Fraudulent Withdrawal

[Guest naveen]

In a 401(k) - PS, an employee has fraudulently withdrawn about 70% out of the plan's account.

The owner is the only participant having an account balance.

How does the plan account for this fraud?

What are the options availabe with the owner?

[Jim Chad]

Naveen, First looking at the time you posted this...you have my sympathies.

IF I follow you right. This is a matter for the police. Maybe you want to call the DOL to ask them also. As far as recovering the money, the owner can sue the employee, but I would not expect much to be collectible.

[ERISAnut]

Wow. Do provide some more details. Was the owner the only participant (and did the employee take 70% of the owners funds)? Who was authorized signor for disbursements from the plan; was a signature forged?

[Guest naveen]

Does the plan sponsor have to make good the "Losses" as a result of this fraud?

What kind of reporting will have to be done with respect to annual filings?

[Kevin C]

I would expect the fiduciary who removed the assets to be on the hook. You have not answered whether the employee mentioned is the owner or not. Either way, the person who took the plan assets became a fiduciary when they became able to access the plan assets. The DOL may be able to help. Their website has lots of news releases where they announce recoveries of plan assets and criminal indictments for theft of plan assets.

The 5500 needs to accurately list what happened. Don't forget the questions about prohibited transactions and losses due to theft or fraud. Even if they don't go to the DOL, I would think answering those questions accurately will just about guarantee an audit. Remember, the 5500 is signed under penalty of perjury.

There was a recent article where a fiduciary's embezzlement affected plan assets and he lied about it on the Form 5500. I think the penalty for the false filing was $123,000.

[Kimberly S]

Does the plan have a fidelity bond?

[Guest naveen]

Thanks Kevin,

Questions:

1. How and where does this get reported on the 5500?
   
2. Does the plan sponsor (Owner having the only account balance) have to make a declaration to make good the amount?
   
3. Can he promise to do so over the next few years (say 7)?
   
4. Would Actuarial losses have to be considered?
   
5. What is the kind of documentation required between the owner and the plan?
   

[GBurns]

Maybe it is just me, but I wonder why Naveen is not willing to give any information or answer any of the questions asked. The interest seems to focused solely on CYA type regulatory reporting from a peculiar point of view.

Could it be that there is a special relationship between the owner and this employee who allegedly committed fraud ? I say allegedly because there appears to be some reluctance to involve the authorities etc.

[K2retire]

Thanks Kevin,

Questions:

1. How and where does this get reported on the 5500?
   
2. Does the plan sponsor (Owner having the only account balance) have to make a declaration to make good the amount?
   
3. Can he promise to do so over the next few years (say 7)?
   
4. Would Actuarial losses have to be considered?
   
5. What is the kind of documentation required between the owner and the plan?
   

We don't have enough information to answer your questions. Since you don't seem to want to divulge more details, we can't point you to a specific line on the 5500 or what the correction rules are. As to the repayment period, that would probably also depend on the specific situation. Keep in mind, however, that if this particular PT involves an excise tax, an additional tax is likely to be due for each year until the PT is fully corrected/repaid.

[GBurns]

But, Do we really know if this is a PT, an item subject to excise tax or even to be corrected/paid ? Do we even know what is reportable?

All we have is an allegation of fraud. How perpetrated, by whom and with what involvement of the owner, we have no idea.

What happens if it turns out that there was no fraud, just that naveen does not understand or know all the details and is just going by a cursory "it looks like" ?

[K2retire]

Good point!

[Guest naveen]

Hi,

The employee who stole the money was not a participant in the plan, but was a close confidant of the owner.

The embezzlement has been reported to the police.

Incidently, this reporting will go on Line 4f of the schedule I, form 5500.

Thanks for the respective inputs.

[GBurns]

naveen

Reporting to the police is not the same as being charged with.

Being charged with a crime is an allegation not a conviction.

There is no embezzlement until there is a conviction.

You do not know that there will be a conviction.

I do not think that it can be reported or claimed until adjudicated.

Think about it, What proof do you have, right now, that would be accepted in a lawsuit ? An audit would be no different.

You need substantiation not allegation.

Also, you earlier posted the possiblity of the plan sponsor "making good" the loss. There would be no loss to the plan if the plan is made good, reimbursed or restitution is made. How would you then report ?

As Kevin C pointed out, reporting will most likely cause an audit. The alleged embezzler and the Owner would quite likely also get audited. You would have falsely claimed a loss which in fact since it was "made good" would not have been a loss. The 5500 is signed under penalty for perjury. How do you plan to handle that ?

If your claim is disallowed or there is no conviction, but your reporting causes the alleged embezzler to be audited, Don't you think that he/she has good grounds for a defamation etc lawsuit with you as a party ?

[Guest naveen]

Gburns:

I am looking for answers.

At least as far as filing with the IRS, could we resort to the VCP?

Any suggestions as to how we need to advice our client

[GBurns]

It is somewhat pointless to have answers to questions which might not be relevant or even applicable.

You have yet to determine what, if anything is even reportable.

Then, if anything is, you ask the How and When.

As it is now you have nothing that is yet reportable. There is no crime as yet, only an allegation.

Even if there was a crime, if there is a "made good" in any of many forms, Is there anything to report to anyone ?

It serves neither you nor your client to have answers for situations that do not exist or might never exist.

In any case your questions raise more questions that need to be answered first. But no one can stop you from jumping ahead of the situation and run the risk of creating a collossal mess for your client.

I hope that others chime in so that you get other perspectives.

[Guest Sieve]

Well, here's another perspective . . .

I think there's a lot of overreacting here. Let's step back a minute and think about this. From a practical perspective, the question, I think, is: what to do when we've discoverd what we think is an unlawful taking (call it whatever you want) from a pension plan by someone not authorized. (And let's assume that naveen is acting in good faith here, everybody--unless, of course, you don't want to. Your choice.)

Again, from a practical perspective, here's what I would do in this situation (aside from following necessary steps to bring about a potential cirminal conviction).

• Try to get the $ back. If necessary, the fiduciary (Trustee, probably) should begin a civil action to recover the $$. Criminal process certainly is not necessary in order to meet the fiduciary obligation to find the $$ and recover it. In fact, it probably would be a breach of fiduciary duty to prosecute a criminal action to the exclusion of a civil action to recover the $$. I would suggest that there's no reason for any individual to put the $$ back into the plan immediately if there's no need to pay out to anybody yet (which apparently there is not), especially if the owner of the employer is the only account remaining and if a civil action is pending against the wrong-doer. Eventually, whoever was responsible for allowing the wrong-doer to have unauthorized access to the trust probably will be responsible to the plan (as a fiduciary breaching his/her duties) if the person taking the $$ does not return it.
  
• Make a claim on the ERISA bond for recovery of the full amount of the loss. I would suspect that it will not be easy to get the $$ back (based on the terms of the bond), but I certainly would make a claim.
  
• Since you're signing the Form 5500 under penalty of perjury, don't call it an investment loss.
  
• Should it be reported on the Form 5500, line 4f of Schedule I? Let's see what the language says in the Instructions for that entry: "Check "Yes," if the plan had suffered or discovered any loss as a result of any dishonest or fraudulent act(s) even if the loss was reimbursed by the plan's fiduciary bond or from any other source. If "Yes" is checked enter the full amount of the loss. If the full amount of the loss has not yet been determined, provide an estimate and disclose that the figure is an estimate, such as "@ 1000."" I would suggest that a conviction for fraud or theft or embezzlement (or whatever we, you or the legal system wants to call it) is NOT necessary for an entry on line 4f. Has someone "discovered any loss as a result of any dishonest . . . act"? If internal investigation determines that this person was not authorized to remove the $, and if he/she did not pay it over to the proper person as a proper distribution or return the $$ to the plan, then I don't think there's any problem calling it the discovery of a dishonest act (at least it doesn't seem a stretch to me). NOT conviction of fraud or embezzlement or anything else, NOT illegal activity, NOT some hyper-technical determination, but just "disover[y]" of an activity that was "dishonest". The fiduciary should be able to determine that. Dishonest does not necessarily require evidence or conviction for fraud or embezzlement or whatever. If a person not authorized to take $ from the plan does so (and that should be easy to determine), and then retains those $$ rather than providing them to someone authorized to receive the $, is that dishonest? Certainly it is. (If naveen or GBurns came home and discovered the contents of a jewelry box empty and evidence that some person unlawfully entered the home, is that "discover[y]" of a "dishonest" act? Of course.) GBurns, why in the world are you discussing crimes--however naveen may want to characterize it--and somehow adding a requirement of conviction of a crime in order to report on line 4f? Is there some other place this can go on the Form 5500? How can this "embezzler" be identified from the filing? Why in the world are we jumping to the conclusion that there will be an audit of anybody (other than, perhaps, the plan)? Let's just stick to what we've got here--which isn't a lot, other than an advisor wanting to advise a distressed client. Just what naveen needs now is a bad Form 5500 filing and a huge civil penalty, or worse, for perjury on the Form 5500. If naveen's client is lying, and there is, in fact, no dishonest act but just some very bad investment and an attempt to hide it, would naveen's client have committed perjury by signing the Form 5500 if Line 4f of Schedule I is marked "Yes"? Of course.
  
• How to replace the $$? I wouldn't worry about that yet, beyond sueing the wrong-doer and looking to the ERISA bond. But be prepared, if there's a DOL audit or other DOL response to the Line 4f answer, for the fiduciary to be asked to replace the $$.
  

[GBurns]

To me, learning about or hearing about a possible embezzlement does not mean that fraud or any dishonest act has taken place. Something more definite is needed whether it be civil action or criminal action. It should not be determined on someone's say so especially since that someone (the Owner) had a more than casual relationship with the alleged perpetrator.

Then there is the issue of "getting back". If the plan is made whole during the samereporting year, What is the amount of the loss ?

In an audit the documents supporting the entries are what are examined, not the Form. Those supporting documents would have to state how the loss was suffered, hence the disclosure of the embezzler's name, when and how.

[Guest Sieve]

Certainly, rumor of unauthorized withdrawal of $$ from a plan's trust is not sufficient to answer Item 4(f) "Yes". But I don't get the impression that this is mere unsubstantiated rumor (after all, a police report already has been filed).

In any event, what about this hypo: . . . Employee E calls bank B (Trustee of a plan) and asks for a check to be cut to E so that E can send the funds to another custodian. E says he/she is acting on authority of the CEO of the plan sponsor. Without any other authorization and realizing that E is not on the list of authorized actors for the plan administrator, B cuts a check made payble personally to E. B admits cutting the check to E, and shows the employer a copy of the check, including E's endorsement depositing the check into E's personal bank account. Isn't that evidence of a dishonest act by E (whether or not the employer has yet filed a civil action)? Are you suggesting that you cannot answer 4(f) "Yes" without first filing a civil action?. Don't know where it says that. And, what if these facts are first discovered on October 1, 2008, and the check was issued & cashed in December, 2007 (calendar year plan)?

Incurring a loss or making the plan whole is immaterial when it comes to answering 4(f) in the affirmative. Instructions: "Check "Yes," if the plan had suffered or discovered any loss as a result of any dishonest or fraudulent act(s) even if the loss was reimbursed by the plan's fiduciary bond or from any other source." (Emphasis added.) (As you know, PTs don't require any loss to the plan, either, but they are still PTs.) That's more reason that the filing of a civil suit should not to be a prerequisite to an affirmative answer to 4(f)--if, e.g., the fidelity bond pays back the unauthorized, dishonest withdrawal.

The annual return filing alone won't name the wrong-doer. Much more time will pass--affording more opportunity to recover the $$--before an audit might require disclosing the name of the supposed "embezzler". By then, if the plan admistrator determines there was no wrong-doing, the PA can inform the police re: the incorrect police report and amend the Schedule I to reflect "No" in Item 4(f). Even if there's an audit at some point, how is the potential "embezzler" more harmed by an IRS audit than being named in a police report as having committed a felony? As the whistle-blower, so to speak, I'd be more concerned about the repercussions of filing the police report than the Form 5500.

I certainly would not want to advise a fiduciary responsible for signing the Form 5500 to answer "No" to item 4(f) of Schedule I if facts similar to those suggested above had occurred. But that's me.

[GBurns]

A good hypo, but in this case we do not know the years involved. It could very well be all in 2008. But, getting back to your hypo, What happens if the "Owner" forgives the act or accepts restitution? Is there a reportable loss ? NO.

Your point about "Yes" for 4f is agreed with except that again if the embezzlement and the reimbursement take place in the same reporting period, it would be a wash and there would be no loss. Eventual reimbursement is a different issue.

The possibility of a false police report and the consequences goes exactly to my point that naveen needs answers to other questions before seeking answers to the posted questions.

As K2retire posted, "We don't have enough information to answer your questions.".

[Guest Sieve]

George -- With all due respect, I don't believe that restitution to the plan by a wrong-doer, even in the same year (as you suggest), in any way negates the need to answer 4(f) in the affirmative if there was a dishonest act resulting in a loss to the plan as of any point in time. Remember, the Instructions indicate that you have to answer "Yes" even if the "loss" is reimbursed to the plan. In other words, it's not a permanent, actual loss which causes a "Yes" answer to be required for 4(f)--it's any loss from a dishonest act, even if the plan suffers no permanent loss because the plan is made whole by somebody. The IRS & DOL want to know about dishonest acts that require reimbursement to the plan, even if, when all is said and done, the plan actually loses nothing due to a fidelity bond or plan sponsor reimbursement. A dishonest act resulting in any loss to the plan, even if the loss is reimbursed, lends credence to the suppositions (i) that further loses (perhaps without reimbursement) may occur to the plan, and (ii) that there is a potential huge shortcoming in fiduciary oversight.

Anyhow, naveen now may have more input on which to base his/her action at this point, may need more info to act further, and understands that he/she needs to be certain, at least, that a dishonest act has occurred (perhaps through info not yet demonstrated through his/her posts).

[GBurns]

Sieve

It seems that our differing viewpoints are caused by different interpretations of the meaning of "loss".

To me, a Form 5500 and in particular items like 4f reflect end of period results. A snapshot of an account balance or item value at a certain time. Fluctuations during the reporting period are not reported just the ending balance on the particular day.

[WDIK]

In my view, it is a stretch to equate "fluctuations" in the account with documented removal of assets (whether considered fraudulant or not).

[Guest Sieve]

George --

As to numbers, I agree with you completely. But I'm not so sure with 4(f).

Apparently you interpret the language of the Instruction to require an end-of-year snapshot response to 4(f). In your scenario, if reimbursement were made in the same year, there would be a "No" answer to 4(f). How, then, do you account for the instruction to answer "Yes" even if there's been a reimbursement? I think that question, as other questions on Form 5500, ask about what happened during the year rather than an end-of-year status. So I believe that the answer is "Yes" in this scenario (regardless of when any reimbursement may occur)--in fact, I would answer "Yes" only in the year in which the "loss" occurred, and "No" in future years. I would agree with WDIK that this is much more than a mere fluctuation in market value.

But, George, I'm willing to agree to disagree on this and leave it at that.

[Kevin C]

To me, a Form 5500 and in particular items like 4f reflect end of period results. A snapshot of an account balance or item value at a certain time. Fluctuations during the reporting period are not reported just the ending balance on the particular day.

George,

Part IV is labeled "Transactions During Plan Year". The questions in item 4 are also prefaced by the phrase "During the plan year:" When you put that with the instructions, as Sieve pointed out, it looks pretty clear to me that the questions need to be answered yes if the transaction occurred at any time during the year.