Without question, in the event that a TPA generated an error that may benefit from one of the IRS remedial programs within the Employee Plans Compliance Resolution System (EPCRS), that administrator needs to notify its insurance broker and/or insurance carrier.
This protocol is significant for several reasons, according to Shell Simonson, of Professional Practice Insurance Brokers, Inc. One reason is that errors in covered professional services trigger a defense under the errors and omissions (E&O) policy form, subject to the normal terms and conditions as set forth in the policy. Therefore, the TPA may have applicable defense costs associated with filing the remedial effort. This could be of further significant value if the professional liability program provides access to professional attorneys with experience in working with the IRS voluntary compliance programs.
Another reason for reporting the error to the insurance company is that there may be damages, including sanctions, which may apply. In the event the TPA generated the error and has followed the reporting terms and conditions set forth in the policy form, those applicable damages may be covered by the professional liability insurance.
Potential trouble
If the TPA-generated error appears "minor" and below the deductible amount, self-insuring the situation without notifying the broker and/or insurance carrier could put the TPA at risk of jeopardizing coverage should the situation escalate.
In the event the TPA did not generate the error - perhaps the plan, for example, is a takeover plan and the former TPA generated the error - then it is unlikely that the filing would trigger the policy form, and it may not be necessary to notify the broker and/or insurance company. However, if the current TPA suspects that the client may be holding it responsible to any degree, then it may be prudent to adopt a "better safe than sorry" approach to the matter.
Legal counsel
If the TPA is not guided by competent counsel in the area of correction, it may be possible that the TPA could actually cause additional harm to the plan. Not only are the types of disqualifying errors that are eligible for EPCRS complex, but the remedial options available are complex as well. So it is important that the TPA work with competent and qualified counsel in the area of correction. Therefore, notifying the broker and/or insurance carrier would actually trigger a responsible mechanism not only to defend but also to guide the TPA through EPCRS.
"An attorney is more apt to protect a TPA from a potential claim. The TPA needs to ensure that nothing it says or doesn't say could be an admission of fault," says Joe Faucher, an attorney with Reish & Luftman. "And TPAs who attempt to cure problems themselves through IRS remedial programs could find they are paying larger sanctions."
The use of legal counsel is crucial because there are different programs and different ways to correct errors. "An experienced lawyer can not only fix the plan, but fix it in a way that makes sense in terms of minimizing cost and inconvenience to the TPA," says attorney Les Klein at Sonnenschein Nath & Rosenthal. The attorney should advise the TPA on how to fix the failure, and if IRS approval is necessary, prepare the submission and negotiate with the Service about the correction, methodology, and sanction.
"There is no road map TPAs can follow that tells them what to do. The programs available to TPAs differ. The selection of the appropriate program often depends on what the TPA wants to achieve," points out Klein. There may be alternative ways of correcting the failure. One method may result in greater expense and inconvenience than another method.
Copyright 1999 Aspen Publishers. All rights reserved. Reprinted with permission from the Pension Plan Administrator, July 1999 (vol 6, issue 7), page 4. Copyright 1999 by Aspen Publishers, Inc. www.aspenpub.com