An Employer's Retirement Plan Dilemma

Our firm promised to contribute a 3% match to employees' retirement accounts for 2008. However, we have been unable to do so. What are our obligations, legally and ethically?—M.M., Morgan Hill, Calif.

The rules governing employee pension plans are extremely complex. Before we get into the details, however, several experts agree that no matter what plan you have, if you put the "promise" into writing and did not change your documents before the end of 2008, you are legally obligated to make the employee match. Typically, the match must be made by the time your tax returns for the year in question are filed, including extensions.

You could be opening your company up to an employee lawsuit or class action if you don't follow through. "If the match is in writing in your plan and you haven't changed it, you are legally obligated to make the match. An employee could sue to get it," says Mary Ellen Signorille, an attorney with the AARP Foundation.

You may not have a legal obligation, however, if any promise you made was verbal and your written documents make clear that a pension matching contribution is optional or dependent on reaching certain profit goals, says Pat Byrnes, founder and president of Actuarial Consultants, a business in Torrance, Calif., that designs, installs, and administers retirement plans. "If you were hoping to make the contribution, but it was not confirmed in writing, the ethics piece goes back to your company culture," Byrnes says.

Explain the Difficulty

Many companies in today's economic climate are making tough decisions about cutting costs and reducing work force levels. If you have done the same—and made sure that your employees recognize that—there's nothing inherently unethical about explaining your difficulty and conveying your disappointment about not being able to meet the hoped-for 2008 contributions.

"If I heard grumblings at my company, I'd be all over it with a companywide meeting," says Byrnes, who counts many entrepreneurial companies among his clients. "Explain the good things you've done. Make sure they recognize it if you haven't had layoffs, haven't cut pay, and so forth." Let your employees know that you plan to do better this year, but do not promise anything you can't deliver.

Coming clean with your employees and improving communications this year may be sufficient if you do not have a legal obligation to make the match. However, if you set up a qualified retirement plan, such as a SIMPLE IRA or SIMPLE 401(k), it's likely that you are obligated legally to come up with the money. If you do not do so, your employees could complain and trigger an investigation by the U.S. Labor Dept. or the IRS. Not making proper contributions to your plan could also stall or kill a future merger or acquisition of your company.

There is a way to correct errors in your plan by going directly to the IRS and availing yourself of its Employee Plans Compliance Resolution System."You can correct the problems yourself, or you can go to the government and pay a user fee and have them correct problems for you," Byrnes says.The IRS Web site also has a page on correction programs for various qualified retirement plans.

Because complying with these plans—even those designed to be simple and self-administered—is complicated, you should first consult an attorney specializing in Erisa, the Employee Retirement Security Act established in 1974 that governs pension and health plans in private industry.

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