USDOL, PWBA v. Braniff, Inc., 1992-RIS-25 (ALJ Sept. 25, 1993)

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USDOL, PWBA v. Braniff, Inc., 1992-RIS-25 (ALJ Sept. 25, 1993)

U.S. Department of Labor Office of Administrative Law Judges
800 K Street, NW, Suite 400-N
Washington, DC 20001-8002 DOL Seal
DATE ISSUED: SEP 27 1993
92-RIS-25

IN THE MATTER OF

U.S. DEPARTMENT OF LABOR, PENSION
& WELFARE BENEFITS ADMINISTRATION,
COMPLAINANT

BRANIFF, INC., RESPONDENT

STEVAN DUROVIC, ESQ.
FOR COMPLAINANT

JEFFREY E. MYERS, ESQ.
EARL N. FORTE, III, ESQ.
FOR RESPONDENT

BEFORE: VICTOR J. CHAO
ADMINISTRATIVE LAW JUDGE

DECISION AND ORDER

This case arises under § 502(c)(2), 29 U.S.C. §1132(c) (2), of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. §§ 1001, et seq. Complainant, Pension and Welfare Benefits Administration ("PWBA"), by way of its Division of Reporting Compliance and its Office of Chief Accountant, assessed a $50,000 penalty on Respondent Braniff, Inc. ("Braniff") as plan administrator of Braniff's Long Term Disability Plan No. 504 ("Plan 504"), an employee welfare benefit plan, for reporting deficiencies in connection Plan 504's 1988 plan year annual report. The alleged deficiency is failure to include the report of an independent qualified public accountant ("IQPA") under ERISA § 103(a)(3)(A), 29 U.S.C. § 1023(a)(3)(A), and regulations at 29 C.F.R.

On March 8, 1993 I held a telephone conference with counsel for both parties; it was agreed that in lieu of an evidentiary hearing counsel would submit a joint stipulation of fact by April 21, 1993 and simultaneous briefs by May 25, 1993. The record of this case consists of a Joint Stipulation of Fact, fifteen (15) Joint Exhibits and two briefs from Complainant and Respondent (David R. Murchison's affidavit with four supporting exhibits are appended to Respondent's brief). Based on the record, I make the following Finding of Fact and Conclusion of Law under 29 C.F.R. § 2570.68.

FINDING OF FACT

1. Braniff filed its chapter 11 petition in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division on September 28, 1989 (Joint Stipulation of Fact paragraph 1).

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2. On July 23, 1992, the Bankuptcy Court confirmed Braniff's liquidating Chapter 11 plan and hence, Braniff is now in the latter stages of liquidating its remaining assets (Joint Stipulation of Fact paragraph 2).

3. Braniff was the administrator of four (4) welfare benefit plans (including plan 504), three (3) pension plans and one (1) employee stock ownership plan, which plans covered certain of its current and former employees and were governed by certain annual reporting requirinents set forth in ERISA § 103, 29 U.S.C. § 1023, and certain related regulations set forth in 29 C.F.R. (Joint stipulation of fact paragraph 5).

4. All of the assets of the plans were always held by a bank and/or an insurance carrier regulated and supervised by state and/or federal agencies, including the assets of plan 504 (Joint stipulation of fact paragraph 7).

5. In accordance with Braniff's annual report requirements under ERISA, Braniff was required to file a "Form 5500" ("annual report") with the Internal Revenue Service ("IRS") for each of its plans, for each reporting year. These reports contain certain financial information about each plan (Joint stipulation of fact Paragraph 9).

6. Pursuant to ERISA § 103, 29 U.S.C. § 1023, Braniff filed timely annual reports with the IRS for each of the plans, including plan 504, for the plan year ended 1988. This information was transmitted by the IRS to the Department of Labor ("DOL") (Joint Stipulation of fact paragraph 10).

7. Based on Braniff's interpretation of the regulations at 29 C.F.R. § 2520.103-8, Braniff did not submit an IQPA report with its annual report filed for Plan 504 for the 1988 report year because all of the assets held by plan 504 were always held by a bank or an insurance company subject to regulation, supervision and periodic examination by state and/or federal agency (Joint stipulation of fact paragraph 13).

8. Braniff received a set of letters from DOL, dated January 15 and February 1, 1991, regarding the annual reports filed for its four welfare benefits plans (including Plan 504) for the 1988 plan year. In these letters DOL took the position that the annual reports had to be accompanied by an IQPA report and that since these annual reports did not have such attachments, Braniff would be deemed to have failed to file the annual reports for these plans (Joint stipulation of fact paragraph 14).

9. Following the receipt of the above mentioned letters, Braniff informed DOL by letter dated February 22, 1991, that it was advised by its accountant that no IQPA report was required with its filings of the annual reports due to the plans' funding arrangement under a 501(c)(9) trust (Joint Exhibit 4).

10. On September 6, 1991, DOL issued a "Notice of Rejection" to Braniff, regarding Plan 504's 1988 annual report. This notice stated, among other things, that Braniff had failed to provide certain "material information", namely, the IQPA report, which DOL asserted was required to be part of the annual report for the plan, and indicated that DOL is authorized to assess a civil penalty of up to $1,000 per day from the date on which the annual report was due unless a report satisfactory to DOL was filed within 45 days of the date of the Notice of Rejection (Joint Exhibit 5).

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11. By letter dated September 25, 1991, Braniff responded to the Notice of Rejection, regarding the four welfare plans. In the letter Braniff took the position that since the financial statements were prepared and certified by a bank in accordance with 29 C.F.R. § 2520.102-5, these plans are excluded from the requirement of an IQPA report (Joint Exhibit 6).

12. By letter dated October 31, 1991, Braniff informed DOL that it had been a chapter 11 debtor since September 28, 1989 and that it had asked a CPA fin to provide a bid to complete IQPA reports on each of the four welfare plans for Plan years 1988, 1989, and 1990. This letter further stated that once the bid was submitted to and approved by the Bankruptcy Court, work would begin on the IQPA reports, but Braniff could not provide a date for completion of the reports at that time (Joint Exhibit 7).

13. By letter dated November 25, 1991, DOL sent Braniff a "Notice of Intent to Assess a Penalty", which restated DOL's position that Braniff was required to submit an IQPA Report with the annual report filed for Plan 504. The Notice also stated that due to Braniff's failure to file an IQPA report, DOL intended to assess a penalty of $150 per day for 833 days ($124,950), up to a maximum of $50,000, against the plan administrator, regarding Plan 504's Plan year ended 1988. The Notice stated that Braniff had 30 days from the date thereof to submit a statement of "reasonable cause" for its failure to file an annual report for the plan satisfactory to DOL or why the penalty should not be assessed (Joint Exhibit 8).

15. By letter dated December 23, 1991 to DOL, Braniff submitted a "statement of Reasonable Cause" setting forth the reasons why it believed that no penalty should be assessed, including Braniff's belief that an IQPA report was not required to be included with its annual reports for its welfare benefit plans. The letter stated that Braniff had asked a CPA firm to provide bids to complete the IQPA reports for the four welfare benefit plans for the 1988, 1989 and 1990 Plans years, and that once the bid was submitted and approved by the Bankruptcy Court, the IQPA reports for the four plans would be completed and forwarded to DOL (Joint Exhibit 9).

16. Braniff received estimates from two CPA firms regarding the cost of the IQPA reports for all of its plans, including Plan 504. The estimate from the CPA firm BDO Seidman states that it will cost $60,800 to provide IQPA reports for Braniff's five pension plans for reporting years 1988, 1989 and 1990, and $19,200 for IQPA reports for Braniff's four welfare benefit plans (including Plan 504) for the same reporting years, a total estimate of $80,000. The CPA firm of Price Waterhouse estimated that it would cost approximately $10,000 per plan, per audit for each of the IQPA reports, not to exceed $120,000 for all IQPA reports (Joint Stipulation paragraph 22).

17. DOL sent to Braniff a "Notice of Determination on Statement of Reasonable Causeö, dated May 8, 1992, which stated, among other things, that Braniff was required to file an Answer to the Notice of Determination with the Of f ice of Administrative Law Judges ("OALJ") within thirty days thereafter in order to avoid entry of a final order imposing a $50,000 penalty against Braniff in connection with Braniff's 1988 annual report for Plan 504.

18, Unable to resolve this dispute amicably with DOL, Braniff filed a Complaint against DOL and IRS on April 23, 1992 in the Bankruptcy Court seeking a declaratory judgment that it is not required to file an IQPA report with any of its annual reports, including, but not limited to, the annual report filed for Plan 504 for Plan year ended 1988. The Complaint was docketed as Adversary Proceeding No. 92-106 in the Bankruptcy Court (Joint Stipulation paragraph 23).

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19. On June 2, 1992 Braniff filed a timely Answer to the Notice of Determination, contesting the jurisdiction of the OALJ over this dispute and denying that any penalty should be imposed (Joint Stipulation paragraph 25).

20. DOL subsequently filed a Motion to Dismiss Braniff's Complaint in the Bankruptcy Court, which Motion was granted by the Bankruptcy Court on the ground of lack of final agency action by DOL on the issue of whether an IQPA report should have been attached to the annual report for Plan 504 for the 1988 Plan year and the imposition of penalties (Joint Stipulation paragraph 26).

DISCUSSION AND CONCLUSION OF LAW

Issue 1: Is Plan 504 exempt from IQPA report under §2520.103-8?

The Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§ 1001, et seq., 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 designed to carry out the important purpose of protecting these plans¹ . Among the means employed to accomplish this purpose are the extensive report and disclosure provisions, which expanded upon the requirements of the predecessor Welfare and Pension Plans Disclosure Act ("WPPDA"). The required financial statements and the audit and opinion of independent qualified public accountant (IQPA) in the annual report are essential devises to achieve the disclosure and enforcement purpose of the Act ² . It is the duty of the plan's administrator, pursuant to ERISA §§ 101 and 104, 29 U.S.C. §§ 1021 end 1024 to complete and file the annual report with the Secretary of Labor ³ . The form and contents of the annual report are set forth in ERISA § 103, 29 U.S.C. § 1023; paragraph (a)(3) specifies the requirements for an annual audit of an employee benefit plan and the report or opinion thereon to be performed by an independent qualified public accountant ("IQPA"), including the form and content of the required report or opinion.

Regulation at 29 C.F.R. § 2520.103-1, which sets forth the contents of the annual report, describes the requirement for an IQPA examination, and states in subsection (b)(5)(ii):

..... Authority for omission of certain procedures which independent accountants might ordinarily employ in the course of an audit made for purpose of expressing an opinion required by paragraph (b)(5)(iii) of this section is contained in § 2520.103-8.

Regulation at § 2520.103-8 entitled "limitation on scope of accountant's examination", provides:

(a) General. Under the authority of § 103(a)(3)(c) of the Act the examination and report an independent qualified accountant need not extend to any statement or information prepared and certified by a bank or similar institution or insurance carrier. A plan, trust or other entity which meets the requirements of paragraph (b) of this section is not required to have covered by the accountant's examination or report any of the information described in paragraph (c) of this section.
(b). Application. This section applies to any plan, trust or other entity some or all of the assets of which are held by a bank or similar institution or insurance carrier which is regulated and supervised and subject to periodic examination by a state or federal agency.
(c) Excluded information. Any statements or information certified to by a bank or similar institution or insurance carrier described in paragraph (b) of this section, provided that the statements or information regarding assets so held are prepared and certified to by the bank or insurance carrier in accordance with §2520.103. (emphasis added).

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Relying on §2520.103-8, Respondent argues that since all of the assets of Plan 504 are held by an bank and/or insurance carrier subject to state and/or federal regulation, and such institution has prepared and certified reports on the Plan assets, the Plan's 1988 annual report is complete without the IQPA opinion. Respondent also argues that it has not found any DOL pronouncement requiring the IQPA opinion in a situation like this case.

Contrary to Respondent argument, DOL did publish the following Preamble on March 10, 1978 in 43 F.R. 10130, at 10135:

§ 2520.103-8
"Other comments requested clarification as to whether a plan is required to engage an independent qualified public accountant when all its assets are held and certified to by a bank or insurance company. If a plan is required under §2520.103-1 to engage an accountant to render an opinion with respect to the financial statements of the plan, an exemption is not provided under §2520.103-8 and subsection 103(a)(3)(C) of the Act from such requirements solely because the plan's assets are held by a bank or insurance company and certification has been provided under §2520.103-5. However, the examination by the accountant and the scope of the accountant's opinion would, in such circumstances, be limited as a result of the applicability of this section." (emphasis added).

In my view, Respondent's argument that no IQPA report is required in this case is further weakened by the position taken in an American Institute of Certfified Public Accountants (AICPA) publication entitled "Audit and Accounting Guide - Audits of Employee Benefit Plans.ö (Joint Exhibit 12). The guide makes clear that §2520.103-8 is not an exemption from the IQPA report but simply a scope limitation.The Guide, at pages 90-94, discusses limitation of the scope an accountant's opinion when assets are held in trust by a bank or other regulated institution and the information is certified to the plan administrator. Although the Guide is presented as "recommendations" of AICPA, this prestigious professional organization lends support to the view that at least a certain level of IQPA examination is required in a situation like this case.

Accordingly, I reject Respondent's argument and hold that Plan 504 is not exempt from the IQPA report.

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Issue 2. Assuming Braniff's interpretation of §2520.103-8 is correct, is Plan 504's 1988 annual report grossly deficient regarding the required financial disclosure?

Braniff's four welfare benefit plans, including Plan 504, were subject to "The Braniff, Inc., Employee' Welfare Benefit Trust" (the "Trust"), which Trust is the subject of a Trust Agreement executed as of December 21, 1983, Between Braniff and InterFirst Bank Dallas, N.A., trustee. InterFirst Bank Dallas, N.A. was succeeded by NCNB-Texas, which was then succeeded by NationsBank of Texas (David R. Murchison Affidavit Paragraphs 8-10). Comparing Page 6 of Plan 504's and Plan 503's 1988 annual reports (Joint Exhibits 1 and 15) with Page 4 of the Trustee's financial report (Joint Exhibit 13), it is clear that the assets of the four plans held in trust have been commingled. Thus, there is no way for an individual participant in Plan 504 to know what the particular financial activity of his plan was for the 1988 plan year. ERISA § 101, 29 U.S.C. § 1021, casts the requirement in terms of "each employee benefit plan" and ERISA § 103, 29 U.S.C. § 1023 requires an annual report "with respect to every employee benefit plan." The reason for this requirement is clear: the plans participating in the same trust may not have the identical participants, whereas the duties under ERISA with respect to a plan are owed first and foremost to the participants and beneficiaries of that plan. Thus, I conclude that regardless of § 2520.103-8 requirement, Plan 504's 1988 annual report is grossly deficient regarding the required financial disclosure.

Issue 3. Is DOL justified in requiring reporting compliance or assessing § 502(c)(2) in this case?

Braniff initially took the position that no IQPA report was required for Plan 504's 1988 annual report. Then, Braniff changed its position by telling DOL that it was getting bids from CPA firms to prepare IQPA reports and that once the bids were submitted and approved by the Bankruptcy Court, the work of such reports would begin. To this date, Braniff has not submitted the IQPA report for Plan 504's 1988 annual report. Apparently IQPA fees were submitted and approved in 1990-1991 in connection with audits of savings and ESOP plans (Joint Exhibit 11, 1st letter). But Braniff gave no explanation why IQPA fee was not submitted and approved for Plan 504's report.

Braniff apparently argues that DOL is not justified in requiring reporting compliance or assessing §502(c)(2) penalty in this case because there is no evidence of fiduciary breaches or damages to the Plan or its participants. However, whether there were fiduciary breaches or losses to the plan or individual participants is irrelevant to whether § 502(c)(2) penalty should be assessed for reporting violation. Furthermore, without an independent audit, who is to ascertain whether there were fiduciary breaches. Braniff also argues that if it were required to spend money to correct past annual reports and/or to pay penalty, such action would be moot because the plans have been terminated and because of their financial inability to pay during Chapter 11 liquidation. However, these matters should not influence the decision whether penalty should be assessed for reporting violation.

In conclusion, ERISA § 502(c)(2), 29 U.S.C. 1132(c)(2) states: "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 l0l(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." (emphasis added). I find the plan administrator's failure to file the required IQPA report for Plan 504's 1988 annual report is a "failure to provide material information".

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Since there are no material factual issues, Complainant's Motion for Summary Decision is granted. Accordingly, DOL's assessment of the $50,000 penalty against Braniff is upheld.

VICTOR J. CHAO
ADMINISTRATIVE LAW JUDGE

[ENDNOTES]

¹ ERISA § 2, 29 U.S.C. § 1001 entitled, "Congressional Findings and Declaration of Policy, subsection (b) states, "It is hereby declared to be the policy of this chapter to protect. . .the interests of participants in employee benefits plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto..."

² The following legislative history of ERISA shows how important Congress intended the report of IQPA in the overall regulatory scheme of employee benefit plans: "The underlying theory of the WPPDA to date has been that reporting of generalized information concerning plan operations to plan participants and beneficiaries and to the public in general would, by subjecting the dealing of persons controlling employee benefit plans to the light of public scrutiny, insure than the plan would be operated according to instructions and in the best interests of the participants and beneficiaries. The Secretary's role in this scheme was minimal.. .Experience has also demonstrated a need for a more particularized form of reporting so that the individual participant knows exactly where he stands with respect to the plan. . .The Committee regards the following changes in the reporting and disclosure provisions as most significant... .Second, the annual report must include the opinion of an independent auditor based upon the results of a required annual audit. Such information will allow better assessment of the plans financial soundness by administrators and participants alike.." Report No. 93-127 to Accompany S. 4, April 18, 1973, PPs. 27-28, reprinted in 3 U.S. Cong. & Adm. News 1974, PPs. 4863-64.

³ 29 U.S.C. 1021(b)(4) provides, "The administrator shall.... file with the Secretary the annual report...."