delinquent employer contributions and lost employee pension benefits

[Guest jaybirdlara]

If a signatory contractor to a collective bargaining agreement with a union fails to pay employee pension benefits, and the union is unable to recover these lost pension benefits through all legal means, is the union pension fund liable to cover these lost employee pension benefits, or are they lost to the employee. I was told that the employee would get credit for vesting purposes, but would not get credit for benefit accrual. I believe this violates IRS and DOL regulations covering ERISA but am not certain. I am an inquiring employee and would be grateful for any information on this subject. Thanks.

[Guest Keith N]

Are you talking about a DB plan or a DC plan?

I think you need to look at your bargaining agreements and your plan document.

What is the basis of the benefit? Is it based on hours worked (ie: $30/YOS) or a percent of contributions received (ie: 2.5% of contributions)?

A DB plan can generally absorb the missing contributions and grant the benefits to the workers, but it is virtually impossible for a DC plan to do this. This is one reason why the union can't let employers get behind in their payments.

A few more details would be helpful.

[mal]

Our multiemployer plans award credits to a participant's account, or benefit accrual regardless of whether we are able to collect. This is based on DOL Adv. Op. 76-89 which held a DC plan participant had a right to the contributions even though the employer did not pay.

If they will not give you credit or accrual, file an appeal (in writing) immediately. They must consider the issue and respond back to you in writing. Goodluck.

[Guest Keith N]

mal

Where does the money come from to restore the participants accounts?

[mal]

It is generally treated as a plan expense. (Which I know can create another host of problems.) This is similar to the way a number of DC plans are funding the USERRA requirements...which have been included in plan documents and blessed by the IRS.

In the multiemployer setting, I'm not sure there is a good answer.

[Guest jaybirdlara]

Keith N,

The plan in question is based on a percentage of contributions. The employers are supposed to pay a set dollar amount for each hour worked by each employee and their benefit is determined by a set multiplyer to calculate benefits upon retirement. So under this type of plan (defined contribution?) the pension fund is not liable under law to cover the benefits which could not be recoved through legal means? I have heard that the plans as a whole have to absorb the employee losses and credit their lost benefits, and this is covered by IRS and DOL regs connected with ERISA. But the fund administrator says this is incorrect and they only credit service for vesting purposes. Hence my question. I am trying to determine without a doubt if what they are telling me is correct, and the benefits are truly lost.

Thanks

[Guest Keith N]

It actually sounds like a defined benefit plan. The monthly BENEFIT at retirement is DEFINED as a percentage of the contributions received. I assume your formula is something like 2% so that if the employer contributes $1000 on my behalf, I will receive an annuity equal to $20/ month at retirement.

That being said, I still think your answer lies in your plan document and/or bargaining agreement. If the Plan document states that the benefit is x% of the amount RECEIVED by the fund, and no amounts were received, I think you may be SOL. Some plans contain special provisions relating to delinquent or unrecoverable contributions.

I think you need to talk to the fund's attorney, but this is a common and potentially messy problem. Chances are that they have encountered this in the past.

[Kirk Maldonado]

Section 411(a)(3)(E) may be what people are thinking of. It provides as follows:

CESSATION OF CONTRIBUTIONS UNDER A MULTIEMPLOYER PLAN.--A right to an accrued benefit derived from employer contributions under a multiemployer plan shall not be treated as forfeitable solely because the plan provides that benefits accrued as a result of service with the participant's employer before the employer had an obligation to contribute under the plan may not be payable if the employer ceases contributions to the multiemployer plan.

[Guest Keith N]

Mal,

Are the participants aware that money is being taken from their accounts to restore the account balances of their "brothers" who worked for defaulting employers?

Or when you say "treat it like an expense", do you mean it's just lumped in with all other expenses and spread amongst the group.

How do you handle it if it is a daily valuation type plan with individual accounts?

[mal]

I am not the administrator of any of these DC funds, but I believe the process works as follows: The contributing employers send their monthly remittance to the custodian where it is briefly held in a money market account. All expenses are then taken out of that "pot" of money prior to the allocation being made into the accounts. Once the expenses are paid, the monies are allocated to the employee accounts. In my experience, trustees of multiemployer funds bend over backwards to prevent from "charging" accounts once the money has already been allocated.

Participants are aware of this procedure...via minutes read at union meetings. However, I strongly push our trustees to be sure all avenues of collection have been explored and exhausted prior to treating a delinquency as a plan expense.

[KJohnson]

I think Kirk is referring to the cancellation of past service credit. This is the cancellation of credit for periods before the employer became signatory tbe CBA. If you are referring to post-signatory periods, here is what the IRS' multiemployer audit guidelines provide:

Service with

Employer Who

Fails to Make

Required

Contributions

(1) A pension plan (including a money purchase pension plan) under which service credit or allocation of contributions is conditioned on an employer's making required contributions violates the definitely determinable benefit rule for pension plans of Reg. 1.401-1(B)(1)(i). It does this by allowing an employer's actions, in effect, to determine the amount of benefits accrued by its employees. It also violates the requirement that all years of service with the employers maintaining the plan be taken into account for participation and vesting purposes as well. If the plan trustees are unable to collect the full amount owed, the plan may incur an accumulated funding deficiency. See DOL Reg. 2530.210 and Rev. Rul. 85-130, 1985-2 C.B. 137.

(2) In contrast, because the definitely determinable benefit rule does not apply to profit-sharing plans, multiemployer profit-sharing plans may provide that a delinquency in contributions will be allocated only to the delinquent employer's employees. This does not violate the definite allocation formula requirement of Reg. sec. 1.401-1(B)(1)(ii). (Note that IRC 401(a)(27)(B) requires that a plan intended to be either a money purchase pension plan or a profit-sharing plan must be so designated in order to be a qualified plan.)

[Guest jaybirdlara]

KJohnson,

I am not an attorney, but from the information in the reg. that you cited, it looks to me that the pension fund "is" responsible to cover the lost employee benefits.

[RockChalkPro]

I have a related problem for a multiemployer Money Purchase Pension Plan (MPPP) that has individual participant accounts.

My understanding is that due to the definitely determinable benefit rule (26 CFR 1.401-1(b)(1)(i)), a MPPP may not refuse to credit a participant's account in the event of employer delinquencies. However, since this MPPP has individual accounts, where does the money come from?

The IRS has already told us we cannot divert a percentage into a reserve account for delinquencies (because all the funds must be used solely on behalf of the participants -- at least that was their justification for refusal). Can we pay the shortfall out of the Administrative Fund? If not, are there other ways of getting the money into the participants accounts?