NOD was the first time that Complainant notified Respondent in writing as to the exact reason for the assessment of the penalty. Respondent was first notified of Complainant's rejection of its filing on January 14, 1992. The notice stated that Respondent was not exempt from the requirements detailing the documentation that must be submitted with an annual report and that Respondent had failed to attach an IQPA as required. (J-15). Respondent replied, acknowledging that it was not exempt, but stating that it had included the IQPA with the annual report. (J-16). Again, in the NOI, Complainant simply stated that the penalty was being assessed for failing to include an IQPA with the annual report. (J-18). Only when it officially assessed the penalty in the NOD did it note that the IQPA was in fact deficient, not missing entirely. (J-21).
As discussed above, Complainant is required by its own regulations to notify Respondent in the NOI of "the reason(s) for the penalty." Complainant's NOI failed to do so and actually mislead Respondent as to the cause of the rejection. Such action is not only a direct failure of Complainant to abide by its own regulations, but also raises serious due process concerns. The regulations give a respondent the ability to provide reasonable cause as to why a penalty should not be assessed as delineated in NOI. In order for a respondent to make effective use of this safeguard, the respondent must be reasonably informed as to the nature of the violation. It is thus incumbent upon Complainant to provide a clear, well-reasoned rationale for the rejection so that a respondent understands the violation and is able to respond.
[Page 8] By incorrectly indicating the reason for rejection in the NOI, Complainant deprived Respondent of the protection within its own regulatory system, and thus deprived Respondent of its due process right contained therein. Accordingly, I find that Respondent's penalty assessment was an abuse of discretion. The fine must then be reduced or waived in its entirety.
D. Reduction of Penalty
The circumstances surrounding the deficiency must be reviewed in order to determine what sort of fine, if any, should be imposed. It is true that Respondent relied upon an interpretation that was speculative at best, as the statute clearly calls for one IQPA per plan. As pointed out by Complainant in its brief, failure to include the IQPA for the merged plan for the time prior to the merger is material and potentially harmful, as it could lead to situations where one or both of the merged plans beneficiaries are harmed through transactions that would only be disclosed in an individual IQPA. A fine is thus necessary.
This circumstance is mitigated, however, due to the fact that this violation did occur in the first year of enforcement. Prior to this time, there was no clear guidance as to Complainant's interpretation of this rule in regards to merged plans. Further, Complainant did show good faith by submitting the requested IQPA as soon as it was made clear what the actual deficiency was, and none of the beneficiaries' financial interests were harmed by the deficiency.
Reviewing the above factors, this situation seems analogous to the late filers that were allowed to submit late annual reports for a ,000 fine.7 Complainant, when first starting to follow through in enforcing the filing provisions of ERISA, it provided a "grace period" to non- filers. If a non-filer filed an application during this time, it would only be subjected to a ,000 fine, at least as to the lateness of the filing.8
While Respondent was not eligible for the amnesty program as its report had been rejected, the premise behind the program is equally applicable. These civil penalties represented a change in the law. Parties were not necessarily prepared with how to come into compliance with ERISA in order to avoid these penalties. Complainant was thus concerned with bringing as many employers into compliance as possible, which is why the grace period program was instituted. Similarly, the circumstances surrounding this deficiency justify the imposition of a minimal fine. The benefit plans that had not filed annual reports prior to the grace period were just as a material a violation as Respondents rejected filing which was brought into compliance within the grace period, and were obviously more willful a violation. Accordingly, I find that, considering all of the factors and Complainants inability to follow its regulations, Respondent should have been fined only ,000.00.9
[Page 9] ORDER IT IS ORDERED that the fine imposed upon Complainant, USAirways, Incorporated, is REDUCED from fifty thousand dollars ($50,000.00) to one thousand dollars ( ,000.00).
at Washington, D.C.
JOHN M. VITTONE
Chief Administrative Law Judge
[ENDNOTES] 1Previously known as USAir, Inc.
2The plans will be referred to "the Piedmont plan" and "the USAir plan" respectively. The plan that continued after the merger will be referred to as "the merged plan."
3This amount represents a penalty of $150 per diem for 711 days for a total of $106,650. However, the penalty was assessed at $50,000, the maximum fine Complainant levies for missing or deficient IQPA's.
4This telephone call represents the first time that Respondent had been told that the IQPA itself was deficient, not just missing from the report.
5This letter of rejection and notice of penalty assessment was the first time the Complainant notified Respondent that the submitted IQPA was deficient rather than simply missing.
6Respondent argues that this is "industry practice." However, Respondent failed to produce any evidence or documentation beyond its own self-serving statement to prove this point.
7Fines otherwise could have ranged up to $30,000 per year for these late filings.
8The grace period ran from March 23, 1992 until December 31, 1992. Respondent submitted the requested IQPA and $1000 in fines on December 14, 1992, which, if Respondent had completely failed to file an annual report, would have been sufficient to qualify for this grace period and bring it into compliance. Complainant found that Respondent was not eligible for this program, as its report was rejected, not late, thus exposing Respondent to a different schedule of fines and penalties.
9It is noted that Respondent has already paid a ,000.00 penalty, and thus is paid in full as to the penalties involved in the present case.
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