Delinquent contributions to multiemployer plans

(Same letter as P/O 77-04)

March 24, 1977

Dear            :

Your letter of July 6, 1976, addressed to the Secretary of
Labor has been referred to this Office for reply. Your
letter states that, on behalf of Local #    , affiliated
with the (union) (Local #    ), you are advising the
Department of Labor that (Company) has failed to make
contributions for the month of March, 1976, to the
Insurance Trust Fund Local #     (Insurance Plan) and the
Local #     and Local #      Severance and Retirement Trust
Fund (Severance Plan). Your letter states that such
contributions are required under section 18 an addendum of
the collective bargaining agreement between (Company) and
Local #      , a copy of which you enclosed with your
letter, and that the amounts involved are $5,175 owed to
the Insurance Plan and $575 owed to the Severance Plan.
Finally, your letter expresses your "hope and expectation
that [the Department] will facilitate the necessary
contributions and assess the appropriate penalty" under
section 502(i) of the Employee Retirement Income Security
Act of 1974 (the Act).

Section 406(a) of the Act provides, as here relevant, that,
except as provided in section 408 of the Act (relating to
administrative and statutory exemptions from the prohibited
transaction restrictions), a fiduciary with respect to a
plan shall not cause the plan to engage in a transaction,
if he knows or should know that such transaction constitutes, among other things, a direct or indirect lending of
money or other extension of credit between the plan and a
party in interest, or a direct or indirect transfer to, or
use by or for the benefit of, a party in interest, of any
assets of the plan.

Section 502(i) of the Act authorizes the Department to
assess civil penalties against parties in interest which
engage in prohibited transactions with plans, unless the
plan is a plan described in section 4975(e)(1) of the
Internal Revenue Code of 1954 (the Code). In addition,
sections 409 and 502(a) of the Act authorize the Department
to seek appropriate relief against plan fiduciaries for
causing a plan to engage in a prohibited transaction.

On March 26, 1976, the Department and the Internal Revenue
Service issued a class exemption, Prohibited Transaction
Exemption 76-1 (41 FR 12741), under section 408(a) of the
Act and section 4975(c)(2) of the Code covering, among
other things, delinquent employer contributions to multiple
employer plans. The preamble to the class exemption
clarifies the circumstances under which the failure of a
participating employer in a multiemployer plan (as defined
in section 3(37) of the Act) or other multiple employer
plan to make a contribution to the plan when such contribution is due, or the failure of the plan to collect such a
delinquent contribution, constitutes a prohibited transaction under section 406 of the Act. In addition, an
exemption is provided to cover certain prohibited transactions which frequently occur as a result of delinquent
employer contributions. A copy of Prohibited Transaction
Exemption 76-1 is enclosed.

As indicated in the enclosure, the mere failure of a
participating employer in a multiemployer or multiple
employer plan to make a contribution to the plan when such
contribution is due does not in and of itself constitute a
prohibited transaction under sections 406 and 407(a) of the
Act or section 4975(c)(1) of the Code because such
delinquent contribution does not come within the types of
transactions (e.g., extension of credit between a plan and
a party in interest) described in those sections. Thus,
such a delinquent participating employer would not, by
reason of the mere failure to make a contribution to the
plan, be subject to the civil penalty which may be assessed
under section 502(i) of the Act or the taxes imposed by
section 4975(a) and (b) of the Code for prohibited
transactions. A prohibited transaction (e.g., lending of
money or other extension of credit between a plan and a
party in interest) may occur, however, if, in connection
with a delinquent employer contribution, the plan fails to
make systematic, reasonable and diligent efforts to collect
the contribution, or the plan agrees to delay collection,
reduce the amount it will accept, or write off the
delinquent contribution.

Because participating employers have little, if any,
control over the contribution collection efforts made by
plans, which efforts are central to a determination of
whether a prohibited transaction has occurred in connection
with a delinquent employer contribution, the class
exemption granted by the Department and the Internal
Revenue Service provides that participating employers will
not be subject to the civil penalty under section 502(i) of
the Act or the taxes imposed by section 4975(a) and (b) of
the Code for prohibited transactions relating to delinquent
contributions, except in the case of arrangements, agreements or understandings between the plan and the employer
which are clearly unreasonable. Thus, unless the Plans and
(Company) have entered into a clearly unreasonable arrangement, agreement or understanding regarding the late payment,
or nonpayment, of {Company)'s contributions, the failure of
(Company) to make a required contribution to the Plans for
March, 1976, would not subject (Company) to the civil
penalty which may be assessed under section 502(i) of the
Act or the taxes imposed by section 4975(a) and (b) of the
Code.

In addition, in our view, section 404 of the Act (relating
to general fiduciary duties) imposes an obligation on
multiple employer plan fiduciaries to secure compliance
with lawful plan provisions and to pursue appropriate
remedies against employers who fail to make required plan
contributions. Accordingly, it may be appropriate under
section 404 of the Act for the fiduciaries of the Plans to
take action, including, where necessary and appropriate,
legal action, to secure payment of delinquent plan
contributions by employers.

Because your letter raises questions under section 4975 of
the Code and under Prohibited Transaction Exemption 76-1,
which, as noted above, was granted jointly by the
Department and the Internal Revenue Service, we have
conferred with representatives of the Internal Revenue
Service concerning this matter and they concur in the views
set forth above as they apply to section 4975 of the Code
and the Prohibited Transaction Exemption 76-1.

Sincerely,