A growing number of multiemployer pension plans and welfare plans, which are common in the construction, transportation and retail food sectors, have modified plan or trust terms to make employer contributions which are due and owning but not paid “plan assets.” Although the due and owing amount is sitting in the company’s bank account awaiting disbursement along with other accounts payable, courts consider the amount due to be a “plan asset” if the plan or trust has a provision to the effect that amounts due and owing are plan assets.
As a plan asset, whoever in the company has the authority to make (or not make) the disbursement may be considered to be a fiduciary under ERISA. As a fiduciary, the person is personally liable for the amount which is due and owing to the fund. West Virginia Laborers’ Pension Trust Fund v. Owens Pipeline Services, ___ F.Supp.2d ___, Case No. 2:10-cv-00131 (S.D. WV Nov. 18, 2011).
Further, the bankruptcy of the company will not extinguish this personal liability and the personal bankruptcy of the individual may not discharge the obligation if the non-payment is considered to be a fraud or defalcation while acting in a fiduciary capacity within the meaning of Section 523(a)(4) of the bankruptcy code. The courts are divided on whether an individual who is a fiduciary under ERISA is also a fiduciary under the bankruptcy code. See, Trustees of Iron Workers v. Mayo,(In re Mayo), 2007 WL 2713064 (Bankr. D. Vt. Sept. 17, 2007), Bd. Trustees of the Ohio Carpenters’ Pension Fund v. Bucci, (In re Bucci), 493 F.3d 635 (6th Cir. 2007).
Posted by Carl H. Hellerstedt, Jr. Mr. Hellerstedt is Counsel with Spilman Thomas & Battle, PLLC. His primary areas of practice are labor and employment and ERISA law.
In transactions where a buyer of assets is also hiring a large group of the seller’s employees who are needed to operate the purchased assets, the Asset Purchase Agreement (“APA”) will contain fairly detailed provisions explaining how the buyer will provide ERISA plans for the employees of the seller who become employees of the buyer. In some transactions, the buyer will require that all the seller’s employees who are hired by the buyer are simply treated as new hires under the buyer’s existing ERISA plans with no connection to the seller’s ERISA plan. In other transactions, the circumstances may require that the buyer adopt the seller’s existing ERISA plans for the seller’s employees who are hired by the buyer or, if not adopting the existing plans, the buyer may be required by the APA to put in place “comparable” plans. It is not unusual for an APA to also include some assurance that what ERISA plans are in place initially will not be changed (diminished) for a period of time.
It is also not uncommon that after the closing, the buyer fails to do exactly what the APA said it would do in terms of the ERISA plan covering the employees hired from the seller.
Federal courts continue to adopt the use of criteria much more expansive than the traditional common law criteria to determine if a purchaser of assets is responsible for the seller’s ERISA liabilities’ despite language in the Asset Purchase Agreement (“APA”) excluding the liability. The courts are saying that there are certain types of ERISA liabilities which will follow the assets no matter what the parties may say contractually to exclude or limit the seller succeeding to the ERISA liability.
The criteria used by the federal courts which have adopted this expanded view of when an obligation of the seller becomes the obligation of the buyer despite provisions in the APA to the contrary has but two elements: (1) notice of the liability (actual or constructive) and (2) continuity of the operations (how closely are the assets purchased used by the buyer in the same way they were used by the seller). Common ownership is not part of the criteria.
Under this expanded definition of when successor liability attaches, the buyer cannot escape the liability by disclaimers or exclusionary provisions in the APA. The courts say that once the buyer is on notice of the liability, the most the buyer can do is negotiate a lower purchase price and/or require the seller to provide an indemnity. Needless to say, neither of these options to mitigate or offset the ERISA liability are necessarily available or practical in a given transaction. Courts generally refuse to enforce contractual indemnity provisions for violations of employment protective statutes, such as Title VII and the FLSA, on public policy grounds. Equal Rights Center v. Arch Stone, Smith Trust v. Niles Bolten Associates, Inc., 602 F.3d 597 (4th Cir. 2010); Gibbs-Alfano v. Burton, 281 F.3d 12, 21-23 (2nd Cir. 2002). The Third and Sixth Circuits have enforced ERISA withdrawal liability indemnification contractual provisions. See, Pittsburgh Mack Sales & Services v. Int’l. Union of Operating Engineers Local Union No. 66, 580 F.3d 185 (3rd Cir. 2009); Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, 2012 WL 880601 (6th Cir., March 16, 2012).
In February of 2012, the DOL published long-awaited final regs under Section 408(b)(2) of ERISA which took effect July 1, 2012. These require the disclosure of fees that service providers charge to pension and 401(k) plans. In light of this ruling, employers shuold:
- Review their pension and 401(k) plan documents, SPDs and TPA agreements to determine if the company is identified as the plan administrator or named fiduciary.
- Obtain fiduciary liability insurance coverage if the company, committee or individuals are identified as a fiduciary or plan administrator.
- Contact the existing TPA to determine its position on compliance with the new regs. If the existing TPA is willing to provide support for compliance with the new regs, enter into a service agreement with the TPA which spells out what responsibilities of the TPA are and the fees for same. Consider having these fees paid from the company funds rather than the plan assets, at least for the initial compliance requirements.
- Put in place written procedures and policies which spell out how and by whom the fiduciary obligations of the new regs will be fulfilled.
- Don’t permit the company or yourself to be a sitting duck for inventive plaintiffs class action lawyers which are sure to have an interest in the new fee regs.
Posted by Carl H. Hellerstedt, Jr.
Mr. Hellerstedt is Counsel with Spilman Thomas & Battle, PLLC. His primary areas of practice are labor and employment and ERISA law.
In February of 2012, the DOL published long-awaited final regs under Section 408(b)(2) of ERISA to be effective July 1, 2012 which require the disclosure of fees that service providers charge to pension and 401(k) plans. The fee regs do not apply to government plans, simplified employee pensions, simple retirement accounts, IRAs and 403(b) annuity contracts and custodial accounts. The fee regs would also not apply to the fees paid to service providers directly by the employer out of general business funds. The regs are directed at fees paid out of assets of the plan or the individual participant’s account. The kinds of services for which fees must be disclosed include, but are not limited to, direct fiduciary services, direct investment advisor services, record keeping and brokerage services, accounting, auditing, actuarial, legal and third party administration.
Why should the employer be concerned about the new regs? Can’t all these requirements be handled by the existing third party administrator for the plan?
The employer should be concerned because almost always the plan documents name the company as the plan administrator which in turn makes the company a fiduciary with respect to the plan. Virtually all service provider agreements, except those for the trustee custodian of funds and entities acting as investment advisers, disclaim that the service provider is a fiduciary and point to the plan administrator as the fiduciary. Since virtually always it is the employer who has the authority to enter into service contracts, the employer will have the fiduciary responsibility. It is important how the plan and related documents identify the plan administrator and/or the “named fiduciary.” It is highly likely that company is named as the plan administrator. Sometime a committee is named as the plan administrator. Virtually never is the third party administrator (“TPA”) identified as the plan administrator (sometime the TPA is identified as the claims administrator which is not the same as the plan administrator).