Responsibility for compliance services to bankrupt clients and their p

[Guest L Speedy]

We are a consulting firm that performs compliance and record-keeping services for qualified retirement plans on a fee basis.

We have a client, a small employer, who sponsors a 401(k) profit sharing retirement plan. The employer recently filed for Chapter 7 bankruptcy and ceased to exist.

This client did not pay for our past services. These past services were covered under a Service Provider Agreement that described our services and rates, and was signed by the plan’s trustees.

What is our legal liability to provide further services for this plan? The employer does not intend to file for a letter of favorable termination. Its representatives most likely cannot file Form 5500 nor process distribution forms, Forms 1099-R, tax withholding, etc. accurately.

Can we in any way be held responsible for refusing to provide services for this plan due to lack of past and future payment? Specifically, these services would protect the tax-qualified status of the participant’s retirement benefit.

[BeckyMiller]

Can't respond to the question of your legal liability. It sounds to me that your engagement was with the trustee and not the plan sponsor. As such, if the trust still has assets, your fees are reasonable and the trust agreement provides for the payment of these services from plan assets, that the trustee is pretty much obligated to continue the relationship with you. I am sure that the plan calls for the annual reports, allocations, etc. ERISA certainly does. I realize that it sounds unfair to make the plan pay these costs, but they have to be incurred to get the funds out to the participants.

You might also want to contact the Department of Labor. If you look at their budget announcement, they have actually set aside a fair amount of money (though not a lot) to assist these orphan plans with the wrap-up. They are very focused on this issue of orphan plans arising from bankruptcy, etc.