USDOL, PWBA v. SPALDING AND EVENFLO COMPANIES, INC., 1992-RIS-19 (PWBA Nov. 18, 1994)
Date: Nov. 18, 1994
In the Matter of:
U.S. DEPARTMENT OF LABOR,
PENSION AND WELFARE BENEFITS
ADMINISTRATION,
Complainant/Cross-Appellant
CASE NO. 92-RIS-19
V.
SPALDING AND EVENFLO
COMPANIES, INC.,
Respondent/Appellant
DECISION AND ORDER
This proceeding is on appeal from the United States
Department of Labor, (hereinafter "the Department" or "DOL")
Office of Administrative Law Judges, and arises under Sections 2,
101, 103, 104, 502(c)(2) and 505 of the Employee Retirement
Income Security Act of 1974 (ERISA), as amended (29 U.S.C. Sec.
1001, 1021, 1023, 1024, 1132(c)(2) and 1135), and the
implementing regulations at 29 C.F.R. Sec. 2520.104-44,
2560.502c-2, and 2570.60 - 2570.71.
BACKGROUND
Each of the three welfare plans which are the subject of
this case provided health, dental, life and accidental death and
dismemberment benefits for employees of divisions of Spalding and
Evenflo Companies, Inc., Respondent-Appellant (hereinafter
"Spalding"). The plans were the Spalding and Evenflo Companies,
Inc. -- Plan Code FF, the Spalding Corporation Group Insurance
for Plant, Office and Sales -- Plan AA, and the Spalding and
Evenflo Companies, Inc. - - Plan H.[1] Each of these plans has
in excess of 100 participants.,
The medical plans were paid for by Spalding until July 1,
1988, when employees began making contributions. Life insurance
in the amount of the employee's salary was paid for by Spalding,
and employees had an option of paying for an increase in
benefits.
[PAGE 2]
Employee contributions to the plans for medical benefits,
which began on July 1, 1988, ranged from $12 to $30 per month
depending upon coverage. The plans were funded by Spalding and
administered by Prudential Insurance Company. Employee
contributions to the plans totalled $140,000 in 1988, and
Spalding's contributions totalled approximately $2,700,000.
Audits for 1988 by Deloitte & Touche which were submitted to the
Department on February 25, 1992 showed that the three plans had
combined total assets, including unreimbursed claims, of
$521,000.
In 1988, absent an applicable exemption from ERISA's
reporting requirements, Plans AA, FF and H each required an
annual report containing an opinion of an independent qualified
public accountant based on an audit of the plan because each plan
was funded and covered over 100 employees. The 1988 annual
report for each plan was due on July 31, 1989.
On February 19, 1991, the DOL notified Spalding that the
annual reports filed for 1988 for the three plans were deficient
because these plans were not exempt from the requirements that
plans with 100 or more participants must attach a report of an
independent qualified public accountant, and such reports had not
been attached.
On March 21, 1991, Spalding submitted an amended Form 5500
for each of the plans, containing a report by the accounting firm
of Deloitte & Touche, based on an audit of the bank account which
held the assets of the three plans. On September 23, 1991, the
DOL issued notices of rejection of the amended 1988 annual
reports, because the accountant's report was based on audit of
the trust account containing the combined assets of the three
plans and not for each of the individual plans, and gave notice
that the Secretary of Labor may assess penalties of up to ,000
per day unless revised reports, satisfactory to the Department,
were filed within 45 days.
On December 12, 1991, the DOL issued a Notice of Intent to
Assess a Penalty of $50,000 against each of the three plans[2] .
On January 13, 1992, Spalding filed a Statement of Reasonable
Cause why the penalties should not be assessed, and on February
25, 1992, Spalding filed an independent qualified public
accountant's report for each plan which was based on a separate
audit of the assets of each of the three plans. On April 1,
1992, the DOL issued its Notice of Determination with respect to
reasonable cause, reducing by 25% the total penalty for the
deficient filings of the three plans, from $150,000 to $112,500.
[PAGE 3]
On February 1, 1993, The Honorable Judge E. Earl Thomas,
District Chief Judge, (ALJ), issued a Decision and Order finding
that Spalding was subject to a civil penalty under ERISA Sec.
502(c)(2) for the delayed filing of annual reports pertaining to
the three employee welfare plans for plan year 1988. The ALJ
found that Spalding was not in full compliance with the reporting
requirements of ERISA until 864 days after the reports were due.
Although Spalding argued that it made a good faith effort to
comply, the ALJ found that no satisfactory explanation was
provided as to why the effort to do the required audits was not
attempted earlier.
The ALJ upheld the DOL's utilization of $150 per day for its
calculation of the penalty, its use of $50,000 per plan cap, and
the granting of a 25% reduction of penalty based on a
determination of reasonable cause to waive part of the penalty
with respect to the filing of the 1988 annual reports of the
plans. The ALJ concluded that the three welfare plans were
subject to the independent audit requirement contained in 29
U.S.C. §1023 and were not eligible for the exemption
contained in 29 C.F.R. 2520.104-44(b)(1)(ii). He further
concluded that Spalding could not rely upon the DOL's failure to
challenge prior years' reports as a defense against the
imposition of penalties for the 1988 year, noting that this
proposition has been defeated in too many cases to mention.
Finally, he also concluded that Spalding had no satisfactory
explanation as to why it could not come into full compliance
until 29 months after the reports were originally due. However,
the ALJ noted that Spalding did make an effort to comply and was
in communication with the DOL, concluding that Spalding's was not
an "extremely willful" violation. The ALJ concluded that the
imposition of a penalty from the initial filing date "seems
unreasonable" because Spalding had been filing reports without
auditor's reports for years and the DOL had not issued notices of
violation for earlier years, and because of Spalding's "spirit of
cooperation". Without further explanation, the ALJ used as a
starting point for calculation of the penalty the date on which
the DOL first notified Spalding of the deficiency in the filing
(February 19, 1991) instead of using as a starting point the day
after the date the reports were originally due (August 1, 1989).
This resulted in the subtraction of 568 days from the 864 day
penalty period, resulting in a penalty amount of $44,400 for each
plan. He then reduced that amount by 25%, as the DOL had done,
resulting in total penalties of $99,900 for the three plans.
Spalding appealed the ALJ decision on the grounds that
[PAGE 4]
Spalding is exempt from the audit requirement under ERISA
Technical Release 92-01, that there is no substantial evidence to
support the ALJ's finding that Spalding tried to avoid full
compliance with the annual reporting requirements, and that the
ALJ erred in upholding the penalty because Spalding complied in
good faith with ERISA annual reporting requirements. The DOL
cross-appealed the ALJ decision on grounds that the ALJ
improperly calculated the penalty amount by starting the
computation on the day the Pension and Welfare Benefits
Administration (PWBA) first sent Spalding notice of reporting
deficiencies rather than from the initial filing date, and
asserted that, if the ALJ found liability, as he did, the ALJ
should have deferred to PWBA's reasonable method of calculation
of the applicable penalty amount. The DOL also asserted that, on
the facts of this case, the court had no equitable basis for
substituting its judgement for the DOL in reducing the penalty
amount.
I shall deal with the issues raised in the cross appeals in
turn.
SPALDING'S CONTENTION THAT ERISA TECHNICAL RELEASE 92-01
EXEMPTS
IT FROM ERISA's AUDIT REQUIREMENT
Spalding was required to file a Form 5500 annual report with
respect to each of three welfare benefit plans, known as plan FF,
plan AA, and plan H, for plan year 1988. Spalding filed annual
reports for the three plans on July 31, 1989. The three reports
were materially incomplete under ERISA section 103 if they were
required to include a report of an independent qualified public
accountant (IQPA). Spalding asserts that Technical Release 92-01
provides it an exemption from the trust requirements[3] .
The basis for Spalding's position is twofold: First, it
asserts that T.R. 92-01 applies retroactively, as well as
prospectively, and therefore covers the 1988 plan year. It also
asserts that, while there was a trust in the form of a bank
account holding assets which paid plan benefits, the assets in
the account held company assets, not plan assets, and therefore
the bank account was not a trust maintained in connection with a
plan.
T.R. 92-01, which is a statement of enforcement policy, is
silent as to its effective date. Spalding argues that, once
adopted, it covers prior plan years, as well as prospectively.
The DOL, without explanation, states that T.R. 92-01 "was not in
effect for the 1988 annual reporting year". Both Spalding and
[PAGE 5]
the DOL have misread th e applicability of T.R. 92-01. As a
statement of enforcement policy, it is applicable to all
enforcement actions which the DOL may bring after the date of
adoption, even if it is based, as this one is, on violations
prior to 1992. Indeed, the stated purpose of T.R. 92-01 was to
expand the categories of violations as to which the DOL would not
assert a violation beyond the limited categories contained in
T.R. 88-1. The preamble to T.R. 92-01 makes clear that its
purpose is to relieve plan sponsors from "incurring significant,
and possibly unnecessary, administrative costs and expenses"
pending the issuance of the contemplated exemptions from the
trust requirements. Therefore, it would be illogical to read the
technical release to govern only enforcement actions relating to
plan violations occurring after May 28, 1992, the date of the
release. However, the enforcement action complained of by
Spalding, the DOL's levying of a civil penalty, took place on
April 1, 1992, which was prior to the adoption of T.R. 92-01.
Nothing in T.R. 92-01 indicates that it was meant to invalidate
prior enforcement proceedings. Therefore, T.R. 92-01 is not
available to provide relief.
However, even if T.R. 92-01 were applicable to this
enforcement proceeding, the record below indicates that the
exemption from the IQPA report contained in T.R. 92-01 was not
available for the Spalding plans. The parties appear to agree
that there was a trust fund which contained assets related to the
three plans (see joint stipulations 7 and 9). Spalding's appeal
argues that the plans were unfunded cafeteria plans eligible for
the exemption contained in T.R. 92-01. However, as Spalding
recognizes, a predicate for the availability of the exemption
contained in T.R. 92-01 is that the plan be unfunded. Spalding
contends that the bank account maintained in connection with the
plans at Ohio Citizens Bank was not a trust maintained in
connection with the plans because Spalding asserts that it did
not contain plan assets, but rather company money, as
characterized by the plans' accountants for purposes of
conducting the audits of the plans. However, Spalding misses the
essential point -- once the monies were deposited in a separate
account for the plans pursuant to an "insurance trust agreement"
with Ohio Citizens Bank as trustee, the assets in that account
were plan assets, regardless of whether the monies in the account
were monies derived from employer contributions or employee
contributions. T.R. 92-01 is predicated on the absence of a
trust containing plan assets. Here there was a trust, in which
all three plans had an interest, as Spalding itself recognized,
in filing the Forms 5500s and in the pre-hearing statement filed
with the ALJ (p.18). Therefore, even if T.R. 92-01 were available
[PAGE 6]
to void enforcement actions taken before its promulgation,
Spalding could not satisfy its substantive requirements.
SPALDING'S CONTENTION THAT THERE IS NO SUBSTANTIAL EVIDENCE TO
SUPPORT THE ALJ'S CONCLUSION THAT SPALDING TRIED TO AVOID FULL
COMPLIANCE WITH THE ANNUAL REPORTING REQUIREMENTS.
Spalding contends on appeal that the ALJ did not have
substantial evidence to support his conclusion that Spalding
tried to avoid full compliance with the annual reporting
requirements. This misrepresents the finding of the ALJ, which
was that Spalding did not provide satisfactory evidence as to why
its accountants did not prepare separate plan audits earlier.
The burden, under the regulations, is not that the ALJ find that
Spalding did not proceed in good faith to comply, but rather that
Spalding must demonstrate, to the satisfaction of the ALJ, that
it proceeded in good faith to comply. As the preamble to the
final regulation notes, the Department regulations "substantially
reduce the possibility of a penalty being imposed on an
administrator who demonstrates good faith and diligence in
complying with ERISA's annual reporting requirements" (italics
added). Thus, the issue before the ALJ was whether Spalding,
having been found to have filed a materially deficient statement,
demonstrated to the ALJ that it demonstrated good faith and
diligence in coming into compliance with ERISA's audit
requirements. The evidence before the ALJ fully supports his
conclusion that "there was no satisfactory explanation as to why
this final successful effort by Deloitte & Touche was not
attempted earlier". Among that evidence was the Notices of
Rejection sent to each individual plan in February 1991,
requiring a report of an independent qualified public accountant
as required by 29 C.F.R. 2520.103-1(b), i.e., a report as to the
assets of each plan, and the testimony of the responsible
Spalding official that the plans' accountants were directed to do
an audit of the trust, not of the plans (Hearing Transcript, pp.
161-163). While there is some disagreement between the parties
as to whether the DOL had indicated to Spalding that such an
audit would be appropriate, it was for the ALJ to determine the
credibility of the witnesses and to weigh the evidence before
him. There was more than sufficient evidence before him to
determine that Spalding did not satisfy its burden of showing
good faith and diligence in coming into compliance.
SPALDING'S CONTENTION THAT THE ALJ ERRED IN UPHOLDING THE
PENALTY BECAUSE SPALDING IN GOOD FAITH FULLY COMPLIED WITH
ERISA'S ANNUAL REPORTING REQUIREMENTS
[PAGE 7]
This argument is rejected for the reasons set forth in
response to Spalding's second contention, above. The record
contains more than sufficient evidence to support a conclusion by
the ALJ that Spalding did not make a good faith effort to comply.
Therefore, the evidence amply supports a conclusion that Spalding
failed to satisfy its burden of proving to the court that it made
a good faith effort to comply.
I now turn to the contentions contained in the DOL's cross-
appeal.
THE DOL's CONTENTION THAT THE ALJ IMPROPERLY CALCULATED THE
PENALTY AMOUNT BY STARTING THE COMPUTATION ON THE DAY THE DOL
SENT SPALDING NOTICE OF REPORTING DEFICIENCIES, RATHER THAN ON
THE FILING DATE
By failing to timely file the required IQPA report for each
of the three welfare plans in question, Spalding is subject to a
civil penalty of up to ,000 per day per plan under ERISA Sec.
502(c)(2). The implementing regulations thereunder provide that
the penalty amount shall be "computed from the date of the
administrator's failure or refusal to file the annual report...
continuing up to the date on which an annual report satisfactory
to the Secretary is filed[4] ."
The regulations define the date on which the administrator
failed or refused to file as the "date on which the annual report
was due (determined without regard to any extension for
filing)[5] ." In Spalding's case, the date on which the penalty
calculation must begin is August 1, 1989, the day after the
original July 31, 1989 filing deadline for the Forms 5500s. The
regulations do not provide for deviations from this starting date
for penalty calculations. The regulations do permit a tolling of
time for calculating penalty amounts in situations in which the
plan administrator files a statement of reasonable cause after
receiving notice that the Department intends to assess a penalty,
stating that "a penalty shall not be assessed for any day from
the date the Department serves the administrator with a copy of
[a notice of intent to assess a penalty] until the day after the
Department serves notice on the administrator of its
determination on reasonable cause and its intention to assess a
penalty[6] ."
The regulations require, therefore, that Spalding's penalty
amount be calculated using a figure of 864 days per plan, which
is based on a starting date of August 1, 1989 (the day after the
date on which the annual reports were due) and an ending date of
[PAGE 8]
December 12, 1991 (the date the PWBA issued its Determination of
Reasonable Cause and Notice of Intent to Assess a Penalty).
The regulations adopted by the DOL at 29 C.F.R. 2560.502c-2
to implement the provisions of sections 104(a)(4) , 104(a)(5),
and 502(c)(2) of ERISA are entitled to deference, unless the
implementation exceeds the agency's authority or is unreasonable.
Nowhere in the ALJ's decision or in Spalding's appeal is there
any indication that the DOL's implementing regulations are
unreasonable. The ALJ's decision is totally silent as to the
issue, as is Spalding's appeal, which argues that the ALJ,
pursuant to its denovo authority, could do
whatever it wanted to in assessing a penalty, based on the
evidence before it. This is correct insofar as the ALJ has the
power to try facts denovo. However, in deciding
issues of law, the ALJ is bound by the governing statute and
regulations, except to the extent he finds them to be invalid[7]
. The ALJ's reduction in penalty amount, based on his altering
the starting date for computing the number of days of Spalding's
lateness, goes beyond the ALJ's mandate, absent a showing that
the DOL's implementing regulations exceeded its authority or was
unreasonable. The regulations explicitly provide that the number
of days be computed starting with the day after the date on which
the filing was due. Were I to uphold the ALJ's novel calculation
method, with its starting date fixed as the date on which PWBA
first notified Spalding that its reports were deficient (February
19, 1991), I would be ignoring not only the specific requirements
of the regulations implementing 502(c)(2), but also the
fundamental nature of ERISA's reporting and disclosure
requirements which form the basis for these requirements.
The burden of accurate and complete reporting and disclosure
is on ERISA plan administrators and fiduciaries, who must meet
the requirements of the statute and regulations thereunder. The
date for complying with the annual reporting requirements is the
date that the annual report is due, not the date on which a PWBA
reviewer first notes a failure or deficiency.
To permit the ALJ's calculation of time in non-compliance to
stand would be to shift the burden of compliance with ERISA
reporting and disclosure requirements away from plan
administrators and onto the DOL, by allowing plans to violate the
statute and regulations without being subject to civil penalties
unless and until PWBA notifies them of their violations. This
shift of the burden of compliance from the plan administrator to
the supervising agency is not only insupportable as a matter of
law but illogical as a matter of fundamental policy.
[PAGE 9]
Therefore, as a matter of law, the ALJ could not set aside
the DOL's method of calculating the number of days of
noncompliance.
I now come to the DOL's second contention.
THE DOL's CONTENTION THAT, ON THE FACTS AND CIRCUMSTANCES,
THERE IS NO EQUITABLE BASIS FOR NOT APPLYING PWBA's PENALTY
CALCULATION METHOD
The facts of this case also do not support the Court's non-
application of regulation 29 C.F.R. §2560.502c-2(b)'s
penalty calculation method on equitable grounds. The Court held
that "the imposition of the penalty from the initial filing date
of July 31, 1989 until DOL notified the plan administrator on
February 19, 1991, that the audit reports were required for each
plan, seems unreasonable.". The Court also noted the respondent's
"lack of prior notices of violations."
The Court, by labeling the imposition of the penalty from
the filing date to be "unreasonable", implies that it is not fair
to penalize someone who thinks he is in compliance until he is
put on notice that he is not in compliance. Although on the
surface this appears to be an appealing rationale, it is not
justifiable on the basis of the facts in this case. Spalding had
a 45-day penalty-free grace period provided by the statute to
come into compliance. The 45-day grace period provides the
element of fairness, due process, and reasonableness. Upon
notice to the administrator, by means of a Notice of Rejection,
that an annual report is not in compliance, the statute and the
regulation provide that the administrator has 45 days within
which to correct the filing defects without any exposure to
penalty liability if the corrections are made within this period.
The administrator is not automatically liable for a penalty
stretching back to the day after the due date for the report[8] .
Moreover, as the record shows[9] , because this was one of
PWBA's earliest cases, Spalding was issued pre-rejection notices
for the three plans on February 19, 1991, seven months prior to
the actual Notices of Rejection. During that time, Spalding had
ample opportunity to secure a proper accountant's report for each
of the plans. After the Notices of Rejection, Spalding had an
additional 45 penalty-free days within which to correct.
Altogether, Spalding was put on notice and had opportunity to
correct approximately 8 1/2 full months before any penalty
exposure would be triggered.
[PAGE 10]
If, on the other hand, the court's motivation was that it
believed that PWBA had not abated the penalty sufficiently to
take into account respondent's "lack of prior notices of
violations and spirit of cooperation," the result is inconsistent
with the court's determination that Spalding "waited until the
very last minute to fully comply with the reporting violations"
and its finding that DOL's 25 percent abatement of penalty was
appropriate. In that case, the Court is substituting its own
exercise of discretion for that of the agency charged with
administering the statute, while at the same time stating that it
"must yield to the expertise of the (agency] as well as its
policy making responsibilities[10] ."
While I find that the substitution by the ALJ of the date of
notice of reporting deficiencies rather than the initial filing
date for calculation of the penalty amount is impermissible as a
matter of law, I also find that there is not a substantial basis
in the decision of the ALJ for the ALJ substituting his judgment
as to the amount of the penalty for that of the DOL. This is
particularly so given the fact that he determined that the
abatement percentage utilized by the DOL to reflect degree of
good faith attempt to comply was appropriate, and did not find
that the DOL implementing regulation setting forth the date for
calculating the days in noncompliance was beyond its authority or
was unreasonable.
I therefore set aside the ALJ's method of calculating the
number of days on which the penalty may be assessed, and hereby
order that the penalty amount as assessed by PWBA, $112,500, be
paid to the U.S. Department of Labor by Spalding within thirty
(30) days from the date of service of this decision. Amounts not
paid by that time shall be subject to penalties and interest
provided for by ERISA and its implementing regulations.
MORTON KLEVAN
Senior Policy Advisor
[ENDNOTES]
[1]
The opinion of the Administrative Law Judge refers to Plan H as
Plan HH, repeating an inadvertent error in the joint stipulation
of the parties.
[2]
DOL calculated the penalty amount for each plan as follows. The
Secretary of Labor had established a penalty level of $150 per
day for a missing or deficient accountant's report. The DOL
multiplied $150 per day by 864 days (the number of days between
the day after the reports were due for each plan (August 1,
1989), and the date of the Notice of Intent to Assess a penalty
was sent to Spalding, the administrator of each plan (December
12, 1991), which resulted in a penalty of $129,600 for each plan,
which was reduced to $50,000, the maximum penalty amount set by
the DOL for a missing or deficient accountant's report.
[3]
T.R. 92-01 provides that the Department of Labor will not assert
a violation in any enforcement proceeding solely because of a
failure to hold participant contributions in trust. Further,
T.R. 92-01 provides that in the absence of a trust, the
Department will not assert a violation in any enforcement
proceeding or assess a civil penalty with respect to a cafeteria
plan because of a failure to meet the reporting requirements by
reason of not coming within the exemptions set forth in 29 C.F.R.
2520.104-20 and 2520.104-44 solely as a result of using
participant contributions to pay plan benefits or expenses
attendant to the provision of benefits. T.R. 92-01 also provides
that in the case of any other contributory welfare plan with
respect to which participant contributions are applied only to
the payment of premiums in a manner consistent with 29 C. F. R.
2520.104-20(b)(2)(ii) or (iii) and 2520.104-44 (b)(1)(ii) or
(iii), as applicable, the Department of Labor will not assert a
violation in any enforcement proceeding or assess a civil penalty
solely because of a failure to hold participant contributions in
trust.
[4]
29 C.F.R. 2560.502c-2(b)(1).
[5]
29 C.F.R. 2560.502c-2(b)(3).
[6]
29 C.F.R. 2560.502c-2(b)(2).
[7]
The DOL regulations governing ALJ hearings provide that "the
administrative law judge shall have jurisdiction to decide all
issues of fact and related issues of law". 29 C.F.R. 18.43(b)
[8]
Furthermore, any penalty accruals are suspended during the
rejection and correction process. See 29 CFR 2560.502c-
2(b)(2)
[9]
Transcript of Hearing, pages 42-43 and 48-51; Decision and Order,
pages 2 and 3.
[10]
The basis for the ALJ reduction of penalty is confusing, stating
in relevant part the following:
"In view of the circumstances, and particularly the fact
that there was no indication during prior years that the 1988
report would be unacceptable, the imposition of a penalty from
the initial filing date of July 31, 1989, until DOL notified the
plan administrator on February 19, 1991, that audit reports were
required for each plan, seems unreasonable. Although the law has
been in effect for many years, Spalding should be given some
consideration for its lack of prior notices of violations and
spirit of cooperation. Thus, a total of 568 days are subtracted
from the 864 previously indicated, leaving 296 penalty days. The
$150 per day assessed by DOL results in a penalty of $44,400 for
each plan or a total of $133,200. There is no basis for finding
that the 25 percent reduction by DOL is inappropriate, and the
undersigned must yield to the expertise of the Pension and
Welfare Benefits Administration as well as its policy making
responsibilities."
