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Employee Benefits Series
The
403(b)/457 Plan Requirements
Handbook
December 2013 | Vol. 4, No. 2
DOL Personally Sues 403(b) Plan Official for
Delayed Deposit of Elective Deferrals
A 403(b) plan and a plan official are being sued by the
U.S. Department of Labor for failing to remit properly
— or at all — employee contributions to the plan. Significantly, the agency contends that the plan official knowingly participated in fiduciary breaches, and thus should
be held individually liable. To that end, DOL is asking the
federal district court for the District of Maryland to have
the official personally restore any financial losses to the
plan. The case is Perez v. Hathaway, Civil action number
1:13-cv-03253-WMN (D. Md. Filed Nov. 1, 2013).
Background
Baltimore Behavioral Health is the plan sponsor and
plan administrator of its 403(b) plan, which was established on Jan. 1, 2005. William Hathaway was a BBH
officer. The plan permitted participants to contribute a
portion of their pay to the plan as elective salary deferrals through payroll deductions.
DOL alleges the following: For payroll periods from
October 2009 through April 2010, BBH and Hathaway
deducted money from participants’ pay as employee contributions but did not remit them to the plan. Even though unremitted employee contributions are plan assets, BBH and
Hathaway failed to segregate the plan assets from BBH’s
general assets. In addition, because BBH and Hathaway
consistently remitted contributions only three to four times
a year since the plan’s inception, contributions were consistently remitted late and without interest.
DOL argues that Hathaway’s decision not to remit
employee contributions was an exercise of discretionary
authority or control under the plan, and indicates he has
discretionary authority or discretionary responsibility
in plan administration. As such, he is a fiduciary under
ERISA, as well as a party-in-interest. Furthermore, the
agency contends that BBH and Hathaway knowingly
participated in or concealed ERISA violations, and did
not make reasonable efforts to remedy the breaches.
As a result, DOL alleges that Hathaway, as a plan
fiduciary:
1)violated ERISA Section 403(a) by failing to ensure
that all plan assets were held in trust by one or
more trustees;
2)violated ERISA §403(c)(1) by failing to ensure that
plan assets did not inure to the company’s benefit;
3) failed to discharge his fiduciary duties to act solely
in the interest of plan participants and beneficiaries
and for the exclusive purpose of providing benefits
to them and defraying reasonable expenses of plan
administration, in violation of ERISA §404(a)(1)(A);
4)failed to discharge his fiduciary duties toward plan
participants and beneficiaries with care, skill, prudence, and diligence, and failed to act as a prudent
person familiar with such matters would, in violation of ERISA §404(a)(1)(B);
5)caused the plan to engage in transactions that he
knew or should have known constituted the direct
or indirect transfer of plan assets to, or use of plan
assets by, or for the benefit of, a party-in-interest,
in violation of ERISA §406(a)(1)(D); and
6)dealt with plan assets in his own interest or for their
own account, in violation of ERISA §406(b)(1).
By knowingly participating in BBH’s fiduciary breaches,
failing to comply with his fiduciary duties in the plan
administration, and failing to make reasonable efforts to
remedy the known breaches, DOL contends that Hathaway is individually liable for BBH’s fiduciary breaches,
based on ERISA §§405(a)(1), 405(a)(2) and 405(a)(3).
Relief Sought
The DOL is requesting that the following relief be
granted by the court:
December 2013 | The 403(b)/457 Plan Requirements Handbook
See Delayed Deposit, p. 2
1
Delayed Deposit (continued from p. 1)
7)ordering Hathaway, his employees, attorneys and
service providers to: (a) provide the DOL and the
independent fiduciary with all documentation relating to plan finances and administration; and (b)
account for all plan contributions and all transfers,
payments or expenses incurred or paid in connection with the plan; and
1)restoring the plan of all losses, including interest or lost opportunity costs and the costs of an
independent fiduciary, caused by Hathaway’s and
BBH’s fiduciary misconduct;
2)requiring the plan to set off any individual account balance of Hathaway’s against the amount
of losses, including interest or lost opportunity
costs and the costs of an independent fiduciary, and
reallocate it to the non-breaching participants, if
Hathaway does not otherwise restore the losses;
3)removing Hathaway as a fiduciary of any employee
benefit plan for which he acts as a fiduciary;
4)permanently enjoining Hathaway from acting directly or indirectly, in any fiduciary capacity, for
any ERISA plan;
5)permanently enjoining Hathaway from exercising
any custody, control or decision making authority
for any ERISA plan assets;
6)appointing an independent fiduciary with plenary
authority and control over plan management and
administration — including the authority to marshal assets and pursue claims on the plan’s behalf
— and to take all appropriate action for the plan’s
termination and the distribution of benefits to plan
participants and beneficiaries, with Hathaway bearing all those costs;
8)attorney’s fees and other equitable relief.
Implications
This case brings home strongly the point that 403(b)
plans are on DOL’s radar, and that care needs to be taken
to handle 403(b) deposits properly. Failure to do so can
well result in personal liability to the 403(b) organization’s senior management.
It also gives DOL another tool by which to challenge
403(b) plans claiming non-ERISA status. This plan was
an elective deferral plan, which never filed a Form 5500.
The DOL is claiming that BBH and its officer, Hathaway,
only paid employee contributions into the plan every
three or four months. By hanging on to the funds this
long, it was an act of discretion that would make any otherwise non-ERISA plan an ERISA plan.
The DOL is saying that if you are a non-ERISA
501(c)(3) plan and you do not make deposits of elective
deferrals into the plan on a timely basis, DOL can claim
jurisdiction over the plan because the delay is an act of
discretion under ERISA that triggers ERISA coverage. This article appears in the december 2014 newsletter of The 403(b)/457 Plan Requirements Handbook. Other
articles in the newsletter explain tips on the proper use of certain investments in 403(b) plans, how to mitigate
late filing penalties in Form 5500 filings, the problems if hour-of-service rules are misapplied, and more.
© 2013 Thompson Information Services, Washington, D.C.
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December 2013 | The 403(b)/457 Plan Requirements Handbook

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