Bankruptcy

[Belgarath]

I really don't know much about this, and wondered whether others had some experience. Typically, when a plan sponsor goes bankrupt, they terminate services with us, and our involvement thereafter is minimal.

But let's say, for example, that a 401(k) plan sponsor goes bankrupt - Chapter 11. Let's further assume that it is a 3% nonelective safe harbor. What happens if the bankruptcy Trustee says, say for the 2009 plan year, that the 3% won't be made? I guess what I'm trying to ask is does bankruptcy override the normal plan provisions? If you file for a plan termination for 2010, would the plan termination likely be approved on its status completely disregarding the requirements for a 3% contribution? What happens if it is a safe harbor matching plan, and the match isn't made - do you have to then do ADP testing?

It seems logical that the plan would not be disqualified if the reason for certain failures is that there is a court approved bankruptcy. But is that how it really works?

Etc., etc... and thanks in advance for any insights.

[mbozek]

I really don't know much about this, and wondered whether others had some experience. Typically, when a plan sponsor goes bankrupt, they terminate services with us, and our involvement thereafter is minimal.

But let's say, for example, that a 401(k) plan sponsor goes bankrupt - Chapter 11. Let's further assume that it is a 3% nonelective safe harbor. What happens if the bankruptcy Trustee says, say for the 2009 plan year, that the 3% won't be made? I guess what I'm trying to ask is does bankruptcy override the normal plan provisions? If you file for a plan termination for 2010, would the plan termination likely be approved on its status completely disregarding the requirements for a 3% contribution? What happens if it is a safe harbor matching plan, and the match isn't made - do you have to then do ADP testing?

It seems logical that the plan would not be disqualified if the reason for certain failures is that there is a court approved bankruptcy. But is that how it really works?

Etc., etc... and thanks in advance for any insights.

Bankruptcy courts have broad powers to overide all contractual obligations of a plan. It makes no sense for the IRS to DQ a plan and cause taxation to the participants because the Bkcy court under its federal law powers refuses to allow a contribution to be made to the plan.

[Belgarath]

Specifically, does anyone know if the 3% non-elective safe harbor is not made, due to bankruptcy, must the plan do ADP testing, which will certainly fail? I'm guessing that you must, absent something in writing from the bankruptcy trustee/court saying otherwise?

[Peter Gulia]

Belgarath, it might be unnecessary for you to sort out whether testing is or isn't needed. Here's a few suggestions for you to get your lawyer's advice on:

If the bankruptcy trustee ended your service contract, there might be nothing left to do.

If your service contract is in effect, rely on its provisions that say you perform services only as the plan's administrator instructs. Ask the bankruptcy trustee (who has become the plan's administrator) whether the plan does or doesn't want testing. And if the trustee/administrator requests any service, collect the plan's payment before you begin work.

If the bankruptcy trustee asks you to advise him or her about whether the plan needs testing, point out your contract's warnings that you don't render tax or legal advice. The trustee/administrator might feel frustrated by that response, but it's not your problem.

Remember that the fact of an employer's bankruptcy doesn't undo the plan's ability to pay for the advice and services that the plan needs for its administration.

In my experience, few bankruptcy trustees use that power. But why should any of us employee-benefits practitioners work for free?

[Belgarath]

Thanks.

[mbozek]

Specifically, does anyone know if the 3% non-elective safe harbor is not made, due to bankruptcy, must the plan do ADP testing, which will certainly fail? I'm guessing that you must, absent something in writing from the bankruptcy trustee/court saying otherwise?

My understanding is that the IRS requires safe harbor contributions to be a contractual obligation of the employer. However the bankruptcy law allows the Bk court to suspend contractual commitments after the filing of bankruptcy and superceeds other laws. One reason not to do ADP testing is if the Bk ct will not approve payment to perform a test that the plan will obviously fail.

[K2retire]

The information about correcting a failure to make a safe harbor contribution is very clear that testing is NOT part of the correction. Does the bankruptcy change that part of the equation too?

[Belgarath]

Thanks. It appears that the 3% safe harbor will NOT be made. We'll be getting an opinion from counsel on this, but if the Plan Administrator directs us to not do ADP testing, then it would seem we are safe in proceeding on that basis?