5500 Preparer's Manual for 2012 Plan Years
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Profit-sharing plan trustees breached their duty of loyalty under ERISA when they withheld from a participant the election forms and other information needed to elect a rollover distribution of his vested account balance, the U.S. Court of Appeals in New Orleans (CA-5) has ruled. A damage award to the participant of nearly $200,000 represented the difference in his account balance at year-end 2007, when he left the employer, and spring 2009, which is when he finally received his rollover distribution.
A sales representative resigned his employment in September 2007. At year end, the vested balance in his profit-sharing account was nearly $500,000. When he resigned the employee was not provided the election form needed to request a rollover distribution, nor was he given other information about his profit-sharing account. He was aware of a company policy requiring former employees to wait one year before requesting account distributions.
Two months after the resignation, the employer filed suit in state court against the employee alleging breach of employment contract and other claims. In April 2008, the employee's attorney made a discovery request as part of the state court litigation for copies of plan documents, but they were not provided. (The employee eventually prevailed in the state court action.)
In September 2008, the employee contacted plan personnel about his account distribution, but was still not provided with the forms needed to elect a rollover distribution. He eventually received a rollover distribution of $306,000, the account balance as of the end of 2008. In February 2009, the employee filed suit in federal court alleging the employer breached its ERISA fiduciary duty by withholding the forms. The district court awarded damages to the participant and the employer appealed.
Duty of loyalty
ERISA §404 does not enumerate the particular duties of a fiduciary, but under the common law of trusts, a fiduciary has a duty of loyalty to administer a trust solely in the interest of the beneficiaries. Connected to the duty of loyalty in the ERISA context is a duty to disclose to participants material facts affecting the participant's interest in the plan. The employer knew as of the employee's termination that he did not have the forms needed to apply for his benefits. Thus, under ERISA §502(a)(2), an award of $183,000, representing the loss and depreciation in the account from 2007 to 2008, was appropriate.
The appellate court also upheld the district court's award of attorney's fees in the amount of $60,000, but reversed and remanded the lower court's award of $25,000 in statutory penalties under ERISA §104(b)(1) for failure to disclose plan documents. It rejected the district court's position that the 2008 discovery request in state litigation could serve as a "written request" for plan documents under ERISA.
Source: Kujanek v. Houston Poly Bag I, Limited (CA-5).
For more information, visit http://www.wolterskluwerlb.com/rbcs.
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