Employer doesn't make required contributions

[Guest Sieve]

Money purchase pension plan. Employer flat-out doesn't make contributions required by Code Section 412, but years later agrees to put funds back into plan, with interest, and file for correction under VCP. Is this also a prohibited transaction, subject to Code Section 4975 excise taxes? And, I assume Code Section 4971 excise taxes apply, as well (for failure to fund pursuant to Section 412). And, of course, neither of those excise taxes is potentiallly waivable under VCP. A nightmare, ehh?

[jpod]

Off the cuff I don't see how 4975 could possibly be triggered. Where is the transaction with a "disqulified person" or self-dealing with respect to "plan assets?"

[Guest Sieve]

The potental PT would be the mixing of plan/trust assets with employer assets (the same PT there is when salary deferrals are deposited into the trust late). But, there are no regs re: when an employer non-elective contribution is considered plan assets. So, I guess I'm asking whether the Plan's provisions re: deposit of assets, if there are any, would cause those assets to be considered plan assets at some point and trigger a PT if not timely contributed--or whether these funds are not plan assets until actually contributed (even if years later) and therefore there can be no PT.

[jpod]

Interesting argument, but I think not. The plan's asset is the receivable, or its claim against the employer, but not the cash or property the employer might deposit to satisfy that receivable.

[Guest Sieve]

I also beleive that there's no PT, jpod. But wouldn't late deposits of employee deferrals (years late, for example) also show up as a receivable? But that clearly is a PT. The difference, of course, is that there's a reg making the employee deferrals themselves trust assets as of a certain date (aside from them also being receivables), but I find nothing that makes employer contributions trust assets until the funds are actully deposited. So, I conclude there is no PT for delinquent employer contributions. At least that's my conclusion until someone points out something I'm missing.

[jpod]

I think we're on the same page. I was just trying to make the point, inartfully, that unlike the regulation governing employee contributions, I don't think there is any authority to support the notion that assets in the employer's hands become "plan assets" once the statutory contribution deadline arrives.

[Don Levit]

I agree with everything that has been said, but I do have a little to add.

In Pfahler, Strine, Ramsey and Devan v. National Latex Products, U.S. Court of Appeals, 6th circuit, Dec. 14, 2007 the case dealt with an improperly funded health plan.

It included both employer and employee contributions.

The suit involved unpaid employee medical expenses.

One of the questions dealt with whether or not the trustees had fiduciary responsibilities to fully fund the plan (employer and employee contributions).

"A misrepresentation will be deemed material if there is a substantial likelihood it would mislead a reasonable employee in making an adequately informed decision. A promise that all claims would be paid would plainly affect a beneficiary's decision as to whether to seek health care."

"Because ERISA does not require an employer to fund a plan, a plan fiduciary is not duty-bound to bring suit to collect contributions from an employer unless an employer is bound contractually to make those contributions."

Don Levit

[Guest Sieve]

Thanks for the case cite, Don. Don't know if a plan is a contract--I think ERISA was passed, to some extent, to keep that issue away from state courts--but it may well be. If so, your quote may mean that the required, contractual (if it is) contribution produces "plan assets", at some point (probably when the "contract"--i.e., the plan--requires that the contribution be made), hence a PT if required contributions are not made timely. I surely don't like that result!! Looks like more research is in the works . . .

[Guest Sieve]

Further research -- Field Assistance Bulletin 2008-01 (2/1/2008) reiterates the DOL's long-held position that "employer contributions become an asset of the plan only when the contribution has been made," citing Advisory Opinon 93-14 and the preamble to PTE 76-1. So, as we suspected, mere failure to make an employer contribution does NOT give rise to a prohibited transaction. However, says the FAB, it would be a PT if the plan did not make efforts to collect a delinquent employer contribution or if there was an arrangement between the plan and the employer not to take efforts to collect the contribution.

[Don Levit]

Sieve:

I agree that plan assets are easier to determine if we look at employee contributions versus employer contributions.

The case I provided had to do with employer and employee contributions for a self-funded health benefits plan.

As you know, employer contributions are not required to be placed in trust for health benefits.

Rather, the benefits can simply be paid from the employer's general assets.

I thought it was interesting that the decision found the employer to be liable for the unpaid contributions, including the unpaid employer contributions.

And, we aren't even alluding to retirement benefits, in which a trust must be established.

What I am wondering is whether or not the employees were expecting the retirement benefits to be funded at the time?

I think that may also have a bearing on the employer's liability.

Don Levit