SOLUTIONS IN A FLASH – RETIREMENT PLAN CORRECTION SOLUTION:
WHEN SALLY MET HER LIMITS AND WHY INSURANCE MATTERS

By: Leah E. Dean, Esq.

Sally Albright owns a third-party administrator (“TPA”) firm, On the Side, Inc. (“On the Side”). On the Side operates on an “a la carte” model, where Sally has a list of services she performs and clients pick and choose what they need. Sally does everything by the book. She does not make mistakes, and she prides herself on that.

Until…April 2026. Sally is at the Pensions on Peachtree Conference (“POP”), sitting next to her old friend and fellow TPA, Harry Burns. She gets an email notification on her phone from her coworker, Marie, who is holding down the fort while Sally is away at POP.

Sally,

We’ve got a big problem! We prepared the calculations for the Catz’s Eatery Profit Sharing Plan (the “Plan”) incorrectly. It has a permitted disparity formula, but we’ve been calculating it using a pro rata formula for the last two years. The client just noticed the error and called me to ask me about it. I told them I’d investigate it further and get back to them.

Please call me ASAP.
– Marie

Sally starts to panic and shows Harry the email. Harry says, “Hey…it’s a mistake. You can figure this out. Surely you have insurance, right?” (Yes, she has insurance, and don’t call her Shirley!)  In her moment of anxiety, Sally isn’t sure where to start first, so Harry outlines for her the steps she should be following.

Step 1: Review Errors & Omissions Insurance

Fortunately, Sally has errors and omissions (“E&O”) insurance in case something like this happens. Because she’s never made a mistake, or perhaps just never realized that she made a mistake, she doesn’t really know what the proper process is.

Likely, she isn’t that familiar with On the Side’s E&O policy, but is about to get a crash course in the key terms and provisions. She needs to find out what the policy covers, what is not covered, when she should report a possible claim to preserve coverage, and what she needs to do to report the claim.

Harry coaches her that policies commonly require TPAs to report potential claims as soon as they arise to preserve coverage. Therefore, as soon as she is made aware of even a potential claim, she should contact her insurance company. Any delay can be a breach of the policy and result in a denial of the claim by the insurance company. And, if it turns out there is no claim to be filed, she can always withdraw her claim notice without penalty.

Sally, who isn’t an expert in the insurance field, would likely feel more comfortable if she gets help from her legal counsel. So she may prefer that her first call be to her friendly neighborhood ERISA attorney before she files the insurance claim.

Step 2: Review Service Agreement

Because Sally is always prepared (even though she almost never makes mistakes), she had her ERISA attorney prepare a service agreement for On the Side to ensure she and her clients are clear as to what On the Side will be doing for the plan(s) and to contractually protect On the Side in the unlikely event of a mistake happening. Besides being good business practice, many E&O policies require TPAs to have a service agreement with clients outlining the terms of their services. In those cases, coverage can be denied if services are provided without a service agreement in place. Other insurers don’t require agreements, but lower premiums if agreements are in place.

Now is the time for Sally to review her service agreement to see how it might limit her liability. The agreement may also contain a statute of limitations provision that would prevent claims after a specified number of years, often a shorter period than litigation laws provide. When Sally looks at her agreement, she finds that On the Side’s liability is limited to the amount of fees that Catz’s paid them for the plan year in which the error occurred. However, being the very diligent TPA that she is, and the pride she takes in her work and her sterling reputation, Sally may do the calculations and decide to voluntarily pay more than the limitation amount to cover the full correction. That is permissible without voiding the liability limitation provision for future potential issues, although the additional amount may or may not be covered by the E&O insurance policy.

Step 3: Communicate With the Client

Harry shares some of his experiences when he has found mistakes, including one particular story of when he had to tell Mr. Zero that he didn’t advise him to take his required minimum distributions before the due date – creating a potential plan qualification failure and potential excise taxes of up to 50 percent of the distribution.  “I’ll tell you, Sally,” he said, “I was nauseous for a whole week and sweated like a pig!”

One of the trickiest parts when you’ve discovered an error may have been made is how to communicate with your client about it. In Sally’s case, the client brought the problem to On the Side’s attention. Marie did the right thing by wanting to investigate the potential issue further internally before discussing it with the client or blurting out “I can’t believe we made that mistake,” while on the phone with the client.  Thankfully, she didn’t immediately say, “I’m so sorry we did this.”

Why is taking a moment to confirm the issue so important? Two reasons. First, if the client is wrong, there’s no reason to apologize. More importantly, most E&O policies provide that coverage can be denied if the insured admits fault without the consent of the insurer. So, simply saying, “I’m so sorry we made this mistake” has the dual negative of being admissible in court to show fault and impairing the insurance coverage that might protect the TPA.

Every TPA owner should instruct all client-facing employees that, if the client claims an error was made, they should do what Marie did – ask for an opportunity to investigate and report back. Do not admit fault.

After investigating, Marie confirms that the issue the client has raised does exist. So, now what? At this point, she has an official reason to advise her insurer of the potential claim. On the Side should communicate with their ERISA attorney and insurer about the potential claim (if they haven’t followed Step 1 already) and the possible approach with client communications. On the Side may note to the insurer that there are opportunities to reduce or eliminate much of the liability (called “mitigating damages”) through plan corrections, but that the cooperation of the client is needed. Under those circumstances, the insurer may permit On the Side to admit fault in the right setting so that these potential damages can be mitigated.

When communicating with the client, you are going to be nervous and anxious, so it is really helpful to outline your talking points ahead of time and be prepared for any questions they may have about what occurred. It is important that you explain what happened in plain English and not using the industry lingo that we all use with each other. You should also be able to discuss what the correction process looks like for the client and have specific numbers, if possible.

We recommend that the initial contact with the client about the problem be done via a phone or video call. Remember, it is important to be aware of how you phrase things, so that you do not accept blame verbally or in writing. Doing this on a call or video chat, while it may make you uncomfortable, gives you an opportunity to really gauge the client’s response and to mend the fence with them as much as possible.

After the phone or video call, send an email to your client recapping the discussion. This both reinforces what has been said on the call and also protects you down the line if there are any questions or misunderstandings about what was discussed. Be sure to make this email as easy to read as possible. If you would like suggestions about effective written communications with your client, see Ilene Ferenczy’s article here.

What If Sally is Providing 3(16) Fiduciary Services?

Now, suppose that Sally is also performing 3(16) fiduciary services for the Plan. Does that change anything? In short, yes. When Sally started performing fiduciary services, she should have made sure her errors and omissions insurance extended to cover fiduciary services. Sally will want to check her policy and ensure that her policy covers fiduciary work.

ERISA Section 410 provides that you cannot contractually limit your liability for losses due to a fiduciary breach. However, if the error is ministerial, then it is permissible (and strongly recommended) to limit your liability in your service agreement. In our scenario, calculating profit sharing contributions is a ministerial function, so Sally can still limit her liability for this error. If you intend that the liability limitations in your agreement apply only to nonfiduciary activities, pointing out in your service agreement which of your activities are fiduciary in nature (and which are not) will make it easier for your client to understand when the limitation applies. If your mistake/failure happened in relation to an identified “ministerial” service, rather than fiduciary activity, it will be clearer to the client (and, if necessary, the courts) that the liability limitations apply to that error.

Conclusion

If you find yourself in a situation that may require reaching out to your insurer, don’t panic! If you have questions about the insurance process, your service agreement, or how to tactfully respond to a client when there may be an error, let us know. A phone call to counsel can help ease the process and save you money.  At all times, remember: We are your ERISA Solution!