Ouch!: ERISA Successor Liability Despite Contractual Exclusions

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).

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New 401(k) Regs on Fee Disclosures

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).

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