Id & Manage Hidden Employee Benefit Exposures In Business Insolvency Or Other Transactions


The June 4, 2013 announcement of the Employee Benefit Security Administration (EBSA) provides a timely reminder to businesses sponsoring employee benefit plans, their owners and management, plan fiduciaries, banks, administrative service providers and other plan vendors, employee benefit plan and bankruptcy trustees, corporate receivers, creditors, and others looking to expedite the windup of abandoned  401(k), profit-sharing and other individual account pension plans of the challenges that can result when employee benefit plan responsibilities are mishandled when companies fail or experience other significant events, as well as the availability of tools to help mitigate or prevent these challenges through responsible proactive action.

Hidden Employee Benefit Exposures For Unwary Abound For Parties In Business Insolvency Or Other Transactions

A complex maze of ERISA, tax and other rules make, administration and termination of employee benefit plans a complicated matter. When the company sponsoring a plan experiences a significant workforce or other restructuring, becomes distressed, goes bankrupt or liquidates, merges, sells assets or engages in other significant business transaction impacting the plans or its workforce, the rules, as well as the circumstances, can create a liability and operational quagmire for everyone from the sponsoring business, its management, buyers, vendors, plan fiduciaries, plan participants and beneficiaries, related entities, asset purchasers and others.  While tough economic times may tempt business leaders to cut corners, more than 3o years of litigation and enforcement precedent make clear that cutting corners on the assessment and handling of employee benefit and other workforce responsibilities amid business distress or in other business transactions or events presents risks for all parties involved.  See e.g., Tough Times Are No Excuse For ERISA Shortcuts;  Mishandling Employee Benefit Obligations Creates Big Liabilities For Distressed Businesses & Their Business LeadersWhile many business leaders and plan fiduciaries lack a strong understanding of these rules and their implications in times of business or benefit plan distress or other significant business transactions, even those experienced with these concerns need to use caution to understand and respond to the series of ongoing changes in these rules, regulations and precedent that impact on the handling of plan related responsibilities in these and other special situations. 

The Internal Revenue Code (Code) requires contains a maze of requirements that companies sponsoring pension, profit-sharing, health and other employee benefit plans, their plans, and plan administrators must follow when maintaining, administering, or terminating these plans including in many instances, special rules on the termination of the plans, distribution of assets, and the liabilities that attach to affiliated companies, successors, and assets resulting from transactions involving employee benefit plans or their sponsors.

In addition to the Code’s rules, companies and other individuals that in name or in function have or exercise discretionary responsibility or authority over the maintenance, administration or funding of employee benefit plans regulated by ERISA also generally must meet ERISA’s high standards  for carrying out these duties based on their functional ability to exercise discretion over these matters, whether or not they have been named as fiduciaries formally. Under many circumstances these rules, or the handling of transactions can broaden the scope of responsibility or create exposures for a surprising range of parties dealing with the plan sponsor, related corporations or their stock, assets, benefit plans or workforce in corporate bankruptcies, mergers, asset or stock acquisitions, liquidations or other transactions.

Beyond these basic tax and fiduciary obligations, ERISA and the Internal Revenue Code (Code) create additional responsibilities and liabilities for when dealing with defined benefit or other pension plans subject to ERISA’s minimum funding and plan termination rules that when violated trigger a plethora of funding and notification obligations, penalties, liens on assets, and other obligations that can create significant traps for unwary plan fiduciaries and administrators, the sponsoring corporation, its management, affiliates and successors, as well as creditors or purchasers of stock or assets and others dealing with them.

Despite these well-documented responsibilities and a well-established pattern of enforcement by the Department of Labor, Pension Benefit Guarantee Corporation, Internal Revenue Service and private plaintiffs, many businesses and business leaders fail to appropriately understand these and other basic responsibilities and liabilities associated with the establishment, administration, termination and windup of employee benefit plans and other details about how their or others mishandling of employee benefit plan related responsibilities can undermine business goals and create unanticipated liability exposures.

Frequently, companies sponsoring their employee benefit plans and their executives mistakenly assume that they can rely upon vendors and advisors to ensure that their programs are appropriately established. The establishment and maintenance of these arrangements with limited review or oversight by the sponsoring company or its management team can be risky.

In other instances, businesses and their leaders do not realize that ERISA’s functional definition to determine fiduciary status means that individuals participating in discretionary decisions about the employee benefit plan, as well as the plan sponsor, may bear liability under many commonly occurring situations if appropriate care is not exercised to protect participants or beneficiaries in these plans.

In yet other instances, purchasers, related entities, bankruptcy trustees and creditors or others don’t appreciate the way their own or others mishandling of employee benefit plan obligations or exposures can impact their transactions and associated risks.

Proactive Action Can Mitigate Exposures & Costs

For this reason, companies providing employee benefits and their management, service providers, and related entities and the businesses dealing with them need a clear understanding of the rules and responsibilities Federal law imposes on the funding, administration and termination of these programs, how these rules can impact their responsibilities and goals, and the steps necessary to avoid or mitigate exposures likely to result if they or others mishandle employee benefit plan related responsibilities or assets and how to avoid or mitigate these concerns.

The challenges of winding up an abandoned plan discussed in the EBSA news release yesterday highlights just one of these complications, the problem of dealing with abandoned plans.

When companies and their management abandon plans, they leave their plans, participants and beneficiaries, service providers and others in limbo, without the authority or funds to wind up the plans.  When employers abandon their individual account pension plans, custodians such as banks, insurers and mutual fund companies are left holding the assets of these abandoned plans but without the authority to terminate such plans and make benefit distributions even in response to participant demands. Service providers often find themselves in the legally awkward situation of having continuing plan responsibilities without necessary direction or compensation for performance.  Meanwhile, participants and beneficiaries can’t manage, access or often even get information about their funds until the situation resolves.  Dealing with these issues usually requires cumbersome, time-consuming and costly processes often requiring complex, lengthy, highly formalistic and expensive judicial and administrative procedures to resolve while fiduciary, tax and other liabilities mount.  Meanwhile, participants and beneficiaries often lose access to their accounts or benefits or even see plan value decline as plan assets that could go to benefits are diverted to cover administrative costs of winding up the plan.

The EBSAs abandoned plan program is just one of many examples of tools that parties struggling with these issues can use to mitigate these challenges and exposures.  EBSA uses its abandoned plan program to facilitate a voluntary efficient process for winding up the affairs of abandoned individual account plans so that benefit distributions are made to participants and beneficiaries when this occurs.

The EBSA Abandoned Plan News Release  and the EBSA’s related response Response to ADP/JP Morgan published June 4, 2013 show an example of how EBSA used its abandoned plan program to give critical relief to JP Morgan Chase Bank NA and ADP Inc. to use to wind up certain abandoned plans without exhausting the 90-day waiting period that ordinarily applies before the termination of a retirement plan based on the best interest of participants pursuant to 29 CFR §2578.1.  By exercising its discretion to waive the 90-day notice period, the EBSA allowed JP Morgan Chase Bank NA and ADP Inc. to terminate immediately and wind up approximately 180 defined contribution pension plans abandoned due to corporate crises or neglect.

Requesting relief from the EBSA like that granted to JP Morgan Chase Bank NA and ADP Inc. in the announcement made yesterday is just one of various types of relief that legal counsel experienced with dealing with workforce and employee benefit plan challenges that can arise when companies or their plans become inadequately funded, bankrupt, or experience other significant transactions or events, can use to help debtors, and other plan sponsors, their management, affiliates, successors, buyers, plan fiduciaries, vendors, bankruptcy creditors and trustees.

Experienced counsel can help companies understand and negotiate the complex rules of the EBSA, the Pension Benefit Guarantee Corporation and the Internal Revenue Service governing dealings with these plans and where appropriate and available by taking advantage of relief or other options to mitigate these challenges.  Involving experienced counsel to explore and use these options early can help all parties get participants and beneficiaries their benefits while minimizing legal risks, time and expenses associated with the wind up of these troubled or abandoned plans.  Even where special dispensation is not available, the early involvement of experienced legal counsel as early as possible after the possibility that a business or its plans or assets will be impacted by underfunding, insolvency, a bankruptcy or liquidation, workforce reduction, sale, merger or other significant event can help plan and administer the steps necessary to handle cost effectively employee benefit related responsibilities and impacts.

For Help or More Information

If you need help with assessing or handing employee benefit or workforce challenges arising from business or employee benefit plan insolvency, stock or asset sales, mergers, bankruptcy or liquidation, reductions or other workforce changes or other significant business transactions or events, or other employee benefit, human resources, insurance, health care matters or related documents or practices, please contact the author of this update, Cynthia Marcotte Stamer.

A Fellow in the American College of Employee Benefit Council, immediate past Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Group and current Co-Chair of its Welfare Benefit Committee, Vice-Chair of the ABA TIPS Employee Benefits Committee, a council member of the ABA Joint Committee on Employee Benefits, and past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, Ms. Stamer is recognized, internationally, nationally and locally for her more than 25 years of work, advocacy, education and publications on cutting edge health and managed care, employee benefit, human resources and related workforce, insurance and financial services, and health care matters including extensive experience handling workforce and employee benefit challenges arising from plan underfunding, company restructurings, workforce change,  insolvencies, bankruptcies, mergers, stock or asset acquisitions, or other significant business or plan transactions.

A board certified labor and employment attorney widely known for her extensive and creative knowledge and experienced with these and other employment, employee benefit and compensation matters, Ms. Stamer continuously advises and assists employers, employee benefit plans, their sponsoring employers, fiduciaries, insurers, administrators, service providers, and insurers, bankruptcy trustees and receivers, asset purchasers, creditors and others dealing with plans and their sponsors, and others to monitor and respond to evolving legal and operational requirements and to design, administer, document and defend medical and other welfare benefit, qualified and non-qualified deferred compensation and retirement, severance and other employee benefit, compensation, and human resources, management and other programs and practices tailored to the client’s human resources, employee benefits or other management goals.  A primary drafter of the Bolivian Social Security pension privatization law, Ms. Stamer also works extensively with management, service provider and other clients to monitor legislative and regulatory developments and to deal with Congressional and state legislators, regulators, and enforcement officials about regulatory, investigatory or enforcement concerns.  Her experience includes involvement in the planning, execution and resolution of workforce and employee benefit related details of a multitude of high and low profile restructurings, bankruptcies and other significant transactions throughout her more than 25 year career.

Recognized in Who’s Who In American Professionals and both an American Bar Association (ABA) and a State Bar of Texas Fellow, Ms. Stamer serves on the Editorial Advisory Board of Employee Benefits News, the editor and publisher of Solutions Law Press HR & Benefits Update and other Solutions Law Press Publications, and active in a multitude of other employee benefits, human resources and other professional and civic organizations.   She also is a widely published author and highly regarded speaker on these matters. Her insights on these and other matters appear in the Bureau of National Affairs, Spencer Publications, the Wall Street Journal, the Dallas Business Journal, the Houston Business Journal, Modern and many other national and local publications.   You can learn more about Ms. Stamer and her experience, review some of her other training, speaking, publications and other resources, and register to receive future updates about developments on these and other concerns from Ms. Stamer here.

Other Resources

If you found this update of interest, you also may be interested in reviewing some of the other updates and publications authored by Ms. Stamer available including:

For important information about this communication click here. THE FOLLOWING DISCLAIMER IS INCLUDED TO COMPLY WITH AND IN RESPONSE TO U.S. TREASURY DEPARTMENT CIRCULAR 230 REGULATIONS.  ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN BY THE WRITER TO BE USED, AND NOTHING CONTAINED HEREIN CAN BE USED BY YOU OR ANY OTHER PERSON, FOR THE PURPOSE OF (1) AVOIDING PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW, OR (2) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TAX-RELATED TRANSACTION OR MATTER ADDRESSED HEREIN.

©2013 Cynthia Marcotte Stamer, P.C.  Nonexclusive license to republish granted to Solutions Law Press, Inc.  All other rights reserved

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