A Profit Sharing Plan is a tax qualified plan that allows an employer to make a
"discretionary" contribution to a trust for the benefit of its employees. Like 401(k)
Plans, each participant has his or her own account. If the assets are properly
invested, the value of each participants' account will appreciate (on a tax-free basis).
The contributions to the plan are usually allocated to the participants based on their
relative level of compensation.
What kind of lawsuits arise in the administration of Profit Sharing Plans?
Misuse of Plan Assets (Prohibited Transactions). There are several restrictions
that apply to the nature and use of assets held in a Profit Sharing Plan. For example,
the assets of the plan can only be used for the benefit of participants. If the assets are
misused, the individuals (fiduciaries) directing the (prohibited) transactions can be
held personally liable for any losses caused to the plan. An example of this situation is
where a profit sharing plan invests in a company that is owned by the sponsoring
corporation and does not receive a prohibited transaction exemption.
Improper Payment of Administrative Expenses. The Department of Labor has
issued several opinions outlining the types of expenses that can be paid by a plan. If
the plan administrator fails to follow these guidelines and causes the plan to pay
expenses that are not consistent with DOL's guidance, then the participants of the
plan may have a legal recourse against the plan administrator. In addition, the
Securities and Exchange Commission is investigating the practices of revenue sharing
practices for qualified plans.
Duty to Provide Complete and Accurate Information. The fiduciaries of the plan
have a duty to provide complete and accurate information. If a fiduciary breaches this
duty to a participant, them he or she may be liable to the participant for any loss
caused to the participants of the plan.
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