DOL dusts off abandoned plan rule for bankruptcy trustees 

July 17, 2024

 

A new Department of Labor (DOL) interim final rule (IFR) expands the abandoned plan program to cover individual-account defined contribution (DC) plans whose sponsors are in liquidation under Chapter 7 of the US Bankruptcy Code. DOL believes that the program’s streamlined procedures will reduce administrative burdens and costs for bankruptcy trustees charged with terminating DC plans. The IFR took effect July 16. This article focuses on aspects of the IFR relevant to plan sponsors.

Initially established in 2006, the abandoned plan program provides a regulatory framework for winding up the affairs of abandoned DC plans. These “orphan” plans arise when the sponsoring employer ceases to exist as part of a bankruptcy proceeding or abandons the plan under certain circumstances, such as incarceration or death. Under the program, a “qualified termination administrator” (QTA) — generally the financial institution holding plan assets — takes on the responsibility of winding up the plan after finding the sponsor has abandoned it.

As originally adopted, the regulations included strict conditions on who could serve as a QTA. These conditions generally precluded bankruptcy trustees from being QTAs, so when a plan was abandoned due to bankruptcy, the trustees had to wind the plan up without the benefit of the program’s streamlined termination and winding-up procedures. But by 2012, DOL had concluded that although bankruptcy trustees have authority under the Bankruptcy Code to take the necessary action, they often are unfamiliar with ERISA and the process for properly terminating and winding up a plan. This often resulted in delays distributing benefits to participants and excessive cost to the plan. Accordingly, to make the process more efficient, the agency proposed letting Chapter 7 bankruptcy trustees serve as QTAs and use the program.

After finding a plan has been abandoned, a QTA must report to DOL before starting the termination and winding-up process. That process includes tasks such as calculating benefits owed to participants and beneficiaries, notifying of them of the termination along with their rights and options, and distributing benefits accordingly. QTAs don’t have to amend the plan to initiate the termination or file a Form 5500 annual report for the plan. However, the QTA must file a special terminal report with DOL once the process is complete.

Special rules for plans abandoned in bankruptcy. Although the IFR is a complete restatement of the regulation, the substantive changes relate solely to plans abandoned in a Chapter 7 bankruptcy proceeding. The new provisions relevant for bankruptcy trustees are as follows:

• Deemed abandonment. Regardless of whether the sponsor has truly walked away from a plan, the plan is deemed abandoned when a court initiates the bankruptcy process in response to a bankruptcy petition.
• Delinquent contributions. Bankruptcy trustees must make “reasonable and diligent efforts” to determine whether the plan is owed more than a de minimis amount of delinquent contributions —generally defined as $2,000 in total employer and employee contributions. If the plan is owed more than a de minimis amount, the bankruptcy trustee must select an “eligible designee” as QTA. The eligible designee can be either an independent bankruptcy trustee practitioner or a custodian that holds the plan’s assets and is eligible to act as an individual retirement plan trustee or issuer. (Appointing an eligible designee is optional if the plan is not owed more than a de minimis amount of contributions). The QTA must then take reasonable steps to collect the delinquent contributions on the plan’s behalf, taking into account the value of plan assets involved, the likelihood of successful recovery and the expected associated expenses.
• Fees for QTA services. DOL has also updated PTE 2006-06 — a class prohibited-transaction exemption that allows paying QTAs for their services — to cover bankruptcy trustees and their eligible designees. The QTA can pay itself reasonable compensation from plan assets for services associated with winding up the plan. DOL evaluates reasonable compensation using industry rates for ordinary plan administration. This would not permit QTAs to pay themselves “attorney-level rates.”
• Fiduciary duties. The IFR grants limited relief from ERISA’s fiduciary responsibilities to bankruptcy trustees and their eligible designees who comply with the IFR. A bankruptcy trustee appointing an eligible designee remains responsible for monitoring that designee throughout the entire termination and winding-up process.
• Reporting obligation. QTAs must report to DOL any delinquent contributions owed to the plan. QTAs must also report any activity that they believe may indicate a fiduciary breach on the part of any prior plan fiduciary. This latter reporting requirement continues to apply to the bankruptcy trustee even after the plan winding-up process has ended: The bankruptcy trustee must report any activity discovered while administering the debtor’s estate indicating a possible fiduciary breach involving plan assets.

The IFR provides that benefits for a missing or nonresponsive participant generally will be distributed to an individual retirement arrangement (IRA), although QTAs may distribute small benefits to an interest-bearing federally insured bank account or a state unclaimed property fund. However, in the preamble, DOL announced that it was extending its temporary enforcement policy permitting QTAs or fiduciaries of terminating DC plans to transfer missing or nonresponsive participants’ balances to the Pension Benefit Guaranty Corp.’s (PBGC) voluntary missing participants program.

Because the comment period for the 2012 proposed rule closed more than 11 years ago, DOL issued the IFR with a request for a new round of comments due by July 16, the same date the IFR took effect. The agency wants to evaluate some stakeholders’ suggestions for further expansion and other possible improvements to address changes in the marketplace since 2012. Some of the topics on which DOL requested comments include:

• The appropriateness of the $2,000 threshold for de minimis amounts and possible indexing of that amount for inflation
• The requirement for eligible designees to take reasonable steps to collect delinquent contributions on behalf of the plan
• The potential need to extend the program’s framework to cover plans whose sponsors are in Chapter 11 liquidation or other receivership and methods of doing so
• The possible addition of an option to voluntarily transfer certain amounts — such as unpaid lump sum cashout checks, automatic cashouts of small amounts and required minimum distributions — to state unclaimed property funds
• The use of electronic disclosures to provide required notices

The agency also asked whether to formally incorporate PBGC’s missing participants program into the abandoned plan regulations as an alternative to — or a replacement for — other currently available distribution options.

• Interim final rule, Abandoned plan regulations (Federal Register, May 17, 2024)
• Abandoned plans website (DOL)

• DOL issues guidance on missing participants (Jan. 19, 2021)