Question: One of my employees stole from the company and when we found out we terminated their employment. Can we use their company retirement plan balance to pay the company back what was stolen?
Answer: You are not the first to ask us this question. Your lousy employee stole from you and you just want to reimburse the company for what was taken. While that would certainly be fair, it would not be legal. When Congress created the federal law called ERISA in 1974, they intended to protect a person’s retirement plan income from creditors. Neither ERISA nor the Internal Revenue Code allows any participant to “assign or alienate” their interest in a retirement plan to another person. These anti-assignment and alienation rules are intended to ensure that a participant’s retirement benefits are there to provide financial support during the participant’s retirement years. However, there are a few exceptions:
- Participants are allowed to take loans from their own account, subject to certain restrictions, under Internal Revenue Code section 72(p).
- In 1984, qualified domestic relation order (QDRO) provisions were added to ERISA to allow reassignment of a participant retirement account with a judicial order related to alimony, child support, or marital property rights.
- In 1997, Congress amended ERISA to allow the assignment of plan assets by plan participants to reimburse the plan upon conviction of criminal misconduct concerning the plan, a civil judgment for “breach of fiduciary duty”, or a settlement with the PBGC for breach of fiduciary duty.
- Federal tax liens or federal criminal fines can attach to a pension account, and more recently there have been court cases where victims of criminal activity have been able to successfully obtain judgement from the plan. However, without a court order to withdraw the funds from the plan, any attempt to take the funds out of a participant account to reimburse the company for the theft by the employee would result in a theft by the company. So don’t do it.
That being said however, once the funds are in the hands of the participant, the company is able to attempt recovery. While you can’t withhold the funds from your ex-employee thief/participant, you certainly have the right to ask for reimbursement for what they stole. You are more likely to receive a positive response if they actually have some money to pay you back so timing your request well could make a difference.