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401(k) distributions to embezzlers?

I recently received an interesting inquiry:

If an employee has embezzled funds from a company, must the company turn over 401(k) funds upon request of the ex-employee?  Is there anything the company can do to hold a distribution until the embezzlement is resolved?”

For the answer, I consulted David Ralston, and ERISA attorney in Dallas, Texas. This is his response:

Unfortunately, there’s not a lot that a company can do. There used to be something called ‘bad boy’ clauses that allowed plans to forfeit an employee’s benefits based on actions that constituted ‘cause’ (forfeiture for cause provision). However, over the years, the DOL and IRS have restricted the application of these provisions to the point that they really are not possible. What we have done with clients is look at ways to postpone distributions. For example, perhaps a plan has generally permitted a distribution upon termination of employment and the criteria is ‘as soon as administratively feasible’ following termination. Perhaps this has meant months or weeks following termination. However, the absolute rule is that distributions must begin no later than attainment of retirement age (i.e., age 65). Maybe the plan can be revised or perhaps interpretation of what is ‘as soon as administratively feasible’ can be adjusted. For example, maybe the distribution can be delayed. You have to be careful about how much you link payment from the plan with settlement of the embezzlement or repayment of amounts by the employee to the employer, but maybe a delay in a distribution may permit some further negotiation.

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