Fiduciary Liability Continues After Company Closing

Some retirement plan sponsors mistakenly believe their fiduciary liability ended when the company doors closed.

An article from Lockton Retirement Services explains that the Employee Retirement Income Security Act (ERISA) was enacted to compel high standards of fiduciary duties with respect to the protection of employee benefit plans. Likewise, the Bankruptcy Code (the Code) was intended to protect those who have been injured by the debtor’s wrongful acts, known as defalcation. When a fiduciary seeks to discharge a defalcated plan debt in a bankruptcy, both the Code and ERISA have been violated. 

“Defalcation for purposes of ERISA covered plans includes misappropriation of plan assets, the failure to forward employee contributions and the stopping of only the fiduciary’s contributions while continuing others,” Samuel Henson, J.D, senior ERISA counsel at Lockton, wrote in the article.  

Where the Department of Labor (DOL) has determined that evidence of defalcation exists, it can file an adversary complaint to establish the non-dischargeability of the retirement plan’s debt under Code §523(a)(4). In addition, the DOL may file a proof of claim on behalf of the plan pursuant to ERISA §502(a), seeking to have the plan debt classified as a priority unsecured claim, according to Henson. 

Assuming the DOL succeeds in discharging the plan’s debt, it will then seek to collect that debt. In those situations where the employer has assets not subject to secured creditors, the DOL may be able to recover monies owed to the retirement plan. However, in those situations in which the employer has no assets and has closed its doors, the DOL may pursue a fiduciary personally under ERISA §409.  

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