PBGC Suits Challenging Standard Terminations: Statute of Limitations and Third-Party Claims

December 4, 2017

Plan administrators seeking a standard termination of a defined benefit pension plan must comply with very specific Employee Retirement Income Security Act (ERISA) rules and Pension Benefit Guaranty Corporation (PBGC) regulations. A U.S. district court recently reviewed the process for standard terminations and PBGC audits, and ruled on two important issues concerning PBGC lawsuits to enforce the results of PBGC audits:

  1. When must PBGC file suit to challenge alleged deficiencies in the standard termination process?
  2. May defendant plan administrators file third-party complaints against service providers allegedly responsible for errors in the standard termination process?

Pension Ben. Guar. Corp. v. Idaho Hyperbarics, Inc., No. 4:16-cv-00325, 2017 U.S. Dist. LEXIS 73889 (D. Idaho 2017).  The case is an important reminder of several key points relating to PBGC’s standard termination process and the ability of plan administrators to rely on the advice of third-party service providers in carrying out that process.

PBGC’s Role in Standard Terminations

PBGC administers and enforces the provisions of the plan termination insurance program under Title IV of ERISA §§ 4001-4402.  

In a standard termination, the plan administrator distributes plan assets to participants and beneficiaries in accordance with Title IV of ERISA and PBGC regulations. Benefits are determined under the plan provisions in effect on the plan’s termination date.

The plan administrator first sends PBGC a Standard Termination Notice (Form 500) with information about plan assets and benefit liabilities. PBGC then has 60 days to determine whether there is reason to believe that plan assets are not sufficient for benefit liabilities or whether the plan administrator is otherwise noncompliant with regulations.

Absent a finding from PBGC that plan assets are not sufficient for benefit liabilities or other noncompliance, the plan administrator must distribute plan assets in accordance with Title IV of ERISA within a specified time period.

To accomplish a standard termination, the plan administrator must (a) purchase annuities from a private insurer to satisfy all benefit liabilities or (b) make alternative forms of distribution (e.g., lump sum payments) in accordance with the provisions of the plan and any applicable regulations.

Within 30 days after plan assets are distributed, the plan administrator must file a Post-Distribution Certification (Form 501), attesting that all benefits under the plan have been properly paid under Title IV of ERISA.

After the Form 501 filing, PBGC still has authority over matters relating to the terminated plan under ERISA § 4041(b)(4), and must audit a “statistically significant number” of standard terminations to determine if participants have received full benefits under the plan. PBGC’s audits are subject to review under PBGC’s administrative review procedures.

PBGC’s Allegations Concerning IHI Plan Termination

PBGC sued Idaho Hyperbarics Inc. (IHI) as plan administrator of IHI’s defined benefit pension plan, alleging that IHI violated Title IV of ERISA and applicable regulations by terminating the plan without distributing plan assets in full satisfaction of the plan’s benefit liabilities. 

IHI’s plan was an Internal Revenue Code section 412(e) plan, which is fully and solely funded through insurance policies. In a standard termination, participants in such a plan are entitled to the full cash surrender value of their insurance policies.

On May 27, 2009, IHI filed a Form 500 with PBGC with a proposed plan termination date of Dec. 26, 2008. On Nov. 15, 2010, IHI filed a Form 501, certifying that all benefit liabilities were satisfied and that IHI paid a total of $575,900 to 15 plan participants no later than March 19, 2009 — more than two months before IHI filed the Form 500. On April 28, 2011, PBGC notified IHI that the plan’s standard termination had been selected for audit because, in violation of Title IV of ERISA, the plan assets were distributed to participants before IHI filed the Form 500.

PBGC alleged that IHI’s documentation showed that only $228,884 was distributed to participants, less than half of the $575,900 reported on the Form 501 and the aggregate value of the cash surrender checks that the life insurer issued on March 29, 2009. During the audit, PBGC determined that, contrary to the information reported on the Form 501, two participants received no distribution and several participants received their distributions months or years after the date stated in the Form 501.

On July 15, 2014, PBGC issued its initial determination to IHI with respect to its audit, finding, among other things, that IHI did not pay plan participants the full cash surrender value of their contracts, as required by the Internal Revenue Code. PBGC’s initial determination required IHI to pay participants the difference between the amount each participant actually received and the full cash surrender value of their annuity contract, with interest.

On Nov. 12, 2014, IHI requested reconsideration of PBGC’s initial determination. On April 28, 2015, PBGC issued its final determination, which upheld its earlier findings.

After IHI failed to make any of the additional benefit payments to plan participants, PBGC filed its complaint on July 21, 2016, alleging that IHI violated Title IV of ERISA and applicable regulations, and seeking enforcement of PBGC’s determinations, as well as distribution of amounts owed to plan participants, with interest.  

Statute of Limitations Starts Only After PBGC’s Determination

Under ERISA section 4003(e)(6), a civil action by the PBGC to enforce its standard termination audit may not be brought after the later of (i) six years after the date on which the cause of action arose, or (ii) three years after the earliest date on which PBGC acquired or should have acquired “actual knowledge” of the existence of such cause of action. In the case of fraud or concealment, the period is extended from three years to six years from the earliest date on which PBGC acquired or should have acquired “actual knowledge” of the existence of such cause of action.

IHI argued that PBGC’s lawsuit was barred by the statute of limitations on the theory that PBGC’s cause of action arose on March 19, 2009, the date IHI paid plan participants. This date was more than two months before IHI’s filing of Form 500 in violation of ERISA section 4041, which provides that the plan administrator cannot pay participants before the filing of Form 500. Alternatively, IHI argued that PBGC’s cause of action arose no later than March 22, 2010, the date IHI received a favorable determination letter from the IRS, or April 28, 2011, the date PBGC selected the plan for audit. Thus, IHI argued that the limitations period expired before PBGC filed suit.

The court rejected IHI’s arguments and ruled that PBGC’s cause of action did not arise until its final determination on April 28, 2015, or — at the earliest — on July 15, 2014, the date of PBGC’s initial determination following its audit. The court reasoned that PBGC was suing to enforce its determination concerning ERISA violations in IHI’s termination of the plan, which determination was not made until its audit was completed.   Idaho Hyperbarics, supra (May 15, 2017).

Thus, the court agreed with the PBGC that PBGC cannot have “actual knowledge” of its cause of action challenging a standard termination until the PBGC completes its audit. Because the court indicates that PBGC’s cause of action did not arise until completion of its audit, the Idaho Hyperbarics case appears to indicate that even the six-year limitation period may not begin to run until the PBGC completes its audit of the standard termination.

All this indicates that plan administrators are unlikely to succeed in raising a statute of limitations defense to a PBGC lawsuit challenging a “completed” standard termination, even if the PBGC lawsuit comes years after the effective date of the standard termination.

Court Denies IHI’s Request to File Third-Party Complaint

After losing its statute of limitations defense, IHI tried to shift — or share — the liability by requesting leave to file a third-party complaint against CJA & Associates (CJA), a service provider retained by IHI to assist in establishing the retirement plan for IHI employees. IHI’s proffered third-party complaint alleged the following:

  • CJA was retained as “third-party administrator of the plan” with “primary discretion to make sure the plan complied with ERISA regulations.”
  • CJA had recommended funding the plan through life insurance and had represented that the costs for premiums under the plan would remain constant. In fact, premiums rose substantially and threatened to push IHI into bankruptcy. 
  • IHI notified CJA of its intent to terminate the plan, but CJA failed to timely prepare the required notices to participants. 
  • Errors in the plan termination process resulted from errors by CJA or incorrect advice from CJA.
  • CJA breached its duties as an ERISA fiduciary, breached its contractual duties to IHI and breached the duty of care CJA owed IHI.

PBGC opposed IHI’s request for leave to file the third-party complaint, arguing that IHI’s third-party claims were not derivative of the underlying action between PBGC and IHI but were instead based on IHI’s independent causes of action against CJA, requiring different factual findings, different legal analysis, and a different standard of review. Permitting the third-party claims in the PBGC lawsuit, argued PBGC, would prejudice PBGC and plan participants by unduly delaying a determination on PBGC’s administrative record.

The court agreed with PBGC and refused to grant leave for IHI to file the third-party complaint. Citing ERISA §§ 4003 and 4041, the court held that “the Plan Administrator alone, not a third party advisor, is responsible for proper termination of the Pension Plan.” The court reasoned that “PBGC’s claim against IHI arises under Title IV of ERISA, and liability is based upon IHI’s acts or omissions, not from the actions of CJA.” Idaho Hyperbarics, supra (Nov. 15, 2017).

Furthermore, reasoned the court, PBGC’s claims against IHI would be resolved on PBGC’s administrative record without need for discovery, while IHI’s claims against CJA would require discovery into issues unrelated to PBGC’s claims, thus needlessly delaying disposition of the issues in PBGC’s lawsuit and payment of benefits allegedly owed to plan participants for several years.  

Takeaways From Idaho Hyperbarics

This case reminds plan sponsors and administrators of several important points:

  • Plan administrators cannot fully delegate their statutory obligations under ERISA.   Reliance on the “expertise” of third parties is generally no defense to a plan administrator’s failure to comply with its ERISA duties in a standard termination.
  • Although errors by third-party service providers may give rise to claims against the service provider, those errors ordinarily do not relieve the plan administrator of ERISA liability.
  • The standard termination process requires careful and timely attention to PBGC and IRS regulations and should be undertaken with sound professional advice, thorough understanding and meticulous care by the plan sponsor and plan administrator.  
  • The PBGC process for reviewing standard terminations may take time, but delay in the PBGC audit or administrative process likely will not provide a defense to the plan administrator.
  • PBGC will perform an audit if at least 300 participants are involved in the termination:

 

Currently, PBGC selects all plans with a participant count of more than 300 for audit. For plans with a participant count of 300 or fewer, PBGC randomly selects plans to audit. PBGC also may audit a plan when we have reason to believe there may be a problem (for example, when we receive a complaint by plan participants or a plan practitioner). In addition, PBGC audits all plans that distribute plan assets in satisfaction of plan liabilities before or without filing a Standard Termination Notice (Form 500) in accordance with the standard termination regulations.


www.pbgc.gov/prac/terminations/standard-terminations

 

  • Because PBGC lawsuits challenging standard terminations will usually be decided on the administrative record developed in the audit, plan sponsors and plan administrators are well-advised to make their case during the administrative process as best they can. 
  • Where clear errors were made in the standard termination process, plan sponsors and plan administrators generally should seek to resolve those in settlement with the PBGC, rather than litigating in hopes of getting a better result. In most cases, the law is stacked in PBGC’s favor so long as it has facts in the administrative record to support its position.
  • The wisest approach to such disputes may be mediation, consistent with PBGC’s announced policy of using “alternative dispute resolution for resolving appropriate disputes in a timely and cost-efficient manner.”  64 Fed. Reg. 17696 (April 12, 1999).

For further information, please contact either of the authors, James P. McElligott Jr. and Robert B. Wynne, or any other member of the McGuireWoods employee benefits team.

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