Safe Harbor 401(k) Plan

[John Feldt ERPA CPC QPA]

Suppose an Employer maintains a Safe Harbor (3% nonelective) 401(k) plan, calendar year. The 100% owner of the plan sponsor (a P.C.) is the Trustee of the plan and is Plan Administrator.

Now suppose that the State took him to court for fraud (for allegedly de-frauding insurance companies about something insurance-related), NOT related to the 401(k) plan at all. He loses in court and his sentence begins in a couple weeks.

Suppose he has not yet made the 3% nonelective Safe Harbor contribution for 2006 (about $20,000) and that another one will be due for 2007 (a smaller amount since the employees are now fleeing the office).

Suppose a decision is made to declare bankruptcy and these 401(k) safe harbor contributions are still not paid (but deferrals are all timely met). Under bankruptcy, do required contributions to a DC plan have priority over the claims of other creditors?

Or, is the pecking order determined by the bankruptcy judge? (for claims). Would the participants have to actually file a claim in order to formally be in line to get this?

Do know of a place this information might be found?

[John Feldt ERPA CPC QPA]

Okay, no takers, even TAG didn't want this one!

[austin3515]

The Plan needs to wait in line with the other creditors. The money is due the Plan in the same way a tenant owes the landlord rent. If this was 401k money, it would be a different story. There are cases out there that support this...

[masteff]

Under bankruptcy, do required contributions to a DC plan have priority over the claims of other creditors?

Or, is the pecking order determined by the bankruptcy judge? (for claims).

Would the participants have to actually file a claim in order to formally be in line to get this?

I remember from college business law that there's a statutory pecking order (versus judge determined). But it's been awhile and I'm sure it got modified by the recent changes in law. Need to be sure the business lists it as an outstanding payable. I assume a plan fiduciary would be responsible for that but if I had a lot owed me as a participant, I might want to see it in writing or file a claim myself as an interested party (not sure how that would really work legally, just thinking out loud).

[Guest Moira]

To go a bit further on this topic, what if the bankruptcy had happened in early 2007, before the employer made the safe harbor matching contributions required for 2006? What do you do in 2007 about the Form 5500? Does the employer file the 5500 without the employer contribution - we would use the Schedule I so no specific place for receivables? Aren't there considerations in a safe harbor plan that if the employer fails to make a safe harbor matching contribution that then the plan is subject to ADP testing and other penalties?