Published in the Business NH Magazine, January 2009 (http://www.millyardcommunications.com/index.php?src=news&srctype=detail&category=News&refno=430)
Tough decisions are being made by businesses across the state—whether to lay off personnel, suspend contributions to retirement plans or close up shop altogether. But before making any of those decisions, business owners and managers need to carefully consider how they will deal with retirement and other benefit plans to comply with the highly complex rules associated with those plans.
The federal law governing employee benefit plans—the Employee Retirement Income Security Act of 1974 (ERISA)—imposes specific standards of conduct on fiduciaries responsible for administering retirement and other plans. These responsibilities are even more significant during troubled times or when a business shuts its doors.
When it comes to decisions affecting benefits plans, fiduciaries must act prudently and solely in the interest of the plan participants and beneficiaries, administer plans in accordance with the plan documents, and diversify plan investments to minimize the risk of large losses unless it is clearly not prudent to do so.
So why is this important to you? If you are the fiduciary for your company’s plan, you are personally liable to make good on any losses to the plan that result from a breach on your part.
Keeping in Compliance
ERISA requires companies to keep retirement-plan assets separate from business assets and held in trust or invested in an insurance contract. ERISA also requires businesses to promptly deposit employee contributions in the plan (normally within seven business days), or penalties can be imposed. Federal law imposes significant penalties on employers who attempt to borrow plan assets to fund business operations. Plan loans are allowed from the business owners’ accounts (subject to the plan loan rules), but ERISA and the Tax Code strictly prohibit using other plan assets. The U.S. Department of Labor and the Internal Revenue Service (IRS) will impose a 20 percent excise tax on the employer, remove the fiduciaries and possibly seek criminal penalties if plan assets are misappropriated.
Federal and state law protects the assets of tax-qualified retirement plans, such as 401(k)s, pension plans, and profit-sharing plans, from business creditors as long as the appropriate plan formalities are observed. This protection not only covers the assets contained within the retirement plan, but also when the plan account is distributed to an employee who transfers the funds to an IRA.
When a Business Closes
Even though an employer may cease operations, retirement and other benefit plans require the attention of the business owner until the plans are formally terminated and all plan assets have been distributed to employees. In the case of tax-qualified retirement plans, fiduciaries are still responsible for retirement plan administrative functions, such as allocating contributions, processing distributions to terminated employees and compliance testing. Normally, fiduciaries are identified in the plan documents and fiduciary responsibility arises if individuals have discretionary authority over plans. If the employer is the only named fiduciary, the business’s officers, directors, and members (in the case of an LLC) all face potential exposure if plan matters are not addressed.
Employees and former employees have a right to receive plan information, including account statements and plan documents. If a fiduciary does not provide the required information, the fiduciary risks penalties of up to $110 per day for each day the information is not provided. Until all plan participants have received their plan accounts, a tax return for the plan must be filed with the IRS. Given the complexity involved, this work will need to be done by a third party administrative firm.
Even if an administrative firm has been retained, fiduciaries will still need to be involved in the process to provide payroll and all other necessary employee information as well as to sign necessary documentation. For this reason, if a business is going to be shut down, the fiduciaries need to secure all information necessary to complete the plan termination before the doors are closed.
Those issues are entirely foreseeable and fiduciaries will be held accountable if plan distributions are delayed or do not occur because information is lost or misplaced due to their inattention. It is critical for the business owners and fiduciaries to retain business and plan records even after a business is closed and the plan terminated in case the IRS or U.S. Department of Labor conducts an audit.
Employers and fiduciaries have added responsibility if they offer a traditional defined benefit pension plan and the business is in financial difficulty or contemplating bankruptcy. If an employer wants to reduce future benefits, they must provide notice at least 45 days before the effective date of the change.
Federal funding rules for pension plans changed significantly in 2008, requiring employers to make annual funding contributions equal to the expected benefit accruals for the year, plus an amount equal to any funding shortfall, amortized over seven years. Essentially, the new funding requirements mandate that plans be fully funded over a seven-year period. Plans that are deemed to be “at-risk” are subject to additional contribution requirements and limitations on benefit payments in order to accelerate funding.
Employers in financial difficulty may be able obtain a waiver from the funding rules if they can show that making the contribution will cause a temporary but substantial business hardship. A waiver application must be filed with the U.S. Secretary of Treasury. As a condition for a waiver, an employer may be required to provide security for the plan. In the event a waiver is not obtained and the employer fails to make the required contribution, it is subject to two successive nondeductible excise taxes. First, a 10 percent initial tax is imposed and, in the event the failure is not corrected within a specified period of time, an additional 100 percent tax is assessed.
Terminating a Plan
If the pension plan is terminated, the plan must fully vest the accrued benefit of all employees. This means that the plan owes all employees the pension benefits that they would have earned, even unvested benefits that would have been lost if the employee had voluntarily left the company. ERISA requires that pension plans go through a termination process with the Pension Benefit Guarantee Corporation (PBGC), the federal agency that ensures pension benefits. The process will determine whether there are sufficient assets to pay all benefits and if not, a priority order is put in place to allocate available plan assets. In the event of insufficient assets, highly compensated employees will see their benefits reduced below the maximum annual guaranteed benefit ($51,750 in 2008.) If there is a bankruptcy reorganization in process when plan assets are insufficient, the PBGC will assert that it should have priority for plan contributions.
Last, fiduciaries also need to be mindful of federal and state law requirements associated with providing health care continuation coverage when terminating an employee or terminating health plans in their entirety. The employer is required to provide employees notice of their continuation rights. In cases where the plan administrator has failed to give a required COBRA notice, courts have held employers and the plan administrators liable for employees’ medical expenses, legal fees and costs. It is critical for employers to coordinate employee notices with insurance carriers and other plan vendors.
John E. Rich Jr. is a director at McLane, Graf, Raulerson & Middleton, Professional Association in Manchester. He specializes in employee benefits, pension, ERISA and tax-related matters. He can be contacted at 603-628-1438 or at email@example.com. The McLane Law Firm is the largest full-service law firm in the State of New Hampshire, with offices in Concord, Manchester and Portsmouth, as well as Woburn, Massachusetts.
It is not unusual for difficulty to arise in locating former employees following a business closing.
it is not unusual for employees to leave the area, they may have to be tracked down if they do not receive employees and
When an employer significantly reduces its workforce or terminates its operations, Tax Code rules require unvested employer retirement plan contributions to become fully vested for terminating employees.
`Employer with multiple business need to keep in mind that the assets of all members of a controlled group can be tapped to provide plan funding in the event plan assets of one employer are insufficient to meet plan liabilities.
That is, once a fiduciary relationship exists, the fiduciary duties arising from it do not necessarily terminate when a decision is made to dissolve that relationship. Courts that have considered the issue have held that an ERISA fiduciary's obligations to a plan are extinguished only when adequate provision has been made for the continued prudent management of plan assets.