OK to liquidate defendant’s 401(k) to satisfy restitution order

Where the defendant embezzled more than $19 million from his employer, his 401(k) account may be liquidated to satisfy a restitution order. The 401(k) trustee and the plan administrator will determine what amount to withhold to cover federal and state taxes that will be triggered by the lump-sum withdrawal.

Background

Between 2007 and 2017, Jon Lawrence Frank embezzled over $19 million from NCI Information Systems Inc., where he served as vice president and controller. In June of 2017, Frank waived indictment and pleaded guilty to one count of wire fraud. He was sentenced to 78 months in prison and ordered to pay over $19 million in restitution to NCI.

On Sept. 5, 2019, in its effort to recover the restitution amount, the government filed an application for writ of continuing garnishment against defendant, naming Charles Schwab Corporation as garnishee. The magistrate judge found that “the funds in the defendant’s retirement account are subject to seizure by the government” to enforce a restitution order, and because the government would step into defendant’s shoes, it could “require a lump-sum liquidation of the 40l(k) account.”

The report was adopted, except for an additional finding that because Frank was too young to withdraw the funds without a penalty, 10% of the funds in the retirement account should be withheld to “pay any penalties or additional taxes associated with liquidating that account.” The Fourth Circuit vacated and remanded the ruling as to the amount of funds which should be withheld.

Analysis

Although the summary plan description states that the administrator, which is NCI, is “required to withhold 20% of the benefit payment” and remit it to the IRS against any tax liability for a lump-sum withdrawal, the more detailed plan documents clarify that this 20% is an estimate, and in fact, a different percentage may be withheld at the trustee’s discretion. The detailed plan documents also explain that Schwab, “in its sole discretion” and pursuant to information furnished by NCI, may withhold from any distribution any such sum as Schwab may “reasonably estimate is necessary” to cover required federal and state taxes. Further, “[Schwab] is required to withhold such amounts if so directed by [NCI].”

Accordingly, Schwab as garnishee shall be ordered to consult with NCI and advise the court and the parties as to the amount it estimates it will withhold to cover the federal and state truces which will be triggered by the lump-sum withdrawal. The remainder of the funds will be turned over to the government under the writ. Should the amount withheld tum out to be less than needed to cover defendant’s truces, the Internal Revenue Service may seek to collect the balance from him. Should the amount withheld turn out to be more than needed, any excess payment must be turned over to the government for restitution.

The summary plan description indicates that an account owner who withdraws his 401(k) funds before turning 59½ “may also have to pay an additional 10% true.” As a matter of law, the court concludes that this true does not apply to this withdrawal because the funds will never go into Frank’s custody (he does not “receive the distribution”), and because a withdrawal pursuant to a garnishment to satisfy a restitution order is expressly exempted from the statute that covers the 10-percent additional true on early distributions from qualified retirement plans.

The defense argues that the question before the court is not whether the true will be imposed in this situation, but whether the defendant would have to pay it if he were withdrawing the funds, because the government is required to “step into [defendant’s] shoes.” The court will not engage in this fiction proposed by defendant. In reality, an exception to the 10% penalty applies because defendant is under an order to pay restitution and the withdrawal is being made to satisfy a portion of that order. Accordingly, Schwab should not withhold an additional 10%.

Finally, defendant urges the court to mandate that Schwab withhold additional funds so that Frank can also meet any state income tax obligations that accrue upon lump-sum withdrawal. This argument is moot as the court has already concluded that the plan requires Schwab to withhold funds to address both federal and state taxes.

United States v. Frank, Case No. 1:17-cr-114, Feb. 22, 2022. EDVA at Alexandria (Brinkema). VLW 022-3-091. 8 pp.