Company going broke and closing doors. Can't afford safe harbor match

[Santo Gold]

What options, if any, are there for a company that fell upon hard times very recently.  They have a basic safe harbor match in the plan and the owner is asking is there any way to get out of that for 2025 (calendar year plan)?  No HCEs have made a 401k contribution for 2025 and have no plans to do so.  Just the NHCEs.  

Any ideas are appreciated.

 

[Paul I]

They can end the SHM, but will have to make any match on YTD deferrals.  Since there are no HCEs deferring, there should be no testing issues by breaking the safe harbor.  As always, read the plan document and any employee communications to form an action plan before doing anything.

The employer may be able to plead a financial hardship with the IRS, but expect the IRS to want documentation that the employer pretty much is penniless.

[austin3515]

I had a client once that went bankrupt. The Plan is simply a creditor.  When assets are liquidated they get a piece just like every other creditor.  Closing the doors is different than a bankruptcy liquidation.  They should definitely be talking to a bankruptcy attorney.  As the saying goes, you can't get water out of a stone.  Sure they owe the money but if the well is dry, yada yada.  If the 100% business owner has money outside the business that is clearly where the exposure is.

[Bruce1]

How does it work with you continuing service? There still has to be a 5500 filing and no ones going to work for free. How do you get paid as a TPA if a company is going bankrupt? Sounds like a stupid question but just curious what other practitioners have done in these cases. 

[Peter Gulia]

A retirement plan’s trust may, unless the plan’s or trust’s governing documents provide otherwise, pay the portion of a service provider’s fee fairly allocated to “reasonable expenses of administering the plan[.]” ERISA § 404(a)(1)(A)(ii).

This is not advice to anyone.

[Lou S.]

1 hour ago, Bruce1 said:

How does it work with you continuing service? There still has to be a 5500 filing and no ones going to work for free. How do you get paid as a TPA if a company is going bankrupt? Sounds like a stupid question but just curious what other practitioners have done in these cases. 

There are a couple of options -

1 The Plan pays the expenses, assuming the Plan allows for this and participant disclosures about fees are properly distributed. Have the Plan Trustee authorize this option in writing.

2 You request payment in advance from the Plan Sponsor (or directly by the business owners if a small business) before completing any work.

3. You hope you get paid by the bankruptcy trustee.

4. You resign as a service provider.

I generally try 1 and 2 first and if that doesn't work, skip to 4.

There may be more options but these seem like the 4 most likely and what decision you come to as a service provider is up to you depending on your level of comfort.

[EBP]

The OP didn't say the employer was going to declare bankruptcy so thoughts about relief under that may be premature. If the employer is just closing down, amend the plan immediately to stop safe harbor prospectively under economic loss (but it can't be effective until 30 days after date employees are notified) and issue a 30-day notice to participants saying the same. Company will still be on the hook for matching contributions on deferrals made from beginning of plan year to date of cessation of safe harbor contributions under amendment and notice. And ADP/ACP testing will be required for the year.

As soon as company declares bankruptcy (if it does), everything about terminating and wrapping up the plan gets exponentially harder. We're currently dealing with a case. First time in 38 years of practice and never want to do it again. I'd give you details, but you really need bankruptcy counsel and ERISA special counsel (which needs to be appointed by bankruptcy court first). The whole process is frustrating, takes a long time, and is different from the normal plan rules.

[Peter Gulia]

If the employer’s circumstances seem likely to result in a voluntary or involuntary bankruptcy:

About Lou S.’s step 2 (and some variations), if the organization that soon becomes a bankrupt paid an amount the organization need not have paid—because the plan at least permitted the plan to pay or reimburse the plan’s expenses, one risks that a bankruptcy judge might find the amount so paid was a preferential transfer, and might order the payee to restore the amount to the bankruptcy estate.

Some service providers might skip from Lou S.’s step 1 to step 4.

And, even if confident about full and prompt payment, some providers are unwilling to continue services if there is a change in the plan’s administration.

Be careful about not discarding records earlier than the service provider’s proper records-retention plan requires or permits.

And a service provider might get its own lawyer’s (not anyone else’s lawyer’s) advice about whether it might be unwise to deliver records, or even copies of records, to a breaching or doubtful fiduciary.

This is not advice to anyone.

[david rigby]

Thankfully, I'll never have to do this again:  About 25 years ago, I spent a full day with a bankruptcy attorney, educating him about ERISA matters for our common client in bankruptcy.  Maybe the legal world is different now.  If the bankruptcy attorney does not have ERISA experience, don't be shy about suggesting that someone (not you) should engage the necessary legal assistance.  

Of course, as pointed out by @EBP, there is no mention (yet) of a formal bankruptcy filing.

[austin3515]

I mentioned bankruptcy because unless the business is bankrupt or the owner (who is a fiduciary) is bankrupt (unless the corporate veil is pierced which is something I know nothing about beyond the term), I don't see how you get out of funding the contribution.

[Santo Gold]

Thank you all for the great replies.  I do not believe that this is a bankruptcy matter, just a drastic turn of events that makes the ongoing operation of the company not viable (small company ~ 8-10 EEs).

The owner does have a large enough plan account balance that would more than cover the YTD match, so they have not hit rock bottom and the owner is decent enough that he would likely not hesitate to use personal assets to fund the shortfall.  So, there may be a way out.

As for the TPA fees, I will address that up front before doing anything further.