Completely Vested; Fired for Embezzlement; No Forfeiture for Cause Provision

[dv13]

Company recently terminated an employee for embezzlement who was 100% vested in his Account (all employer money) The plan document (a nonqualified deferred compensation plan) does not contain any forfeiture for cause provisions. ER does not want to pay. Are there any repurcussions for not paying - from a 409A perspective or otherwise? Any case law similar to this scenario? What do you see as a potential solution for this ER?

[Lou S.]

I don't deal with this in 409A plans but I know it does come up in 401(a) plans somewhat regularly and the answer is you cannot forfeit, as irksome as that is. But the rules may be different for 409A, has the client consulted legal counsel? That's probably the first place to start.

[QDROphile]

Nonqualified plans are not subject to ERISA or tax code proscriptions that apply to qualified plans. All the more reason to get professional advice.

[dv13]

A strict compliance with the plan terms would seem to dictate that the EE needs to be paid, regardless of the theft of funds. If the ER does not pay him, it would fall under an operational violation of 409A; however, the associated penalties are only imposed on the EE. I suppose the EE could file a claim and/or lawsuit for the money, but that wouldn't be too smart since the ER could likely file criminal charges. So, appears that maybe there is minimal recourse against the ER for withholding payment in this case. Am I completely off-base?

[QDROphile]

The deferred compensation arrangement is a contract. The employer needs to evaluate the prospect of breaching the contract terms. Your message touches on some of the considerations.

[Peter Gulia]

QDROphile is right that a nonqualified deferred compensation plan is not governed by or subject to the same ERISA and Internal Revenue Code rules and conditions that usually apply to an IRC § 401-qualified plan.

But if the deferred compensation is provided by a plan established or maintained by an employer (and is not a governmental plan or a church plan), the plan might be governed by title I of the Employee Retirement Income Security Act of 1974. If so, the exceptions that ERISA sections 201, 301, and 401 provide for an unfunded select-group plan excuse such a plan only from Parts 2, 3, and 4 of subtitle B of title I of ERISA, and do not excuse a plan from Parts 1 and 5.

Alternatively, an agreement with an employee – especially if just one has deferred compensation – could be so lacking in a need for administration that it might not be a plan (within the meaning of ERISA § 3(2)(A)).

Whether ERISA or State law governs, a deferred compensation agreement might include an implied obligation of good faith and fair dealing. So Lou S.’s suggestion about getting a lawyer’s advice makes sense not only to get a clear picture of the employer’s rights and remedies but also because in a later dispute the employer might be well served by showing it acted in good faith and with fair dealing by seeking and following a lawyer’s advice.

[jpod]

My recollection is that there is something that calls off 409A non-compliance if the failure to pay in accordance with the stated terms is due to a unilateral refusal to pay by the service-recipient. Of course this is only my recollection and i would check that first. On the other hand, if the employer was my client I would have no hesitation to advise it not to pay if it has reasonable proof of embezzlement, and I really don't think the client should care about 409A consequences under that scenario.

[My 2 cents]

My recollection is that there is something that calls off 409A non-compliance if the failure to pay in accordance with the stated terms is due to a unilateral refusal to pay by the service-recipient. Of course this is only my recollection and i would check that first. On the other hand, if the employer was my client I would have no hesitation to advise it not to pay if it has reasonable proof of embezzlement, and I really don't think the client should care about 409A consequences under that scenario.

Are you saying that because it is not an ERISA plan? Because, as I understand it, (unless the embezzlement was from the plan itself by a plan official) benefits under an ERISA plan can never be denied to an embezzling employee who met the vesting requirements.

[jpod]

I am assuming that it either is not an ERISA pension plan or it is an ERISA top hat pension plan, and therefore in either case it would not be subject to the ERISA vesting requirements or have "plan assets." I agree that if neither assumption is sound there would be a potential problem. I am also assuming that by the terms "contractually" of the plan he is vested in at least some part of the benefit, but so what? If the claim of embezzlement is not merely a wild accusation but one based on some concrete facts, in the first place the likelihood of the former employee sticking his head up and filing a lawsuit seems minimal, but even if he did the employer's liability to him may be offset fully by his liability to the employer.

[Guest Dressageho]

We had a similar issue with an employer that wanted to keep vested benefits that an ex-employee had in their cash balance pension plan - definitely ERISA-covered. We actually had the ex-employee sign all of the distribution paperwork, with instructions that the trustee pay the money directly to the employer. This was done as part of the legal proceedings against the ex-employee though, and could not otherwise be compelled under ERISA. The ex-employee agreed to sign the distribution paperwork with those instructions as part of a release of liability for the embezzlement. In other words, the judgment against the ex-employee was reduced by the amount paid out of the Plan. Even though the money never touched the ex-employee's hands, it legally belonged to the ex-employee and was essentially exchanged for "judgment relief." If the embezzlement here is legitimate and you have a legal proceeding, I would think you could do something similar. However, without a forfeiture provisions, I do not see any other way to compel the desired result.