Wrongful retention of employer contribution by buyer following sale

[C_Mpls]

I have an issue I have not come across before. A (new) client sold his home healthcare company in 2023 in a membership interest sale. The business offered a Cash Balance Benefit Plan to its employees. The Benefit Plan was to continue after the sale. The seller made (on bad information) a high dollar value ($250k) contribution to the Benefit Plan after the sale was completed. The parties did not complete the paperwork to make the change of the trustee and employer under the benefit plan until the end of 2023. For the purposes of the Plan, when the contribution was made, the seller/contributor was still the "employer" under the Plan. The Plan contains a provision stating: 

15.02 Return of Employer Contributions. Upon written request by the Employer, the Trustee must return any Employer contributions provided that the circumstances and the time frames described below are satisfied. The Trustee may request the Employer to provide additional information to ensure the amounts may be properly returned. Any amounts returned shall not include earnings but must be reduced by any losses.

            (a) Mistake of fact. Any Employer contributions made because of a mistake of fact must be returned to the Employer within one year of the contribution.

            (b) Disallowance of deduction. Employer contributions to the Trust are made with the understanding that they are deductible. In the event the deduction of an Employer contribution is disallowed by the IRS, such contribution (to the extent disallowed) must be returned to the Employer within one year of the disallowance of the deduction. 

 

Seller believed he could deduct the contribution but was mistaken about this. He has since demanded the return of the funds many times. Buyer has not responded to the demands and threats of litigation.

Although the sale of the business included the Cash Benefit Plan, that contribution was not in the Plan at the time of the sale and was not bargained for in the transaction. The Buyer has failed to comply with regulations and was dropped by the third party administrator as a result, about 1 year after the sale of the business. Client's previous attorney sent a demand letter and received no response. I did the same and was told they would be responding, and since have received no further response. 

If anyone has dealt with anything remotely similar or has any suggestions on proceeding, I would be grateful. 

[CuseFan]

Those rules are very particular, and "I thought I could deduct but my accountant told me no" (or some other facsimile) I don't think qualifies as a mistake of fact. CB contributions - minimum required and maximum deductible - should have been calculated by a knowledgeable  actuary. Following bad advice, ignoring good advice, or not getting advice is not a mistake of fact. Mistake of fact is like having the actuarial calculations based on materially incorrect data such that the contribution range is materially incorrect. Maybe that is the case here, but you don't provide details. If so, and a refund was requested from the trustee within a year of the contribution then there could be actionable cause, in which case I'd recommend lawyering up and following through on the litigation threat as it seems the seller has been ghosted.

Note the amount available for return is limited to the excess over what could have been contributed had the mistake leading to the error not occurred.

Disallowance of deduction is specific to IRS action and you don't mention that as a relevant event here.

[Peter Gulia]

To help the seller evaluate possibilities and probabilities of outcomes about a demand, an arbitration, or a court proceeding seeking a return of what the seller might assert was a mistaken contribution, the seller might want its lawyer’s evaluation.

An important issue could be whether the seller’s ostensible belief or mistaken assumption was a mistake of fact.

What fact was not known to the seller and would not have become known had the seller used reasonable diligence? Including (at least) reading all documents of the organization and of the transactions?

If the seller might ground a claim on the receiving plan’s § 15.02(b), might such a claim be inchoate until the seller has filed an income tax return that claims a deduction for the contribution and the IRS has somehow “disallowed” the deduction? Or, might the receiving plan’s fiduciary be persuaded by a reasoning that the seller’s knowing that it must not file a tax return that would claim a deduction the taxpayer knows it is not entitled to is tantamount to the IRS’s disallowance.

If, when the contribution was made, the seller was the or an employer regarding the participants (and their beneficiaries) who are the subject of the contribution, how confident are you that the contribution is not deductible?

What consequences result from relevant acts having transpired in 2023?

Although $250,000 might matter to the seller, might professionals’ fees and other expenses outweigh the probability-discounted recovery?

This is not advice to anyone.