Employee Theft

[pmacduff]

We have a client who has fired an employee for stealing (not related to the Plan). The plan is a non-standardized safe harbor 401(k) using the safe harbor non-elective 3%. No other contributions in the Plan.

Of course the client is spitting nails about having to pay the participant out the Employer portion of the account (can't say I blame them!) Anyway, in the interest of the client, I thought I'd grasp at that straw...anyone have any ideas on how the Employer could delay or deny payment or does anyone have any experience with this situation in the recent past? I have advised them to check with counsel.

[SRP]

I have recently dealt with a situation where the an employee embezzled funds from the employer. This embezzlement did not have anything to do with the Employer's retirement plan (fortunately).

The employer sued and received an out-of-court settlement issued by the court.

As part of the settlement - the participant assigned the rights to the 401(k) plan balance over to the employer.

This is permitted as long as a few conditions are satisfied (e.g. voluntary assignment, writing that indicates the EE had a right to change her mind, ...).

Generally, ERISA prohibits any assignment but there is at least this one exception.

Your client may want to pursue a legal remedy against the EE unless they already have done so and then consider the method described above as a possible settlement (in part or in whole).

[david rigby]

http://benefitslink.com/boards/index.php?showtopic=33713

[pmacduff]

great info...thanks!

One problem I forsee is that the plan distribution policy is "as soon as administratively feasible following the plan year quarter in which the participant terminates employment". The normal course of events is to send the distribution paperwork at that time. Is there valid support to delay sending out the paperwork as a remedy is pursued?

[david rigby]

Is there valid support to delay sending out the paperwork as a remedy is pursued?

Maybe. Probably best to direct this question to the plan's legal counsel. (You don't want to get your legal advice from this website.)

[jpod]

Give us more facts, like -

1. How much does the client believe was stolen?

2. How much can the client prove was stolen by this employee?

3. Is the client prepared to go to the police/FBI over this?

4. Is the answer to Q2 a large enough to justify filing a civil suit against the employee? If so, why not file the suit TODAY (figuratively speaking)? Once the employee is sued, or at least shown a copy of a formal complaint which the employer is getting ready to file, he or she may be ready to negotiate over the disposition of the 401k money, which can be handled pursuant to the voluntary assignment procedures described by SRP.

[pmacduff]

Client is prosecuting. The amount in the account is "close" to the amount stolen. Client and counsel are discussing and will advise me accordingly. Client was concerned about the timing issue, because distribution paperwork would otherwise be provided (due very soon) and there may not yet be a legal resolution before that time.

Thanks for all the input!

[Steelerfan]

The reason qualified plans don't have bad boy clauses is that vested means can't be forfeited for any reason. I understand an employer not wanting to pay, but I don't see how it's legal to deny or delay payments, you could cause a plan failure.

[pmacduff]

So far the client is not delaying the payment. The plan states that the distribution period is "the quarter following the quarter in which termination occured". The participant terminated in the end of Sept. '07 so is due to be sent forms/request payout in the current quarter.

[pmacduff]

An update...

Client's counsel advised that unless the Plan Doc distribution provisions specifically address "termination for cause" then the client should go ahead and send out the paperwork/process the distribution. This is a basic prototype plan and the Plan Doc doesn't address termination for cause. We are sending out the dist. forms per the client.

[Steelerfan]

Client's counsel advised that unless the Plan Doc distribution provisions specifically address "termination for cause" then the client should go ahead and send out the paperwork/process the distribution. This is a basic prototype plan and the Plan Doc doesn't address termination for cause.

Interesting advice. Not sure what counsel would be referring to. You would be hardpressed to find a plan with termination for cause provisions because you cannot forfeit qualified plan benefits on account of termination for cause. Such provisions aren't enforceable and the IRS would not provide a favorable determination letter on such a plan.

[pmacduff]

I think that the attorney was referring more to something that might be in the distribution date definition that would state if a participant was terminated for cause the Plan/Administrator could "delay" distribution; not necessarily that the Doc would state that the participant would forfeit the plan balance altogether. This client wanted to "delay" the distribution until the case went to court; but was pressed for time due to the distribution date definition in the Plan.

The client was more than likely going to reach the plan's distribution date way before the case went to court and there was some sort of outcome. As I mentioned in the OP, I was "grasping at straws" because I did feel for this particular client in this situation. I wondered what others had found in similar cases if there ever was an instance where the Employer prevailed with regard to the plan balance and according to SRP there has been at least one....

[masteff]

Just thinking out loud... I know that in the case of QDROs an administrative hold is placed on an account. I wonder, given that the employer is prosecuting, if a judge could issue an order putting a hold on the account. It wouldn't delay providing forms but could delay the distribution itself. I don't know if it's possible legally, but something worth looking at.

[Kimberly S]

Another long shot, but our documents call for distribution "as soon as administratively feasible" after a particular date. Could it be argued that it is not administratively feasible while the litigation with the participant is pending?

Of course the participant will object since he or she is probably wanting the distribution ASAP to pay lawyers to defend this very suit.

[Belgarath]

"Another long shot, but our documents call for distribution "as soon as administratively feasible" after a particular date. Could it be argued that it is not administratively feasible while the litigation with the participant is pending?"

A creative idea.

My response is purely a non-attorney's answer. I can't imagine anything more galling to an employer than paying a distribution to an employee who stole from them, unless it might be subsequently defending against (and maybe/probably losing?) a lawsuit by that very same employee! Again stressing that I'm not an attorney, I can't see how the employer's litigation against the employee overrides/affects the ability of the plan to pay this participant. But the legal experts on this board can likely set me straight on this.

[Guest mjb]

Just thinking out loud... I know that in the case of QDROs an administrative hold is placed on an account. I wonder, given that the employer is prosecuting, if a judge could issue an order putting a hold on the account. It wouldn't delay providing forms but could delay the distribution itself. I don't know if it's possible legally, but something worth looking at.

I thought that state laws that relate to alienation of retirement benefits are preempted under ERISA which is why Congrress amended ERISA to permit restriction on distribution of benefits by an employee under a state divorce decree under the QDRO rules. In US v. Novak, 476 F3d 1041, the 9th circuit stated stated that the only two exceptions to the ERISA non alienation rule are qudros and to recover wrongs against the retirement plans. "ERISA broadly protects retirement benefits from dissipation through payment to third parites even if the payments are authorized by the participant or would otherwise be valid under the force of law." The only attachment or freezing of benefits permitted are those allowed under federal law.

[pmacduff]

Belgarath - I'm with you, I'm no attorney, but I do feel for the client and what they are going through. Not sure if I mentioned before, but this is a 3% SHNEC plan; the employee contributed some in the past, but the bulk of the account was Employer funded. (about 20% is employee portion and 80% is employer).

The client, while acknowledging that they probabaly could not withhold payment, was hoping to delay the payment pending the trial outcome.

My question to SRP...you mention ERISA in your post/case, was your case under State or Federal court? This client's case would be State (actually Local??) court and if I'm reading mjb correctly, if said State or Local court awarded the client the 401(k) account it really wouldn't be valid anyway??

[buckaroo]

I will also chime in that I am not an attorney and I am just brain storming as well, but how about amending the plan to a different distribution date/timing? What are the other choices in the proto-type? How long can it be delayed under those choices?

The other two questions are:

1) How will this affect other termianted employees? My answer is the distribution date/timing is probably a maximum. Maybe it says payout within x days/months etc... but does it say anything about paying it out earlier?

2) Is this a protected benefit under 411(d)6? By legally amending the plan and essentailly delaying the distribution, are you cutting back a participant's benefit? Something else to consider.

Again, just brain storming...

[Steelerfan]

The situation SRP is talking about is in Reg § 1.401(a)-13(e)(1):

An arrangement in which a participant or beneficiary directs the plan to pay all, or any portion, of a plan benefit payment to a third party (including the participant's employer), will not be an “assignment or alienation” if it is revocable at any time by the participant or beneficiary, and the third party files a written acknowledgment with the plan administrator. This acknowledgment must state that the third party has no enforceable right in, or to, any plan benefit payment or portion of any plan benefit payment (except to the extent of payments actually received under the terms of the arrangement).

There is no way to garnish the account or force the participant to make the assignment. The idea of delaying distribution I guess would be to buy time to get the judgement before the participant has time to move or spend the money. I wonder if the IRS would approve language allowing a delay pending the outcome of litigation.

[Guest Kabert]

A criminal restitution court order is also an exception to the 401(a)(13) anti-assignment/alienation rules. If you can get an order, you may be able to force a distribution from the 401(k) account to the employer. There's case law on this as well as IRS rulings.

[Guest mjb]

A criminal restitution court order is also an exception to the 401(a)(13) anti-assignment/alienation rules. If you can get an order, you may be able to force a distribution from the 401(k) account to the employer. There's case law on this as well as IRS rulings.

Can you please provide the cites.