CHAPTER 7 PANEL TRUSTEE TRAINING Trustee Issues with Pension and Other Benefit Plans Timothy J. Snyder, Esquire 11 U.S.C. 704(a)(11) 11 U.S.C. 704(a)(11) provides that the Chapter 7 Trustee assumes the responsibility for administration of any ERISA Plan where debtor was the administrator prior to the Chapter 7 filing. ERISA 3(16)(A) Administrator the person specifically so designated by the plan documents; If no administrator designated - the plan sponsor; or no designation and unidentifiable plan sponsor -- such other person as the DOL may by regulation prescribe. 1
Administrative Duties Is a Chapter 7 Trustee the Plan Administrator? Trustee in In Re: NSCO, Inc. 704(a)(11) only carry out duties of an Administrator DOL either plan administrator or functional fiduciary with same fiduciary obligations and liability under ERISA Types of Plans Welfare Plans Health Dental Vision Insurance (life, AD&D) Pension Defined Benefit Defined Contribution (including 401(k)) Defined Benefit Plans Subject to Title IV of ERISA Governed by the Pension Benefit Guaranty Corporation (PBGC) Ongoing funding obligations Claims of PBGC: Funding deficiency Minimum contributions Unpaid PBGC premiums 2
Defined Benefit Plans Must be terminated If fully funded standard termination If underfunded distress termination procedures In Chapter 7 case usually Trustee enters into Agreement with PBGC to take over the plan PBGC may try to cajole a member of control group to take over the plan Defined Contribution Plans 401(k) Plans Profit Sharing Plans ESOPS Defined Contribution Plans Partial Plan Termination/Vesting Restoration of Forfeitures Nondiscrimination testing Safe harbor contributions Required minimum distributions 3
Administrative Issues Terminating plans (DB and DC) must have plan documents incorporating all tax law changes through date of termination Plans may file Form 5310 to request determination letter for terminating plan Additional fees to file 6 to 8 months before IRS may issue letter Distribute benefits before letter received Administrative Issues (con con t. t.) Chapter 7 Trustee must negotiate with PBGC to take over underfunded defined benefit plans Must provide records and benefit computations Continue benefit payments to retirees until PBGC takeover Form 5500 All plans must continue to file Form 5500 for each Plan Year until all assets are distributed Plans with more than 100 participants at the beginning of the Plan Year must engage an independent auditor (80 120 rule) Fees for audit may be paid from Plan assets 4
Forfeitures Upon termination, all Plan participants must become 100% vested in employer contributions Must examine records to see if a partial plan termination occurred prior to Chapter 7 filing Partial Plan Termination 20% or more of employer s workforce terminated/laid off May occur over several years Administrative Expenses ERISA 404(a)(1)(A)(ii) For the exclusive purpose of defraying the reasonable expenses of administering the plan Per DOL: reasonable expenses of administering a plan include direct expenses properly and actually incurred in the performance of a fiduciary's duties to the plan Administrative Expenses Use of plan assets to terminate plan and maintain its tax-qualified status is consistent with ERISA Written for Insurance Commissioner of the state of California 5
Administrative Expenses engage counsel and administration firms to -- (i) amend the plan; (ii) audit the plan; (iii) prepare and file Forms 5500; (iv) benefit statements - calculate accrued benefits; (v) notify participants of their benefits under the plan; and (vi) seek a determination letter from the IRS Administrative Expenses Plan documents specifically permit payment of expenses of administration amend the plans to include a provision which permits such payments if plan is silent, DOL position is that the plan may pay reasonable administrative expenses Administrative Expenses Settlor Functions Establishment, Design; Termination Generally not fiduciary activities subject to Title I of ERISA Activities undertaken to implement the plan termination payable from plan 6
Administrative Expenses Maintaining tax exempt status benefits employer but if no assets to pay for maintaining tax exempt status, benefits only participants; But See ERISA Opinion Letter 2001-01A, 01/18/2001 maintaining tax qualified status may be plan expense Important Steps for Chapter 7 Trustee Make arrangements to acquire all plan, employee and payroll records for at least current and prior year Immediately contact plan custodian/administrator to freeze distributions from Plan until evaluation can be completed Provide participants with appropriate blackout notice Important Steps for Chapter 7 Trustee (con con t. t.) Determine if forfeiture restoration is needed Use remaining forfeitures to pay plan related expenses (accounting, legal, recordkeeping fees) Locate missing participants Engage independent auditor for all years where audit is required 7
Employee Contributions ERISA 29 CFR 2510.3-102 Must be paid to plan as of the earliest date they can be reasonably be segregated from the employer's general assets If paid late - breach of fiduciary duty and prohibited transaction DOL requires lost earnings to be made up Employee Contributions Not contributed to plan prior to bankruptcy BAPCPA amended the definition of property of the bankruptcy estate to exclude employee contributions, including amounts withheld from wages If unpaid employee contributions are still held by debtor upon Chapter 7 filing Automatic Rollovers 29 CFR 2550.404a-2 - Safe harbor for automatic rollovers to individual retirement plans Safe Harbor applies to distributions of $5,000 or less No safe harbor for automatic rollovers of >$5,000 8
In re: NSCO, Inc. Bankruptcy Code controls over ERISA Courts can issue orders to relieve trustees of duties they have as ERISA Fiduciary Case can be reopened if later determined that there has been a fiduciary breach No obligation for estate to remain open fr ERSIA statute of limitations In re: Mid-States Express, Inc. Bankruptcy Court lacks jurisdiction over matters related to Chapter 7 Trustee in role as Plan Administrator of ERISA Plan 11 U.S.C. 704(a)(11) gives Chapter 7 Trustee responsibility of Plan Administrator. Plan Administrator rights and responsibilities are governed by ERISA. Questions? Timothy J. Snyder, Esquire tsnyder@ycst.com 302.571.6645 Young Conaway Stargatt & Taylor, LLP The Brandywine Building 1000 West Street, 17 th Floor Wilmington, DE 19801 9