Can a 401(k) account be accessed as restitution for embezzlement from the company that sponsors the 401(k)?
In the case at hand (United States v. Frank, 4th Cir., No. 20-6706, 8/10/21) 2007 to 2017, Jon Lawrence Frank embezzled over $19 million from his former employer, NCI Information Systems, Inc.—making unauthorized payments of company funds to his personal bank accounts. In June 2017, after his scheme was uncovered, he pled guilty to one count of wire fraud, and was sentenced by the district court to 78 months’ imprisonment and three years’ supervised release. That court also ordered Frank to “pay restitution in the total amount of $19,440,331”—and to date, the appellate court noted, the government has recovered from Frank and remitted to NCI more than $7 million.
This appeal arises out of the government’s effort to garnish Frank’s 401(k) retirement account under the Mandatory Victims Restitution Act of 1996 to “further satisfy the criminal restitution order against him.”
Now, Schwab held $479,504 in a 401(k) account in Frank’s name. The terms of that plan provide that Frank, once no longer employed by NCI, can request that his 401(k) assets be “distributed in a lump sum,” albeit subject to 20% withholding (and the potential application of a 10% penalty if younger than 59½).
The Case
For his part, Frank argued that the government could not garnish his retirement account at all because the account was governed by ERISA’s anti-alienation provision—and that even if the government could access the account, it would be subject to the same withdrawal limits as Frank himself (precluding a lump-sum withdrawal of the full amount). Oh, and for good measure, he claimed that the wage garnishment restriction of the Consumer Credit Protection Act of 1968 limited the government’s “take” to 25% of the funds in the account.
A magistrate judge rejected Frank’s core contention that ERISA bars the government’s seizure of his 401(k) account, noting that the key question was “whether the MVRA’s directive mandating victim restitution trumps ERISA’s robust protection of retirement funds”—concluding (after a careful analysis of the MVRA[i]) that it does. He also noted that that reading was consistent with the view of every court of appeals and district court to have considered the issue.
As for how much the government could take, the magistrate judge ruled that they could access as much of the account as Frank could (“step into his shoes”), but no more. And in this case, since Frank no longer worked for NCI, that meant access to a lump sum payout of the account, regardless of what Frank might choose. However, the magistrate judge also commented that that would be subject to “any tax withholdings by Schwab under the terms of the plan,” but noted that Frank’s argument about the CCPA was irrelevant because that garnishment limit doesn’t apply to single, lump-sum withdrawals from retirement accounts.
District Court
The district court accepted nearly all of the magistrate judge’s findings—except for the limitation for 20% withholding. Instead, the court held that “the government has the right to force the immediate liquidation of Frank’s entire 401(k) account”—and then, that as a “matter of equity,” the government should remit ten percent of the account to Frank to “offset any additional tax penalty incurred.”
The appellate court concurred (Judge Pamela A. Harris wrote the decision, with Judges Paul V. Niemeyer and Barbara Milano Keenan joining in the opinion) with the district court’s critical holding that the MVRA authorizes garnishment of ERISA-protected retirement funds pursuant to criminal restitution orders, and that the government is entitled to the same lump-sum distribution from Frank’s 401(k) account as Frank himself (and that the CCPA’s garnishment cap does not apply).
Appellate Difference(s)
They did, however, differ in one respect: They agreed that the government is entitled to seize no more than the funds to which Frank has a present property right, but noted that the district court did not consider whether there are conditions limiting Frank’s current property right in his 401(k) account. And on that account, they tossed the judgment of the district court and sent it back to that court for a reconsideration of what present right Frank—and, by extension, the government—has in the account’s funds.
“To be clear, we do not fault the district court here; the complications regarding Frank’s present right to the funds in his 401(k) were not presented to that court with great clarity. But because we are a 'court of review, not first view' Biggs v. N.C. Dep’t of Pub. Safety, 953 F.3d 236, 243 (4th Cir. 2020), we remand so that the district court may resolve these issues in the first instance,” Judge Harris wrote.
“Specifically, the district court should determine whether the terms of Frank’s plan in fact require Schwab to withhold 20 percent of any present withdrawal. If they do, then those terms would constitute a limit on Frank’s ability to presently withdraw from the account—which means, as explained above, that the government, too, would be so limited in garnishing the account’s funds. On our reading, the plan indeed mandates a 20 percent withholding. But this is a question of plan construction that the district court did not decide and the parties have yet to address in any depth, and so we leave its resolution to the district court on remand.”
[i] According to the appellate opinion, “the MVRA, enacted in 1996, butts up against this anti-alienation provision,” mandating that courts “shall order” defendants to make restitution to victims for specific offenses, “[n]otwithstanding any other provision of law.” 18 U.S.C. § 3663A(a)(1); see id. § 3663A(c)(1)(A)(ii). The MVRA then instructs the government to enforce criminal restitution orders in the same manner as criminal fines. See id. § 3664(m)(1)(A)(i). And that, in turn, allows for broad enforcement of such orders.
