Can DB Plan Forfeit Vested Benefit of Participant Convicted of Embezzling from the Employer?

[Übernerd]

This is a new one on me. A state instrumentality ("Employer") sponsors Plan A, its own defined benefit plan (i.e., Plan A is not a state-wide, public plan). Participant X, who has a vested benefit under Plan A, has been arrested for embezzling a large amount of money from Employer. Employer would like to amend the plan prospectively to provide that any participant convicted of a felony against Employer forfeits all employer-provided benefits under the plan. Can it do so?

The plan is exempt from ERISA as a governmental plan, so the federal vesting and anti-alienation rules don't apply. Not surprisingly, the state's statutes don't deal directly with this question. (And the statutes governing the state's own pension plan don't apply.) Does this boil down to simple state contract law?

Cheers.

[Carol V. Calhoun]

When you say "prospectively," do you mean that the new rule would apply to this employee (because Participant X hasn't yet begun to receive benefits)? Or only to employees convicted in the future? Or only to benefits accrued in the future? Or only to employees hired after the date of the change?

Having a provision that employees forfeit benefits on a conviction should not in itself be an issue, as such provisions are common in governmental plans. However, many courts have interpreted federal and state constitutional provisions concerning nonimpairment of contracts to prohibit modifying a public plan in a way that is unfavorable to current employees. CalPERS at one point did an analysis that suggested that imposing forfeitures on "existing members who have already acquired substantial rights to their pensions" could be an issue under this authority.

[mbozek]

NJ enacted a law in 2007 that forfeits the pension benefit of any public employee convicted of a crime resulting from misuse of his office, e.g., accepting bribes to approve govt contracts. Law was passed because elected and appointed officials who were convicted of accepting bribes were retiring to collect their state pensions. State courts have upheld forfeiture of all benefits earned while a member of public retirement system regardless of when employee joined.

What is unclear in above case is whether public employer can forfeit retirement benefits under municipal govt plan if state law does not allow forfeiture. Need to see if state law prohibits any forfeiture of vested benefits.

I never heard of a federal court prohibiting forfeiture of a vested benefit allowed under state law because the states have sovereign immunity. Under various federal laws retirement benefits and IRAs can be seized to pay fines and restitution resulting from conviction for violating federal laws such as accepting bribes.

[Übernerd]

When you say "prospectively," do you mean that the new rule would apply to this employee (because Participant X hasn't yet begun to receive benefits)? Or only to employees convicted in the future? Or only to benefits accrued in the future? Or only to employees hired after the date of the change?

Having a provision that employees forfeit benefits on a conviction should not in itself be an issue, as such provisions are common in governmental plans. However, many courts have interpreted federal and state constitutional provisions concerning nonimpairment of contracts to prohibit modifying a public plan in a way that is unfavorable to current employees. CalPERS at one point did an analysis that suggested that imposing forfeitures on "existing members who have already acquired substantial rights to their pensions" could be an issue under this authority.

Thanks, Carol. Ideally, the new rule would apply to this employee, who hasn't begun receiving his benefit; second-best would be for it to apply to employees convicted in the future; third-best only to future accruals.

Nothing in the state statutes regarding its state-wide plan applies to Plan X, which is an independent plan sponsored by an instrumentality. So I've been thinking, as you suggest, that it will boil down to a state-law contract issue. FWIW, this state does not have a forfeiture law for its state-wide plan.

[Übernerd]

NJ enacted a law in 2007 that forfeits the pension benefit of any public employee convicted of a crime resulting from misuse of his office, e.g., accepting bribes to approve govt contracts. Law was passed because elected and appointed officials who were convicted of accepting bribes were retiring to collect their state pensions. State courts have upheld forfeiture of all benefits earned while a member of public retirement system regardless of when employee joined.

What is unclear in above case is whether public employer can forfeit retirement benefits under municipal govt plan if state law does not allow forfeiture. Need to see if state law prohibits any forfeiture of vested benefits.

I never heard of a federal court prohibiting forfeiture of a vested benefit allowed under state law because the states have sovereign immunity. Under various federal laws retirement benefits and IRAs can be seized to pay fines and restitution resulting from conviction for violating federal laws such as accepting bribes.

Thanks, mbozek. My review of the state statutes has turned up nothing on point--i.e., they all concern the state-wide plan. I've done a fair amount of work with the federal-penalty exception to ERISA's anti-assignment rules, but agree that those principles don't apply here.

[mbozek]

You need to read the state law to see how broad is the application. For example NY has a law that protects the pensions of all public employees from claims of creditors. While it resides in the chapter of NY law that governs state pensions it applies to all municipal plans that provide benefits to government employees including plans established by local govts.

[Übernerd]

You need to read the state law to see how broad is the application. For example NY has a law that protects the pensions of all public employees from claims of creditors. While it resides in the chapter of NY law that governs state pensions it applies to all municipal plans that provide benefits to government employees including plans established by local govts.

It appears to be quite broad, though not by statute. The state's supreme court has adopted the "California Rule," which prohibits even prospective reductions in the accrual rate for vested employees (with exceptions not relevant here). It has also extended that rule to plans sponsored by municipalities and other governmental subdivisions.

Thanks for the replies, all--they were very helpful.

[Carol V. Calhoun]

I suspect that you would have issues applying the rule to existing employees, even as to future accruals, if the "California rule" applies. The best you can probably get would be to have it apply to new hires.