28 November 2020

Case of the Week: 401(k) Plans and Embezzlement

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The ERISA consultants at the Retirement Learning Center Resource 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 plans. 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.

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
  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.

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