Distributions from 401(k) plan when employer in bankruptcy?

Can distributions be made out of a 401(k) plan when the employer is in bankruptcy? QTA has not yet been appointed yet (hearing next week).  All funds have been frozen pending appointment of the QTA.

Is the employer's bankruptcy a reorganization (chapter 11) bankruptcy, or a liquidation (chapter 7) bankruptcy?

Hi Peter.  It's chapter 7

I just had a participant call and ask for a full rollover to an IRA.  Since we're pending appointment of a QTA and no termination has been initiated, can this rollover be done? 

If there are fees that are going to be paid from the plan assets, for the QTA, recordkeeper, custodian, auditor, advisor, TPA etc typically all of those should be addressed first, before payouts occur. 

In bankruptcy - if the plan accounts are to cover the fees - as most plan allow - then you don't want the people who took their time taking their distributions to bear a disproportionate portion of the remaining fees. 

justanotheradmin thanks.  That was precisely my concern, that this person will withdraw and the other participants will bear the costs of the fees (QTA, legal etc) disproportionately.  Unfortunately, this gentleman advised that his wife is terminally ill and he needs the money, and since the plan termination has not been initiated, is there a duty to continue to administer the plan and allow him to do the rollover? 

That the employer is a debtor in a chapter 7 liquidation bankruptcy does not by itself undo a fiduciary’s responsibility to administer a retirement plan according to the plan’s governing documents, ERISA’s title I, and other Federal law. But:

A bankruptcy trustee or her eligible designee [see 29 C.F.R. § 2578.1(j)], as the plan’s administrator, might consider:

whether the bankruptcy trustee amended the plan (for example, to cut optional distributions);

whether special circumstances make it prudent to use the maximum period (90 + 90 = 180 days) to process a participant’s claim [see 29 C.F.R. § 2560.503-1(f)(1)];

how a fiduciary’s duty of impartiality relates to the fiduciary’s responsibility.

A retirement plan’s directed trustee (if any) should not follow what otherwise might be a proper direction until the trustee has satisfied itself that the direction is given by the person that has authority to direct the trustee.

This is not advice to anyone.

A good question and one you should probably send back to the ERISA Plan Administrator or Plan Trustee to direct you in how to act with respect to withdrawals in this time period.

Lou S.  The plan trustee "froze" the assets so there would be no withdrawals during this interim period but he did so not on grounds of any legal advice, he just thought that was "best."  The interim administrator (ADP) says they were told not to make distributions so they refuse to.  Legally, I'm torn between the fiduciary obligation to administer the plan and the issue of fees having to be paid and how distributions now will shift the burden of those fees to any remaining participants (some of whom we told they could not withdraw at the moment).  Then, there is the person's particular circumstance with this person's wife being terminally ill.  And of course, we're waiting to get the QTA appointed. 

I'm thoroughly confused.  The only effect of the employer filing bankruptcy is that a Bankruptcy Trustee may be appointed who should become the plan fiduciary for purposes of terminating it and distributing assets.  In any event, absent the bankruptcy trustee assuming responsibility, the existing plan fiduciaries remain the plan fiduciaries .  Interestingly enough, the OP indicates an active plan fiduciary, but also the pendency of an application under the DOL's Abandoned Plan program - and those two facts are inconsistent.  In order to have a QTA appointed, one must documents efforts to contact an existing fiduciary, and only if they can't be found, or are unable to continue as fiduciary, will a QTA be appointed.

In any event, if a plan fiduciary exists, it's a fiduciary decision to approval or not requests for distributions, considering many factors but including a diminishing pool of assets/participants to pay ongoing fees.  If the choose not to all distributions (a good idea, IMHO) then some "action" should be taken to effectuate plan termination and minimization of fees - else the DOL, when the denied participant complains, will question the fiduciary.

If the plan is "abandoned" under the DOL criteria, then by definition no fiduciary exists until a QTA is appointed.  Where I used to work, I was the QTA, and we would have a plan to bulk distribute benefits so as to reduce fee impact.  Often; however, the fees were due to us (a r/k), and we would waive those fees as to charge them might be perceived as egregious or greedy, and reputational risk outweighs revenue.

So, bottom line, who's the fiduciary NOW, and in any event allowing distributions is a fiduciary decision....

56 minutes ago, erisageek1978 said:

The plan trustee "froze" the assets so there would be no withdrawals during this interim period

I would say you have your answer.

Direct the participant to the claims procedures in the SPD and send them back to the Fiduciary who "froze" withdrawals.

Does the Trustee have any authority to "freeze" the assets? 

And exactly what is meant by "freeze"?  Does any participant have a right to reallocate his/her investment decisions now?

Does the Plan contain any language that might, automatically, terminate the plan due to bankruptcy filing?  The original post states "in bankruptcy".  Does that mean any formal filings have been made?  or just expected?

17 hours ago, david rigby said:

Does the Trustee have any authority to "freeze" the assets? 

That is a good question, but it goes deeper than that.  Often the trustee claims to be a non-discretionary directed fiduciary (and often claim they aren't a fiduciary - but that is a topic for another thread.)  Our practice as R/K and custodian, and the entity directly responsible for directing the institutional trustee, was to not process distributions, as there was no fiduciary to authorize them.  Even in those cases where processing distributions was outsourced to us (i.e. the plan sponsor need not be involved except to provide term dates and we'd handle the rest), we would refuse to process distributions as our authority was under an on-going delegation from the fiduciary - that evaporates when there is no active fiduciary to continue the delegation to us (and yes, our agreements so specify).  So "freeze" may not be the right term, and the trustee may not have been acting with authority, but rather not acting as not having continuing authority.

Regarding a chapter 7 liquidation bankruptcy, it matters to distinguish the roles:

the debtor, which lacks power except as the bankruptcy court or an Article III court authorizes;

the bankruptcy trustee, who takes on the debtor’s role as the retirement plan’s sponsor (if the debtor was the plan’s sponsor);

the bankruptcy trustee, who takes on the debtor’s role as an employer that participates under the retirement plan;

the bankruptcy trustee, who takes on the debtor’s role as the plan’s administrator if the debtor “or any entity designated by the debtor” was the plan’s administrator [Bankruptcy Code (11 U.S.C.) § 704(a)(11) http://uscode.house.gov/view.xhtml?req=(title:11 section:704 edition:prelim) OR (granuleid:USC-prelim-title11-section704)&f=treesort&edition=prelim&num=0&jumpTo=true];

an eligible designee, if the bankruptcy trustee appointed one (see 29 C.F.R. § 2578.1(j)(4) https://www.ecfr.gov/current/title-29/part-2578#p-2578.1(j)(4));

(If ADP is the plan’s recordkeeper, a bankruptcy trustee’s eligible designee might be State Street Bank and Trust Company, or another trust company the debtor had selected as the plan’s trustee or custodian. A recordkeeper might do much of the work under an arrangement with a trust company the recordkeeper suggests to customers. But last I knew ADP is not a bank, trust company, or insurance company eligible to serve as a qualified termination administrator or eligible designee.)

As MoJo explains, if a recordkeeper provides a service meant to be nondiscretionary and constrained by the plan administrator’s policies, procedures, and supervision, a recordkeeper might discontinue such a service until it satisfies itself that the recordkeeper gets its instruction from the person that has the plan-administrator powers and responsibility.

Likewise, for a service about something delivered to a plan’s administrator (for example, a draft of a Form 5500 report, or a quarter-yearly report about participants’, beneficiaries’, and alternate payees’ plan accounts), a recordkeeper might wait to deliver that something until the recordkeeper has a court’s order or other satisfactory evidence about which person has assumed the plan-administrator role.

A directed trustee should not pay anything to anyone until the trustee receives a proper direction from the plan’s directing fiduciary that has power and responsibility to give the direction.

This is not advice to anyone.