When Are Employers Personally Liable for Plan Contributions?

By Ryan C. Smith

“You should have paid contributions to the benefit plan, but you chose to pay other business expenses instead. As a fiduciary, you are liable for the unpaid contributions,” John, a plan participant, told Jerry, a company board member.

“We are not plan fiduciaries, and the amounts paid were not contributions, they were company assets, so we do not owe you anything,” Jerry said.

FACTS:An event-marketing company that helped design and set up exhibits mainly related to the automotive industry hired workers for various construction projects.

The company was hit hard when a major automobile manufacturer went bankrupt and the company lost three clients that accounted for about half of its business.

As a result, the company downsized, began to wind down its affairs and sought to pay amounts owed to its lenders.

Trustees of the company's multiemployer benefit plan brought a four-count complaint against the company, claiming that it prioritized other creditors and expenses over the $500,000 in contributions that it was required to make to the benefit plans of the employees.

In one count, the trustees sought to hold three of the company's corporate officers personally liable for the amounts, under the theory that the unpaid contributions were plan assets as defined by the Employee Retirement Income Security Act.

By directing that company assets be paid to other creditors, the executives prioritized other corporate expenses over fund contributions, exercising discretionary authority and rendering them ERISA fiduciaries personally liable for fiduciary breach and for the amounts owed to the benefit plan, the trustees said.

ISSUE: Are executive officers personally liable for unpaid benefit-plan contributions?

DECISION: Unpaid employer contributions are not plan assets unless an agreement exists between the employer and the plan that indicates otherwise, the court said.

The point at which employer contributions become plan assets under ERISA had not been fully addressed by the U.S. Court of Appeals for the Sixth Circuit, the court said.

There also were no rulings from higher courts that determined the circumstances that make an employer's contribution a plan asset, it said.

The Labor Department issued regulations that address under what circumstances an employee's contributions become plan assets, but not when employer contributions become assets, the court said.

Trustees sued individual executive officers for fiduciary breach after contributions went unpaid.

In a Second Circuit case, the Labor Department determined that employer contributions only become a plan asset when a contribution has been made, the court said.

The court decided to follow the reasoning of persuasive decisions by the U.S. Courts of Appeals for the Second, Third, Ninth, Tenth and Eleventh circuits.

Quoting a rule mentioned in a case from the U.S. Court of Appeals for the Eleventh Circuit case, the court said that “unpaid employer contributions are not assets of a fund unless the agreement between the fund and the employer specifically and clearly declares otherwise.”

Because the unpaid employer contributions did not constitute plan assets under ERISA, the corporate officers were not ERISA fiduciaries and could not be liable for the shortfall in contributions, the court said.

Even if the unpaid contributions were found to be plan assets, the corporate officers did not commit fiduciary breach by prioritizing other expenses over the company's obligation to the benefit fund, the court said.

“If unpaid employer contributions were plan assets, the employer would automatically become an ERISA fiduciary once it failed to make the payments,” the court said. “The employer would owe the plan undivided loyalty at the expense of competing obligations to the business, and to others such as employees, customers, shareholders and lenders. It is difficult to envision how proprietors could ever operate a business enterprise under such circumstances,” it said.

The company officers were not fiduciaries and not personally liable for unpaid contributions owed to a multiemployer benefit plan, the federal district court held (Trs. of Mich. Reg'l Council of Carpenters' Emp. Benefits Fund v. H.B. Stubbs Co., 2014 BL 200247, E.D. Mich., No. 2:14-cv-11393-GCS-PJK, 7/17/14).

POINTERS: Under ERISA, a person is a fiduciary to a plan if they exercise discretionary control in managing the plan, exercise investment advice in relation to the plan for a fee or has responsibility in the administration of the plan.

If the court found that the unpaid contributions were plan assets, it would not necessarily follow that the corporate officers committed fiduciary breach by prioritizing other expenses over the company's obligation to the benefit fund because the officers may not be considered fiduciaries under ERISA.

For more information, see Compensation and Benefit Library's “Fiduciary Standards” chapter.

This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.

To contact the editor responsible for this story: Michael Baer at mbaer@bna.com