Calling every delinquent employer a deadbeat might be a bit harsh especially in these challenging economic times. But we all know deadbeats – those with no intention of ever paying their contributions in full and on-time – exist and trustees usually want to hunt them into the ground to collect what’s owed the fund. That is until the trustee starts looking at the costs of collection weighed against the possibility of recouping any money.
Those unlucky enough to discover the delinquent employer hasn’t been paying taxes either know exactly what this dilemma feels like. Somehow those tax liens always manage to rival or exceed the delinquent fund contributions not to mention the company’s likely assets.
So what is a trustee to do?
Trustees have a fiduciary obligation to collect contributions that become due. Failure to do so is a breach of the trustee’s fiduciary duty. Moreover, failure to collect all contributions due and owing is an extension of credit and may be a prohibited transaction. Luckily trustees do not need to spend endless time and money pursuing the impossible but can instead compromise (i.e. enter into settlements) or even write-off contributions owed as uncollectable.
The steps necessary to discharge a duty to collect contributions will depend on the facts of each case. In determining what collection actions to take, a fiduciary should weigh:
- The value of the plan assets involved.
- The likelihood of a successful recovery.
- The expenses expected to be incurred.
Trustees may also take into account the employer’s solvency.
You may have noticed there is no factor for considering the good intentions or lack thereof of the delinquent employer. That means, all things being equal, you have no less obligation to collect from the “good” employer who has run into cash-flow problems because, for instance, a general hasn’t paid for work performed, than you do from the deadbeat who never had any intention of paying the fund. In fact, the failure to enforce a contribution obligation in order to keep an employer in business, even if it’s done to benefit active participants, may be a fiduciary breach.
The Department of Labor has long held the view that if the plan is not making systematic, reasonable and diligent efforts to collect delinquent employer contributions, or the failure to collect delinquent contributions is the result of an arrangement, agreement or understanding, express or implied, between the plan and a delinquent employer, such failure to collect delinquent contributions may be deemed to be a prohibited transaction.
But why would you want to put “good” employers out of business? You may not. In fact it may be very prudent to compromise a debt and allow such an employer to enter into an installment payment plan if ultimately the fund is able to collect more contributions that way than it would if the employer were forced out of business and the fund were in line behind numerous other secured creditors for limited assets. The point is to have a reasonable and objective basis for the decision to compromise. This can best be achieved by having good collection procedures in place that the plan follows.
When you are putting together those collection procedures, keep in mind the guidance put forth by the Department of Labor. It permits funds to compromise an obligation or permit extended payment terms provided the following: