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John J. Stockdale, Jr.
June, 2017

Handling Unfunded Retirement Contribution Claims

Companies facing insolvency often “rob Peter to pay Paul.”  In these cases, pension and retirement contributions may get robbed. While we generally see this occur where the insolvent company is unionized and the pension plan is underfunded, it can also involve 401(k) retirement savings plans.  In contrast to unions, which have private lawyers to protect their members’ interests, retirees and employees with 401(k) retirement savings plans are protected by the Department of Labor, Employee Benefits Security Administration (the “DOL”).  In chapter 11 bankruptcy cases, where the employer has not fully funded its retirement saving plan, the DOL has become increasingly involved. 

A.    Claim Analysis Considerations

Generally, claims for unpaid retirement savings plan contributions are unsecured claims.  However, under section 507(a)(5) of the Bankruptcy Code unpaid retirement plan contributions may receive special treatment, elevating their status over general unsecured claims.  Specifically, section 507(a)(5) allows the “priority portion” of the unpaid retirement plan contributions to be paid ahead of general unsecured claims.[1]

In order to receive priority treatment under section 507(a)(5) of the Bankruptcy Code, the unpaid retirement plan contributions claim must satisfy two requirements. First, they must have arisen within the 180 before the company’s bankruptcy filing date.[2]  Second, they cannot exceed an amount equal to the number of retirement plan participants times $12,475[3] less any payments made to the employees for unpaid wages, salaries or commissions under section 507(a)(4).[4]  Thus, the initial claims analysis determines how much of the unpaid retirement plan contributions claim is a priority claim and how much of it is merely a general unsecured claim.

To determine the priority portion, one must first investigate how the unpaid retirement plan contributions arose.  For example, withheld employee contributions are generally entitled to priority treatment, but an employer’s matching contributions may not be,[5] because funds withheld from an employee’s wages are immediately due when they are withheld.[6]  In contrast, employer’s matching contributions may only be due periodically under the employer’s retirement savings plan documents.

When the DOL files a proof of claim, it generally asserts that all unpaid retirement plan contributions are priority claims regardless of their character.  Thus, conducting a priority analysis and filing a timely claim objection as to any non-priority portion may save the employer thousands of dollars by reallocating some or all of the unpaid retirement plan contributions claim from a priority claim to a general unsecured claim.  Going through this analysis may also improve the feasibility of an employer’s reorganization plan because priority claims must generally be paid upon the effective date of the plan, while unsecured claims can simply be treated under a confirmed plan.  In other words, unsecured claims can be paid pennies on the dollar and be paid ratably over time (often over 5 years or longer) rather than being paid in full on the date the plan is effective.[7]

B.     Personal Liability Considerations

In addition to analyzing the priority status of unpaid retirement plan contribution claims, consideration should be given to the impact of the unpaid retirement plan contributions claim on the employer’s owners and managers.  Sometimes, the DOL argues that the employer’s owners and/or managers are personally liable for the unpaid contributions.[8]  In addition, if the owner or manager files a personal bankruptcy case, the DOL may pursue a nondischargeability action against the owner or manager.

The DOL generally brings nondischargeability actions under section 523(a)(4) of the Bankruptcy Code, which provides “[a]discharge under section 727 … of this title does not discharge an individual debtor from any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.”  In a nondischargeability action, the DOL may argue that the employer’s owner is a fiduciary under section 1002(21)(A) of the Employee Retirement Income Security Act (“ERISA”)[9] if that person “exercise[s] any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.”[10]  With nondischargeability of  unpaid retirement plan contribution claims at stake, identifying their character may have a real impact on owners and managers.

Generally, courts have held that unpaid retirement plan contributions withheld from employee wages, and other related losses, are not dischargeable under section 523(a)(4) of the Bankruptcy Code.  This is because the funds withheld from employee wages become assets of the retirement plan at the time they are withheld.[11]  In contrast, employer contributions only become plan assets when they are actually paid.[12]  Since withheld funds are “plan assets” when withheld and because the employer’s owner generally has the power to decide when and which bills are paid, that person “exercise[s] authority or control respecting management or disposition of [plan] assets.”[13] Consequently, the owner and/or manager is personally liable for such unpaid, withheld contributions (and related losses).  Moreover, that debt is not dischargeable under section 523(a)(4).[14]

Although withheld employee contributions may not be dischargeable in an individual case, unpaid employer contributions are treated differently.  Courts, including the Sixth Circuit, have held that an employer’s obligation to make the employer contributions is dischargeable in the owner’s or manager’s personal bankruptcy case.[15]  These courts focused on whether the owner is a fiduciary.[16]  They generally concluded that “the alleged fiduciary must have duties that preexist the act creating the debt” and that those fiduciary duties must not arise because of the debt.[17]  To the extent that the fiduciary duties arises because the employer contributions claim went unpaid and because the employer contributions are not retirement plan assets until paid, the employer’s obligation to make the employer contributions, as opposed to the employee withheld portion, to the retirement savings plan is simply a dischargeable, contractual obligation.[18]

Conclusion

Business owners and managers must understand character of the unpaid retirement plan contribution claim in assessing both the viability of any reorganization effort as well as their potential personal exposure for unpaid retirement contribution claims.  Schafer and Weiner, PLLC has considerable experience assisting businesses and business owners in insolvency situations that involve labor issues.  Do not hesitate to consult with us when facing these types of issues.

 


[1] Of course, they are still paid after secured claims, administrative claims, and some higher priority claims under section 507.

[2] Or the cessation of business, whichever comes first.  11 U.S.C. § 507(a)(5)(A).

[3] This amount is the 2016 amount, but it adjusts periodically.

[4] 11 U.S.C. § 507(a)(5)(B).

[5] This analysis will necessarily involve a detailed review of the plan documents.

[6] 29 C.F.R. § 2510.3-102(a); Trustees of Michigan Regional Council of Carpenters’ Employee Benefits Fund, et al. v. H.B. Stubbs Company, et al., 33 F.Supp.3d 884, 889 (E.D. Mich. 2014) (“… it is well settled that if an employer withholds a portion of employee wages for the purpose of paying the funds, the withheld wages are plan assets.”).

[7] 11 U.S.C. § 1129(a)(9)(B)(ii).

[8] See, e.g., In re Dombek, 2012 Bankr. LEXIS 4911 (Bankr. N.D. Ill. Oct. 16, 2012); In re Holman, 2005 Bankr. LEXIS 3165 (Bankr. E.D. Ky. Mar. 21, 2005); In re Dukes, Case No. 98-32382 (Bankr. N.D. Ohio) [DN 195, Aug. 9, 2000].

[9] 29 U.S.C. § 1101, et seq.

[10] 29 U.S.C. § 1002(21)(A)(i) (emphasis added).

[11] In re Holman, 2005 Bankr. LEXIS 3165, *12, citing 29 C.F.R. § 2510.3-102(a).  See also Trustees of Michigan Regional Council of Carpenters’ Employee Benefits Fund, et al. v. H.B. Stubbs Company, et al., 33 F.Supp.3d at 889; In re Dombek, 2012 Bankr. LEXIS 4811, *34.

[12] See, e.g., In re Bucci, 493 F.3d 635, 642 (6th Cir. 2007) (“Traditionally, the ‘proper rule, developed by case law, is that employer’s contributions are not assets of fund unless the agreement between the fund and the employer specifically and clearly declares otherwise. ITPE Pension Fund v. Hall, 334 F.3d 1011, 1013 (11th Cir. 2003).”).

[13] In re Dombek, 2012 Bankr. LEXIS 4911, *34-*37;  In re Holman, 2005 Bankr. LEXIS 3165, *12-*15;  In re Dukes, Case No. 98-32382 (Bankr. N.D. Ohio) [DN 195, p. 9-10, Aug. 9, 2000].

[14] In re Dombek, 2012 Bankr. LEXIS 4911, *37; In re Holman, 2005 Bankr. LEXIS 3165, *19. See also In re Bucci, 2006 Bankr. LEXIS 4174, *17-*18 (Bankr. N.D. Ohio Mar. 24, 2006) (amounts withheld from employees under collective bargaining agreement and not transmitted to pension plan were nondischargeable under 11 U.S.C. § 523(a)(4)), aff’d by 351 B.R. 876 (N.D. Ohio 2006).

[15] In re Bucci, 493 F.3d 635 (6th Cir. 2007); In re Volpitto, 455 B.R. 273, 292-293 (Bankr. S.D. Ga. 2011).  But see In re Hemmeter, 242 F.3d 1186 (9th Cir. 2001) (holding that unpaid employer contributions created a technical trust and were nondischargeable under 11 U.S.C. § 524(a)(4) as to the ERISA fiduciary).

[16]  See, supra, n. 17.

[17] In re Bucci, 493 F.3d at 643 (6th Cir. 2007); Holderman v. Devine, 474 F.3d 770, 778 (10th Cir. 2007), discussing In re Luna, 406 F.3d 1192, 1205-1206 (10th Cir. 2005); In re Volpitto, 455 B.R. at 292-293.

[18] In re Bucci, 493 F.3d at 643; Holderman v. Devine, 474 F.3d at 778 (10th Cir. 2007), discussing In re Luna, 406 F.3d at 1205-1206.