Employer using salary deferrals to cover bad cash flow

Im horrible at searching and finding previous posts on a subject.  Forgive me if this has been answered before...

A CPA I work with asked me what should be done... here is the situation -

His client works for a small company and has been deferring from his paycheck.  He was on track to defer around $13K for 2017.  After looking at his account he became concerned that the deferral deposits are not adding up. Significant discrepancy.  Come to find out the deferrals have been withheld BUT they were not being deposited.  In fact the company was using his (and maybe other participants) deferrals to cover some cash flow problems.  Not good.

I have never had this kind of problem.  What do people suggest the proper steps he should take? 

Thanks

19 minutes ago, K-t-F said:

Im horrible at searching and finding previous posts on a subject.  Forgive me if this has been answered before...

A CPA I work with asked me what should be done... here is the situation -

His client works for a small company and has been deferring from his paycheck.  He was on track to defer around $13K for 2017.  After looking at his account he became concerned that the deferral deposits are not adding up. Significant discrepancy.  Come to find out the deferrals have been withheld BUT they were not being deposited.  In fact the company was using his (and maybe other participants) deferrals to cover some cash flow problems.  Not good.

I have never had this kind of problem.  What do people suggest the proper steps he should take? 

Thanks

That is a crime.  Inform the DOL and let them handle it.

I may be wrong about this, but wouldn't the technical legal term for the employer's actions be "grand larceny"?

Assuming (rightly or wrongly) that continued employment by a company that does this sort of thing is not necessarily an unalloyed blessing, it could be that the best course of action would be to promptly contact the Department of Labor.  I am sure that they would be nearly as upset as you about it if your suspicions are true.  The DOL would be a good place to start.

He can talk to them and confirm his suspicions is a good first step in my mind.  If confirmed he can ask if and when they are going to solve the problem. 

Obviously, he might want to stop deferring if it isn't going to the plan but it will make his bank account.

If he wants to drop the hammer on the company this is one of the DOL's hot button issues.  They will beat the company up pretty hard for doing this.  Of course if the company is having cash flow problems sending in a bunch of DOL auditors is going to cost the company money they don't have which might feel good but not really help.  But what they are doing is obviously wrong and the DOL's position is this is a Prohibited Transaction as it is a loan from the plan to the company.  It opens them to having to put the money into the plan with lost earnings and pay excise taxes as a punishment.  The DOL's postion is you have mere days to deposit the money and anything longer then that is a problem.  This came out of a few high profile cases in the '90s where people lost most of their 401(k) money because it was never deposited but it was showing up on their statements. 

He can hire an attorney but the DOL is cheaper but slower. 

To me stopping or at least not deferring more then it takes to get a full match (if any) seems like a good first step.  There are plenty of cases where if the company goes bankrupt the money is never recovered.  If it isn't in the 401(k) trust it is just a general liability of the company making recovery in BK hard.  If it is in the 401(k) trust then the company creditors can't touch the money. 

Even if the company cannot make good on attempts at recovery, the owners could perhaps find a way (especially if doing so would avoid, or at least reduce, jail time for them).

I was going to make the post's headline "plan sponsor stealing participant deferrals".  I mean that is what they are doing!

I did suggest the participant top deferring immediately.... DUH

I also told the CPA that the DOL is the watchdog when it comes to pensions and participant rights.  i guess he needs to confront the company and get the ball rolling  to recover his own money.  I will suggest that he reach out to the DOL and even the TPA.   I don't know who the TPA is but I hope they make it clear to the company that what is happening is illegal and they are risking more than they know. 

Thanks

It sounds like you do not yet know if this is happening or has happened to any other participants?

Is there any possibility that, for example, it is a simple mistake and the deferrals have been deposited to the account of another participant? Such things DO happen.

You may want to consider, before calling in the DOL, simply asking your employer why your deferrals are not showing up in your account. If the answer is unsatisfactory, unclear, or standard BS stonewalling, then by all means contact the DOL. I'd just be very hesitant to contact the DOL without at least giving the company the opportunity to explain or discover a simple and honest mistake. If it WAS an honest mistake, and you sic the DOL on them, it may bode poorly for your future at the company, which may or may not be a bad thing from your viewpoint.

That is a very good point and I would suggest that first.  I am not the TPA, just a resource for the CPA to bounce this question off of.  There could be a simple explanation for the missing money.  I certainly would not want to be the one to sic the DOL on my employer if in fact there is a simple explanation to the problem. 

Thanks for that!

50 minutes ago, Belgarath said:

It sounds like you do not yet know if this is happening or has happened to any other participants?

Is there any possibility that, for example, it is a simple mistake and the deferrals have been deposited to the account of another participant? Such things DO happen.

You may want to consider, before calling in the DOL, simply asking your employer why your deferrals are not showing up in your account. If the answer is unsatisfactory, unclear, or standard BS stonewalling, then by all means contact the DOL. I'd just be very hesitant to contact the DOL without at least giving the company the opportunity to explain or discover a simple and honest mistake. If it WAS an honest mistake, and you sic the DOL on them, it may bode poorly for your future at the company, which may or may not be a bad thing from your viewpoint.

Your sentence beginning with "I'd just be very hesitant...", you forgot to include the phrase "and correct" immediately after "explain or discover".  Anything short of a full correction is inadequate, and really does call for bringing the DOL in.  Let it not be forgotten that taking money from 401(k) deferrals is never justifiable, even if the alternative is for the company to have to close!

And at risk of pointing out the obvious or repeating myself and others a full correction includes lost earnings. 

Thanks my2. I didn't forget it, but assumed that full correction was implicit in all of this. However, you are of course correct, and I shouldn't have assumed that everyone out there would understand this.

If this were my client, I would suggest the following:  

1)  Stop deferring.  

2)  Look for a new job.  This is not a facetious comment.  If the company is stealing money from the DC plan, the rot goes deep.  Sudden job loss is a serious possibility.  Better a controlled exit than an unplanned one.  

Suppose you went to work one day and a repo person is hauling away the company's printer because of overdue bills.  That would be an alarm bell that the company is in trouble.  Failure to contribute deferrals to the 401(k) is like that, but worse.  

3)  At some point, notify the DOL.  As others have noted, the company is engaged in criminal conduct.  The DOL should be able to restore your money, as long as it is possible to do so.  If there is no money, the company owner may go to jail, but that will be cold comfort.    

MAYBE--It is just as likely (if not more so) that Bill's money is sitting in Bob's account on accident.  I've seen that 1000 times over the years, but blatant theft of EE deferrals I've seen only once.  It's possible, but it's not the most likely scenario.  

41 minutes ago, TPAJake said:

MAYBE--It is just as likely (if not more so) that Bill's money is sitting in Bob's account on accident.  I've seen that 1000 times over the years, but blatant theft of EE deferrals I've seen only once.  It's possible, but it's not the most likely scenario.  

I have seen that and that is why I suggested talking to management first then going to the DOL. 

I have also seen a lazy/overworked employer what just doesn't bother depositing the money.

To be clear to the OP the correction in any of those cases is the same.  Restore the account with lost earnings.  All of these issues are still pretty serious as people count on their employer to put the money in the correct place timely.  Even those fairly innocent explanations represent a break down in someone's process and systems. 

Absolutely agree with that ESOP.  I should have quoted, but I was directing it more at Serenity who suggested a slightly premature solution that involved some rash decisions--Go to zero, quit, then tattle is a long way away in my mind 

My answer if the Employer has inadvertently done this is to follow the correction procedures for DFVCP which we have done for employers many times. That is, assuming it was an honest mistake.

If it is not an honest mistake, agree with much of what has been said, the employee has perhaps bigger problems than this single issue. But DOL has gone after bad actors in this type of space many times successfully, and will continue to do so.