- Negotiation
Background: As described in the Program release, one of
the objectives of the Program is to allow applicants to make complete and fully acceptable
corrections without discussion or negotiation with the Department. If the Department were
to negotiate the relief owed, the release states that the Department would be obligated to
assess a civil penalty under section 502(l) of ERISA. This civil penalty is imposed on any
breach of fiduciary responsibility or other fiduciary violation, or knowing participation
in such a fiduciary breach of violation, with respect to the amount recovered pursuant to
any settlement agreement with the Department, or ordered by a court in a judicial
proceeding instituted by the Department. This penalty, in the amount of 20% of the amount
recovered, is reduced by any penalty or tax imposed under section 4975 of the Code or
section 502(i) of ERISA. In addition, it may be waived or reduced if the Department
determines that the fiduciary or other person acted reasonably and in good faith, or that
the person will not otherwise be able to restore all losses to the plan without severe
financial hardship.
Comment: The inability to even enter into discussions with the Department prior
to filing a Program application will deter use of the Program. It will force parties to
take their chances in determining what is an acceptable correction method, and whether the
transaction involves what the Department would consider to be potential criminal
violations that could result in a criminal referral of the matter. Under this standard,
any uncertainties faced by the applicant could not be resolved prior to filing an
application, so that the applicant would risk the application being rejected and the
possibility of subsequent enforcement action (now that the Department would be on notice
of the breach).
Similar issues arose under the IRS voluntary correction programs for qualified plans.
As those programs evolved, the IRS became more flexible in permitting pre-filing
negotiations and even anonymous pre-submissions. These steps helped to encourage use of
the programs, and also saved time and money by resolving issues in advance rather than
requiring the IRS staff to respond to defective applications.
Recommendation: It should be possible to provide some mechanism for limited
pre-filing discussions, as under the IRS programs, without requiring the Department to
assess section 502(l) penalties. The Department should reexamine the issue of whether
voluntary correction under the Program should in fact be considered a "settlement
agreement" with the Department, particularly where any discussions regarding
correction are limited to interpreting and applying the Program’s correction
standards in advance of an actual submission. In addition, section 502(l)(3) gives the
Department discretion to waive or reduce the penalty if the fiduciary or other person
acted reasonably and in good faith. The Department should consider whether voluntarily
correcting a fiduciary breach pursuant to the Program can be treated as acting reasonably
and in good faith for purposes of section 502(l)(3). The Department should be able to
conclude under one of these approaches that pre-filing discussions will not trigger
penalty assessments, thereby facilitating use of the Program. In addition, the Department
should consider extending such a position to any post-filing discussions that may require
additional corrections, in order to further encourage use of the Program.