Employer Could Not Take Embezzler’s Account Balance

Posted on November 22, 2013

A recent federal district court determined that an employer could not take the defined contribution plan account of a former employee and plan participant who had embezzled money from the employer.

The employer obtained a judgment against the participant for more than $19 million. In a criminal prosecution of the former employer, the court ordered the employee to pay restitution to the employer of more than $8 million. When the employer terminated its defined contribution plan, the employer did not notify the participant of the termination, and retained his account balance of approximately $22,000 in partial satisfaction of its judgment. The participant sued and the court held that the employer was not permitted to keep the participant’s plan benefit.

The court held that the fact that the retirement plan was terminated did not make the plan trustee trustee immune from liability for improperly giving the funds to the employer, pointing to the fact that with an Employee Retirement Income Security Act (ERISA) plan “all benefits [needed to] be distributed to participants before the plan trust is terminated” and that based on the plaintiff’s allegations, this was clearly not done. The fact that the participant did not request a distribution of his account was irrelevant since the plan had an obligation to satisfy all liabilities as part of the termination.

Finally, the court disagreed with the participant’s claim that the Mandatory Victims Restitution Act (MVRA) provided an exception to “the anti-alienation provision in an ERISA pension plan where there is a criminal restitution order.”  The court concluded the MVRA did not apply here, since only the government could enforce such a judgment and not the employer.

Many employers know that with few exceptions a participant’s benefit in a tax qualified retirement plan is protected from the participant’s creditors. One exception is for court orders, known as qualified domestic relations orders or QDRO’s that split a benefit between the participant and a former spouse or dependent in the event of divorce. Another exception is for a violation of the ERISA fiduciary rules where the plan can retain the fiduciary’s benefit to reimburse the plan after a criminal conviction, civil judgment or settlement with the Department of Labor. However, there is no exception that allows an employer to keep an account balance if the participant has committed a crime against the employer.

Participants can voluntarily direct the trustee or plan administrator to pay another person their plan benefit. It is suggested that if a situation like the one presented here arises, the employer should attempt to persuade the participant to voluntarily direct the payment of the plan benefit to the employer. However, this case makes clear that even where the participant owes the employer a lot of money and even when the money owed is the result of a crime, the employer is not allowed to keep the participant’s qualified plan benefit.