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Embezzle to 401(k) plan


sla

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Payroll person uses/embezzles employer funds to pay her 401(k) loan. Terminates employment, receives her full vested distribution from the plan. Since embezzled money was deposited to the plan on her behalf, then distributed to her from the plan. Employer has discovered this issue recently in 2015, transactions occurred 2013 & 2014. What is the responsibility of the plan? Or is this an internal employer issue?

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I am not a lawyer, but I cannot imagine that the plan has any responsibility to check the provenance of money used to repay a plan loan. As far as I can tell, without further suspicious circumstances, it sounds as though the plan has done everything right.

Clearly, the former payroll person is the one who owes the employer money. Threat of prosecution might be enough to get the perpetrator to agree to a suitable program of restitution.

Always check with your actuary first!

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Unless I misunderstand the original post, the plan did not suffer any losses due to embezzlement, so the bonding company would not have any liability. Absent knowledge by the plan that the repayments were not legitimate, the plan cannot be considered liable to the employer for the employer's losses, could it?

This doesn't even come down to a question of the plan taking money from the participant's account to repay the employer for those losses. That money is gone. What possible justification can there be for the other participants suffering any penalty at all to make the employer whole? The employer cannot legitimately withhold amounts that would be payable to the accounts of the innocent parties as matching funds.

Always check with your actuary first!

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There have been a few prior discussions on the topic of (or similar to) embezzlement. As I recall, at least one of them had a reasonable suggestion. Try using the Search function. Suggested key words include embezzle, embezzlement, embezzled, theft, etc.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Review the loan policy & loan agreement. It seems as there is an operational error. Does the loan agreement say payments would be from payroll? In this case, the funds were never withheld from pay and are excess payments to the loan. Does the plan allow people to pay from personal checks? It seems as this didn't happen either. Unless she funneled funds from the ER account to her personal account then to the plan.

For the distribution, she was paid funds she was not entitled to.

1099-R was wrong, as she should have been taxed ont he true outstanding balance of the loan.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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This is the reason for a fidelity bond. The bonding company may take responsibility for pursuing the embezzler.

Most companies have a fidelity bond protecting the employer from theft of the employers assets. Not sure how much she stole or how much the deductible is (or if they even have such a bond). I actually think this has nothing to do with the Plan at all. She stole from the Employer, not the Plan.

Austin Powers, CPA, QPA, ERPA

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But the plan received loan payments it should not have received. It paid out those funds, too.

To me, it's similar to putting in deferrals to someone's account that didn't come out of a paycheck.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I didn't say this was a crime (on the plan's part). Just that the plan should take steps to correct this operational failure.

The Trustee or the Plan Administrator obviously did not match up plan loan payments to loan payments made through payroll. Therefore unauthorized funds were put into the plan and paid out erroneously.

In your thoughts, should the plan do nothing? Including allowing an obviously incorrect form 1099-R stand as issued?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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The loans were repaid though with real money, and they were applied to a real obligation. It is where she got the funds that presents the problem.

I'm not suggesting that the courts can't garnish the money, I actually have no idea if they can. I'm merely saying the plan did nothing wrong here and there is no operational failure to correct.

Austin Powers, CPA, QPA, ERPA

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Let me play Devil's Advocate for a moment - suppose plan accepts loan payments by check? (some do) - or suppose this person was they payroll person, and doctored the accounting somehow so that embezzled funds were run through payroll as a normal loan payment? Doesn't seem like any plan operational error there to me.

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What if this plan ONLY has payroll deduction for loans? Is is not incumbent on the Trustee to ensure all the loan payments posted to the accounts actually ran through payroll? In this case, the Trustee (probably really just the Plan Administrator, or, heck, the payroll lady) got two years of reports showing loan payments to her account that did not match the payroll records.

Unless she paid herself extra via payroll, then it's not the Trustee's problem. If she just added her loan payments to the 401(k) data submission spreadsheet and the R/K just ACH'd the funds, then I think it's an operational error--accepting loan payments that did not get paid via payroll.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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