In Chao v. Unique Manufacturing Co., a federal district court determined that a business consultant brought in to run a distressed company was a fiduciary to the company’s 401(k) plan and liable for the failure to transfer employee 401(k)contributions to the plan.  

Regulations under the Employee Retirement Income Security Act of 1974 (ERISA) provide that employee contributions to a 401(k) plan become assets of the plan as of the earliest date (not later than 15 days) they can be segregated from the employer’s assets. If contributions are held beyond that date, the persons responsible for the delay are subject to fiduciary liability for failure to transfer the funds. Delays of this type occur frequently by oversight orbecause of cash flow problems. Late transfer of 401(k) contributions is a prime area of ERISA enforcement by the U.S. Department of Labor (DOL).  

In Unique, a management consultant was retained “to provide management, financial advisory and investment banking services in connection with the Company establishing a private placement to raise capital or sell the Company.” The consultant had signing authority for the corporate bank account. Beginning before his retention, and continuing during it, employee contributions to the 401(k) plan were deducted from payroll but retained in the corporate account. In an enforcement action, the DOL sued the company, the consultant and the former president of Unique who had signing authority for the bank account prior to the consultant, seeking to have the employee contributions, plus a “lost opportunity” amount, restored to the plan.  

The court held that the consultant was a fiduciary to the plan because he had “practical control” of the bank account where the contributions (which were plan assets) were held. As a fiduciary, he failed to ensure that the assets were transferred to the plan and allowed them to be spent on corporate expenses. This was despite the consultant’s arguments that he was initially unaware of the failure to transfer, then tried to remedy it, but was rebuffed by the executor of the estate of the company’s late owner. The former president, who was also trustee of the 401(k) plan, was found liable for the failure to remit contributions prior to the consultant’s retention.  

DOL enforcement activity in this area can be expected to continue. For any company with a 401(k) plan (or other plan with employee contributions), anyone who comes to have “practical control” of company finances is potentially liable for late contributions. This could include a manager, business consultant, or private equity firm, among others. Due diligence on procedures for handling employee contributions, currently and historically, is necessary, as is a good payroll agent. (Chao v. Unique Manufacturing Co., 2009 WL 63064 (N.D.Ill., Jan. 7, 2009))