Fiduciary Liability Insurance: I’ll Bet You Didn’t Know about IRS Remedial Program (EPCRS) Coverage
Most commercial policyholders have some understanding of Fiduciary Liability Insurance, which covers the sponsors and fiduciaries of employee benefit plans against ERISA and similar state law claims. In addition to liability insurance coverage, these policies often provide first-party coverage for certain attorneys’ fees, and IRS fines and penalties associated with participation in the “Employee Plans Correction Resolution System” program (EPCRS) and similar programs. EPCRS is the IRS’s remedial program that employers use to either self-correct, or formally correct with the IRS acceptance and issuance of IRS Compliance Statement) certain employee benefit plan compliance defects in order to avoid the loss of tax-favored treatment. EPCRS coverage is woefully underutilized in our experience. Although we don’t have a good explanation, we expect it has to do with a lack of understanding of ERISA compliance by commercial insurance practitioners and a lack of understanding of Fiduciary Liability Insurance policies by ERISA practitioners.
While we won’t identify the compliance failures eligible for remediation or the various correction programs available under EPCRS, here’s what you need to know for EPCRS coverage purposes. If you hear your employee benefits folks using terms like EPCRS (often pronounced “eppcriss”), “plan defect,” “operational defect,” “self-correction program” (SCP), “voluntary correction program” (VCP) or “Audit Closing Agreement Program” (Audit CAP), check your fiduciary liability insurance policy to see if you have this coverage. Better yet, you should know if you have the coverage before the lawyers go to work on a correction. The policy may limit your choice of counsel, and it probably only provides coverage to the extent that the insurer consents in advance to the attorneys’ fees, program fees, penalties or other costs. Importantly, this coverage is usually sub-limited (e.g., if the overall policy limit is $1,000,000 aggregate, this first-party coverage may be limited to $100,000). But the flipside is that the coverage usually is not subject to any retention or deductible – it is first dollar coverage and oftentimes full correction (even for a large plan) will entail corrective amounts and professional fees well under $100,000.