Responsibility to Collect Contributions
Rev. 11/17/11; E-mail Alert 2011-15

The Department of Labor (DOL) (through its Employee Benefit Security Administration (EBSA) division) works to protect benefits of employees in retirement plans, including 401(k)s. Lately, the DOL has been investigating delinquent contributions to qualified retirement plans.

In addition to the obvious problems that arise when plan contributions are not timely deposited, the DOL has found that some plan documents expressly absolve plan trustees from the responsibility of monitoring and collecting delinquent contributions. Based on its findings, the DOL issued Field Assistance Bulletin 2008-01 (FAB 2008-01) to provide guidance regarding delinquent deposits into qualified plans, such as 401(k) plans.  The FAB addresses two questions:

• When are contributions delinquent?
• Who is responsible for collecting delinquent contributions?

When are contributions delinquent?
The answer to the first question is straightforward: “Employer contributions are delinquent when they are due and owing to the plan under the documents and instruments governing the plan but have not been transmitted to the plan in a timely manner.”

The FAB goes on to say that “. . . when an employer fails to make a required contribution to a plan, the plan has a claim against the employer for the contribution, and that claim is an asset of the plan.” Since assets of the plan must be protected, a failure on the part of the trustee to take active steps to ensure that delinquent employer contributions are collected constitutes a prohibited transaction under ERISA. In addition, plan fiduciaries could be held liable.

Who’s responsible for collecting delinquent contributions?
The answer to the second question is more complex. The FAB includes a reminder that “. . . the duty to enforce valid claims held by a trust has long been considered a trustee responsibility under common law.” The trustee is expected to “. . . use reasonable diligence to discover the location of the trust property and to take control of it without unnecessary delay.”

It is the DOL’s view that the fiduciary with the authority to appoint the plan’s trustee(s), i.e., the “appointing” or “named” fiduciary — generally the plan sponsor — must ensure that the obligation to collect contributions is appropriately assigned. The authority may be assigned to a trustee, unless the plan document expressly provides that the trustee will be a “directed trustee with respect to contributions,” or it may be delegated to an investment manager.

Assigning responsibility
Thus, FAB 2008-01 establishes an affirmative duty for the appointing fiduciary (often the plan sponsor) to assign responsibility for monitoring and collecting contributions. If that authority is not delegated, the appointing fiduciary is liable for plan losses resulting from the failure to collect contributions. As an additional incentive for plans to comply, the DOL states that if responsibility for monitoring and collecting contributions is not delegated, the appointed trustee or trustees(including a directed trustee)will be required to takeappropriate steps to monitor and collect contributions, even if a trust document says otherwise.

Liability may apply to fiduciaries who either actively participate in the breach of a co-fiduciary or who, by their action or inaction, enable the breach to occur.A fiduciary with knowledge of a breach by a co-fiduciary will only avoid liability by making “reasonable efforts to remedy the breach.”

In the event that the delinquent contributions are not deposited, the “DOL expects the trustee, or the appropriate party, to inform the DOL of this situation.”The DOL further stressed that under ERISA, plan documents cannot absolve a plan fiduciary from taking appropriate action to remedy the known breach of a co-fiduciary.

The DOL’s conclusion
“The responsibility for collecting contributions is a trustee responsibility. If a plan has two or more trustees, the duty may be allocated to a single trustee. A plan may also provide that a named fiduciary may direct a trustee as to this responsibility or may appoint an investment manager to take on this duty. To the extent the nature and scope of the trustee’s responsibilities are specifically limited in the plan documents or trust agreement, it is generally the responsibility of the named fiduciary with the authority to hire and monitor trustees to assure that all trustee responsibilities with respect to the management and control of the plan’s assets (including collecting delinquent contributions) have been properly assigned to a trustee or investment manager.”

In other words, the onus is on the named fiduciary (often the plan sponsor) to ensure that someone is assigned the duty of collecting contributions.

Unanswered questions
FAB 2008-01 assumes a situation where the trustee and investment manager are a corporate entity. However, it is not clear how the above guidelines should be applied to a self-trusteed plan. In this situation, who would be appointed to monitor contributions and collections? Indeed, who would want to take on this responsibility and potential liability?

How does this FAB help?
This FAB helps protect participants whose deferrals have been deducted from their pay but not deposited into the plan by requiring plan trustees to remind the plan sponsor to deposit late deferrals. It also requires the trustees to inform the plan sponsor of their responsibility to notify the DOL if deposits are not made. This often provides the necessary incentive. (Note: When deferrals are deposited late, there is also interest due.) This FAB also applies to other plan contributions.

Ongoing audits
The DOL has stated that an overwhelming number of filings in its Voluntary Fiduciary Compliance Program (VFCP) involve the late deposits. Hopefully, a future modification to the VFCP program will include de minimis criteria to provide a self-correction method.

To learn more, call 973-492-1880 or e-mail info@mhco.com.