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DOL Home > OALJ > ERISA > USDOL, PWBA v. Bakery & Confectionery Workers Local 125 Health & Welfare Trust Fund, 1994-RIS-48 (ALJ Apr. 12, 1995)

USDOL/OALJ Reporter USDOL, PWBA v. Bakery & Confectionery Workers Local 125 Health & Welfare Trust Fund, 1994-RIS-48 (ALJ Apr. 12, 1995)

U.S. Department of Labor Office of Administrative Law Judges

211 Main Street, Suite 600

San Francisco, CA 94105

DATE: APR 12 1995

CASE NO. 94-RIS-48

In the Matter of

U.S. DEPARTMENT OF LABOR,

PENSION AND WELFARE BENEFITS

ADMINISTRATION,

Complainant

v.

BAKERY AND CONFECTIONERY WORKERS

LOCAL 125 HEALTH AND WELFARE

TRUST FUND,

Respondent

DECISION AND ORDER This case involves a civil penalty that complainant, the U.S. Department of Labor, Pension and Welfare Benefits Administration ("PWBA"), assessed against respondent, Plan Administrator, Board of Trustees of the Bakery and Confectionery Workers Local 125 Health and Welfare Fund ("the Plan"), for failure to timely correct deficiencies and file an acceptable annual report for the plan year ending June 30, 1991, as required by the Employee Retirement Income Security Act of 1974 ("ERISA" or "the Act"), as amended, 29 U.S.C. §§ 1001, et seq.

On March 14, 1995, a hearing was held where the parties were afforded a full opportunity to present evidence and argument as provided by the Act and the applicable regulations. Ronald D. Allen, Chief, PWBA, Division of Reporting Compliance, and arcus Aron, Senior Staff Accountant, PWBA, Division of Accounting Services testified for complainant. Respondent appeared through its duly authorized representative Alexander Miller of Hemming Morse, the Plan's accountant.1

The issues presented for determination in this case are (1) whether respondent failed to comply with ERISA section 101(b)(4) and 104(a)(1)(A), 29 U.S.C. §§ 1021(b)(4) and 1024(a)(1)(A), and regulations 29 C.F.R. §§ 2520.103-1 and 2520.104a-5 issued thereunder, by its failure to timely correct deficiencies and file an acceptable annual report for plan year ending June 30, 1991; and (2) whether PWBA assessed a penalty against respondent in an arbitrary and capricious manner based on respondent's actions and the entire compliance record in this case.

[Page 2] ERISA is a comprehensive statute adopted by Congress after careful study of employee benefit plans. Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 510 (1981). Its provisions are remedial in nature and were designed to carry out the vitally important purpose of protecting those plans. Brink v. DaLesio, 667 F.2d 420, 427 (4th Cir. 1981). See Barrowclough v. Kidder Peabody & Co., 752 F.2d 923, 929 (3rd Cir. 1985); Eaves v. Penn, 587 F.2d 453, 457 (10th Cir. 1978); ERISA section 2, 29 U.S.C. § 1001. Among the means employed to protect employee benefit plans are ERISA's extensive reporting and disclosure provisions. The Act requires that plans file annual reports which may be required to include financial statements, and a plan audit with an opinion by an independent qualified public accountant ("IQPA"). These financial disclosures are essential devices to achieve the disclosure and enforcement purposes of the Act.2 The annual reports are the principal source of information and data available to the Secretary of Labor for the over 1 million plans that the Secretary is charged with regulating under ERISA. These plans cover an estimated 60 million participants and involve assets in excess of $1.5 trillion. The annual reports are also the primary means by which participants, beneficiaries, and the general public monitor the operations of these plans.

At the hearing Mr. Allen described the statutory provisions which govern the reporting and disclosure requirements for employee benefit plans. The following is a summary of Mr. Allen's testimony. Under ERISA sections 101 and 104, 29 U.S.C. §§ 1021 and 1024, the plan administrator is responsible for ensuring that the annual reports are properly completed and timely filed. Section 104 of ERISA, 29 U.S.C. § 1024, sets forth in detail what the annual report should contain. These statutory requirements include instructions relating to form as well as content.

ERISA section 104(a)(4), 29 U.S.C. § 1024(a)(4), authorizes the Secretary to reject annual reports that do not comply with the statutory requirements of ERISA section 103.3 ERISA section 104(a)(5), 29 U.S.C. § 1024(a)(5), provides that if the Secretary rejects an annual report and an acceptable report is not filed within 45 days of the rejection, the Secretary may, among other things, retain an IQPA to perform the required audit and report, bring an action for appropriate legal or equitable relief, or take other action authorized by Title I of ERISA. See ERISA section 104(a)(5), 29 U.S.C. § 1024 (a)(5).

In 1987, Congress amended ERISA by adding section 502(c)(2), 29 U.S.C. § 1132(c)(2), which section gives PWBA discretionary authority to assess a penalty on the administrator of an employee benefit plan for filing late or defective annual reports.4 This new provision was intended to give PWBA a mechanism to enforce the reporting and disclosure provisions of the Act.

Pursuant to authority granted in ERISA section 505, 29 U.S.C. § 1135, the Secretary promulgated regulations which set forth the procedures governing the assessment of civil penalties under ERISA section 502(c)(2). See 29 C.F.R. § 2560.502c-2. At the hearing, Mr. Allen also described the regulatory provisions that govern the reporting and disclosure requirements. Briefly summarized, the regulations provide for the following adjudicatory process. PWBA triggers an enforcement action by sending a plan administrator a Notice of Rejection. The Notice of Rejection must explain the reasons why the filing is being rejected, and it informs the plan administrator that he has a 45 day penalty-free period to submit an acceptable annual report correcting the deficiencies identified in the Notice of Rejection. r. Allen stated that the 45 day penalty-free period is set by statute and the Agency has no discretion to give extensions. If a corrected filing is not submitted within the grace period, PWBA sends the plan administrator a Notice of Intent to Assess a Penalty. The Notice of Intent includes the amount of the potential penalty and informs the plan administrator that he may respond with a statement of reasonable cause explaining why his filing was deficient. PWBA then issues a Notice of Determination assessing a final penalty after considering the entire compliance record in this case, including the plan administrator's statement of reasonable cause.

[Page 3] Mr. Allen also testified that the Secretary of Labor has established a penalty level of $150 per day for failure to file a timely, or acceptable IQPA report. He explained that penalties are assessed from the day after the date that a complete report is due to the date on which an acceptable annual report for the fiscal year is filed. Mr. Allen stated that as a policy matter, the penalty for a deficient or late filing of an accountant's report is capped at $50,000.

The following facts are undisputed. On June 11, 1993, PWBA issued a Notice of Rejections to the Plan Administrator of the Bakery and Confectionery Workers Local 125 Health and Welfare Fund notifying the Plan Administrator that the annual report had been rejected. The Notice of Rejection stated that the IQPA report was deficient because it contained:

a scope limitation other than that provided for in Department of Labor regulation 29 C.F.R. 2520.103-8. As indicated in the IQPA report, the Fund did not conduct periodic audits of contributing employers' payroll records, nor did the scope of their engagement include such tests. Consequently, the amounts reported as employer contributions are limited to those amounts voluntarily reported by contributing employers to the Fund manager.

Accordingly, the plan has not had an audit as required by ERISA section 103(a)(3)(A).

Joint Exhibit-2, (hereafter "JX- ").

The Notice of Rejection further informed respondent that in order to avoid a possible civil penalty, a corrected annual report had to be filed within 45 days. Respondent did not file an acceptable annual report within the 45 day penalty-free period and he did not communicate with PWBA during this time.

On August 20, 1993, PWBA sent respondent a Notice of Intent to Assess a Penalty. IX-

3. The Notice of Intent informed respondent that PWBA intended to assess a $50,000 penalty against respondent for failure to submit a corrected filing with an acceptable IQPA report within the 45 day penalty-free period. Respondent was also informed that he had 30 days to file a written statement setting forth the reasons why he had failed to file an acceptable annual report for the plan year ending June 30, 1991.

On August 31, 1993, respondent filed a statement of reasonable cause and a corrected annual report that included an acceptable IQPA report. Respondent's statement of reasonable cause explained that:

[d]ue to the nature of the deficiency it was impossible to implement and complete the required compliance audits within the requested 45 day period. The above mentioned Fund has responded to your notice and we respectively request that the penalty be abated due to the above stated circumstances.

JX-4.

[Page 4] On February 25, 1994, PWBA sent respondent a Notice of Determination notifying respondent that in consideration of respondent's statement of reasonable cause and because an acceptable annual report was now filed, it was waiving 90% of the $50,000 proposed penalty. The Department, however, further informed respondent that it had determined there was no reasonable cause to waive the remaining $5,000 penalty because respondent's statement of reasonable cause provided no explanation for why the filing was deficient in the first place and because the Department received no response to its Notice of Rejection. JX-5.

At the hearing, Mr. Miller argued that the civil penalty should be abated further because the Plan Administrator filed a corrected IQPA report as soon as it was reasonably feasible to do so. He stated that, in order to cure the deficiency identified by PWBA in the Notice of Rejection, the Plan had to conduct employer payroll audits, and that it was impossible to complete that task within the 45 day penalty-free period. He explained that conducting employer audits were both time consuming and expensive because it required that the accountant go to the employers' workplaces and review their records. He also argued that under the circumstances of this Plan employer audits were not cost-effective because, unlike other multi-employer welfare plans that base their contribution levels on the number of hours employees work, this Plan charges a flat rate per employee which makes tracking contributions very simple and subject to less abuse by contributing employers. Mr. Miller stated that because a flat fee was charged by this Plan, he personally did not believe the qualification in the IQPA was material, but was forced to render a qualified opinion under the professional standards governing audits, specifically Statement on Auditing Standards No. 58 ("SAS No. 58"), which is published by the American Institute of Certified Public Accountants. JX-7.

In further support of his position that the employer audits were not cost-effective for this Plan, Mr. Miller introduced evidence of the result of Hemming Morse's audit of contributing employer's payroll records. JX-10. The evidence showed that Hemming Morse conducted employer audits covering a two year period and that it reviewed 33% percent of the participating employers representing 76% of the total number of participants. JX-10. Mr. Miller testified that the employer audits revealed that during the two year period examined, Hemming Morse found that employer contributions were under-reported by a total of $24,854, and over-reported by $9,514. IX-10. He testified, that the net result of the employer audits revealed that over a two year period a total of $15,340 went unreported. The Plan, on the other hand, paid his firm $21,000 to conduct the employer audits. JX-10. He argued that the payroll audits resulted in a net loss to the Plans of $5,660 because of the fees the Plan paid Hemming Morse to conduct the audits.

Mr. Miller, nonetheless, conceded that Hemming orse had filed a qualified IQPA, based on the fact that the Plan Administrator failed to keep records which were material to the accountant's ability to render an unqualified opinion. Mr. Miller also conceded that he was not alleging that PWBA's process was deficient or that the Agency acted outside the scope of its authority.

Mr. Aron explained that SAS No. 58 only instructs accountants on the specific language an auditor must include in his report once the auditor determines incomplete records exist to render an unqualified opinion. Mr. Mon further explained that a qualified opinion by an auditor by definition means that the auditor judged that the missing or incomplete records were material. Mr. Aron testified that Hemming Morse determined that insufficient records were available to render an unqualified opinion with respect to the accurate collection of employer contributions. Mr. Aron added that, therefore, the IQPA was

[Page 5] unable to conduct an audit in accordance with generally acceptable auditing standards as required by ERISA section 103)a)(3)(A), 29 U.S.C. § 1023(a)(3)(A). He noted that the 1990 IQPA report was qualified because it stated:

[t]he Fund did not conduct periodic random audits of contributing employers' payroll records, nor did the scope of our engagement include such tests. Accordingly, amounts reported as employer contributions are limited to those amounts voluntarily reported by contributing employers to the Fund Manager as described in Note 2B of the financial statements.

In our opinions, except for the effects of such adjustments, if any, as might have been determined to be necessary had periodic audits of contributing employers' payroll records been conducted, the financial statements referred to above present fairly, in all material respects, the net assets of the [Plan]....

JX-1 (emphasis added).

Mr. Axon also testified that, under limited exceptions set forth in ERISA section 103(a)(1)(A), 29 U.S.C. § 1023(a)(1)(A), and 29 C.F.R. 2520.103-8, a plan may file an acceptable annual report that includes a qualified IQPA report, but he testified that the qualification in the report at issue in this case did not fall within the exceptions.

The PWBA has the burden of demonstrating by substantial evidence that a penalty was properly assessed. Substantial evidence has been defined as "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Consolo v. Federal Maritime Comm'n., 383 U.S. 607, 619 (1965), citing Consolidated Edison Co. v. Labor Board, 305 U.S. 197, 229 (1938). "This is something less than the weight of the evidence, and the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's findings from being supported by substantial evidence. [Citation omitted]." Id. at 620.

ERISA section 104(a)(4), 29 U.S.C. section 1024(a)(4), in part, provides that:

[t]he Secretary may reject any filing under this section---

(B) if he determines that there is any material qualification by an accountant or actuary contained in an opinion submitted pursuant to section 103(a)(3)(A) or section 103(a)(4)(B).

It is undisputed that the IQPA report for plan year ending June 30, 1991 contained a material qualification. That the expressed qualification was material is reflected by the auditor's inability to render an unqualified opinion. It is also undisputed that the scope limitation in the IQPA report did not fail within one of the narrow exceptions set forth in 29 C.F.R. 2520.103-8.

The documentary record in this case demonstrates that PWBA had a more than adequate basis under the substantial evidence standard to reject the Plan's annual report for plan year ending June 30, 1991. PWBA's Notice of Rejection advised respondent that the annual report was rejected because the IQPA report contained a scope limitation other than that provided for in Department of Labor regulations. Accordingly, the prima facie documentary record in this matter demonstrates that substantial evidence exists showing that the annual report was deficient and that PWBA was fully justified in rejecting it.

[Page 6] Upon receipt of the Notice of Rejection dated June 11, 1993, respondent had a 45 day penalty-free period within which to file a corrected annual report. The record shows that respondent did not file an acceptable annual report until August 31, 1993, 79 days after he received the Notice of Rejection. Under these facts, respondent is not entitled to a complete abatement of all penalties because an acceptable annual report was not filed within the 45 day penalty-free period.

On August 31, 1993, respondent submitted a statement of reasonable cause and an acceptable annual report. The reasonable cause statement explained why respondent was unable to file an annual report correcting the deficiency identified by PWBA within the 45 day penalty free period. Respondent's statement of reasonable cause did not provide any explanation as to why the original filing was deficient.

Upon receipt of respondent's statement of reasonable cause, PWBA decided to waive $45,000 of the penalty, representing a 90% abatement, because an acceptable IQPA report was filed. PWBA found no reasonable cause to waive the remaining ten percent (10%) of the assessed penalty. The Notice of Determination informed respondent that the failure to initially file an acceptable IQPA report did not constitute reasonable cause for a 100% abatement of the penalty. It is well within PWBA's discretion to regard the plan administrator's initial failure to file an acceptable IQPA report as insufficient grounds to warrant full abatement of all penalties. Accordingly, it is found that PWBA has demonstrated by substantial evidence that a penalty was properly assessed.

It must now determine whether PWBA abused its discretion by assessing the penalty in an arbitrary or capricious manner. The $5,000 penalty assessed represents ten percent (10%) of the $50,000 penalty initially calculated. The final penalty assessed is not an unjustifiable, excessive, or unconscionable amount, especially in view of the statutory authority to assess penalties of up to $1,000 per day. Moreover, the Agency has an established policy that a Plan Administrator will be fined at the rate of $150 per day for filings submitted with missing or deficient accountant's reports. The Plan Administrator in this case was fined based on the established per diem rate for missing or deficient accountant's reports. Respondent has presented no evidence that the Agency acted arbitrarily and capriciously in assessing this penalty, and in fact testified the he was not making any such allegations. Under these facts, respondent cannot demonstrate that PWBA acted in an arbitrary, capricious or unreasonable manner regarding either the opportunities provided to the respondent to correct its filing, or the basis for PWBA's determination to assess a $5,000 penalty.

PWBA has demonstrated that there was substantial evidence to justify the imposition of a penalty in this case, and that PWBA did not abuse its discretion in assessing a ten percent (10%) penalty. Accordingly, it is found that the $5,000 penalty the Agency assessed against respondent was properly assessed, and respondent is ordered to pay the penalty within 30 days from the date of this order.

ALEXANDER KARST

Administrative Law Judge

San Francisco, CA

AK:mj

[ENDNOTES] 1 At the hearing, r. Miller testified under oath that the Board of Trustees of the Bakery and Confectionery Local 125 Health and Welfare Fund had voted at a meeting of the Board of Trustees to allow Mr. Miller to speak on their behalf at the March 14, 1995 hearing.

2 See Report No. 93-127 To Accompany S.4, April 18, 1973, pp. 27-28, reprinted in 3 U.S. Cong. & Adm. News 1974, pp. 4863-64.

3 ERISA section 104(a)(4) provides that:

(4) The Secretary may reject any filing under this section -

(A) if he determines that such filing is incomplete for purposes of this part; or

(B) if he determines that there is any material qualification by an accountant or actuary contained in an opinion submitted pursuant to section 103(a)(3)(A) or section 103(a)(4)(B).

4 ERISA §502(c)(2) provides that:

The Secretary may assess a civil penalty against any plan administrator of up to $1,000 a day from the date of such plan administrator's failure or refusal to file the annual report required to be filed with the Secretary under section 101(b)(4). For purposes of this paragraph, an annual report that has been rejected under section 104(a)(4) for failure to provide material information shall not be treated as having been filed with the Secretary.

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