Delinquent Employers

[Guest ooota]

Union currently has a money purchase pension plan, which plan requires the the fund to pick up the tab for any delinquent contributions that cannot be recovered. If the Union were to switch to a profit sharing plan would the fund still be required to pick up the tab for any delinquent contributions that could not be recovered?

Thank you in advance for your thoughts.

[RTK]

No, unlike mp plan, IRS will permit employer deliquency to be allocated to individual participant if ps plan. I believe this is addressed in IRS audit guidelines.

[KJohnson]

The following is from the examination guidelines:

Service with Employer Who Fails to Make Required Contributions

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((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.

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((1)(ii). (Note that IRC 401(a)(27)( 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 ooota]

Your help is VERY much appreciated!

[Guest ooota]

As it states in the multiemployer examination guidelines: "because the definately 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." How does this work in practice? Thank you for your guidance.

[RTK]

I believe that most plans do not actually allocate an employer delinquency to the individual participants' accounts. Instead, I think that in most cases, nothing is allocated to the participants' accounts until the delinquent contributions are collected, at which time the collected deliquent contributions would be allocated to the applicable accounts.

[KJohnson]

I agree with RTK. How you allocate any interest and/or liquidated damages that you might subsequentlly collect on the delinquent contributions has always been an interesting issue. Are they allocated only to the accounts of the employees of the delinquent employer?

[Guest Benefitsesq]

What happens if the Fund is unable to collect the delinquent contributions from the employer? Say the Fund has taken reasonable efforts to collect but they have determined the contributions are uncollectible. Can the Fund then use administrative expenses to pay the participants whose employer was delinquent?

[Effen]

You need to talk to your ERISA counsel about your question, but I don’t think you can treat it like an “administrative expense”.

I have several clients who use a "penalty delinquency fund" which is a trust that collects all of the fines and penalties levied against employers for late contributions. The Trustees use this money to reimburse the accounts in the DC plan when a contribution is deemed uncollectible. This doesn’t always have enough to cover the shortfall, but it often helps.

The shortfall in the DB plan is just treated as a loss.

You should also have procedures to notify various parties once the contributions were late. If the men were notified that the employer was not timely on his contributions, and they still chose to work for him, they knew the risk.

[Fielding Mellish]

What if the Plan is a money purchase plan? Can the plan treat the unrecoverable delinquencies as a plan expense and credit the participant's accounts as a plan expense?