The Issue: A terminated employee makes a claim against the employer for damages. The company says it fired him for stealing from the company. He says it was in retaliation for reporting law violations by the employer (that is, for being a whistle blower). At the same time, he files a claim for his benefits under the company’s 401(k) plan. Does the plan have to pay him out?

The Solution: Yes. The fact that the company feels wronged by the employee – for the theft and possibly for alleging that it violated the law – is irrelevant. The employee’s benefits are still protected and must be paid.

Analysis: This issue is one of the most disconcerting for employers. We often get the question, “you mean we have to pay this [bad actor] his benefits even though he stole from us and is trying to ruin our reputation?” No matter how much we may empathize, we still have to give the client the answer they don’t like: yes, you have to pay out the benefits.

There are some exceptions, but they are limited. A plan may contain a “bad boy” provision that changes the vesting schedule if a participant engages in certain acts that are adverse to the interests of the employer and are spelled out in the plan. This wouldn’t apply to the employee’s own deferrals, since those must always be 100% vested, but could be applied to employer contributions (such as a match or profit sharing contribution in a 401(k) plan). Few plans have such a provision; and if it’s not in the document, for benefits purposes, it doesn’t exist. Trying to add it to a provider’s document (a prototype) would likely cause it to lose prototype status. And once the employee has satisfied the vesting period, even if the provision is included, the benefits have to be paid out, no matter how “bad” the employee was.

Arguably, too, a court would not permit enforcement of a plan document provision that includes whistle blower activity in the list of “bad boy” conduct. While we aren’t aware of case authority on this point, it seems likely the court would say it violates public policy.

One last point: if the employee steals from the plan, under certain circumstances, the plan may be able to seize the benefits to satisfy its claim. This doesn’t help the employer, and the circumstances under which this can be done are very limited

The bottom line: don’t try to hold the employee’s retirement benefits hostage to other claims the company may have against the employee. It generally isn’t permitted and can result in a lot of trouble for the employer, the plan and the plan fiduciaries.