Our office has a takeover medical practice who has a calendar year 401k plan in 2002. Dr. A, who was part owner, deferred $12,000 in 2002. Dr. A also stole big bucks from the practice and there is a lawsuit in the works. Due to Dr. A's theft of company money, Dr. B refused to fund Dr. A's $12,000 deferral for 2002.

Our position is that the $12,000 must be funded to the plan no matter what is happening within the company. Any other thoughts?

Perhaps a bit too obvious, but Dr. B should be getting ERISA legal advice from his/her ERISA attorney.

Unless Dr. B wants to join Dr. A in jail, the company need to deposit the money. That's over-dramatizing it, but you get the gist. Don't forget that since they will be depositing the money late, they also need to pay an excise tax and pay lost earnings!!

As pax stated, the company needs to retain an ERISA attorney.

Q: from what account did A steal the funds? If it was the company account used to pay the deferrals to the trustee then the employer could claim that Dr. A stole from himself and thats why there are no funds to pay the plan. If there is a conversion of the funds by an owner I dont see why the employer has to make the thief whole. There is a general principal of equity that a wrongdoer cannot profit from his own wrong doing. ERISA claims are claims in equity. You should get your own counsel but I would have no problem in refusing to fund A's account.

First, it is not known if Dr. A really stole any money. Note that this does not even seem to be a criminal suit but a civil suit between the 2 Drs.

Second, What happens if Dr. A really did not steal anything?

Third, Deferrals are taken from a participant's salary and I think every state and federal labor law states that money deducted must be used only for the purpose deducted and done so expeditiously. That leaves Dr. B in a very precarious position if he does not put the deferral where it was directed by Dr. A.

Refusing to fund the account on the basis that you do not have the money seems no different from telling the IRS that you could not pay the payroll tax or withholding because you did not have enough money. Dr. B is asking for BIG trouble.

Good point. Why weren't the deferrals (if that is the correct term) deposited promptly?

The $12,000 deferral was not deposited because Dr. B did not want Dr. A to get the contribution due to him embezzling money. A check for $12,000 was actually written to the broker, but Dr. B refused to send it.

Under some state laws the business would have a a right to offset amounts owed to Dr. A by the amount he embezzled. Also Dr B as an owner may not be protected by state or federal laws protecting employees. This could also be viewed as a business dispute between two owners subject to agreements they signed. The Check for 12k could be held in escrow until the matter is resolved. The rights of Drs A and B will be resolved by lawyers or the cts.

As far as I know State laws for embezzlement require at least a court order requested by the state prosecutors. There has been no mention of state prosecution, injunction or even a filing or anything else.

What would be the legal basis for escrowing funds in a civil dispute of this sort?

Are you implying that "I don't want to pay the money for the purpose that I deducted it so I am holding the money?" or " I do not want to send the money to where I was supposed to, so here, Mr. Clerk of the Court, you hold this money in case I win the case". as being a good course of action for Dr. B?

How would escrowing the funds satisfy state and federal labor (payroll) laws? Or should they be ignored just in case Dr. B wins his case eventually?

How would breaking one agreement (the salary reduction agreement) help Dr. B in claiming that Dr. A broke some alleged business agreement (the substance and terms of which are not known)?

Wouldn't ERISA antiassignment laws preempt any such state law? The only way I see any basis for failing to remit the deferrals is if 401(a)(13)© applies. From the facts that we have it doesn't seem to apply because there is no judgment or settlement & this doesn't seem to be a fiduciary breach against the plan.


© Special rule for certain judgments and settlements.--
Subparagraph (A) shall not apply to any offset of a
participant's benefits provided under a plan against an amount
that the participant is ordered or required to pay to the plan
if--
(i) the order or requirement to pay arises--
(I) under a judgment of conviction for a crime
involving such plan,
(II) under a civil judgment (including a consent
order or decree) entered by a court in an action brought
in connection with a violation (or alleged violation) of
part 4 of subtitle B of title I of the Employee
Retirement Income Security Act of 1974, or
(III) pursuant to a settlement agreement between the
Secretary of Labor and the participant, or a settlement
agreement between the Pension Benefit Guaranty
Corporation and the participant, in connection with a
violation (or alleged violation) of part 4 of such
subtitle by a fiduciary or any other person,

GB: This is a business dispute between the parties who will use every legal weapon at their disposal. Some prosecutions for embezzlement/fraud begin after the theft becomes public knowledge, either in the newspapers or by a lawsuit. If there is a basis for prosecution it would not be a good idea for Dr A to attempt to recover the 12k. But Dr. A will have to determine whether he wants to proceed in ct.

Again, that is the point , to "use every legal weapon at their disposal" but you cannot state any legal basis for any of your suggested actions and have suggested actions that are not legal weapons but emotional responses.

What type of entity is it and what type of compensation was Dr. A taking? Is there is any basis for claiming that there was no income from which a deferral could be made? E.g., if this was a partnership, maybe there is a position for saying that Dr. A's extra "expenditures" reduced his income to zero under the terms of the partnership arrangement. And he can't make deferrals on zero income. Just a thought. I agree with the others that counsel should be consulted.