Top heavy contribution made from the plan accounts of Keys

[alanm]

An adopting employer of a multiple employer plan went bankrupt without funding the 3% top heavy contribution they owed. Can the Administrator of the plan use the account balance of the owner/key to redistribute to the other participants? Does it make a difference if the key agrees to the redistribution?

[No Name]

no. anti-alienation. beef is with the employer.

[AlbanyConsultant]

I've got a case similar to this, where the company went belly-up but still owes a MP contribution and the owner wanted to take it from his account. No go. The bankruptcy trustee/attorney claims that the plan now becomes a creditor of the employer. We haven't gotten past that yet, so I'm not sure what kind of priority claim it has.

I'd recommend going to the attorney handling the bankruptcy and get their input.

[austin3515]

How bout amending the plan to add in-service distributions?

[mbozek]

The only remedy is for the plan to file a claim for the contribution with the bankruptcy trustee as an unsecured creditor.

[alanm]

Well, I don't think that is the only remedy; but thanks for the advice. I wasn't privy to the bankruptcy filing and suspect the plan's top heavy contribution wasn't listed with the court, which just means it didn't participate in the settlement dictated by the bankuptcy. Neither was the key employees account balance subject to the corporate bankruptcy in the first place, as it is protected. However, I think after the bankruptcy was completed and the company dissolved, the key employee is still left with a fiduciary duty and moral obligation to have not increased his pay in prior years in lieu of funding the top heavy contribution, since he was sole owner and controlled the money. Instead, he used the higher pay to make a deferral into the plan and now is being asked to reallocate his account to take care of the compliance problem. Technically, the bankruptcy court didn't have a problem with his pay nor his deferral. The administrator of the plan could take the position in a possible suit that this co-sponsor violated the exclusive benefit rule; in lieu of that suit, a settlement could be reached to reallocate if the key employee agrees. There are several court cases on the issue, some saying you can, some you can't; so I suspect the administrator will try and get a voluntary settlement and order a reallocation if that can be had.

[mbozek]

I am interested in the cases you mentioned. Was the employer a corporation or an individual? What type of plan is this?

I am a little confused by your argument. I though the result of bankruptcy was the discharge of the debtor from all liabilities to creditors including a pension plan. How is a key employee of the business liable for the contribution of the employer that declared bankruptcy. And who is going to sue the key employee if he refuses to agree to a settlement and will plan assets be used to pay for the suit?

[alanm]

It was regular C corp, only five employees. I don't think the owner declaring bankruptcy, nor the attorney, even considered the top heavy funding issue and didn't list it as a debt. They adopted onto a multiple employer plan that has a trustee and administrator that is independent of this employer. However, the adopting employer is considered a co-fiduciary when it comes to generating the funding. The administrator has a duty to get the contribution because one compliance failure by one of the employers in the plan compromises all the adopting employer under section 413c. Therefore, ERISA would dictate an honest effort to get the contribution and the person controlling the money of the co-sponsor, being the key employee in question, is a deemed fiduciary for that reason; really over and above the bankruptcy issue--that has been settled. The fact the administrator missed being listed as a creditor is not a plan operational failure, per se, the regs don't say what steps need to be taken to get the funding, only that there be a honest effort. In the end, it is the right thing to do for this key to give it up and reallocate, it was he that made the decision to not fund but to add to his deferral. The court didn't think his pay and deferral to be unreasonable when approving the payment plan; however, they do not speak for ERISA fiduciary issues. So I think there is a reasonable position to ask for the key to sign off on an allocation of his account and make the multiple employer plan compliant. Forcing reallocation of the key's account is another issue entirely, that is clearly precluded and the account is protected; but if the key/owner/sponsor wants to do the right thing, I don't think the administrator is barred from reaching a settlement in writing and doing it; a threat of a 409 breach lawsuit only helps the key see the light.

[alanm]

Sorry, forgot the cases: A fiduciary-participant's account was allowed to be reallocated to offset an obligation in Coar V. Kazimir, 990 F.2d 1413(3rd circuit, 1993) and in Crawford V. La Boucherie Bernard, 5th cir, 1990. In 1997 Congress also amended ERISA section 206(4) to permit this type of offset.

[No Name]

What were the tax ramifications? I would think the "Key" would have FED/State and possible Excise Tax issues.

[alanm]

Ah! That is the rub. The participant must take 1040 return, corrective measures for the income tax reduction he got for the deferrals in prior years, used to make a top heavy contribution now; but that is up to him, not the plan administrator. Will he do the right thing twice? It is none of my business because no money is coming out of the plan.