Office of Administrative Law Judges 101 N.E. Third Ave., Suite 500 Fr. Lauderdale, FL 33301
DATE: FEBRUARY 1, 1993
CASE NO.: 92-RIS-19
In the Matter of
U.S. DEPARTMENT OF LABOR,
PENSION AND WELFARE BENEFITS
ADMINISTRATION,
Complainant
v.
SPALDING & EVENFLO COMPANIES, INC.
Respondent
Appearances:
STEVAN DUROVIC, ESQ.
For the Complainant
RICHARD B. FELLOWS, JR., ESQ.
For the Respondent
BEFORE: E. EARL THOMAS
DISTRICT CHIEF JUDGE
DECISION AND ORDER
This proceeding arises under Section 502(c) (2) of the Employee Retirement Income Security Act of 1974 (ERISA), as amended (29 U.S.C. §§l02l, 1103 and 1132(c)(2)), and the implementing regulations at 29 C.F.R. §§2520.104-44, 2560.502c-2(d), and 2570.66(a). On December 5, 1991, the U.S. Department of Labor (DOL or Complainant) issued a notification to Spalding & Evenflo Companies, Inc. (Spalding or Respondent) of its intention to assess a civil penalty for the plan's 1988 Form 5500 annual report. DOL found the report unsatisfactory because of the following deficiency:
The report of an independent qualified public accountant (IQPA) required by Department regulation 29 C.F.R. §2520.103-1(b) and requested in our [notice] of Rejection of September 23, 1991 was not provided. IQPA report that was provided was of the trust, not the plan.
[Page 2]
The deficiency notice advised Respondent of the opportunity to file a statement of reasonable cause for its failure to file a satisfactory report.
The DOL received a satisfactory report as of April 1, 1992, but determined to assess a civil penalty of $150,000 for the three plans. After receiving Respondent's Statement of reasonable cause, DOL waived 25% of the penalty for each plan, which reduced the total amount to $112,500. Respondent requested an administrative hearing on this determination, which was held on October 20, 1992.
JOINT STIPULATIONS
At the hearing, the parties entered the following stipulations for the record which are accepted:
1. Respondent, Spalding & Evenflo Companies, Inc., is the plan sponsor and the plan administrator for the three employee welfare benefit plans that are the subject of this proceeding: the Spalding & Evenflo Companies, Inc.– Plan Code FF (Plan FF); the Spalding Corporation Group Insurance for Plant, Office and Sales-- Plan AA (Plan AA); and the Spalding & Evenflo Companies--Plan Code HH (Plan HH) (collectively: plans). Each of these plans has in excess of 100 participants.
2. The plans are covered by the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ll0l, etseq., (ERISA) and the plan administrator is required to file Form 5500 annual reports for the plans.
3. Respondent filed 1988 Form 5500 annual reports for Plan FF, Plan AA, and Plan HH on or about July 31, 1989, with the Internal Revenue Service (IRS).
4. None of the 1988 annual reports filed on or about July 31, 1989, for the three plans included an independent qualified public accountant's report (IQPA report) on any of the plans.
5. On or about February 19, 1991, the Pension and Welfare Benefits Administration (PWBA), U.S. Department of Labor, issued three letters to the plan administrator for the plans, one letter for each plan, informing the plan administrator that review of the annual reports for the plans by the Division of Reporting Compliance (DRC) of the Office of the Chief Accountant, PWBA, showed that the plans were not exempt from the requirement to attach an IQPA report required by regulation 29 C.F.R. §2520.1031(b), but that it appeared that the plan administrator failed to attach IQPA reports to the annual reports for the plans. The letters gave notice that DRC considered the IQPA reports to be material information as that term is used in ERISA §502(c) (2), 29 U.S.C. §l132(c)(2), and that penalties may be assessed for failure to provide material information. The letters advised that to avoid possible rejection of the plans' annual reports by the Department of Labor, IQPA reports be sent to DRC within 30 days of the date of the letter. The letters were signed by Ronald D. Allen, Chief of DRC, and were received at Respondent's address at 5750 N. Hoover Boulevard, Tampa, Florida, on or about February 26, 1991.
[Page 3]
6. On or about March 13, 1991, attorney Richard B. Fellows responded on Respondent's behalf by letter to Joseph Roberts of DRC, referencing a telephone conversation with Mr. Roberts on March 13, 1991, and advising that steps were being taken to compile an accountant's report, and an attempt would be made to file these accountant's reports no later than March 21, 1991. This letter was received by DRC on or about March 19, 1991.
7. On or about March 21, 1991, Respondent sent to DRC three letters signed by Alice L. Akerberg, Tax Manager, one for each plan, to DRC. Each letter was accompanied by an amended Form 5500 annual report, signed March 21, 1991, by Akerberg, for the corresponding plan and included an IQPA report performed by Deloitte & Touche on the Spalding & Evenflo Companies Insurance Trust Fund for Employees. These three IQPA reports were identical and reported on the single Insurance Trust Fund utilized by the three plans. These three submissions were received by DRC on or about March 25, 1991.
8. On or about September 23, 1991, PWBA issued three Notices of Rejection, one for each plan, signed by Ian Dingwall, Chief Accountant, PWBA, rejecting the 1988 annual reports filed for the plans on the basis that the IQPA report provided with each of the annual reports was on the single Trust Fund, not the plans. The letters gave notice that the Secretary of Labor may assess penalties of up to $1,000 per day unless revised reports satisfactory to the Department were filed within 45 days of service of the Notices of Rejection. These Notices of Rejection were received at the Respondent's address at 5750 Hoover Boulevard, Tampa, Florida, on or about September 26, 1991.
9. On or about November 5, 1991, Mr. Fellows responded to the Notices of Rejection by telefaxed letter to Ronald D. Allen. This letter referenced a telephone conversation between Mr. Fellows and Mr. Allen that took place on October 30, 1991. Mr. Fellows advised that, after discussing the rejections with Mr. Allen, Mr. Dingwall, and other DRC staffers, the Respondent agreed to file a single, combined annual report for the plans for the 1988 plan year. Mr. Fellows stated his understanding from the October 30, 1991 telephone conversation that the Department would not assess any civil penalties or take any legal action against Respondent pending the filing of the amended combined annual report, provided that DRC received written notice of the intent to file such a report. Mr. Fellows indicated that the Respondent desired to file this report on or before January 31, 1992. The letter went on to summarize the events that had taken place to date, the steps taken by the Respondent and the accounting firm of Deloitte & Touche with respect to auditing the Insurance Trust Fund, and referenced a conversation with DRC analyst Joseph Hanley and other DRC staffers, who advised that the IQPA report was rejected because it was not performed on a plan-by-plan basis. Mr. Fellows went on to state that it was impossible to perform an audit of the Fund on a plan- by-plan basis because records of contributions and disbursements were not kept on a plan-by-plan basis. The letter closed by restating that it was agreed in telephone conversations with DRC that the Respondent would merge all the plans that participated in the Fund into one plan and file a single amended annual report. The original of this letter was received by DRC on or about November 13, 1991.
[Page 4]
10. On or about December 12, 1991, PWBA issued to Respondent three Notices of Intent to Assess a Penalty signed by Ian Dingwall, one for each plan. The Notices of Intent referenced the statements in Mr. Fellows' November 5, 1991 letter with respect to the agreement regarding a single, amended filing for the three plans, but noted that Mr. Fellows was in fact informed that three filings can be merged if and only if there is only one plan. If the plan documents show that there are three separate plans, then three filings cannot be merged into one filing because ERISA and the regulations require each plan to file an annual report. The Notices of Intent calculated intended penalties of $150 per day for 864 late days for each plan, or $129,600 per plan, but capped at a maximum of $50,000 per plan, and advised, among other things, that the Respondent had 30 days from service of the Notices of Intent to file a statement of reasonable cause, containing a declaration that the statement was made under penalties of perjury, for the failure to file acceptable annual reports or why the penalty as calculated should not be assessed.
11. On or about January 3, 1992, Mr. Fellows wrote to Alan Lebowitz, Deputy Assistant Secretary for Program Operations. PWBA, referencing a telephone conversation with Mr. Lebowitz on January 2, and stating his understanding from this conversation that the Department would consider any records and auditor's opinion filed in support of the Respondent's statement of reasonable cause, due January 13, 1992, that was filed subsequent to January 13 if Respondent describes in the statement of reasonable cause what is intended to be produced and a reasonable time frame within which to produce these items. This letter was received on or about January 8, 1992.
12. On January 13, 1992, Mr. Fellows telefaxed a letter to DRC, referencing the enclosed statement of reasonable cause and stating that Deloitte & Touche would have records necessary for the audits assembled by January 27, 1992, and the audit would be completed by February 14, 1992.
13. The statement of reasonable cause, signed under perjury declaration by Stephen J. Dryer, Vice President and Controller for Respondent, stated that Respondent did not initially include an IQPA report with the plan's filing because it was under the belief that it was exempt from this requirement and Spalding's financial records cannot now be broken down for each of the three plans, making it impossible to produce separate accountant's reports for each plan. The reasons set forth for waiving the penalties were that (i) the plans should qualify for the exemption from auditing requirements available to certain unfunded and insured plans because Spalding holds employee contributions for only a short time; (ii) if not exempt, Respondent should be permitted to meet ERISA annual reporting requirements with a combined filing and a single accountant's report; (iii) no "material" information is missing by performing a single accountant's report for the three plans; and (iv) Respondent has shown good faith. The original signature page and another copy of the statement accompanied by extensive attachments was submitted on January 31, 1992, and received by DRC on February 3, 1992.
14. On or about February 12, 1992, Mr. Dryer submitted a letter, accompanied by three individual IQPA reports performed by Deloitte & Touche, one for each plan. In the letter, Mr. Dryer reiterated why Respondent thought it would be impossible to perform a separate audit for each plan and explained that the assets in the Trust Fund did not represent employees' money. For that reason, it should not be necessary to break out the Trust's assets plan by plan. The letter also detailed certain assumptions made by the auditors in order to render separate audits and reports. Amended 1988 Forms 5500 for the plans were subsequently submitted, signed by Mr. Dryer dated February 25, 1992.
[Page 5]
15. The 1988 amended annual reports for the three plans containing the individual IQPA reports for each plan that were filed in February 1992 were determined by DRC to be acceptable filings.
16. On or about April 1, 1992, PWBA issued three Notices of Determination on Statement of Reasonable Cause to the plan administrator, signed by Ian Dingwall, one for each plan, waiving 25% of the intended $50,000 penalty set forth in the Notice of Intent for each plan and assessing a $37,500 civil penalty for each plan. The reasons stated in each of the Notices of Determination for not waiving 75% of the penalty for each plan included that (i) Respondent's erroneous interpretation that the plans were exempt from providing IQPA reports does not relieve Respondent of the obligation to timely file satisfactory IQPA reports; (ii) there was no prior record that the plans were operated other than as three separate plans, yet Respondent consistently maintained that it was impossible to produce separate records necessary to render separate IQPA reports for each plan; and (iii) although Mr. Fellows repeatedly denied over nine months that records were available for preparing a separate IQPA report for each plan, these records were in fact assembled, some 29 months after the due date, when it became clear that nothing less than a separate IQPA report for each plan would be satisfactory.
17. The parties stipulate to the exhibits listed in the attached exhibit list, that marked copies of the exhibits listed in the attached exhibit list are true and accurate copies of the original exhibits, and that these exhibits are authentic and are what they purport to be.
FINDINGS OF FACT
As the above stipulations indicate, the facts in this case are not seriously disputed. Spalding had, among many others, four welfare plans in existence during 1988, three of which required annual audits under ERISA because they covered over 100 employees. Although ERISA has given DOL compliance and enforcement responsibilities since its enactment in 1974, until §502c(2) was enacted by Congress, DOL did not have the resources or mechanism to monitor every individual plan report. Compliance was sought through random or spot checks of filed reports.
When funds were appropriated by Congress in 1990, DOL became able to meet its statutory responsibility to review these plans through a computerized reporting system implemented and shared with the Internal Revenue Service. In an effort to complete its data base for future monitoring, DOL announced an amnesty program for administrators who previously had failed to file reports.
Although Spalding in previous years had filed annual reports for the plans in question, these reports were not questioned until February 19, 1991 when DOL notified Spalding that the report for the. three 1988 plans was deficient because the plans had assets held for investment and audits for these plans were not submitted. Spalding then directed its accountant, Deloitte & Touche, to perform an audit of the records for the account which held the assets for the three plans. A report of the audit of the account was submitted to DOL on March 21, 1991.
On September 23, 1991, DOL issued notices of rejection for the accounting report because the audit was made of the trust account for the plans and not each of the individual plans. The audit submitted for the trust account showed assets of approximately $10,000. During a telephone conversation on October 30, 1991, Spalding offered to file an amended combined annual report and affirmed this intent in a letter of November 5, 1991, but DOL did not commit to waiving civil penalties or legal action pending the filing of this report.
[Page 6]
On December 2, 1992, DOL issued Notices of Intent to Assess a Penalty against each of the plans in the amount of $50,000. A Statement of Reasonable Cause why the penalty should not be assessed was filed by Spalding on January 13, 1992, and on February 19, 1992, Spalding filed a separate audit report for each of the plans. On April 1, DOL issued its Notice of Determination which reduced the total penalty from $150,000 to $112,500.
Spalding's welfare benefit programs were divided into separate plans a number of years ago and the company presently cannot provide the reasoning behind the divisions. Spalding has four divisions - Spalding, Evenflo, Juvenile Furniture, and Corporate. The three plans in question, however, do not correspond exactly to the divisions. Although each of the plans provides health, life and accidental death and dismemberment benefits. Plan AA is for salaried and hourly employees in the Spalding Division, Plan FF is for hourly employees in the Juvenile Division, and Plan H is for salaried employees in the Juvenile Division. The financial records for the programs were maintained by each division and do not correlate to each plan.
An accurate analysis of the funding of each of the plans from the record evidence is made difficult due to the fact that although there was a uniform program of benefits for all employees, the plans covered different employees and were funded differently. For example, the medical and dental plans were paid for by Spalding until July 1, 1988, when employees began making contributions. The life insurance was a cafeteria plan in which Spalding paid for a benefit equal to the employee's salary, and the employee had an option of paying for an increase in benefits.
Employee contributions to the medical plan, which began on July 1, 1988, ranged from $12 to $30 per month depending upon coverage. This plan was funded by Spalding and administered by Prudential Insurance Company, which charged Spalding an administration fee for each claim processed. In other words, the insurance company would pay claims on a weekly basis and then charge Spalding's account for 100 percent of the claim plus a processing fee. The life and accident plans were paid by the insurance companies whose premiums were paid monthly by Spalding.
Employee contributions to the three plans totaled $140,000 in 1988, and Spalding's contribution was about $2,700,000. When the plans were finally separately audited by Deloitte & Touche, the reports showed that the three plans had combined total assets of $521,000. However, it is not clear from the evidence (as opposed to briefs) whether this was actual money sitting in an account (as DOL would imply) or unreimbursed claims (as Spalding claims). Regardless, it is clear from the relatively small amount of employee contributions (3.9%) that the bulk of this account would have come from Spalding, if it were plan funds.
Although the issue is largely immaterial, I am not persuaded by DOL's suggestion that by forcing Spalding to conduct three separate plan audits instead of a single account audit, some $511,000 of "extra" funds were somehow discovered. The money obviously was there along. It was, perhaps, only because of certain accounting assumptions made by Deloitte & Touche that this additional amount was generated.
[Page 7]
As mentioned previously, the financial records kept by division did not correspond to the individual plans and it was only through certain accounting techniques that the auditors were able to establish individual plan records. The assumptions, which need not be described for purposes of this decision, allowed the auditors to estimate various employee and company contributions based upon known amounts, and apply these amounts to the 1988 plan year. DOL's analysis of the final plan reports apparently found the results of the audits and the methods utilized to be satisfactory.
CONCLUSIONS
ERISA, at 29 U.S.C.A. §1023 requires that an annual report be published for every benefit plan after an audit by an independent qualified public accountant. The regulations at 29 C.F.R. §2520 provide that,
. . . unfunded and/or wholly insured welfare plans need not perform the audit and provide the accountant if the insurance premiums are paid directly by the employer or employee organization from its general assets or partly from its general assets and partly from contributions by its employees or members.
Spalding argues that its welfare plans were exempt from the reporting requirements because it held employee contributions in a trust account only for a short period of time. While it is true that employee contributions that are forwarded by the employer within three months are exempt, and employer contributions that are paid directly are exempt, an analysis of Section 2520.104-44(b) (ii) read in conjunction with 29 U.S.C. §1023 reveals that the clear intent of the statute and regulations is to exempt only those employer or employee contributions which are not being held for some period of time in a separate depository. Moreover, the law does not distinguish small contributions from large, and so long as any part of Spalding's trust account contained employee contributions, the audit requirements apply. Even though only 3.9 percent of the overall contributions came from employees, the purpose of the statute is to require an audit of welfare plans, no matter how large or small the amount of employee contribution, so long as they constitute a funded account. Once contributions become plan assets, the Section 1103 exemption does not apply.
After annual reports are analyzed and material deficiencies are discovered, as in this case, a notice of rejection is issued to the plan administrator. This notice gives the administrator 45 days in which to make required corrections without penalties. If the administrator does not respond, or responds incorrectly, a notice of intent to assess penalty is issued which provides an additional 30 days to respond. If a satisfactory response is received, the penalty will be abated. If not, it is imposed.
Penalties in this case were calculated on 864 days beginning the day after the annual report was due, which was November 12. At $150 per day, this came to $129,600 per plan, but was capped at $50,000 per plan. Section 502 c(2) of ERISA permits the assessment of penalties of up to $1,000 per day. DOL reduced its original assessment by 25% to $112,500.
It is understandable that Spalding felt it could rely upon the government's failure to challenge prior years' reports as a defense to the imposition of penalties. This proposition has been defeated in too many cases to mention. This is a common argument used against government enforcement, but the fact is that businesses cannot rely upon the inability of prosecutors to challenge every mistake. Spalding's argument that it should not be penalized for timely filing an incorrect report when non-filers are given amnesty must also fail. All DOL's amnesty program does is put a $1,000 cap on the penalty for late filing. It does not prevent the imposition of penalties that could otherwise be assessed. There are separate penalties for failure to file timely as opposed to penalties for non-compliance with reporting requirements.
[Page 8]
Spalding was not in full compliance until 29 months or 864 days after the reports were due. Spalding argues that it made a good faith effort to fully comply, but was under the mistaken impression that it would be impossible to actually audit the individual plans because of the manner in which the financial records were maintained by division and not by individual plan. But the fact remains that Spalding auditors were able eventually to do the required audits. There was no satisfactory explanation as to why this final successful effort by Deloitte & Touche was not attempted earlier. I can only assume that it was because of Spalding's reluctance to devote the apparently enormous resources required to reconstruct all of the necessary records and the expense involved in the actual audit. It appears from the evidence presented that Spalding simply waited until it was obvious that the government would not budge before devoting any greater expenditure than was absolutely necessary toward achieving compliance.
Counsel's argument that the imposition of civil penalties cannot or should not be greater than the maximum criminal penalty authorized by ERISA is not supported by reference to congressional intent or case law, nor could the undersigned find support for this proposition. The criminal enforcement of ERISA involves considerations that are not applicable to civil penalty enforcement and a comparison of these programs is not appropriate for purposes of this decision.
Although it appears that Spalding may have waited until the very last minute to fully comply with the reporting provisions, it also is obvious that this was not an extremely willful violation. Spalding did exhibit an effort to comply and certainly was in communication with DOL. It was responsive in meeting all reporting dates, even though the responses were inadequate.
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 has filed its reports each year and as far as this record shows, there have been no previous notices of violations. 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.
In view of the foregoing, a total penalty of $99,900 is imposed.
[Page 9]
ORDER
It is hereby ORDERED that Respondent, Spalding & Evenflo Companies, Inc., pay to the U.S. Department of Labor a civil penalty of Ninety Nine Thousand and Nine Hundred Dollars ($99,900.00) within thirty (30) days from the date of service of this decision for violations of the Employee Retirement Income Security Act of 1974. Amounts not paid by that time shall be subject to penalties and interest provided for by the Act and Regulations.
