Compliance October 6, 2020

Supreme Court Denies Review of PE Firm Withdrawal Liability Case

The denial lets stand an appellate court decision that two entities of Sun Capital Partners, which bought a firm that withdrew from a multiemployer plan, are not liable for unfunded vested benefits owed to the plan.

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Without explanation, the U.S. Supreme Court has denied a petition to review the case of New England Teamsters and Trucking Industry Pension Fund v. Sun Capital Partners, et. al.

The fund has been in a long-running legal attempt to collect withdrawal liability from two entities of Sun Capital Partners as members of an implied partnership-in-fact under “common control” with Scott Brass Inc. (SBI), a withdrawing employer from the fund. The Supreme Court’s denial lets stand a 1st U.S. Circuit Court of Appeals decision in which it reversed a U.S. District Court ruling that there was an implied partnership-in-fact which constituted a control group and made the two funds liable for the pro rata share of unfunded vested benefits owed to the pension fund. In other words, the appellate court ruling determined the private equity firms are not responsible for paying the withdrawal liability.

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In its petition to the high court in August, the New England Teamsters and Trucking Industry Pension Fund said the appellate court’s decision reversing the district court’s finding of a partnership-in-fact is based on its “reluctance” to impose withdrawal liability for private equity (PE) funds and provides “a blueprint for such funds to escape withdrawal liability while securing virtually risk-free investments in portfolio companies with known, unfunded pension liability.” The pension fund says the decision limits recovery of withdrawal liability by multiemployer pension funds.

“In essence, it has created a judicial exemption to withdrawal liability that shields private equity firms,” the fund claimed in its petition.

John Lowell, an Atlanta-based actuary and a partner with October Three Consulting LLC, has told PLANSPONSOR that more private equity funds are doing acquisitions in industries where multiemployer plans are common.
Ask the Experts October 6, 2020

Can a 403(b) Be Added for HCE Deferrals to Help Pass Testing?

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning retirement plan administration and regulations.

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“I work with a health care organization that sponsors a 401(k) plan. The plan usually fails the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests due to highly compensated medical staff and administration. They would like to set-up a 403(b) plan in addition to their 401(k) plan to defer any excess contributions by highly-compensated employees (HCEs) to the 403(b) plan. Is this strategy allowable under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

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Assuming that your employer is eligible to sponsor a 403(b) plan (e.g. a 501(c)(3) charitable organization), the Experts don’t believe there is any reason why this organization couldn’t set up a 403(b) plan for additional deferrals. Generally, as long as your eligible employer allows all employees to make elective deferrals to the 403(b) under the universal availability rule under Internal Revenue Code Section 403(b)(12)(A)(ii), the employer should be able to sponsor a 403(b) plan. However, sponsoring a 403(b) plan likely wouldn’t necessarily help with passing ACP testing, since 403(b) plan sponsors that provide employee matching or employee after-tax contributions are generally required to perform ACP testing if they choose to match deferrals in that plan (which, as a practical matter, is unlikely, since it is already matching deferrals in the 401(k)).

The 403(b) is useful to address your ADP testing issues, since ADP testing is not required in a 403(b) plan. Of course, it would have been simpler if your employer established a 403(b) in the first place, so that ADP testing could have been avoided entirely, but it would likely be a more disruptive option now to terminate the 401(k) in favor of a 403(b).

Another idea is that the health care organization may wish to consider establishing a 457(b) plan for supplemental deferrals, if it has not established one already. If the entity is a private tax-exempt, participation in the 457(b) plan would be limited to select management or highly compensated employees, which may be the very individuals that are causing the 401(k) ADP testing to fail. In addition, this type of plan is a so-called “Top-Hat” plan that would not be subject to ERISA, so there should be less administration involved than for a 403(b) plan.

Finally, if all else fails, there are safe harbor plan designs that can be used to avoid ADP/ACP testing as well.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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