Shareholder Personally Liable for "Delinquent Contributions"

In some prior entries, I have made reference to the obligations of employers to make contributions to their own benefit plans and the obligation to make contributions to a multiemployer benefit plan. These references have generally been associated with some question about the fiduciary duties of an employer or plan sponsor as it relates to those required contributions. In a recent decision from the Western District of Pennsylvania, a district court touched on all of the relevant issues, including personal liability, that I felt it should be considered. In Carpenters Combined Funds v. Klingman, the Court considered a case where the sole shareholder, officer and director of a company was personally sued for breach of fiduciary duty for failing to submit payment of employee fringe benefit contributions to the Funds. The Court found that Klingman was personally liable for the delinquent contributions because they constituted "plan assets" such that he had a fiduciary obligation to contribute them to the Fund. Before questioning whether this means that all owners will now always be individually liable for contributions, consider the actual facts. First, the Labor Agreement that created the contribution obligation had a specific provision that provided that in the event the employer failed to make contributions, personal liability would attach to each corporate officer. So there was a signed bargaining agreement that provided for the possibility of such liability. Second, the required contributions were deferrals and withholdings from payroll that were, at least in part, to be put into defined contribution plans. So it was clear that the employees were putting money into the hands of the employer intended to go into the benefit plans. Third, the Court' specifically limited its analysis to the fiduciary duties as defined under ERISA and stayed away from any labor relations laws that can cloud the issue. Not every delinquent contribution is a "plan asset" that creates personal liability. Instead, the Court looked to prior decisions that determined that when employee deferrals are withheld with the intention of submitting them to plans, the person (or persons) in charge of that process have a fiduciary obligation under ERISA 404 to timely submit these contributions to the plans. hey are "plan assets" when withheld, not when contributed. Moreover, under ERISA 409, a fiduciary can be personally liable for damages as a result of a breach of fiduciary duty. So ERISA clearly envisions liability to an individual. In the end, the decision really serves as a reminder to those who handle deferrals and contributions to benefit plans that they are fiduciaries because plan assets are "plan assets" when the deferrals are take out (when the contributions are due) not just when they are actually put into the plans. By way of simple example, an employee deferral to a 401(k) plan is an asset of the plan when the deferral is made, and there is a fiduciary obligation to put that deferral into the plan in a timely manner. Similarly, if the contribution obligation arises under a collective bargaining agreement, that contribution is a plan asset when the contribution is due, not necessarily when it is actually made. So be wary about how these contributions are handled. Make sure bargaining agreements don't create personal liability. Timely remit deferrals to the requisite benefit plans. And above all, be aware that fiduciary liability can arise simply by taking control of plan assets, even if it is not anticipated. If you have any questions about when fiduciary status arises, or how to protect against potential breaches, contact your attorney at Fox Rothschild.

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