Employer pocketed 401k contributions. Is this illegal?

Question

I'm working for a small business that's been having some financial problems lately. They used to use a billing service and have pay stubs and all of that, but switched to personal checks earlier in the year (around February). I think they've been having wire transfers from various investors to cover payroll each time.

It was just revealed that for some time now, the money taken out of people's paychecks for their 401k hasn't actually gone into the 401k, but instead into the company to cover costs.

My first thought was that this must be illegal, but I'd like to hear some thoughts on the subject? The company is acting like it isn't too big of a deal and people are afraid to make waves (no one wants to be the one to push things over the edge and make the business fail). But to me it certainly sounds like big deal?

Answer 1

.   He will serve jail time if this is true.  You are not liable for taxes on money you don't receive.

Answer 2

It's not illegal. However, the business is accountable for those funds, which it holds in what is essentially a trust.

Unfortunately, if the business goes under, those funds will be unrecoverable.

Answer 3

This is illegal.  An employer must, with no exception, put all 401k money in account handled by third party fiduciary. It MUST be done each payroll date.

One can question if payroll deductions for Income Taxes, Social Security, etc. are also being used by the employer.  I know of former employer that was caught, and business had to be sold to recover these funds.  Owner went to jail.

Answer 4

Contact the closest regional office of the US Department of Labor.  You can find locations at their website www.dol.gov.  The DOL is responsible for enforcing employer fiduciaries and how they handle employee benefit plans.  The misuse of employee contributions and failure to remit the deferral amounts to the plan trust is a big no-no and the DOL will be quick to bring legal action.

Yes, it is illegal.  It is a violation of ERISA and DOL regulations.  They might not be as clear or common as bank robbery, but it is still a crime and the fiduciaries of the plan and the company can be held responsible for losses that plan participants incur.  Of course if the company is not solvent and unable to make its payments, then the participants might be out of luck.  But contact the DOL at least so you are not alone in wondering what's happening to your money.  You deferred the money from your salary.  They are legally required to give it to you.  

Answer 5

First off...you need to determine just how important this is to you.  There are people in your company that are plan administrators and plan sponsors.  If you go to the US Department of Labor and they are found to have not deposited the funds in a timely manner then your company will have to come up with those funds AND interest and penalties (though you will only get the interest).  if your company is already having problems then you're right...this could push them over the edge.  

Better way to handle it is to simply let them know that the law requires that all 401k deposits must be segregate from company assets (ie put into trust) within 15 days following the end of the month in which they were deferred from income OR as soon as administratively possible which the DOL has deemed to be approx 5 days following payroll for most US companies.  Ask that all 401k deposits be made current and that future withholdings be made timely.  

Then go out and look for a new job...if a company is down to using 401k deferrals to cover expenses then they are not long for the business world.  If they don't make the 401k plan whole (make the deposit) then I'd redouble my efforts to find a new job and once you do...report them to the DOL.   But it's not an attorney general issue and it's not fraud or anything like that.  It's an ERISA issue and is a Federal Court issue.  You can't afford to bring a lawsuit and no attorney will bother listening as it's not worth their time.  The can't get damages and such so you'd be paying their fees.   Better to work it as noted above.

Answer 6

It's fraud and it's a crime. Report them to your local District Attorney, and get a new job. Don't let it continue. As Frank mentions above, it is also possible that they are not paying your income tax withholding or workers compensation premiums. As long as you put up with it, they will continue to take your money.