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Proposed DOL Abandoned Plan Regulations

Guest Thornton

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Guest Thornton

Company A went into Chapter 7 bankruptcy in 2006. Company A sponsored several welfare plans and a 401(k) profit sharing plan. The 401(k) deferrals were and mostly still are invested on the American Funds recordkeeper direct daily platform. The profit sharing contributions were invested in a single common fund, invested largely in company stock. Shortly before the company failed, several key employees quit (fled?) and were paid their profit sharing distributions in non-company stock, leaving the plan with the soon to be worthless company stock. The bankruptcy trustee, in his role as plan trustee, filed a lawsuit to recover the distributions. Some of the money has been recovered, and a couple of actions are still pending.

The plan cannot be terminated until resolution of the legal actions. The plan is on a prototype document, and we were retained in March 2010 to complete the EGTRRA restatement. The document is currently in compliance. We were also asked to file the delinquent 5500s and to prepare the plan for termination as soon as the lawsuits are resolved. This is where the problems begin. The last 5500 was filed for the 2005 plan year. Thereafter, the TPA, unable to get any cooperation, resigned. Nothing has been done since. We have obtained many of the financial records, but no sponsor data, such as participant census data, etc. has been located. We have come to the conclusion that the material is probably lost, or at least unrecoverable at a reasonable cost. The plan is also in audit status. In brief, the cost of preparing the missing 5500s and paying for the DOL late filing penalties and the plan audits will likely exceed the probable plan assets.

Obviously, the abandoned plan rule would be a major benefit here. However, based on current regulations, since the bankruptcy trustee assumed the role of plan administrator, the plan is technically not abandoned. The DOL, in its December, 2012 proposed regulations, recognizes this fact and expands the Abandoned Plan Program to firms undergoing liquidation in Chapter 7.

Finally, I get to my questions:

  1. Is it possible to apply the proposed abandoned plan regulations to this situation? If yes, does it make a difference that the sponsor was in bankruptcy prior to the proposed regulations?
  1. If the answer to #1 is no and we have to do a standard plan termination, can we petition the DOL to waive the late filing penalties and audit fees. The problem, as noted above, is that the 5500s would most likely be incorrect and the audits would be qualified.
  1. Can a QTA be appointed in this situation?
  1. Should the plan trustee throw himself on the mercy of the DOL?
  1. Should the plan trustee retain an ERISA attorney?
  1. Any other ideas?



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While I don’t give advice, here’s a few thoughts that you, with your lawyer’s advice, might consider to help you protect your engagement. (For your convenience, I put them in an order related to the order of your queries.)

The 2012 proposed rule is a proposal; the Labor department has not adopted it.

Even if not as a QTA, a current fiduciary can engage service providers if he, she, or it does so meeting all duties, including duties under ERISA §§ 404-406.

In my experience, the Labor department is reluctant to excuse a plan’s administrator from a duty to engage an independent qualified public accountant to audit the plan’s financial statements. This has been so even when the plan’s expense for the auditor’s fees would result in a serious reduction in participants’ account balances. (I’d like to learn whether others have had similar or different experiences.)

A penalty for an administrator’s failure to file an annual report is chargeable, at least initially, against the breaching administrator. The Labor department might assert breaches and penalties against persons who caused or allowed the administrator’s breach.

A plan’s administrator might choose to file a Form 5500 annual report using the best information available to the administrator.

It is not improper to file a Form 5500 merely because it includes an auditor’s report that is qualified or even adverse.

A current fiduciary might be unconcerned with filing a report that reveals breaches of other fiduciaries if the current fiduciary, upon taking office, did what he, she, or it could do to correct and remedy those breaches.

An abandoning or otherwise breaching fiduciary should get lawyers for personal advice and defense.

A current fiduciary likely needs lawyers’ advice just to meet the fiduciary’s duties. If a current fiduciary is confident that his or her administration is blame-free, he or she might evaluate engaging lawyers at the plan’s expense. He or she would evaluate such a choice knowing that the evidence-law privilege for confidential lawyer-client communications likely would not keep those communications secret from the plan’s participants or the Secretary of Labor. For anything in which the correctness of the fiduciary’s administration could be an issue, one would want that advice or representation from lawyers who are separate from those who rendered advice for the fiduciary’s role as a fiduciary.

Given your description about pending litigation concerning distributions that might have involved unfair valuations or unfair allocations (and the possibility of other litigation concerning other breaches), those appointed or engaged to serve this plan might prepare for a long ride.

Even if your firm already accepted an engagement, get your lawyers’ advice about what you can do to protect the terms of your engagement and your risks.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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