To expedite distribution of retirement assets from companies in Chapter 7 bankruptcy proceedings, the U.S. Department of Labor wants to allow bankruptcy trustees to use its Abandoned Plan Program. This program establishes a process to terminate abandoned plans so that plan participants and beneficiaries gain quicker access to their benefits; currently, however, bankruptcy trustees do not meet the criteria to take advantage of it.
To remedy this problem, on Dec. 11 DOL issued a proposed rule expanding the program to include Chapter 7 companies’ retirement plans. This would allow bankruptcy trustees to reduce the chance that participants’ accounts will be hit with excessive fees in the process of the plans’ termination amid a bankruptcy case.
DOL’s Abandoned Plan Program provides standards for determining when a plan is abandoned, simplified procedures for winding up the plan and distributing benefits to participants and beneficiaries, and guidance on who may initiate and carry out the winding-up process, according to a DOL fact sheet.
A plan is considered abandoned if no contributions or distributions have been made to or from the plan for at least 12 consecutive months. The DOL program exempts qualified termination administrators from ERISA’s prohibited transaction rules on payment for services provided by themselves and other vendors in a termination. Currently, such a designation is open only to financial institutions holding assets of plans abandoned by their sponsors.
After attempts to locate the plan sponsor, the QTA determines that the sponsor no longer exists, cannot be found or is unable to maintain the plan. Using the Abandoned Plan Program ensures that QTAs satisfy ERISA requirements for winding up plans.
But the bankruptcy of a retirement plan sponsor complicates this process. First, the proposed rule notes that the QTA provisions do not cover bankrupt retirement plan sponsors. Such plans are not considered abandoned because the bankruptcy trustee assumes the role of the plan administrator under the Bankruptcy Code, and as such, is considered a plan fiduciary for ERISA purposes. Second, bankruptcy trustees are not able to meet the “QTA” definition because, for example, they seldom hold the plan assets of the bankrupt plan sponsor and have minimal or no experience providing services to ERISA-covered retirement plans.
Finding out More
For more information on plan terminations, see ¶1000 in the Pension Plan Fix-It Handbook and ¶464 of The 403(b)/457 Plan Requirements Handbook.
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