time frame for filing suit

[eilano]

Client would like to know the latest time frame for filing suit against their former TPA. It relates to the administration that was completed for the December 31, 1998 plan year end.

[pjkoehler]

eilano: The answer depends on what theories of recovery the plaintiff pursues. ERISA imposes a federal statute of limitations with respect to claims of fiduciary breaches. See ERISA Sec. 413.

In general, the plaintiff must commence the action no later than the earlier of

- 6 years after the date of the last action which constituted a part of the alleged breach or, in the case of a failure to act, the latest date on which the fiduciary could have cured the alleged breach; or

- 3 years after the earliest date on which the plaintiff had actual knowledge of the alleged breach, BUT

In the case of fraud or concealment, the plaintiff must commence the action no later than 6 years after the date of discovery of the alleged breach.

[rcline46]

In general, a TPA is not a fiduciary to a plan. Assuming this is the situation, the claim may be much more difficult in that a state suit for malpractice would have to be instituted. You would have to determine that statute of limitations in the relevant state for this claim. Have they tried negotiation?

[mbozek]

First question is what was the breach by TPA? If it is a breach of fid duty then the ERISA s/l applies and state laws are preempted. Generally any act that affects the employer but not the rights of the participants under the plan is a claim under state law, e.g. , actuarial error which requires er to make additonal contributions to DB plan is a state law claim of malpractice. State law claim could be either a claim for malpractice if the TPA is acting in a professional capacity, e.g., accountant or actuary or it could be a claim for breach of contract or warranty, e.g. , failure to perform services under the terms of the agreement between the employer and TPA. S/l for malpractice is usually shorter than s/l for breach of contract. In NY s/l for malpractice is 3 years, contract s/l is 6 years. You need to know the law in the state where the plan or employer is located. Then you need to determine the S/l for the appropriate claims. Also s/l commences at different times in different states. In NY s/l for malpractice commences when the document containing the malpractice is given to the client. In other states the s/l commences when the malpractice is discoverd by client, e.g, client is notified of IRS audit. S/l can also be extended after the act of malpractice under the doctrine of continuing representation. Also some tpa agreements now require mandatory arbitration. Some benefit professisonals, e.g., insurance agents are not regareded as professionals for malpractice purposes under state laws. By the way in what state is the employer located?

[eilano]

Aggregate plan testing was not done originally to determine the top heavy status of the plan. Plan was top heavy for 1998 and therefore employer owed additional contributions to the plan to satisfy the top heavy minimum contribution requirements. The employer is located in Georgia.

[mbozek]

Based on previous experience I would say that this is breach of contract not malpractice since it is not an accounting or actuarial matter. Your client needs to review the TPA agreemnt to determine if TH testing was part of the services that the client was paying for. Second client needs to determine whether TPA had necessary info to make the determination. TH calculations can be complex and the TPA could defend based on failure of client to give necessary info to determine TH status. Client needs to retain counsel and review TPA agreement for options -is arbitration required to resolve disputes?

Good luck.

[pjkoehler]

eilano: There's generally a fiduciary around somewhere who is a likely defendant. In this case, the plan administrator (probably the board of directors - but check the plan document) relied upon a contract administrative service agent. Assuming the service agent didn't engage in any discretionary activities that would have rendered it a fiduciary (and there's no indication on the facts you've given us that the TPA did anything other than screw up the top heavy calculation, which isn't a discretionary act), then the fiduciary breach would be a claim brought by the participant against the plan administrator, as fiduciary, probably on a theory that the failure to seek collection of the unpaid minimum contribution from the employer was a failure to discharge its duties in accordance with the plan documents.

The participant is not in privity with the TPA, although the participant might be able to argue that he is a third-party beneficiary of the service agreement between the company and the TPA. Nonetheless, bringing a breach of contract action against the TPA in state court is probably not a cost-beneficial exercise. Far better, to bring an ERISA action for breach against the plan administrator for failure to seek collection of the unpaid top heavy minimum contribution.

If the Plan Admininstrator and the employer are one and the same, well then ... we have mother's milk to the ERISA plaintiff's bar - the classic conflict of interest, which is yet another theory for fiduciary breach as well as a potential prohibited transaction.

The more effective approach here is not to sue the incompetent number-cruncher, but rather the fiduciary that engaged the incompetent number-cruncher and who turned its back on the losses incurred by the plan in reliance upon the incompetent number-cruncher top heavy calculations.

[mbozek]

PJ before making a federal case out this matter the employer can make the TH contributions to the NHCE along with an interest component ( if it has not already done so) and then bring a action against the TPA in state ct. I also question whether this would be a fiduciary matter since TH provisions are exclusively an IRC matter. According to a reported case the employee would have a claim for TH benefits under ERISA 502(a) from the plan since the top heavy contributions are a part of the plan. The failure of the tpa to notify the employer of the need to make the contribution is separate claim under state law which does not affect employees right to recover benefits from the plan.

[pjkoehler]

Eilano: Isn't the concern here that the employer knows of the TPA's mistake or disputes that the error occurred and so is not inclined to accede to the participants' view that it underpaid the minimum top-heavy contribution? If so, then the nonkey employees and the employer are adverse on this issue and an outcome satisfactory to them cannot be expected to result from the course of action mjb suggests.

mjb: First, I'm sure you know that an employee lacks standing to bring a claim for wrongful denial of benefits under ERISA section 502(a) until the employee is eligible for payment of the amount in dispute under the terms of the plan. If the employer didn't make the minimum top heavy contributions, then all nonkey employee participants are adversely affected by the underpayment and lost earnings. Unless they have terminated their employment or otherwise become eligible for a distribution, they have no cause of action under 502(a) for wrongful denial just because the TPA made a mistake that the employer failed to correct it. Second, a 502(a) action is a claim against "the Plan." In this case it's the Plan that got short-changed by the employer's reliance on the incompetent number-cruncher. How does the plan make up the shortfall unless the employer makes it up? Third, in view of your aversion to "federal cases," I'm sorry to inform you but an action under ERISA Sec. 502(a) . . . yep, you guessed it - federal courts have jurisdiction to hear this claim. Fourth, most of the provisions of an ERISA Title I plan that is a qualified plan are there by dent of the requirements of tax qualification, e.g. top-heavy rules. So what? Once set forth as a plan term, ERISA requires plan fiduciaries discharge their duties in accordanced with such terms.

Do you advise that the aggrieved nonkey employees just wait around to pursue their claim for the underpayment plus lost earnings until they eventually become eligible to receive a distribution through voluntary termination, layoff, death or what have you, perhaps many years from now or employer relents? (That's a rhetorical question.) Eilano what do you think?

In contrast, these participants have standing to bring a breach of fiduciary duty claim right now to enjoin the employer to make the minimum top-heavy contribution and mitigate the potential lost earnings. More importantly, ERISA's statute of limitations is running and they'll lose the opportunity if they don't commence the action before it runs.

[mbozek]

PJ: the original inquiry on this thread was what is the employer's remedy against tpa for failure to determine that TH contributions had to be made. It is amazing that U added the spin of potential liability to employees for TH contributions which has never been mentioned as an issue. Nothing in the facts indicates that the employees will not be made whole. U really need to get away from treating every inquiry involving plan administration as a breach of fid duty for which there must be a lawsuit to vanquish the guilty parties and focus on how to resolve these matters in the most expeditous and most economical manner possible.

[pjkoehler]

mjb: If the employer made up the shortfall plus lost earnings after discovering the TPA's mistake, then there is no fiduciary liability issue. It's not clear from the first message whether the employer thinks that its obligations to make the minimum required top heavy contributions are contingent on the likelihood of recovering damages from the TPA. But, if that's the case, I hope you see the fiduciary liability issue. The TPA could be judgement proof and it wouldn't affect the employer's fiduciary obligations to the plan. Some of the confusion stems from who "the client" is. One way to interpret this is "client" means "participant."

The problem with the employer suing the TPA is (1) it's prohibively expensive, (2) it's difficult to measure the employer consequential damages and (3) there is probably all sorts of liquidated damages provisions in the administrative service agreement that reduce the TPA's exposure to a miniscule amount. Certainly, the TPA is not liable to restore the minimum top heavy contribution itself, but perhpas the lost earnings and costs of administration, amended 5500s, etc. . The best approach is probably to either demand a credit against future TPA fees or just fire the TPA and exercise greater care in hiring and monitoring a new one.

[KJohnson]

PJK--I wonder about the fiduciary liabiilty issue. Absent "employee contributions" in the DOL sense which automatically become plan assets as soon as it is administratively feasible to segregate them, and absent a contractual provision that makes "due and owing" contributions assets of the plan whether paid or not, I am not sure that failure to fund the plan for a top heavy contribution is a fiduciary breach. This would seem to be similar for the failure to fund a money purchase pension plan. In both isntances the contribution is required by the Plan document.

I know there is one case out your way called J.D. Refigeration (or something like that) which provided in a multi context that the failure to fund is a fiduciary breach based on a plan asset analysis, but I don't believe that has been widely accepted. Thus if the "unmade" contributions are not plan assets, it would seem that there would not be a fiducairy breach on that grounds.

Suing the Trustee for its failure to collect from the employer may be viable.

The "in accordance with plan documents" argument is intriguing.

The result is far reaching in the multi context. If you have a money purchase plan that has a stated contribution obligation, and if an employer is delinquent in making contributions, could the Plan's Trustees sue the employer for fiduciary breach? Also, could they sue the officers of the company personally since they were "acting" on behalf of the corporation? (I know we've had this debate before).

In essence, you are making almost a per se personal liablity argument for delinquent contributions. I've always thought that this seemed like the return of the 3(f5) "economic reality" test for identifying the employer that was rejected in the mid 80's.

However, I know of a number of multis that would like to run with such a theory.

KJ

[mbozek]

KJ- are you referring to the threads in a previous post that there is no date for making a th contributon in a discretionary ps/401(k) plan because there is no requirement that the contribution be contributed within 8 1/2 months after the end of the plan year as ther is in a mp/db plan under IRC 412?

[pjkoehler]

KJohnson: an important distinction in the multiemployer plan context, is that delinquent employers are usually not wearing the plan administrator/fiduciary hat. Their delinquency is limited to a settlor function, i.e. making the contribution. The trustees have the fiduciary responsibility to pursue collection usually under the terms of the collective bargaining agreement as well as the trust. If the plan's administrative body determines that all contributing employers need to kick in an extra amount due to administrative error, a delinquent employer who didn't like it would be subject to a speedy collection action authorized by the trutees and would probably have no recourse against the plan's administrative body.

In a single employer plan, the ordinary case is an employer who is a plan administrator/fiduciary and perhaps trustee as well. The disgruntled employer who didn't like the incompentent TPA's revised contribution amount and who doesn't promptly ante up the shortfall is economically benefitting from it's inaction and, therefore, in a classic conflict of interest situtation vis a vis the plan participants. Such an employer's inaction in the light of ERISA's "exclusive purpose" (duty of loyalty) as well the "documents rule" would seem to be at issue.

[KJohnson]

PJK--Your point is well taken. In most multis the Trustees are actually designated as the Plan Administrator as well. However, I think from an funcitonal analysis you have to get back to whether the obligation to make a contribuiton is a "settlor" obligation or a fiduciary obligation. Without some mechanism to make the "unmade" contributions a plan asset, it would appear to remain a settlor function.

Where the employer is the trustee this is probably just a matter of semantics and pelading. Your cause of aciton would not be the failure of the employer as employer to make the contribution, the cause of action may be against the employer as trustee for failing to enforce the contractaul obligation "with itself" as settlor to make a contribuiton.

Whether the cause of action would be viable against an employer who was the Plan Administrator but not the trustee would probably require an analysis of the document.

Also, your prior point about where the money would come from is valid from a qualification standpoint as well. For multiemployer money purchase pension plans the IRS takes the position that, because of defintiely deteminable contribuiton/benefit requirements, the money has to be in the participant's accounts even with the employer is delinquent. Obvous that presents a big problem. I asked Wickersham whether he had an answer to how you fund the account of partcipants of a delinquent employer and I mentioned taking it "off the top" with the earnings on all accounts. His opininon was that that was unacceptable. I asked him what the other alternatives were and he responded : "That's for people who get paid the big bucks to figure out." Ultimately I think that many multi MPP plans converted to profit sharing plans with a mandated contribuiton formula in the CBA to get around this issue. (I think some others actually negotiated a separate contribution to fund delinquencies).

[pjkoehler]

KJohnson: Yes, I agree that in a multi or single employer context, the naked obligation to make a contribution is a contractual obligation of the employer, which is a settlor function. In a single employer plan (dual settlor-fiduciary) context, depending upon plan/trust language, it may be argued taht the plan administrator or trustee has a fiduciary duty to take reasonable steps to prevent the plan from incurring losses due to the failure of the employer to make contributions required by the governing instruments of the plan, particularly delinquent contributions that jeopardize the qualified status of the plan, e.g. minimum top heavy plan contributions. But even if that is unavailing, you still have the conflict of interest fiduciary breach theory. A co-fiduciary third party trustee may have some exposure for failing to take reasonable steps to induce the employer to make the contribution because it knows or should know the conflict exists and that the employer is benefitting from the breach.