Company Withholding Retirement Money, Never Deposited

[illyrianmoon]

The question I have is about my husband's retirement account. He recently left the employment of a small company after 6 1/2 years. Upon leaving, he discovered that the money that the company was withholding for his retirement account (pre-tax, supposedly matched) was never put into a mutual fund (as it was supposed to be), but is instead sitting in a slush fund in the company's name. Why the owner of the company chose to do this, we have no idea. However, since my husband is no longer working for the company, they are not able to fix the problem and open an account for him retroactively. Supposedly, they will give him a check for the money they owe him, but we don't know what kind of tax or penalties he'll run into once the money is withdrawn. Besides which, the whole thing seems highly illegal, and he doesn't want to do something wrong and end up facing charges for it. We basically need advice on how to proceed with this money. To complicate matters, the owner of the company is a friend of ours, and we don't have it out for him. We just don't want to pay for his mistakes.

 

[cbg]

This is a very big deal. Employers go to jail for this. What you should do is pick up the phone RIGHT NOW and call the US DOL. I understand that where the owner is a friend you may not want to do this, but that is the answer I would give anyone else.

You will need to pay tax on this if he writes you a check. I'm not sure about penalties if it never was actually deposited in the retirement account, but it definitely will be taxable income if you get it that way. My strong point is health and welfare plans, not retirement plans, but I wonder if it could be deposited into an IRA to protect the pre-tax status?

 

[Beth3]

I strongly suggest that you and your husband contact an attorney who specializes in employer sponsored retirement plans immediately.* Almost certainly, the Plan Document, which describes and controls all the details of the retirement plan, mandates that the employee and employer contributions are to be forwarded to an investment advisor and the funds invested according to the employee's direction (in the funds available through the investment advisor.)

The Plan Document will also state whether the employer is obligated to make any sort of contribution, whether matching or discretionary.

If your husband was still working, I'd suggest he file a complaint with the federal Department of Labor (which he still may want/need to do) but since he's retired, he has no time to waste. He needs the advice of a qualified attorney right away.

To complicate matters, the owner of the company is a friend of ours, and we don't have it out for him. You and your husband need to ask yourselves whether this friend has been looking out for your best interests and complying with federal laws that employers who offer a retirement savings plan are subject to. It sure doesn't sound like it.

You need to let the chips fall where they may. The security of your retirement is in jeopardy. Giving you a taxable lump-sum check without any of the earnings you would have received had it been invested is NOT in your best interests.

*Contact the larger law firms in your area or the nearest large cities and ask if they have any attorneys who specialize in employer sponsored retirement plans. If you husband can get hold of a copy of the retirement Plan Document, that will make things much easier for the attorney to sort out.

 

[Beth3]

but is instead sitting in a slush fund in the company's name.

As cbg said, this is a VERY big deal. What the company owner has done is diverted employee retirement contributions into the company's general operating assets. This is a huge violation of federal benefit laws with criminal liability for the business owner.

Do not delay. Find an attorney and file a complaint with the federal DOL.

 

[illyrianmoon]

To clarify. . .

Thanks so much for the responses. Just to clarify, my husband is not retired. He simply left his previous company's employ to start a consulting business. We are, fortunately, still fairly young and my retirement account is in tact. Still, it sounds like legal action may be in our best interests.

 

[cbg]

It doesn't matter whether he's retired or not. This is a HUGE violation of Federal law.

 

[LdiJ]

Thanks so much for the responses. Just to clarify, my husband is not retired. He simply left his previous company's employ to start a consulting business. We are, fortunately, still fairly young and my retirement account is in tact. Still, it sounds like legal action may be in our best interests.

How much money are we talking about?

 

[Beth3]

Thanks so much for the responses. Just to clarify, my husband is not retired. He simply left his previous company's employ to start a consulting business. We are, fortunately, still fairly young and my retirement account is in tact. Still, it sounds like legal action may be in our best interests.

That's fortunate. I thought your husband had retired and the both of you were dependent on the income from this retirement plan, hence my urgent advice to consult with an attorney.

Contact the federal DOL immediately (The U.S. Department of Labor Home Page) and file a complaint. Your husband's ex-employer has seriously violated federal law. Plus, if he's done it to your husband, I expect he's doing it to other employees too. As I said above, you need to let the chips fall where they may. He is obligated to comply with the law and has a fiduciary and ethical responsibility to manage the retirement plan in the best interests of his employees.

 

[illyrianmoon]

Thank you for all the replies. We will definitely contact the DOL. And yes, we have it on good authority (three other friends) that other employees had to fight to get their money too. Both fortunately and unfortunately, we live in a community where people tend to just let things go, rather than take any sort of retributive action, especially against friends. My husband just talked to the owner, who said that the money is sitting in the company's checking account right now. This strikes me as completely inappropriate, as well as illegal. Since the owner has an accounting background, I have a hard time believing he didn't realize what he was doing. He has a history of making bad business decisions. In any case, thank you again for all your help. This has given us some good ideas on how to proceed.

 

[cbg]

If there are other employees involved, I can't see any other way around it. My initial response was predicated on your being the only employee affected. As I said earlier, employers go to jail for this. It is very illegal and I'm glad you've decided to report it.

 

[davew128]

My strong point is health and welfare plans, not retirement plans, but I wonder if it could be deposited into an IRA to protect the pre-tax status?

Don't quote me on it, but I don't think so if for no other reason than its NOT coming from a qualified plan...at least it isn't right now.

I have dealt with situations like this in the past where idiot business owners didn't know they had to get administrators and set up segregated accounts, etc. Last one I dealt with, DOL calculated an expected rate of return on contributed amounts and the employer wrote checks payable to the former "plan participants".

 

[LdiJ]

Don't quote me on it, but I don't think so if for no other reason than its NOT coming from a qualified plan...at least it isn't right now.

I have dealt with situations like this in the past where idiot business owners didn't know they had to get administrators and set up segregated accounts, etc. Last one I dealt with, DOL calculated an expected rate of return on contributed amounts and the employer wrote checks payable to the former "plan participants".

I asked how much money it was, because if it was less than the max annual contribution amount for an IRA the employee could contribute that amount to an IRA to simplfy the tax consequences.

That shouldn't get the employer off the hook, but it might make life more simple for the employee.