401(k) deferrals - double deduction or not

[Guest 401kbee]

ER had a hickup with payroll. Didn't deduct contributions. Would it be fair to double up next paycheck or rather make up the contribution in the form of a QNEC. Where does this stand with the EBSA? would they be the body guiding this?

[jpod]

I'm assuming that this is a calendar year plan and the failure to deduct occurred in 2007. Send a memo to affected employees giving them the opportunity to increase one or more future payroll deductions to make up for the omissions.

If you're straddling plan years or there is a very short amount of time left in the plan year, this is a much more difficult case.

[Guest Truth]

I would not recommend that outcome.

See Revenue Procedure 2006-27 - - Section 6, Part .02(7) states that "If a Qualified Plan has an Operational Failure that consists of excluding an employee that should have been eligible to make an elective contribution under a cash or deferred arrangement or an after-tax employee contribution, the employer should contribute to the plan on behalf of the excluded employee an amount that makes up for the value of the lost opportunity to the employee to have a portion of his or her compensation contributed to the plan accumulated with earnings tax free in the future." (http://www.irs.gov/pub/irs-irbs/irb06-22.pdf, Page 956).

While people are quick to suggest that outcome, I haven't seen anywhere in the guidance that permits anything other than an employer contribution here.

Similarly, the last EPCRS Revenue Procedure (2003-44) states that for a partial year failure of this type, "The employer makes a corrective contribution on behalf of the excluded employee that satisfies the vesting requirements and distribution limitations of [iRC Section] 401(k)(2)(B) and ©."

I could see how people could reasonably argue over whether to use the full amount that should have been deferred, or 1/2 that group's ADP rate, but I just don't understand how you could justify no corrective contribution at all.

On the correction method above, does the plan allow the participant to change their deferral election daily? If not, that might create another operational failure...

[Bird]

As long as the employees don't care, I'd just make it up in the next payroll and move on with my life.

[jpod]

Truth, you don't speak the truth. This was not an exclusion of an eligible employee. This was a payroll error.

[Guest Truth]

A payroll error which causes an employee who was supposed to defer into the plan to not be able to defer into the plan. Sounds like the payroll error caused this employee to be excluded from the plan, if only for one payroll.

What if the plan only has quarterly deferral election changes? You are causing another operational failure (or possibly two more) by allowing the participant to double up the next pay period and then going back to normal after that.

[jpod]

Many corrections expressly permitted by EPCRS or if not expressly permitted within the spirit of EPCRS are technically operational diversions. The IRS is not looking to play gotcha with plans and employers.

[Guest Truth]

I've read Rev Proc 2006-27 and Rev Proc 2003-44 cover to cover dozens of times. This isn't within the spirit of EPCRS. The "spirit" of the EPCRS is that employees are returned to the position they would have been in, had the error not occurred. Shorting an employees take home pay in future paychecks to make up for an employer error is not returning them to the position they would have been.

What if this was 6 payrolls instead of 1? What if it was 15? You'd probably be telling me it's the employee's responsibility to monitor their paycheck. I'd respond with the same quote from 2006-27, above.

[jpod]

Truth, obviously one of the key facts is that it was just 1, not 6 or 15. Let's just agree to disagree. If you are ever faced with this situation (one payroll error), please let us all know what your client's reaction is when you tell him or her that he/she has to make QNEC contributions.

[Guest Truth]

I have been faced with this error, and the employer didn't care at all when I advised a QNEC of 1/2 the nHCE's rate for one payroll. We're not talking about a lot of money here.

Using high numbers let's say he makes $50,000 and the nHCE ADP rate is 5%. That's $1923 per payroll (bi-weekly). 2.5% of that is $48. Gee, a $48 QNEC to remain in compliance. And that's with relatively high numbers, since few plans have nHCE rates of 5%.

[Guest Truth]

And another thing, if you're advising something that is not in the EPCRS, I hope you're a lawyer, because if you're not it's an unauthorized practice of law. If you are a lawyer, it's just bad legal advice. It's one thing to read EPCRS, and then make recommendations based on examples given. It's another to recommend solutions not offered by EPCRS.

[Belgarath]

"I've read Rev Proc 2006-27 and Rev Proc 2003-44 cover to cover dozens of times. This isn't within the spirit of EPCRS. The "spirit" of the EPCRS is that employees are returned to the position they would have been in, had the error not occurred. Shorting an employees take home pay in future paychecks to make up for an employer error is not returning them to the position they would have been."

I think that perhaps your many readings have been unnecessarily rigid in this regard. I don't know of anyone else who takes this interpretation. In fact, these employees were not really excluded from participation. And if they are "shorted" in their next paycheck, that places them in the same position they would have been otherwise, since their prior take home paycheck was LARGER than it should have been. I do believe that most of us would argue that this is precisely in the spirit and overriding principles of 2006-27.

There is actually specific support for this general idea, in a situation where employees are actually improperly denied the opportunity to defer. Take a look at Appendix B, Section 2, .02(F). Since this clearly and specifically allows for a result where the employer is NOT required to do the make-up contribution that you deem is required, in a situation where an employee is ACTUALLY excluded - then it would seem absurd to not allow a similar fix in a situation which is far less egregious.

But heck, if your employers don't mind paying the extra money, there's certainly nothing wrong with your approach. I just don't believe it is required.

[QDROphile]

I would go so far as to say that a corrective contribution by the employer would NOT be be permitted if you were dealing primarily with HCEs.

[masteff]

I do believe that most of us would argue that this is precisely in the spirit and overriding principles of 2006-27.

There is actually specific support for this general idea, in a situation where employees are actually improperly denied the opportunity to defer. Take a look at Appendix B, Section 2, .02(F). Since this clearly and specifically allows for a result where the employer is NOT required to do the make-up contribution that you deem is required, in a situation where an employee is ACTUALLY excluded - then it would seem absurd to not allow a similar fix in a situation which is far less egregious.

But heck, if your employers don't mind paying the extra money, there's certainly nothing wrong with your approach. I just don't believe it is required.

Yep, I'd sure argue that!

A one time missed deduction that's noticed immediately within the same plan year can, as Belgarath noted under App B, Sec 2, be fixed by simply taking the deduction in the next pay period. The two things I would look at are 1) did the EE miss out on any match which might need to be corrected after the extra deduction is taken and 2) is two times the EE's deduction % greater than the plan's allowed deferral %, in which case I'd be extra careful to document why the higher % was taken on that subsequent paycheck.

After the second payroll is run and the double deduction is taken, as long as any lost match is corrected, then the employee will be in the same position as he/she would have otherwise been after that same payroll.

[John Feldt ERPA CPC QPA]

That's all good.

Be sure to look out for any deferring employees who quit right after that one goofed up paycheck is paid, and thus they do not have enough pay in the next payroll to cover the double deferrals.

[Guest 401kbee]

thank you all for you comments, It seems as if we are going to be creating a memo for participants regarding a double deduction. The plan is very flexible to allow for payroll period deferral changes, and the max deferral percentage is 70%. You did make a good point regarding the match. They do have a match, so must be careful on reporting the deductions separately so that participants receive their proper match. Now with regards to any gain or interest owed, would that be credited as a straight ER contribution subject to vesting or would that come in as a QMAC?

[masteff]

Now with regards to any gain or interest owed, would that be credited as a straight ER contribution subject to vesting or would that come in as a QMAC?

If you're using a fixed rate of interest, it should be neglible amount for one pay period. We always just stuck ours in w/ regular ER contributions. I'm not aware that we ever did it as a QMAC.

[Steelerfan]

The other thing you have to check is that you complied with the DOL plan asset regulation [29 C.F.R.2510.3-102.] The failure to remit employee contributions constitutes ER use of money that should have been withheld.

[jpod]

Steelerfan, the plan asset reg. is not pertinent here because this is an issue of money not being withheld (as opposed to withheld money not being deposited).

[Steelerfan]

Steelerfan, the plan asset reg. is not pertinent here because this is an issue of money not being withheld (as opposed to withheld money not being deposited).

I'm not sure your thinking straight on this. The failure to withhold does not get you out of the plan asset reg because the amounts become plan assets as soon as they can be reasonably segregated from the general assets of the employer even if they forgot to withhold the money. As a matter of payroll, whether or not the amount is coded and "withheld" properly, the amount sits in the employers GL until it is tranmitted to the plan. The issue as you say "withheld money not being deposited" is really a fiction--the "withheld" money stays put until transmission to the trust (unless the ER is evil). The glitch of forgetting to withhold doesn't take away the obligation to pay the money (which is still sitting where it would normally be had it been "withheld") to the trust. This was one of the first cases I ever worked on.

Under your logic the failure to withhold deferrals would never raise a DOL concern? Not true. There are two issues under the plan asset regulations. One is the failure to withhold, which creates a "sole benefit" issue--i.e. holding on to $ the employer is no longer entitled to--the ER "benefits" from having use of the $. DOL would be very concerned about systematic failures to withhold as a breach of the terms of the plan, fiduciary duty and use of the assets not for the sole benefit of participants and beneficiaries and a prohibited transaction.

The regulation requires that employee contributions be transmitted to the plan and properly invested at the time that employee contributions can reasonably be segregated from the employer's general account, but in no event later than the 15th business day following the month in which the participant contributions are received by the employer.

If the employer screws up its payroll and forgets to withhold, the plan asset clock starts to tick. If you notice the problem any time after the amounts would normally have been transmitted to the trust, I would think the DOL compliance program would be on the agenda.

[Bird]

the amounts become plan assets as soon as they can be reasonably segregated from the general assets of the employer even if they forgot to withhold the money.

Wow. I find that pretty extreme. How can they segregate the assets if they don't have them?! Remember, the money went to the participants (and some to tax withholding, I would guess); it's not like the employer is holding anything here.

[Guest mjb]

SF: What reg are you looking at? The plan asset regs apply to "amounts that a participant has withheld from his wages by the employer, for contributions to the plan". If the employer fails to withhold the contributions from the employee's wages there are no "plan assets" subject to the plan asset regs. The purpose of the plan asset reg was to prevent the employer from using employee contributions that were withheld from the employee's pay for its own benefit. Until the employee's contribution is withheld from the employee's pay by the employer it is not a plan asset.

I dont see what the PT issue is since the employer does not withhold any funds from the employee's pay but pays them to the employee the funds never become plan assets subject to ERISA or 4975.

[Steelerfan]

the amounts become plan assets as soon as they can be reasonably segregated from the general assets of the employer even if they forgot to withhold the money.

Wow. I find that pretty extreme. How can they segregate the assets if they don't have them?! Remember, the money went to the participants (and some to tax withholding, I would guess); it's not like the employer is holding anything here.

They are obligated to make the contribution under the terms of the plan. The amounts were wrongly paid to the participant, you're right, but the plan is entitled to the money and employer has the obligation to pay, so I guess I'm saying the employer has use of the money it must still pay to the plan, even though the participants has been "overpaid", as has been pointed out.

[Guest mjb]

The er doesnt have any "use of the money" because contributions are never withheld from the employee's wages. E.g., employee elects to defer 10% of weekly pay of $1000. If employer fails to withhold $100 employer pays employee $1000 less withholding and employer withholdws bupkis from the employee's pay.

[Steelerfan]

The er doesnt have any "use of the money" because contributions are never withheld from the employee's wages. E.g., employee elects to defer 10% of weekly pay of $1000. If employer fails to withhold $100 employer pays employee $1000 less withholding and employer withholdws bupkis from the employee's pay.

I understand. there's just something not right that I can't put my finger on. I think this raises a different problem than the plan asset reg--its' the exclusive benefit rule and plan's right to receive the contribution. The DOL has indicated that a prohibited extension of credit may occur if fiduciaries fail to take appropriate steps to collect delinquent contributions, including employee deferrals that are not timely paid over to the trust. [PTE 76-1, 41 Fed. Reg. 12740 (1976)]

Clearly, as a fiduciary, the employer had a duty to withhold contributions and remit to the trust. If ER fails to withhold $, the employees could certainly sue on behalf of the plan, even though they got the money in their pay.

[Guest mjb]

What is the extension of credit between the plan and the employer if the employer does not retain any funds but pays it to the employee? I dont see the employer as a fiduciary because wages paid to employees are not plan assets. What would be the employees claim under ERISA against the employer?

[Steelerfan]

What is the extension of credit between the plan and the employer if the employer does not retain any funds but pays it to the employee? I dont see the employer as a fiduciary because wages paid to employees are not plan assets. What would be the employees claim under ERISA against the employer?

Clearly there is no plan asset issue, I was off base on that. It looks like the ER accidentally "enriched" the participants at the expense of the plan--this would be a real mess, I do not believe that the only thing wrong with this scenario is a minor 401(a) failure, as you seem to be implying. Imagine if this went unnoticed for a long time (hard to believe but not impossible). The participants are enjoying the assets that should be in the plan, so it's the plan that gets screwed here (and ultimately the participants because the employer is not following the terms of the plan and saving their money). The employer is at fault for its failure to properly administer the plan as required by ERISA and subject to suit by the plan or it's fiduciaries (who wear two hats remember), or by participants whose contributions are not being made as required by the plan.

Obviously this type of error would normally not go unnoticed for long, but if it did and you were a participant in the plan, what would you do? Wouldn't you take action on behalf of the plan to make the plan whole? Imagine by the time everyone figures out what happened. You've spent all the money because you are barely making ends meet and didn't notice. You just found out your idiotic employer forgot to wihhold all the contributions. Are you suggesting they have no recourse against the ER?

[Guest mjb]

SF: Ignoring for the time being whether the er is a fiduciary with regard to paying wages, what would be the damages that the employees would be entitled to under ERISA for the failure to withold the contributions?

[Steelerfan]

SF: Ignoring for the time being whether the er is a fiduciary with regard to paying wages, what would be the damages that the employees would be entitled to under ERISA for the failure to withold the contributions?

Restoring losses to the plan because of the employers failure to adher to the terms of the plan document as required by ERISA.

[Guest mjb]

what losses are there? The lost gains because of the inability to invest the funds is a claim for money damages which is not allowed under ERISA since it is a law in equity. The only remedy is for the employees to recover any profits the employer made by not contributing the wages to the plan which is bupkis.

[401_4_ever]

Just thinking out loud here, but how about the loss of the tax benefit to the participant? Also I would think any proveable investment income the participant would have had is available.

[Guest mjb]

That is not a claim in equity. It is a claim for money damages which is available only in an action at law.

[Steelerfan]

That is not a claim in equity. It is a claim for money damages which is available only in an action at law.

A plan has the right to enforce a contribution requirement. The emloyer has an obligation to make these conributions. A 401(a) correction would require that the contributions be made by the ER. But if the employer refuses to correct under 401(a), do you actually believe there is no right of action by anyone to recover lost contributions and earnings?

The action under ERISA would be a claim in equity for restoration to the plan of all contributions and earnings that were not contributed as a result of the ERs breach of ficuciary duty. ERISA requires an employer to follow the terms of the plan, which includes the deferral agreement. The breach of that agreement by not making the required contributions is a violation of the plan and thus a violation of ERISA. Maybe participants could be required to disgorge some of the funds, I don't know but there is definitely a right of action somewhere in these facts. The P's would not be asking for money damages but for an action to resore the plan to the position it would have been had the breach not occured. Seems like a slam dunk--far from a stretch of the law.

[Guest mjb]

You have any citation for your slam dunk theory? ERISA limits recovery to restitution, e.g., the benefits which were unjustly kept by the wrongdoer and earnings that inured to the wrongdoer. In this case the employer did not retain any funds. Money damages for losses by participants are not allowed. In Helfrich v. PNC Bank, 267 F3d 477, the sixth circuit denied a participant's claim for restitution, disgourgement, injunctive relief and monetary damages against a bank fiduciary that invested his Q retirement plan account in a MM fund instead of the mutual funds that he had instructed the bank to invest in. The Sixth Circuit reversed the district court holding that the participant's claim under ERISA for restitution included the right to be placed in the position that he would have been had PNC not failed to follow his directions with respect to his benefits. The Sixth Circuit held that the relief requested by the participant was in the nature of money damages holding the "ERISA does not permit participants to claim money damages from plan fiduciaries"

I dont understand your logic that the participants could be required to disgourge funds because it would require that the particpants sue the employer for the contributions and the employer would in turn sue the employees for a return of the contributions under a cliam of unjust enrichment.

[Steelerfan]

You have any citation for your slam dunk theory?

I dont understand your logic that the participants could be required to disgourge funds because it would require that the particpants sue the employer for the contributions and the employer would in turn sue the employees for a return of the contributions under a cliam of unjust enrichment.

ERISA [29 U.S.C.A. § 1001 et seq.] clearly assumes that all fiduciaries will act to ensure that a plan receives all funds to which it is entitled, so that those funds can be used on behalf of participants and beneficiaries. Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc. 472 US 559 , 105 S Ct 2833 , 86 L Ed 2d 447 , 53 USLW 4811 , 6 EBC 1665 ;ERISA ; see also Opinion Letter 77-04. A plan must pursue delinquent contributions.

Although much of the authority deals with delinquent employer contributions, the Supreme Court said ALL FUNDS TO WHICH A PLAN IS ENTITLED; there is no basis for distinguishing between types of contributions. These are "employee contributions" under the DOL standard, but collection and remittance is under the control of the ER and must be made by the ER, who has fiduciary/trustee powers. The Supreme Court applied the common law of trusts to require that fiduciaries act to make sure a plan recieves all funds to which it is entitled. I can't imagine a more basic a statement in the law protecting the rights of beneficiaries to recieve what they are entitled to under a plan than that. The case you cite has no applicability to this factual situation; rather it involved a restoration due to investment choice, not a failure to contribute, as in this case. This case would not be a participant claim for money damages; it involves the restoration of losses due to a negligent failure to make contributions. If you think you can show that the employer is not a fiduciary/trustee in a case like this, then you must be houdini reincarnated--show me a case on point.

The disgorgement statement was made only on the thought that in order to fashion an appropriate remedy a court might require some of the funds to be returned by participants, I don't know, but I think the ER would be on the hook for all of it.

[Guest mjb]

1. In your zeal to find liability you are missing the essential point of this discussion which is that a recovery in equity is limited to restitution, not money damages which is available ony in an action in law. According to the Helfrich court (at 267 F3 481) " A restitutionary award focuses on the defendant's wrongfully obtained gain while a compensatory award [in law] focuses on the plaintiffs' loss at the defendant's hands. Restitution seeks to punish the wrongdoer by taking his ill gotten gains, thus removing his incentive to perform the wrongful act again. Compensatory damages on the other hand focuses on the plantiff's losses and seeks to recover in money the harm done to him." In the case of an employer who does not withhold 401k contributions there is no gain to the employer because the funds are paid to the employee, not withheld for the employer's use. A restoration of losses to the employees is not allowed.

2. Restitution only permits a return of the specific property wrongfully paid which is in the possession of a wrongdoer. If the wrongdoer no longer possesses the property there can be no action in equity. See Kroop v. Rivlin, 2004 WL 2181110 where a plan was denied recovery for overpayment of benefits because the defendant no longer had the funds in his possession. "A claim for property no longer in the defendant's possession seeks to impose personal liability on him rather than to restore property to the plaintiff and is legal, not equitable in nature. "

3. There is no need to discuss whether the employer is a fiduciary since there is no remedy to recover the contributions from the employer under ERISA.

[Guest mjb]

According to a story on todays Benefits in the News Walmart and the fiducaries of its 401k plan are being sued for a breach of fiduciary duty by plan participants because of the failure of Walmart to make 401k contributions due on compensation that Walmart illegally failed to pay its employees. This case arises from a decision in PA last year that Walmart illegally failed to pay 78M in wages due its employees. The Q is whether fiduciaries have an independent duty to determine if the employer is making contributions required under the plan.

[wsp]

According to a story on todays Benefits in the News Walmart and the fiducaries of its 401k plan are being sued for a breach of fiduciary duty by plan participants because of the failure of Walmart to make 401k contributions due on compensation that Walmart illegally failed to pay its employees. This case arises from a decision in PA last year that Walmart illegally failed to pay 78M in wages due its employees. The Q is whether fiduciaries have an independent duty to determine if the employer is making contributions required under the plan.

Seems to me that they are trying to pin the duty of ensuring that correct compensation is being paid by the employers onto the fiduciaries. In order to ensure that the contribution is being correctly made you would have to determine the compensation. As much as I dislike Walmart....can't imagine them losing this one.

[Steelerfan]

According to a story on todays Benefits in the News Walmart and the fiducaries of its 401k plan are being sued for a breach of fiduciary duty by plan participants because of the failure of Walmart to make 401k contributions due on compensation that Walmart illegally failed to pay its employees. This case arises from a decision in PA last year that Walmart illegally failed to pay 78M in wages due its employees. The Q is whether fiduciaries have an independent duty to determine if the employer is making contributions required under the plan.

Seems to me that they are trying to pin the duty of ensuring that correct compensation is being paid by the employers onto the fiduciaries. In order to ensure that the contribution is being correctly made you would have to determine the compensation. As much as I dislike Walmart....can't imagine them losing this one.

Walmart is a fiduciary too, just not the only one--I'm sure they have investment managers, etc., but Walmart itself can't escape it's fiduciary duty with respect to contributions owed--remember the company wears two hats!!!; any fiduciary who knew or should have known is potentially on the hook. I would not want to be Walmart othis one. If they owed the wages they will owe the contribution--they have a pretty good case i think

[Belgarath]

What are the plaintiffs asking for? As a non-attorney, it would seem reasonable that they should receive contributions based upon actual income as defined in the plan. But in a profit sharing plan, the employer isn't generally obligated to contribute a specific percentage. It would be interesting to know if their contribution was based upon a percentage (in which case the case for additional contributions would seem pretty strong) or on a dollar amount (in which case, not so strong, perhaps, although some reallocation of the contribution might be necessary.) Are the plaintiffs asking for additional damages of some sort?

[Guest Guest99]

Belgarath -- While I haven't read the complaint, I agree. If their contribution was based on a set percentage, their case is pretty strong. For example, what if they are a Safe Harbor Non-Elective, or the formula was a mandatory formula and not discretionary. I am an attorney -- if those are the facts that would seem to be a solid case.

[Steelerfan]

As a qualified plan and specifically a 401(k) matter there would be an "automatic" required contribution in the amount of the participant's deferral election on file (or default) and any mathch that would have been made on such compensatin that was not paid but should have been paid. It's qualified plan's 101. I can't even imagine the participants losing I haven't read the complaint yet either, but i'm assuming the plan is fairly straitght forward with respect to deferrals and match. I don't agree that the case is necessarily weaker if there is a discretionary PS formula if such contrution was made and the amount of compensation at issue affected the contrubution amount.

[Guest mjb]

Most of the 33 page complaint consists of conclusory statements of what ERISA requires instead of factual statements alleging wrongdoing by the defendants which is an indication that the plaintiff is short on evidence of wrongdoing. The factual allegation against the fiducaries (i.e, 15 unnamed individuals and Walmart) is contained in para 87 that that the fids knew or should have known that wm was not paying required contributions b/c it was miscalculating contributions based on improperly supressed baseline work wages, i.e, not paying overtime required under fed law and improperly punching out employees one minute after they returned from a lunch break to avoid crediting additional working time.

para 88 alledges a breach of fiduciary duty to prudently manage plan assets by failing to respond to underpayment of company contributions to the plan.

While the above allegations sound plausable they have a number of hurdles including does a fiduciary have a duty under ERISA to determine that amount of the contributions made by the employer to the plan for employees is based on correct amount of wages earned by the employees in accordance with the employment agreement between the employee and employer which a matter of contract law, not a fiduciary duty. Secondly, a fiduciary is only responsible for duties that he is agrees to perform and I dont think there is any plan subject to ERISA which requires that the fids determine if compensation reported by the employer (or contributions to the plan based on the employees' comp) has been correctly reported by the employer in accordance with applicable state and federal labor laws. Third is is the question of whether wages owed by an employer are to be considered plan assets before they are contributed to the plan.

[Steelerfan]

I'm not sure why you think there must be wrongdoing to make a breach of fiduciary case--which is more or less a negligence standard. The only remedy under ERISA is not restitution, as you seem to always imply.

A complaint will always be short on facts because (1) there has been no discovery yet to uncover the facts and (2) they are not alleging fraud. It has already been legally determined that the compensation was owed. Where do you get the idea that a plan cannot enforce a contribution requirement without a showing of wrongdoing? If a plan could not enforce a contrbution requirement, if would render most of ERISA moot.

Incidentally, it seems wm could be liable beyond what they "agree to perform" because they are the sponsor and remain liable in a general fiduciary capacity (not limited like an ERISA investment manager) unless the plan or trust limits their duties (and they have control over the payment of wages)

[Steelerfan]

See Walker, et al. v. National City Bank of Minneapolis, CA-8 (1994), 18 F3d 630, 18 EBC 1249.

In this case the trustee knew the employer failed to make the required contributions, but was not on the hook because of its limited duties as defined in the agreement (no doubt drafted by the bank's legal staff and outside counsel). This is sort of sad that they had no duty to notify the participants when they knew about the failure, but the participants clearly would have had an action against the ER for the failure to make contributions.

[in this case the part's sued the bank as trustee because the employer was bankrupt, but under the court's rationale, the employer would have been on the hook for failure to make contributions. The trustee got off the hook only because of the specific limiting language in the plan and the employer got off the hook because of bankruptcy. Walmart is obviously not bankrupt.]

Quotes from the case:

"It is undisputed that the bank was a fiduciary under the plan. Its obligation was to the beneficiaries. The issue before the district court was whether a trustee in an ERISA plan owes a duty, as a fiduciary, to inform beneficiaries of an employer's failure to make contributions required under the terms of the plan, when the duty to inform is specifically assigned to the plan administrator and not the trustee."

"The Plan specifically provided that “[t]he Trustee ... shall have no duty to see that the contributions received [from the Employer] comply with the provisions of the Plan” and that “[t]he Trustee shall not be obliged to collect any contributions from the Employer.”

"Thus, the language of the Plan clearly established that the Bank had no duty or responsibility to monitor contributions to the Plan or to notify participants if contributions ceased or became delinquent.

"These provisions [of the Plan] clearly establish that the sole responsibility for determining, making and notifying participants regarding contributions to the Plan was allocated to MWE as Employer and Plan Administrator.

What does this case tell me: if you are the employer, you have a duty to make required contrubutions to the plan and (as pointed out above) unless your duties are limited, you are on the hook. In Walker the trustee's duties were limited because it was the ER's responsibility. Therefore, unless Walmart goes into bankruptcy, the principles in this case would put the participants in a pretty position, because someone will be responsible.

[Guest mjb]

Restitution is only a remedy in equity if there is wrong doing by a person, e.g., a breach of duty by a fiduciary in performing fiduciary dutes under ERISA.

Whether an employer is liable for unpaid contributions is dependent on the terms of the agreement between the fund and the employer, not on the employer's status as plan sponsor. In ITPE v. Hall, 334 F3d 1011, the 11th circult held that the owners of a business are not fiducaries to the plan for unpaid contributions because unpaid contributions are not assets of the plan unless the agreement between the plan and the employer specifically and clearly declares that unpaid contributions are plan assets. According to the court, a person should not be attributed fiduciary status under ERISA and thus accountable for performance of strict liabilities required in that role if he is not clearly aware of his status as a fiduciary. Without clear contractual language it would be improper to impute fiduciary liability.

[Steelerfan]

The case you site stated at the end: "Because employers are so often the guarantors of expected retirement incomes, it is easy to understand why unions and other employee organizations might wish to devise a forceful means of holding corporate officers to account for missed payments. I believe it is at least possible that the agreement before us represents one such effort, and I therefore concur in the decision to reverse and remand for the district court to make that determination" emphasis added.

ITPE v. Hall should probably be read narrowly because it is in the contect collective bargained plans context. In addition, since the officers had "control" over plan assets as fiduciaries, the court felt it "needed" to conclude that missed contibutions are "plan assets", which it was not willing to do under the plan as written. I think it would be wrong to make that "extra" step a typical requirement in all cases. The Walker case stated: "As the Employer, MWE had the duty to determine and make contributions to the Trust." Therefore, simply being the employer was enough to create the duty, without the need to declare that missed contributions must be "plan assets" under the terms of the plan and trust.

In addition, sometimes courts react differently in collectively bargained situations like the case you site, where employers often make mistaken contributions or aren't even sure which fund they are supposed to contribute to. In such cases you get more sympathy from the courts for employers.

Judging from the Walker case I cited above, such language (holding fiduciaries liable for missed payents) will appear in well drafted plans. But in any event, making contributions to a plan is so basic a function (i.e. they are the life blood of a plan) that many will understandably assume that someone will moniter and make contrubutions. If I had to guess I'd say that most courts, in this post ENRON era, will find fiduciary liablilty in cases like this through the basic terms of most ERISA plans in circulation.

[Guest Guest99]

What law school did either of you crack legal researchers go to?

[Guest mjb]

SF: Both cases stand for the principle that a party must agree to be a fiduciary and perform a fiduciary duty before he can be deemed a fiduciary. In the absence of such an agreement fiduciary status will not be imposed. Thus a fiduciary will not have a duty to collect plan contribution in the absence of a plan provision requiring collection. I have never seen a plan that required a fiduciary to collect a contribution from an employer who fails to pay it.

Also plans usually have a provision that allows the plan administrator/fiduciary to rely on information provided by the employer and shall have no duty or responsibility to further verify or question such information. This would include amount of compensation paid to employees.

As a final comment how would the fiduciary of a DC plan pay for counsel to collect the back contributions from an employer since there is no source of funds in the plan to pay for such expenses?

[Steelerfan]

SF: Both cases stand for the principle that a party must agree to be a fiduciary and perform a fiduciary duty before he can be deemed a fiduciary. In the absence of such an agreement fiduciary status will not be imposed. Thus a fiduciary will not have a duty to collect plan contribution in the absence of a plan provision requiring collection. I have never seen a plan that required a fiduciary to collect a contribution from an employer who fails to pay it.

Take look at Castaneda v. Baldan 961 F Supp 1350 (As part of their fiduciary duty to make reasonable collection efforts, ERISA plan administrators must make reasonable investigation and decision as to whether to initiate legal action to recover plan assets, such as delinquent contributions.)

The Court held "that a plan administrator and fiduciary: (1) has a duty to make reasonable collection efforts; (2) has a duty to give notice to participants of an employer's failure to pay and his own decision not to incur expenses to seek contribution; (3) has a duty to make reasonable investigation of alternatives for recovering delinquent contributions; (4) has the power, but not an independent duty, to audit an employer's records if necessary to discharge the previous duties; and (5) has a duty to take reasonable actions to remedy another fiduciary's breach once aware of that breach." The court based its analysis on the Supreme Court case I brought up in an earlier post.

Commentators also agree:

"The groundwork laid over the years since ERISA's enactment is now beginning to spawn private suits to enforce the rules. A recent case [then] pending in federal court in California, Castaneda v. Baldan, 1997 U.S. Dist. LEXIS 1621 , suggests that courts are becoming receptive to private suits to force collection of delinquent contributions designated for ERISA plans. . . In addition, any delay by a plan fiduciary in moving to protect the plan's interest in participant contributions can lead to charges that the fiduciary has breached its general fiduciary duties to the plan's participants and beneficiaries, or has engaged in other unlawful conduct." JOHN J. MCGOWAN, JR.

Multiemployer plans routinely hire attorneys in house to collect delinquent contribuitions using fund money to pay salaries of such attorneys.

Also, if you read ERISA's fiduciary duty rules, it never limits the plan sponsor (plan administrator with large caps) to duties that it agrees to. If that were the case, employers could get out of "default" duties simply by agreeing not to perform them or ommitting them from the agreement. That would be absurd. Under ERISA, fiduciary status is attributed to anyone specifically named as a fiduciary in the plan document and to persons performing certain functions on behalf of the plan. A plan sponsor is always considered a plan fiduciary by virtue of maintaining and administering the plan. Although a person may be a fiduciary only with respect to the areas of plan operation over which he or she exercises discretionary authority, the plan sponsor typically fulfills a variety of roles with respect to plan operation and exercises authority by selecting and monitoring the providers retained to provide services to the plan.

A breach of fiduciary duty can occur for someting as simple a failure to exercise duties to the plan in a responsible manner. It's just not hard to make a case on the sorts of facts we've been discussing here. I wonder what you would do for your client if they told you the employer failed to contribute to the plan???