Embezzlement: Are Plan Assets Safe?

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants 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, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Georgia is representative of a common question on 401(k) plan embezzlement.

"I have a business-owner client who sponsors a 401(k) plan. A now former employee of my client embezzled money from my client’s business. Can my client use the terminated employee’s 401(k) plan balance to help offset the monetary loss to the business?"

Highlights of the discussion

No, in most cases, the anti-alienation provisions of the Employee Retirement Income Security Act (ERISA) of 1974 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. There are some exceptions to this rule, however, including the following.

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, codified at 18 U.S.C. §3663A 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.