Recordkeeper Not Liable for 401(k)'s Failure to Provide Financial Audit

In addition to imposing penalties for failure to provide requested plan documents to a 401(k) participant, a federal district court found the plan filed a simplified Form 5500 in years it was not allowed to do so.

After deciding in February that Reppert, Inc. failed to provide certain documents to a 401(k) participant who requested them, in violation of the Employee Retirement Income Security Act (ERISA), U.S. District Judge James Knoll Gardner, of the U.S. District Court for the Eastern District of Pennsylvania, has ordered the plan to pay a total of $15,959 in restitution.

Gardner also found that the Reppert Inc. 401(k) plan did not file required financial audits with its Form 5500 in certain years, and that the plan’s recordkeeper was not liable for the audits not being filed.

In Gardner’s February opinion, he determined that Reppert Inc. was liable for its delay in producing any requested plan documents from December 6, 2008 (31 days after plaintiff’s first document request) to October 2, 2009, and for its failure to produce the plan’s custodial agreement with Nationwide from May 17, 2012 (31 days after plaintiff’s April 16, 2012 Document Inventory) to sometime in January 2015. The maximum penalty for failure to provide plan documents is $110 per day. 

However, Gardner noted that to determine whether to impose a penalty and how great a penalty, the court may consider a number of factors including “bad faith or intentional conduct on the part of the administrator, the length of the delay, the number of requests made and documents withheld, and the existence of any prejudice to the participant or beneficiary.” The total delay for the requested plan documents measures 300 days, subjecting Reppert, Inc. to a maximum possible statutory penalty of $33,000.00.

In light of the circumstances, however, Gardner found that a document penalty of $50 per day, yielding a penalty for this period of time of $15,000.00, as opposed to the statutory maximum, is appropriate. Gardner determined that although defendant Reppert, Inc. withheld documents intentionally and not inadvertently, it did so with something less than bad faith. “There were two principal reasons for the delay in document production between November 5, 2008 and October 2, 2009:  (1) defendant Reppert, Inc.’s requiring plaintiff to first pay a $1,800.00 charge before forwarding the documents to him and (2) an unfortunate but faultless breakdown in communications,” Gardner wrote in his opinion. 

As for the Nationwide document, the delay measures 959 days. The maximum statutory penalty for that length is $108,790.00, however, Gardner found that a nominal penalty of $1 per day, or $959.00, is most appropriate. He explained that the defendants did not produce the Nationwide agreement because they believed that they were not required to produce it. “That belief was neither frivolous nor unreasonable. Section 1024(b)(4) does not explicitly require its production, and as I noted in my February 4, 2016 Opinion, I am not aware of  any legal precedent that has specifically addressed this issue. Indeed, I concluded that Section 1024(b)(4) does require the production of the Nationwide agreement only after an extensive analysis, and even then, I found it a close question,” Gardner wrote.

NEXT: Failure to provide a financial audit

In regard to the failure to provide an independent financial audit with Reppert’s Form 5500 annual reporting, Gardner noted that a plan may generally only file a simplified annual Form 5500 report if it has fewer than 100 participants at the beginning of the plan year. However, pursuant to the “80-120 participant rule”, a plan with between 80 and 120 participants at the beginning of a plan year can continue to file a simplified annual report if it did so the previous year. 

Following a trial, the conclusion is that there were more than 120 participants in the 401(k) plan at the beginning of 2008. Gardner granted judgment in favor of the plaintiff that the 401(k) plan was not permitted to file a simplified annual report and was not exempt from the audit requirement.

The defendants allege that the 401(k) plan recordkeeper California Pension Administrators & Consultants, Inc. (CalPac) breached its contract to provide defendant R.L. Reppert, Inc. with plan administration and recordkeeping services by incorrectly determining the number of participants in the 401(k) plan at the beginning of 2008 and incorrectly recommending that defendant Reppert, Inc. not conduct an audit of the 401(k) plan. Gardner found the defendants’ breach of contract claim fails.

Gardner said it is not clear that CalPac, as opposed to R.L. Reppert, Inc., was responsible for any error. Paragraph 11 of the Client Service Agreement specifically absolves CalPac of “any liability or obligation to the Client for any errors or omissions in servicing the Plan . . . except those arising solely from the actions of CALPAC.” According to Gardner, to the extent that CalPac incidentally provided legal advice to Reppert, Inc. in its preparation of the 401(k) plan’s annual reports, Reppert, Inc. was required to consult its attorney and independently verify that legal advice.

The opinion in Askew v. R.L. Reppert, Inc. is here.