Criminal Sentences and Bad Boy Clauses – When ERISA Account Balances Can Be Recovered by the Plan

We recently discussed how a court case provided for Using an Account Balance to Offset Damages Resulting from a Fiduciary Breach. The following items provide some more background on the case, and bad boy clauses, and criminal sentences and ERISA plans:

• "Bad boy" clauses aren't passe after all - but sometimes it takes a judge to do the right thing provides more details about the criminal acts of the case.
  


• It also discusses the pre-ERISA history of Bad Boy Clauses and how they are a violation of the IRC Section 411 vesting requirements.
  


• Qualified Retirement Plan Protection from Creditors discusses how criminal sentences or bad boy clauses are not permitted:
  
  Generally, the terms of a criminal sentence may not order the plan to pay out a participant's benefits to a third party as restitution, even for a crime committed against the employer. For example, suppose an employee embezzled $20,000 from the employer. The employer is not permitted to recover the $20,000 by taking the participant's 401(k) plan assets because of ERISA protection of retirement benefits. There is a limited exception in cases where the crime was committed against the plan. Had the employee stolen $20,000 from plan's assets instead of from the employer, then a Federal court or the U. S. Department of Labor could order the plan administrator to offset the plan's loss against the participant's account. In this case, the participant is presumed to have already received a distribution from the plan for the amount embezzled from the plan.