Terminating Plan / No deposit of receivable

[BFree]

What are the potential consequences for a plan that terminates without the plan sponsor having made some Match contributions that were accrued in prior years?

Specifically, the client accrued Match contributions for 2000 and 2001. The client is now bankrupt and the plan administrator will not fund those amounts.

Is the 2000 5500 considered incorrect, and if so should it be amended? Is there an issue with participants who were paid based on account balances that included the never-to-be deposited receivables? Multiple Use testing would change.

Any other problem areas to be aware of?

Thanks.

[mbozek]

If the employer is bankrupt the plan is just a general creditor. If the company is liquidated then there is no chance that any payment will be made. If the company comes out of bankruptcy then u need to see if the debt to the plan is discharged. If it is, then too bad. I dont know why the 5500 needs to be changed but that is an accounting question. It would be changed if contributions were listed as having been made or a receivable.

There may be a claim against the fiduciary for failing to collect the contributions but only participants may have an issue with that.

[david rigby]

You might read this Fact Sheet from the PWBA: http://www.dol.gov/dol/pwba/public/pubs/bkrupfs.htm

It is difficult to imagine a liquidation bankruptcy that does not terminate the plan. There may be examples where the court treated that as "automatic".

[pjkoehler]

I assume that the 2000 Form 5500 reported the "accrued" company matching contribution on the basis of the deemed contributed rule set forth in Section 404(a)(6) for deduction purposes. That section provides that a taxpayer will be deemed to have made a payment on the last day of the preceding taxable year if such payment is "on account of" such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions). Rev. Rul. 76-28, 1976-1 C.B. 106, discusses the "on account of" requirement, and provides that a contribution made after the close of an employer's taxable year will be deemed to have been made on account of the preceding taxable year under section 404(a)(6) if, among other conditions, the company designates the payment in writing to the plan administrator or trustee as for the preceding taxable year or the company claims it as a deduction on its tax return for the preceding year. Once a payment has been so designated or claimed, the choice is irrevocable.

On your facts the "accrued" contribution was not made as of the section 404(a)(6) deadline. Accordingly, it was not deemed to have been made as of the last day of the 2000 plan year, which makes reporting it on the 2000 Form 5500 as an "accrued" contribution inaccurate. Technically, an amended return is order.

QUESTION: What is the plan year and taxable year of the employer? If the plan operates on a calendar plan year and the company has a calendar year taxable year, the nonpayment would have been apparent by September 15, 2001. I assume the company filed its corporate tax return by that date and did not claim the deduction. The extended filing deadline for the 2000 Form 5500 was October 15, 2001. Assuming that the company obtained an extension for the 2000 Form 5500 and filed it after September 15, 2001, wouldn't it have known that the form was inaccurate when filed?

To the extent the employer communicated the amount of the 2000 "accrued" contribution to the employees, e.g. in the form of benefit statements or otherwise, participants theoretically could argue, on the basis of the Supreme Court decision in Verity that, to the extent the persons responsible for the communications were also plan fiduciaries (members of the plan admininstrative committee, trustees, etc.), they had a duty not to communicate information that they knew or should have known to be false, which could expose those persons to personal liability for breaching one or more of ERISA's fiduciary responsibilities.