1. Forms
2. MP
3. MP-04-04

What the form is

The MP 04 04 Coverage Extension–CAP Penalties is an endorsement that modifies an existing Management Protection Policy. Its primary purpose is to broaden the policy's definition of "loss" to specifically include penalties that an insured may become legally obligated to pay as a result of the Internal Revenue Service's (IRS) Closing Agreement Program (CAP). These penalties typically arise from administrative errors or failures in qualified employee benefit plans that the insured sponsors.

Classes of business it applies to

This endorsement is relevant for a wide range of commercial entities, both for-profit and not-for-profit, that sponsor employee benefit plans subject to IRS regulations. Examples include:

• Companies offering 401(k) plans, 403(b) plans, or other qualified retirement plans to their employees.
• Organizations that may have inadvertently made operational errors in their retirement plan administration, leading to potential disqualification of the plan and subsequent CAP penalties to maintain its tax-qualified status.

For instance, a mid-sized manufacturing company that discovers it failed to make timely matching contributions to its employees' 401(k) plan might enter into a CAP agreement with the IRS to correct the error and avoid plan disqualification. The penalties paid under this CAP agreement could be covered under this endorsement.

Special considerations

• Specific to CAP Penalties: Coverage is typically limited to the civil penalties assessed by the IRS under the Closing Agreement Program. It may not cover other types of fines, taxes, or legal expenses unless specifically stated.
• Prerequisite Coverage: This endorsement is used in conjunction with a base Management Protection Policy (e.g., MP 00 07) and does not provide standalone coverage.
• Exclusions: The underlying policy and this endorsement may contain exclusions for intentional wrongdoing, fraudulent acts, or penalties resulting from actions taken with knowledge of their impropriety.
• Notice Requirements: The insured is typically required to provide prompt notice to the insurer of any circumstances that could lead to a claim, including an IRS audit or investigation into their employee benefit plans.

Key information for agents and underwriters

• Risk Assessment: Underwriters should carefully evaluate the insured's history of employee benefit plan administration, the complexity of their plans, and any past IRS audits or compliance issues. The size of the plan (number of participants and assets) can also be a factor in potential penalty amounts.
• Coverage Scope: Agents should clearly explain to clients what constitutes a CAP penalty and the extent of coverage provided by this endorsement, including any sublimits or specific conditions.
• Loss Prevention: Encourage clients to implement robust compliance and administrative procedures for their employee benefit plans to minimize the risk of errors that could lead to CAP penalties. This includes regular internal audits and consultation with ERISA (Employee Retirement Income Security Act) legal counsel.
• Pricing: The premium for this endorsement will reflect the perceived risk associated with the insured's employee benefit plan exposures. Factors such as the number of employees, plan types, and prior claims history will influence pricing.