Employer & Owner Liable for Failing to Roll Over Employee’s Money
In a recent case, a Federal District Court in New York found an employer, its sole owner & plan fiduciary, and the 401(k) plan sponsored by the employer, liable for damages for failing to roll over an employee’s 401(k) account in a timely manner.
The employee resigned in January 2005 and was entitled to a distribution as of December 31, 2005, according to the plan document. The employee asked the owner for his distribution in 2005, but was ignored, the owner later indicated he did so because the request was not on a proper form. The employee followed up with written requests for a rollover in 2007 and 2008. The 2007 request was rejected because the owner stated is was not made in time. The 2008 request was rejected because the plan had begun the termination process.
The court rejected the defendants’ argument that the owner was justified in ignoring the employee’s initial request because it was not in the proper form, noting that the plan does not require formal claims for participants to receive benefits. The plans’ TPA confirmed this by telling the employee all they needed to process the distribution was the owner’s authorization.
In addition, the court found the owner breached his fiduciary duty by failing to execute the subsequent written rollover requests. It rejected the argument that the refusal to execute the first written request was justified because it was untimely. Nothing in the plan or under ERISA (Employee Retirement Income Security Act) required that the request be made within any specific time frame. (Even if the plan did require a request to be submitted by a particular time, that could not in and of itself be used to deprive the employee of benefits due him under the plan.)
The defendants argued that the refusal to execute the second written request was justified because the request was not timely, and because the funds were frozen pending Internal Revenue Service (IRS) approval of the plan’s termination. The court noted that a plan termination does not allow a fiduciary to hold onto a participant’s assets before plan termination occurs or where a participant has no notice that termination has occurred. Moreover, once a plan termination is imitated, the assets must be distributed as soon as practicable.
There was evidence that the owner and the employee had an unrelated financial dispute. The owner had even initiated litigation against the employee ion account of that dispute.
The court awarded the employee judgment for his account balance as of December 31, 2005, when he should have received his distribution. (The account was ultimately transferred to a mandatory IRA as part of the termination and had declined in value. The current value of the IRA will be credited against the amount due from the defendants.) In addition, he was awarded interest from December 31, 2005 and the right to attorney’s fees.
Attorney’s fees are generally only awarded in egregious cases. The court was persuaded this case justified an award of attorney’s fees finding in part that the owner’s actions “seemed to have coincided with an unrelated dispute with [the employee]”.
The case highlights the point that employers (and many times, their owners) are ERISA fiduciaries and, as such, they have duties to plan participants and beneficiaries that trump any dispute or issue they may have with an employee that is unrelated to the employee’s plan benefit. Plan fiduciaries need to keep their emotions in check and follow ERISA’s rules to avoid personal liability. Although the plan was also found liable to the employee, it would in turn have against the employer and owner as the plan fiduciaries.