457b Participant Employee Embezzles Money

[austin3515]

This hasn;t happened, thank goodness, but the question being posed by a board member is, if a participant were to embezzle money, or was terminated for some other crime against the employer, is there a way to forfeit their balance?

My assumption is that nothing the participant can do will eliminate the liability to the participant.  Yes, I am aware of the fact that this is doable in a 457f plan which is still subject to a substantial risk of forfeiture.  I assume there is no possibility of this in a 457b.

Let me know what you think!

[Carol V. Calhoun]

Are we talking about a governmental 457(b) or a 457(b) of a nongovernmental entity?

In the case of a nongovernmental entity, a 457(b) is purely a contractual obligation.  Thus, I would assume that the contract could be set up in the first place so as to provide for forfeiture in the event of a crime against the employer.  Doing so would likely not result in the amounts contributed being treated as subject to a substantial risk of forfeiture.  26 C.F.R. § 1.83-3(c)(2) says that it would not for purposes of section 83, and an old EO Text indicates that the same rule applies for purposes of section 457(b).

In the case of a governmental entity, the same rules should apply.  However, there are two issues.  First, because a governmental 457(b) plan is funded, some provision would need to be made for what would happen in the event that an amount was forfeited.  Presumably, this would involve decreasing future employer contributions, inasmuch as adding it to other participants' account could result in going over the annual 457(b) maximum.

The second issue is that governmental entities are often subject to Constitutional rules prohibiting modification of even future accruals under a retirement plan with respect to individuals who have already begun participation.  Thus, if a plan does not initially provide for forfeiture, it may be impossible to modify the plan to do so with respect to existing participants.  Obviously, the judicial decisions in the particular state should be consulted to determine whether this is an issue.

[austin3515]

I  meant to come back and clarify that this was a tax-exempt entity 457b plan and that all monies were 100% vested.  I submitted a question to ERISApedia and essentially got the same answer.  Thanks Carol!!