401(k) Plan and Embezzlement

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Georgia is representative of a common inquiry related to the anti-alienation rules under the Employee Retirement Income Security Act of 1974 (ERISA). The advisor asked: “If a former employee embezzled money from his employer (who sponsors a 401(k) plan). Can the employer/plan sponsor use the terminated employee’s 401(k) plan balance to help offset the financial loss to the business?”

Highlights of the Discussion

No, the anti-alienation provisions of ERISA protect the former employee’s 401(k) account balance in this case, and prohibit the plan sponsor from using plan assets as an offset for the stolen funds, unless one of the following exceptions applies. 

ERISA provides for only four narrow exceptions to its strict anti-alienation rules: 

1. For payments to alternate payees pursuant to qualified domestic relations orders (QDROs) in cases of divorce or legal separation [ERISA Sec. 206(d)(3)]; 

2. For payments of IRS tax levies [Treasury Regulation 1.401(a)-13]; 

3. For payments of federal court garnishments stemming from the imposition of criminal fines and orders of restitution (Mandatory Victim Restitution Act of 1996 and United States v. Novak, 476 F.3d 1041 (9th Cir. 2007)) ; and 

4. To satisfy liabilities of the participant to the plan due to criminal convictions, civil judgments, or administrative settlements involving the participant’s misconduct with respect to the plan [Taxpayer Relief Act of 1997, ERISA Sec. 206(d)(4) and IRC Sec. 401(a)(13)]. 

Conclusion

The anti-alienation rules of ERISA make it difficult for anyone except the plan participant to lay claim to qualified retirement plan assets, although there are a few exceptions.