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February 1, 2008
Memorandum For: |
Virginia C. Smith, Director of Enforcement Regional Directors |
From: |
Robert J. Doyle Director of Regulations
and Interpretations |
Subject: |
Fiduciary Responsibility for Collection of Delinquent
Contributions
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What are the responsibilities of named fiduciaries and
trustees of ERISA-covered plans for the collection of delinquent employer
and employee contributions?
A number of pension plan investigations have revealed
agreements that purport to relieve the financial institutions serving as
plan trustees of any responsibility to monitor and collect delinquent
contributions. The investigations have revealed circumstances where no
other trust agreement or plan document assigns those obligations to
another trustee or imposes the obligations on a named fiduciary with the
authority to direct a trustee. In other cases, the plan documents and
trust agreements are silent or ambiguous on the matter. Questions have
been raised as to whether, and if so, to what extent, trust agreements and
other instruments may define the scope of trustee undertakings and exclude
responsibilities for monitoring the plan’s receipt of contributions,
determining when they are delinquent and taking appropriate steps for
collection.
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.(1)
The Department has taken the position that employer contributions become
an asset of the plan only when the contribution has been made.(2)
However, when an employer fails to make a required contribution to a plan
in accordance with the plan documents, the plan has a claim against the
employer for the contribution, and that claim is an asset of the plan.
Participant contributions that are withheld from wages or paid to the
employer are delinquent if they become plan assets while still in the
hands of the employer. Under the Department’s regulations, participant
contributions become plan assets in the hands of the employer on the
earliest date that the amount withheld from the participant’s pay or
paid to the employer reasonably can be segregated from the employer’s
general assets. With respect to an employee pension benefit plan, this
date can be no later than the 15th business day of the month
following the month in which participant contribution amounts were
withheld from the employee’s paychecks or paid to the employer.(3)
The duty to enforce valid claims held by a trust has
long been considered a trustee responsibility under common law. IIA Austin
W. Scott & William E. Fratcher, The Law of Trusts § 177 (4th ed.
1989); Restatement (Third) of Trusts, § 76 (2007). See also George G.
Bogert & George T. Bogert, The Law of Trusts and Trustees § 583 at
p.355 (2d rev. ed. 1980) (where the settlor retains possession of trust
assets, “the trustee must hold the settlor to [his] obligation”);
Scott 175, at 1415 (“trustee is under a duty to take such steps as are
reasonable to secure control of the trust property and to keep control of
it”). The Supreme Court affirmed that the collection of contributions is
a trustee responsibility under ERISA in Central States, Southeast and
Southwest Areas Pension Fund v. Central Transport, 472 U.S. 559, 571
(1985). The Court noted that:
One of the fundamental common-law duties of a trustee
is to preserve and maintain trust assets, and this encompasses “determin[ing]
exactly what property forms the subject-matter of the trust [and] who
are the beneficiaries.” The trustee is thus expected to “use
reasonable diligence to discover the location of the trust property and
to take control of it without unnecessary delay.” A trustee is
similarly expected to “investigate the identity of the beneficiary
when the trust documents do not clearly fix such party” and to “notify
the beneficiaries under the trust of the gifts made to them”
(citations omitted).
Section 404(a) of ERISA requires that a fiduciary
discharge his duties prudently and solely in the interests of the
participants and beneficiaries of the plan. The steps necessary to
discharge a duty to collect contributions will depend on the facts of each
case. In determining what collection actions to take, a fiduciary should
weigh the value of the plan assets involved, the likelihood of a
successful recovery, and the expenses expected to be incurred. Among other
factors, the fiduciary may take into account the employer’s solvency in
deciding whether to expend plan assets to pursue a claim. Diduck v.
Kaszycki & Sons Contractors, 874 F. 2d 912 (2nd Cir. 1989). The
Department of Labor has also long held the view that if the plan is not
making systematic, reasonable and diligent efforts to collect delinquent
employer contributions, or the failure to collect delinquent contributions
is the result of an arrangement, agreement or understanding, express or
implied, between the plan and a delinquent employer, such failure to
collect delinquent contributions may be deemed to be a prohibited
transactions under section 406 of ERISA.(4)
Section 402(a)(1) provides that every employee benefit
plan shall be established and maintained pursuant to a written instrument,
and that the instrument “shall provide for one or more named fiduciaries
who jointly or severally shall have authority to control and manage the
operation and administration of the plan.”(5)
Section 403(a) of ERISA provides, with certain exceptions, that all assets
of an employee benefit plan must be held in trust by one or more trustees,
who are to be named in the plan or trust instrument or appointed by a
person who is a named fiduciary. Section 403(a) further provides that “upon
acceptance of being named or appointed, the trustee or trustees shall have
exclusive authority and discretion to manage and control the assets of the
plan . . . .” A plan trustee, therefore, will, by definition, always be
a “fiduciary” under ERISA as a result of its authority or control over
plan assets and, accordingly, is required to discharge its trustee
responsibilities prudently and solely in the interest of the plan’s
participants and beneficiaries. Although trust documents cannot excuse
trustees from their duties under ERISA, ERISA clearly gives named
fiduciaries the authority to appoint multiple trustees and to allocate
trustee responsibilities among those trustees (including directed
trustees).
Section 403(a) recognizes two exceptions to the general
rule that exclusive authority and discretion to manage and control the
assets of a plan must be vested in one or more plan trustees. The first
exception, at section 403(a)(1), applies when “the plan expressly
provides that the trustee or trustees are subject to the direction of a
named fiduciary who is not a trustee.” In such instances, the trustee,
commonly referred to as a “directed trustee,” is subject to the proper
directions of the named fiduciary. As the Department noted in Field
Assistance Bulletin No. 2004-03 (Dec. 17, 2004), directed trustees are
fiduciaries, and as such, are subject to ERISA’s fiduciary rules, but
the scope of their duties is “significantly narrower than the duties
generally ascribed to a discretionary trustee under common law trust
principles.” The second exception to the “exclusive authority”
provision in section 403(a)(1) applies when the authority to manage,
acquire or dispose of plan assets is delegated to one or more investment
managers pursuant to section 402(c)(3).
Additionally, section 405(b)(1)(B) provides, in
relevant part, that, except as set forth in section 403(a)(1), if the
assets of a plan are held by two or more trustees they shall jointly
manage and control the assets of a plan except that nothing shall preclude
any agreement, authorized by the trust instrument, allocating specific
responsibilities, obligations, or duties among trustees, in which event a
trustee to whom certain responsibilities, obligations, or duties have not
been allocated shall not be liable either individually or as a trustee for
any loss resulting to the plan arising from the acts or omissions on the
part of another trustee to whom such responsibilities, obligations or
duties have been assigned. Similarly, in those cases where the assets of a
plan are held in more than one trust, a trustee is responsible only for
those acts or omissions of the trustees of the trust for which it is
trustee.(6)
Thus, in accordance with the statutory framework
described above, authority over a plan’s assets subject to the trust
requirement of section 403(a) of ERISA, including a plan’s legal claim
for delinquent contributions, must be assigned to i) a plan trustee with
discretionary authority over the assets, ii) a directed trustee subject to
the proper and lawful directions of a named fiduciary, or iii) an
investment manager.
Accordingly, it is the view of the Department that a
named or functional fiduciary who has authority to appoint the plan’s
trustee(s) must ensure that the obligation to collect contributions is
appropriately assigned to a trustee, unless the plan expressly provides
that the trustee will be a directed trustee with respect to contributions
pursuant to section 403(a)(1) or the authority to collect contributions is
delegated to an investment manager pursuant to section 403(a)(2).
Thus, although a fiduciary may enter into a trust
agreement under which a particular trustee is not responsible for
monitoring and collecting contributions, if no trustee or investment
manager has this responsibility, the fiduciary with authority to hire the
trustees may be liable for plan losses due to a failure to collect
contributions because the fiduciary failed to specifically allocate this
responsibility.(7)
These situations should be evaluated on the basis of
all the facts and circumstances. Where the provisions in trust instruments
and plan documents are ambiguous, they should generally be interpreted in
a manner that corresponds to the statutory scheme, rather than in a manner
that relieves all of the trustees and investment managers from
responsibility.(8)
Reliance on plan, trust and other governing documents to define the
responsibilities of plan fiduciaries, however, may not be completely
determinative if the provisions in the documents are inconsistent with the
actions of the parties. For example, if a nominally directed trustee
routinely assumes discretionary responsibility, the trustee cannot seek to
limit its liability with respect to the exercise of that discretion on the
basis that it is a directed trustee. Similarly, a trustee cannot alter its
status as fiduciary through a contractual provision that defines its
trustee duties as non-fiduciary in nature.
If a particular trustee is not responsible for
monitoring and collecting contributions under the terms of the trust
instrument, that trustee (including a directed trustee) nonetheless would
have an obligation under sections 404 and 405(a) to take appropriate steps
to remedy a situation where the trustee knows that no party has assumed
responsibility for the collection and monitoring of contributions and that
delinquent contributions are going uncollected. As explained in Field
Assistance Bulletin No. 2004-03, a fiduciary, pursuant to section
405(a)(1), is liable for the breach of another fiduciary if the fiduciary
“participates knowingly” in the breach of the other fiduciary. In
addition, under section 405(a)(2), a fiduciary is liable for a breach of
another fiduciary if the fiduciary’s failure to comply with section
404(a)(1) in the administration of his specific fiduciary responsibilities
enables the other fiduciary to commit a breach. Under section 405(a)(3), a
fiduciary is liable for a breach of another fiduciary if the fiduciary has
knowledge of the breach of the other fiduciary, unless the fiduciary takes
reasonable efforts under the circumstances to remedy the breach. Efforts
to remedy may, depending on the circumstances, include advising the named
fiduciary or the Department of Labor of the breach, reporting the breach
to other fiduciaries of the plan, directly taking actions to enforce the
contribution obligation on behalf of the plan, seeking an amendment of the
relevant plan and trust documents, or seeking a court order mandating a
proper allocation of fiduciary responsibility over contributions. The
documents and instruments governing a plan cannot serve to absolve a
co-fiduciary from liability for failing to take steps to remedy a known
breach of another fiduciary.(9)
Whether and to what extent information concerning the failure of an
employer to forward contributions to a plan constitutes knowledge of a
breach that would give rise to co-fiduciary liability will depend upon the
facts and circumstances of each case.
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.
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In the event that those instruments
are ambiguous, promised employer contributions are delinquent if not
transmitted to the plan within a reasonable time after the legally
enforceable obligation to make the contribution arises.
-
See Advisory Opinion 93-14;
Preamble to Prohibited Transaction Exemption 76-1, 41 FR 12740 at
12741 (Mar. 26, 1976).
-
See 29 CFR 2510.3-102. An
employer continuing to hold participant contribution commingled with
its general assets after the participant contributions reasonably
could have been segregated will have engaged in a prohibited
transaction in violation of ERISA section 406. This memorandum is not
intended to address any civil or criminal liability that may attach to
an employer as a result of such a prohibited transaction.
-
See the preamble to Prohibited
Transaction Exemption 76-1, 41 FR 12740, 12741 (Mar. 26, 1976).
-
Section 402(a)(2) of ERISA defines
the term “named fiduciary” to mean “a fiduciary who is named in
the plan instrument, or who, pursuant to a procedure specified in the
plan, is identified as a fiduciary (A) by a person who is an employer
or employee organization with respect to the plan or (B) by such an
employer and such an employee organization acting jointly.”
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See discussion below on co-fiduciary
liability under section 405(a).
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Under ERISA section 403(b), employee
benefit plans are not subject to section 403(a)’s trust requirement
if the plan’s assets consist entirely of insurance contracts or
policies issued by an insurance company qualified to do business in a
State, or individual retirement accounts, such as SIMPLE-IRA plans and
SEPS, with assets held in custodial accounts under Code section
408(h), or contracts established and maintained under Code section
403(b) with assets held in custodial accounts under Code section
403(b)(7). In such cases, the duty to use reasonable diligence to
discover the location of the plan’s property (such as delinquent
contributions) and to take control of it without unnecessary delay is,
in the view of the Department, part of the named fiduciary’s duties
under ERISA section 402(a)(1) to control and manage the operation and
administration of the plan. In the case of SIMPLE-IRAs and SEPS, the
plan sponsor generally will be a named fiduciary because the documents
establishing the plan typically provide the employer with authority
with respect to management and administration of the plan
notwithstanding that the plan documents may fail to state expressly
that the plan sponsor is a “named fiduciary.”
-
See Best v. Cyrus, 310 F.3d
932, 935 (6th Cir. 2002)
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See ERISA section 410 (which
provides, subject to certain exceptions, that “any provision in an
agreement or instrument which purports to relieve a fiduciary from
responsibility or liability for any responsibility, obligation, or
duty under this part shall be void as against public policy.”). See
also 29 CFR § 2509.75-4.
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