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Fourth Circuit Affirms ERISA Theft Convictions for Unpaid Employer Retirement Plan Contributions - Prison Sentences Upheld

    Client Alerts
  • May 09, 2008

Employers who sponsor a 401(k) or other retirement plan involving employee salary deferral contributions are frequently reminded of ERISA regulations that provide that deferral amounts withheld from employees’ wages become “plan assets” within a short time after being withheld and must be remitted to the plan relatively quickly.  (The U.S. Department of Labor recently announced a proposed safe harbor of seven business days for smaller plans - link).  A failure to timely remit such amounts to the plan is considered a “prohibited transaction” involving improper use of these plan assets by the employer, and the Department of Labor has undergone extensive enforcement activity in assuring compliance with these rules.  A recent case from the 4th Circuit Court of Appeals (which covers the Carolinas) also reminds employers that improper use of ERISA plan assets may be characterized as the theft of such assets in violation of federal criminal law. 

Salary deferrals withheld from employees’ pay that are not timely remitted as well as funds already contributed to a plan are clearly plan assets under applicable regulations.  However, this recent case involved required employer contributions that were not timely deposited.  The 4th Circuit Court of Appeals reviewed an appeal of ERISA theft convictions of two company officers who failed to remit employer contributions to two ERISA retirement plans that the company was obligated to make under the plans’ terms.  The larger of the two plans was a defined contribution plan which, by its terms, obligated the employer to contribute 3% of compensation for eligible employees, while the other was a plan for unionized employees that required a contribution of 15¢ per hour worked by eligible employees.  For the 1998 plan year, contributions to the plans were due by September 15, 1999, but were not made until April 18, 2000.  For the 1999 plan year, required contributions of $324,000 were never made.  The defendants argued on appeal that the law prohibited theft of assets of the plans, but that unpaid employer contributions did not constitute such assets.  However, relying primarily on 2nd Circuit precedent (which at least arguably involved only employee contributions), the 4th Circuit affirmed the district court’s ruling that the unpaid contributions did constitute “moneys, funds, or assets” of the plans under the ERISA theft offense statute and that theft occurred.  For this offense and others, the defendants were sentenced to prison terms of 108 and 87 months, respectively.

This case highlights the importance of making timely employer contributions to qualified retirement plans according to those plans’ terms and applicable law.  While this case involved a money purchase plan, which requires commitment in the document to annual employer contributions, its principles might equally apply to other employer contributions, such as matching contributions or profit sharing contributions when the plan documents expressly require specific contribution amounts.  (Many documents can allow these contribution amounts to remain discretionary.)