You Cannot Take The Embezzler’s 401(k) Plan Balance

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 QDROs, that split a benefit between the participant and a former spouse or dependent in the event of divorce. Another exception is for crime committed by a fiduciary against a plan where the plan can retain the fiduciary’s benefit to reimburse the plan under certain circumstances. However, there is no exception that allows an employer to keep an account balance if the participant has committed a crime against the employer.

A recent federal district court case made that point clear. The case involved an individual participant who embezzled funds while working for the employer. The employer obtained a judgment against the participant for more than $19 million. When the employer terminated its defined contribution plan, the employer retained the participant’s account balance of approximately $22,000 in partial satisfaction of that judgment. The participant sued and the court held that the employer was not permitted to keep the participant’s plan benefit.

Participants can voluntarily direct the trustee or plan administrator to pay another person their plan benefit. 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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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