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Business Bankruptcy in the Twin Cities: What Happens to Employee Benefits?

If you are a small business owner or a board member or senior executive of a larger company that is failing rapidly, you may be wondering what happens to employee benefits during bankruptcy.

The answer is one that not a lot of people like and that is to freeze the benefits. This advice may seem counterintuitive for someone who is trying to keep their company afloat and who would be personally affected if their benefits were lost. However, this is something that is very important.

Here is an example of a Minneapolis-based company that was placed in a bankruptcy situation:

In 2010, a company had to cease operations because of its financial difficulties. Creditors then filed an involuntary petition in the U.S. Bankruptcy Court for the District of Minnesota in Minneapolis for Chapter 7 bankruptcy. According to the complaint, the company’s beneficiaries and employees had incurred around a half million dollars in health care expenses that were not covered at the time of the filing. The company could purchase stop-loss coverage for the large claims, but that coverage does not protect the employees from the company not being able to pay.

At this point, the bankruptcy trustee sought to recoup any payments that the company made in its final few months. This was done on the basis that the company was insolvent during that period. The end result was the employees not getting much help from the bankruptcy trustee, which was not the ideal result for individuals who thought they had medical coverage.

Because the former employees could not recover on their benefit claims, the next step was to look at plan assets in the way of 401(k) plans. This is where there is reliance on the Department of Labor’s regulation regarding timely contribution to such accounts is had. It is looked at whether or not there were timely contributions to these accounts and that any loan repayments and elective deferrals not paid to trust constitute plan assets. The fiduciary is liable for fiduciary breach, which occurs when timely contributions are not made to these accounts as mandated. But what happens if a company is failing and its creditors are picking at its corporate accounts? How can an executive gain control of these accounts and make sure that every employee’s money is contributed to trust?

The example company did not have an issue with its 401(k) plan contributions, but there was one payroll period where life insurance premiums were withheld and the Department of Labor used the same argument.

The company could have opted for the settler decision to terminate welfare benefits when the company was declared insolvent, but it didn’t. When making a settler decision, a company acts in its best interest and is not subject to fiduciary standards. If a company has a chance of recovery, then it may work to maintain the status quo.

The example company was able to maintain its self-insured dental and medical plans. It also maintained its flexible spending plan. However, there was a point where it was announced that plans were going to be cancelled the next day. There was a complaint that the employee contributions were actually plan assets and that the executives were fiduciaries who breached their fiduciary duties.

So if ever in a position where the business is rapidly declining, it is suggested to consult with an experienced Minneapolis bankruptcy attorney on what the next steps should be. It is important to maintain the status quo with employees and what the impact of doing so will be.