Distribution paid to plan sponsor?

[Guest YvonneT]

A 401k participant steals money from the plan sponsor and is then terminated. The participant agrees to use their 401k account balance to pay back the sponsor. Can a court order the plan to pay the distribution directly to the sponsor? Can the plan pay the participant's distribution directly to the plan sponsor? If so, do we withhold taxes/issue a 1099R?

[MoJo]

A 401k participant steals money from the plan sponsor and is then terminated. The participant agrees to use their 401k account balance to pay back the sponsor. Can a court order the plan to pay the distribution directly to the sponsor? Can the plan pay the participant's distribution directly to the plan sponsor? If so, do we withhold taxes/issue a 1099R?

I think the answer is quite clearly "no." Internal Revenue Code Section 401(a)(13) makes a retirement plan assets not subject to "alienation" except as provided for in that code section (none of which apply to embezzeling from the plan sponsor). Such a Court's order is unenforceable against the plan.

I have actually been involved in a situation where the participant/criminal "requests" a distribution and then signs the distribution check over to the company (in a pre-arranged deal where immediately before sentencing this occurred, to show the court an attempt to repay the employer for their losses - as a show of remorse to get a lighter sentence). Didn't work. He got the max.

[Guest YvonneT]

Thanks. I thought the answer was no, but wanted to make sure.

[ETA Consulting LLC]

A 401k participant steals money from the plan sponsor and is then terminated. The participant agrees to use their 401k account balance to pay back the sponsor. Can a court order the plan to pay the distribution directly to the sponsor? Can the plan pay the participant's distribution directly to the plan sponsor? If so, do we withhold taxes/issue a 1099R?

I think the answer is quite clearly "no." Internal Revenue Code Section 401(a)(13) makes a retirement plan assets not subject to "alienation" except as provided for in that code section (none of which apply to embezzeling from the plan sponsor). Such a Court's order is unenforceable against the plan.

I have actually been involved in a situation where the participant/criminal "requests" a distribution and then signs the distribution check over to the company (in a pre-arranged deal where immediately before sentencing this occurred, to show the court an attempt to repay the employer for their losses - as a show of remorse to get a lighter sentence). Didn't work. He got the max.

Pushing the "like" button. We should be aware of the "bad boy" rule exception. Even here, those provisions must be written into the plan's document and may not violate the maximum statutory vesting schedule (i.e. 6 year graded). The rule, itself, usually has minimal (if any) effect.

Good Luck!

[Belgarath]

"The participant agrees to use their 401k account balance to pay back the sponsor. Can a court order the plan to pay the distribution directly to the sponsor? Can the plan pay the participant's distribution directly to the plan sponsor? If so, do we withhold taxes/issue a 1099R?"

I agree with prior commenters that that plan can't be forced to pay to the employer. However, there's nothing preventing a VOLUNTARY assignment by the participant of benefits that are payable, providing the requirements of 1.401(a)-13(e) are satisfied. For that matter, future payments can be assigned as well provded cerain requirements are met.

Assuming such assignment is made and the payments are made to the employer, the participant is still liable for all appropriate taxes. Since the assignmant is voluntary and revocable, my best guess, without looking into it further, is that the 20% mandatory withholding would apply, but I haven't really looked into that question.

[MoJo]

A 401k participant steals money from the plan sponsor and is then terminated. The participant agrees to use their 401k account balance to pay back the sponsor. Can a court order the plan to pay the distribution directly to the sponsor? Can the plan pay the participant's distribution directly to the plan sponsor? If so, do we withhold taxes/issue a 1099R?

I think the answer is quite clearly "no." Internal Revenue Code Section 401(a)(13) makes a retirement plan assets not subject to "alienation" except as provided for in that code section (none of which apply to embezzeling from the plan sponsor). Such a Court's order is unenforceable against the plan.

I have actually been involved in a situation where the participant/criminal "requests" a distribution and then signs the distribution check over to the company (in a pre-arranged deal where immediately before sentencing this occurred, to show the court an attempt to repay the employer for their losses - as a show of remorse to get a lighter sentence). Didn't work. He got the max.

Pushing the "like" button. We should be aware of the "bad boy" rule exception. Even here, those provisions must be written into the plan's document and may not violate the maximum statutory vesting schedule (i.e. 6 year graded). The rule, itself, usually has minimal (if any) effect.

Good Luck!

Yea, the "bad boy" exception -"may be" useful in reducing an offender's vested percentage *IF* the plan had an accelerated vesting schedule and they didn't mind being the defendant in a lawsuit. The bad boy exception is a judicially created exception (i.e. has no basis in ERISA or any other statute that arguably could apply), must be included in the plan document (which most don't, anymore) and you'd have to hold your nose while you invoked it. Even so, the money would be forfeited, (and only the "excess vested amount") and would be applied via the terms of the plan dealing with forfeiture (which may, or may not, benefit the employer indirectly).

[ETA Consulting LLC]

you'd have to hold your nose while you invoked it.

"Like"

[ESOP Guy]

I have also seen one example where the judge made it clear if the bank teller paid the stolen money back by tapping in this case their ESOP account he would take that into account when determining the amount of jail time the teller would get.

The teller paid money back to the employer by depositing her ESOP distribution check into the account of the bank she stole from, signed it over to the bank.

But once again strictly speaking they choose to give the money over.

In this case the judge did reduce the sentence. One would think a good defense attorney would make that part of an agreement up front.

[pmacduff]

We had one where the participant agreed through the court to turn 100% of her 401(k) balance over to the Employer which did reduce her sentence.

As many have already mentioned, since the plan did not allow for assignment of benefits under any circumstances, the check was actuallly issued to the participant.

It was mailed to the attorney's office where the check was endorsed by the participant back to the Employer.

Seems like things could still go bad with that scenario i.e. if the vendor mistakenly mailed the check to the participant's home address or something!

On a side note - we had a plan with a participant killed by her spouse (who was listed beneficiary). Spouse was convicted (life sentence) and jailed. Trustees of the plan split the account balance between the 2 surviving children and decided that if someone wanted to create an issue in the future they would cross that bridge if they had to.

My thought is that you would think qualified plans could have some way to address these types of cases. I believe wholeheartedly that the Employer should be entitled to the $$, especially since a civil case might drag on forever and there's a good chance the Employer may never see any of the stolen funds. (can't get blood from a stone as they say)

On the other hand if an Employer were to falsely accuse someone just to avoid paying out the Plan funds, I can see that nightmare as well.

[MoJo]

We had one where the participant agreed through the court to turn 100% of her 401(k) balance over to the Employer which did reduce her sentence.

As many have already mentioned, since the plan did not allow for assignment of benefits under any circumstances, the check was actuallly issued to the participant.

It was mailed to the attorney's office where the check was endorsed by the participant back to the Employer.

Seems like things could still go bad with that scenario i.e. if the vendor mistakenly mailed the check to the participant's home address or something!

On a side note - we had a plan with a participant killed by her spouse (who was listed beneficiary). Spouse was convicted (life sentence) and jailed. Trustees of the plan split the account balance between the 2 surviving children and decided that if someone wanted to create an issue in the future they would cross that bridge if they had to.

My thought is that you would think qualified plans could have some way to address these types of cases. I believe wholeheartedly that the Employer should be entitled to the $$, especially since a civil case might drag on forever and there's a good chance the Employer may never see any of the stolen funds. (can't get blood from a stone as they say)

On the other hand if an Employer were to falsely accuse someone just to avoid paying out the Plan funds, I can see that nightmare as well.

The problem with ERISA making provisions for this kind of thing is that it can adversely impact an innocent spouse of the participant - protections for which REA was enacted back in '84.

With respect to the murdering spouse situation you spell out, FWIW, many (if not most) states have provisions that specify that convicted murderers cannot benefit from their act - and are deemed as if they "predeseased" their victim for purpose of inheritance and life insurance proceeds. Not sure how that squares with ERISA's spousal protection provisions, but it is a "leg to stand on."

[mbozek]

Simple answer to question of whether participant can be ordered to pay plan benefits to employer as part of a criminal sentence or as a condition for lesser sentence:

1. ERISA does not preempt state criminal laws. Therefore judge can order payment to be made from plan benefits.

2. Employee can request a distribution and assign check to employer. Employee will be taxed on the distribution.

Spouses who kill the employee are automatically disinherited from receiving the employee's pension benefits under the equitable principle that a wrongdoer cannot benefit from their own wrong. There are cases under ERISA that apply this principle.

[Belgarath]

MB - can you please elaborate on answer # 1, as it goes against what I thought I understood.

Suppose a participant in an ERISa plan gets mad at his ex-wife's new boyfriend, so he burns down his house, and is convicted of arson and ordered to pay restitution. Can the judge really validly order involuntary attachment of his benefits? And how can the Trustee comply of the plan doesn't permit such attachment?

I was under the impression that other than the existing specific statutory exceptions, such involuntary alienation wasn't allowed. Slayer's statutes seem a little different, as the participant is dead already.

Sal has a reference to USA v. Jackson, 229 F.3d 1223.

Is there established case law that deals with this, other than slayer's statute stuff? Thanks for your insights on this subject!

[mbozek]

MB - can you please elaborate on answer # 1, as it goes against what I thought I understood.

Suppose a participant in an ERISa plan gets mad at his ex-wife's new boyfriend, so he burns down his house, and is convicted of arson and ordered to pay restitution. Can the judge really validly order involuntary attachment of his benefits? And how can the Trustee comply of the plan doesn't permit such attachment?

I was under the impression that other than the existing specific statutory exceptions, such involuntary alienation wasn't allowed. Slayer's statutes seem a little different, as the participant is dead already.

Sal has a reference to USA v. Jackson, 229 F.3d 1223.

Is there established case law that deals with this, other than slayer's statute stuff? Thanks for your insights on this subject!

Retirement benefits can be attached pursuant to a St court order of restitution under a generally applicable St. criminal law which is not preempted by ERISA. State v. Pulasty, 612 A2d 952 (NJ App 1992).

Also there are numerous federal laws which permit attachment of retirement benefits as seizure or restitution since ERISA does not preempt any other federal law, e.g., income tax IRC 6334; collection by the US as a judgment or fine under Federal Debt Collection Procedures Act, 28 USC 3001 or Mandatory Victims Restitution act, 18 USC 3613(a) and ©, US v. Novak 476 F3d 1041 (2007); property resulting from illegal drug acts 21 USC 853; payment of outstanding child support, 42 USC 666(b)(8).

However the Fed gov. right to collect the benefits is no greater than the participant's right to receive benefits under the plan. US v. Novak, 1061. Benefits can be seized when participant requests a distribution. US v. Tenzer, 986 FSupp 361 (1997).

Also ERISA benefits can be seized after payment if employee is in prison. Wright v. Rivland, 219 F3d 905.

[Belgarath]

Thank you.

[MoJo]

MB - can you please elaborate on answer # 1, as it goes against what I thought I understood.

Suppose a participant in an ERISa plan gets mad at his ex-wife's new boyfriend, so he burns down his house, and is convicted of arson and ordered to pay restitution. Can the judge really validly order involuntary attachment of his benefits? And how can the Trustee comply of the plan doesn't permit such attachment?

I was under the impression that other than the existing specific statutory exceptions, such involuntary alienation wasn't allowed. Slayer's statutes seem a little different, as the participant is dead already.

Sal has a reference to USA v. Jackson, 229 F.3d 1223.

Is there established case law that deals with this, other than slayer's statute stuff? Thanks for your insights on this subject!

Retirement benefits can be attached pursuant to a St court order of restitution under a generally applicable St. criminal law which is not preempted by ERISA. State v. Pulasty, 612 A2d 952 (NJ App 1992).

Also there are numerous federal laws which permit attachment of retirement benefits as seizure or restitution since ERISA does not preempt any other federal law, e.g., income tax IRC 6334; collection by the US as a judgment or fine under Federal Debt Collection Procedures Act, 28 USC 3001 or Mandatory Victims Restitution act, 18 USC 3613(a) and ©, US v. Novak 476 F3d 1041 (2007); property resulting from illegal drug acts 21 USC 853; payment of outstanding child support, 42 USC 666(b)(8).

However the Fed gov. right to collect the benefits is no greater than the participant's right to receive benefits under the plan. US v. Novak, 1061. Benefits can be seized when participant requests a distribution. US v. Tenzer, 986 FSupp 361 (1997).

Also ERISA benefits can be seized after payment if employee is in prison. Wright v. Rivland, 219 F3d 905.

While what you cite certainly is accurate, we must keep in mind that ERISA does, in fact, preempt state laws to the extent that affect participant rights, and impose new burdens on plans. Criminal courts cannot force a payment from the plan. Criminal courts can force criminal defendants to request distributions (too the extent a distributable event has occurred), as a condition for leniency, or to approve a bargained plea - BUT, the participant could always refuse.

Yes, certain provisions of the tax code allow for attachment of benefits - but only to the extent distributable under the terms of the plan. Draft a plan that restricts distributions to age 65 regardless of employment status (and I've seen them) and the money will sit until the participant (former employee) turns age 65 - at which time it may be attachable.

Your cases may, in fact be correct (and I haven't read then YET) but keep in mind, district court cases and state court case are of limited precendential value - and apply only in the territory over which they have jurisdiction, and only to the extent not appealed, or otherwise overturned by a higher court in a case coming from some other jurisdiction. To date the definitive case on the anti-alienation provisions of ERISA is Shumate v. Patterson, a Supreme Court case from the around 1990 - which pretty much held the anti-alienation provision almost absolute - as against even federal bankruptcy law (i.e., in that case, ERISA DID pre-empt another federal statute). Bankruptcy law has changed since then, and frankly I'm not sure if Congress included provisions in the bankruptcy law that would change the Shumate result.

With respect to the murdering spouse issue - don't assume that all jurisdictions have adopted the equitable principle that a wrongdoer cannot benefit from their crime. There have been some cases in some jurisdictions that have ruled ERISA's anti-alienation provisions pre-empt. Best to research the specific jurisdiction when the issue comes up.

[david rigby]

For further reading, there are a few similar discussion threads. Try using the Search function; suggested key words are embezzle, embezzle, theft, fraud.

BTW, there might be a difference between "steals money from the plan sponsor" and "steals from the Plan". Just covering all the bases.

[mbozek]

MOJO

I am limiting my response to the following two statements in your last post.

1. Patterson v. Schumate did not hold that the ERISA nonalienation provision preempts the bankruptcy code provision that allows certain assets of a debtor to be included in the bankruptcy estate. The Court held 9-0 that section 541©(2) of the bankruptcy law which exempts property of a debtor subject to a restriction on transfer enforceable under non bankruptcy law includes property held in a trust which is subject to a non alienation provision of federal law, i.e., ERISA, instead of just state law restrictions. Some lower courts had held that the 541©(2) restriction on alienation only applied to restrictions that were required under state law. The Supremes held that the nonalienation restriction required under ERISA contained in the retirement plan constituted an enforceable restriction on transfer under 541©(2) which excluded the pension benefits from the bankruptcy estate. There was no ruling that ERISA preempted another federal law which is expressly prohibited under ERISA 514(d).

2. While there may be a few exceptions to the rule that a murderer of an insured can not receive the benefits, "state laws prohibititing murderers from receiving death benefits are relatively uniform". Mendez-Bellido v. Board of Trustees of Divison 1181, 709 F.Supp 329 (1989). Footnote 3 of the decision cites a exhaustive list of 48 st. court cases that denied LI benefits to murderers. Only two cases allowed payment to a murderer, and one was before state law was amended. 3 other cases allowed payment in the case of minor or if the conviction was for manslaughter. The Mendez court also noted that federal courts construing the provisions of the servicemens group life insurance law have had consistently held as a matter of federal law that a beneficiary convicted of murdering an insured is precluded form receiving the insurance benefits.