Employer not turning in your 401k and tax withholdings

[Rushie]

I've got a friend who works for a small company. She recently discovered that her paycheck withholdings have not been sent to her 401k plan for several months now. (My understanding is companies with less than 100 employees have 7 days to send it in.) Also, apparently the tax withholdings haven't been sent either. She has discovered that the IRS is sending letters to the owner (but doesn't know the content of those letters). She has also discovered the county is doing an investigation, but doesn't know why (non-payment of property tax?)

It's a husband and wife who own the company, and she's been working there about 30 years, never had a problem before, they are "good people" but they must be getting pretty old, they started the business in '79. She can't believe they'd be drug addicts or otherwise pilfering the money for such like that. She confronted the wife who said, "Oh yeah, ha ha ha! I am behind on the paperwork!" The husband had a closed head injury a couple years ago with a long recovery; possibly they are just overwhelmed and mismanaging everything but it sure looks fishy from here, looks like might be having money problems, although business is booming, they have so many orders coming in my friend works a lot of overtime. She can't believe they're going under, but I guess it's possible.

Googling tells me she can report them to the Department of Labor, for the 401k matter. But if they don't send in her taxes she will be on the hook for it all come April 15, right? Quitting outright isn't an option; she is still getting a paycheck. She is in her late 50s and fears she has "no skills" and couldn't get another job. Plus, if the wife truly is just behind on all the paperwork and they're good for it, she doesn't want to mess up the long term working relationship.

I'm thinking her options are:
1) contact the DOL and the IRS and let them take it from there, while dusting off the resume and start looking
2) pay for a lawyer consult and let him tell you what to do
3) go to the owners and give them x number of days to send the funds in or else, and get their side of the story. This is a long term relationship with historically good people. Between old age and head injury, plausible they just are way behind. If the cash is piling up in the bank and it's just not been sent in, they can remedy this (including making up the 401k interest loss). Maybe the IRS letters and county tax office stuff is nothing - she has not read those letters. But she has verified with her 401k plan that it has not received the funds.

My feeling is she should do number 2 first, but she says she cannot afford a lawyer. This is not a high paying job. She has talked to another employee who also says her stuff hasn't been sent in either. I'm thinking the two of them maybe can pool together and pay for at least one hour of a lawyer's time. I feel she cannot afford NOT to talk to a lawyer about this; she's losing her 401k growth, and she's going to be paying her taxes double if they don't send in the cash or give it back to her, right? Does the IRS come after you for this or do they go after the employer? And if the employer but they're bankrupt does the IRS come back to you?

Any of you ever had a similar situation, and if so how did you handle it?

 

[flyingron]

Actually, the law requires them to promptly make the contribution. It's a myth that there is 15 days past the end of the month or even seven days.

If it is indeed late I would definitely report to the DOL. I suspect the IRS is already well aware of the failure to pay the withholding (that is VERY bad and something they track closely). They won't advocate for her anyhow.

A lawyer is probably premature, but if the company ends up going tango uniform or into bankruptcy, she may find that (perhaps she can band together with some of her coworkers also affected) advantageous.

I would certainly NOT do #3. While she can certainly write a letter inquiring why the payments haven't been made, making threats is not going to result in any change that would be beneficial to her (indeed, they might just fire her for it).

 

[Rushie]

I would certainly NOT do #3. While she can certainly write a letter inquiring why the payments haven't been made, making threats is not going to result in any change that would be beneficial to her (indeed, they might just fire her for it).

Very good advice. Thanks!

 

[Skip Miller]

The DOL (or perhaps the State DOL) is the place to start. But be aware there is no turning back once you get them involved - this is pretty much the Nuclear Option. However, the longer you wait, the deeper the hole gets. Let's hope the owners have the cash sitting around somewhere and can easily bring the accounts into balance.

-Skip

 

[PaulS]

That business owner is going to be thrown in the pokey, you don't mess with the IRS, that money is the government's and they don't take kindly to people stealing their money. The tax withholding will not be the employee's problem, unfortunately it sounds as though the 401k contributions might be lost if the owner is bankrupt.

The best thing for the employee to do would be to go ask why the 401k contributions aren't showing up.

 

[Howard Wilson]

For that kind of 401k plan, wouldn't there be a third party administrator that reviews the plan annually? In our company an employee that is part of the plan can call the TPA "to check on their account".
Might be a softer indirect way to move things along. Could ask for an update because they are thinking of taking a loan out of their account.....Might flag the TPA indirectly?

 

[Matthew]

I work for a small company, too, and I'd start with the owners to find out what's going on, and be ready to call the Feds if it doesn't get resolved quickly - like tomorrow. 401k and tax withholdings are "big deals" and affect your friend's financial stability and tax bill. She's not only losing the tax withholdings that she's still going to gave to pay, she's losing the tax deferment on the 401k contributions, the value of the company match, and any growth.

 

[comanchepilot]

I've been doing this kind of litigation for 31 years. . . .

the 401k contribution is the most serious because she has lost out on one of the great bull market market run-ups we will see in our lifetime.

That can be recovered . . .

Asking helps - but it doesn't recover the lost gains.

I'll say one thing - when this happens - it has nothing to do with paperwork - it has to do with spending the money that belongs to other people. In 31 years of litigating these types of cases I have heard the paperwork excuse almost every time - yet - the paperwork [bank statements and personal records] reveals the money was spent by the business owner. Has nothing to do with paperwork - and misleading participants on ERISA related contribution issues is a criminal offense- in addition to being a clear breach of fiduciary duty - making the company and owners personally liable - and non-bankruptable. But you need a good lawyer to press that issue - and they cannot fire her for asking or hiring counsel. That is a separate civil claim with recovery of punitive damages and attorneys fees, with a presumption that if there is any adverse employment action it was the result of asking about protected rights. The obligation shifts to the employer to prove it was not a reason - good luck there. You have very skeptical federal judges in this arena - they're not stupid and generally see right through BS excuses. There are no coincidences in this area of law.

The DOL will basically send a nastygram - informing them of their obligations. They will be satisfied with the company making the contributions - and will accept the paperwork excuse providing the contributions get made. They will do nothing to collect the lost gains.

It's better if the lawyers asks the questions - I always start out dumb and let them commit themselves to facts that always end up being false - then I start unraveling the string - one step at a time. "What happened here?" Get a phony story about paperwork errors. "Ok,m lets see your business quarterly filings." Oh, well, those are misplaced. "OK, give me a tax consent form so I can get copies from the IRS." Can't do that? ""Lets start with the 401k plan - who does your plan administration?" its a local company - 'Who?"

I call them - ask for copies of all documents sent to the company in the last 3 years - gues what? You'll find a contribution document - and you'll also see a letter telling them they failed to make it. There is that proof.

The employers always play these games - and I always start out dumb until they realize I'm not dumb. Then they realize they're nailed in a bunch of lies - then they clam up and hire a lawyer - who then tries to bluff his way through the facts. Then we talk about the attorneys fees I can collect - and the damages for lost income - and the personal liability.

Then they come back to me with a proposal to simply pay the contribution. Which is an admission of failure to make it - which gets me the lost gains. . . . .

Ain't my first rodeo - and the horse always bucks the same way the first 30 seconds out of the gate.

 

[Rushie]

Hmmm.... I looked up the property tax (public records). They are paid up current, so that's a good sign. Whatever letter from the county tax office might just have been a reassessment notice or something.

Thanks for all your responses, this is really helpful.

 

[N747JB]

If she's been there 30 years, she must have a pretty good relationship with the owners, maybe she can offer to help them with the "paperwork"? I have 75 employees and our 401k has audits every year for compliance, meaning when the money was collected and when it along with the matching portion is sent in. There isn't much leeway on late payments. My father had a company that shared our 401k and health insurance plans, his office manager made the 401k payments late a couple times and they were penalized.

 

[Clip4]

Employers stealing their employee's 401 contributions is not uncommon.

 

[Ravioli]

First step... cancel your 401k contributions until the matter is resolved.

You have no exposure on withholding issues but if you're taking deductions in pay that are not going into your 401k you are a victim. Stop your exposure immediately.

You'll have to wait it out to see how much you lose in the end. Once the tragic end comes and you can compare payroll deductions to actual deposits you'll have the number to sue the guy for. You'll most likely get a judgement. Might not ever get a penny.

Don't make threats, just mitigate your damages and wait. And maybe look for a new job?

 

[Jeff Oslick]

Contracted payroll services are so inexpensive, I don't know why a small business (other than maybe an accounting firm) wouldn't just use one of those services to help stay compliant. Small business owners sometimes don't know when they are being penny-wise and pound-foolish; they should spend their time on their business, not doing payroll filings.

But, if the owners are really holding back the employee's contribution to the 401(k), not just the employer match, there is a serious problem here. If the business owner wants to get legit again, they need to call in outside help asap, before they dig themselves a major tax violation they exceeds just getting fined and a wrist slap.

 

[N747JB]

Contracted payroll services are so inexpensive, I don't know why a small business (other than maybe an accounting firm) wouldn't just use one of those services to help stay compliant. Small business owners sometimes don't know when they are being penny-wise and pound-foolish; they should spend their time on their business, not doing payroll filings.

But, if the owners are really holding back the employee's contribution to the 401(k), not just the employer match, there is a serious problem here. If the business owner wants to get legit again, they need to call in outside help asap, before they dig themselves a major tax violation they exceeds just getting fined and a wrist slap.

Right not it's an issue, if it continues it will become a problem a big problem!! I agree if you can't handle the payroll part, it's easy to sub it out. We do ours in house, it's not too complicated as long as you have the right people and software!

 

[Norman]

Contracted payroll services are so inexpensive, I don't know why a small business (other than maybe an accounting firm) wouldn't just use one of those services to help stay compliant. Small business owners sometimes don't know when they are being penny-wise and pound-foolish; they should spend their time on their business, not doing payroll filings.

But, if the owners are really holding back the employee's contribution to the 401(k), not just the employer match, there is a serious problem here. If the business owner wants to get legit again, they need to call in outside help asap, before they dig themselves a major tax violation they exceeds just getting fined and a wrist slap.

Our shop owner's daughter is a CPA and did all accounting for the shop. An IRS auditor arrived one day to look at the books. He said it usually took three days. She had everything laid out for him, and at noon he said "You don't need me. Everything is in perfect order".

 

[Zeldman]

Owners possibly pocketing all the money they can with the plan on walking away from the business? Long time with the same business, a little behind in paperwork, injury.... all tells me a planned bankruptcy being worked out.

This has happened to me twice. Both times the owners had all the answers when questioned by employees. At least the second time I was a little smarter and walked away before I lost out too much.

Sorry to hear y'all are having this problem. My only advice, whatever it is worth is to protect yourself and stop giving them money.

 

[Anymouse]

Our shop owner's daughter is a CPA and did all accounting for the shop. An IRS auditor arrived one day to look at the books. He said it usually took three days. She had everything laid out for him, and at noon he said "You don't need me. Everything is in perfect order".

Accounting can make or break a company.

 

[eetrojan]

First step... cancel your 401k contributions until the matter is resolved.

This seems like very good advice.

 

[Rushie]

I've been doing this kind of litigation for 31 years. . . .

Awesome post, great information, thank you.

First step... cancel your 401k contributions until the matter is resolved.

You have no exposure on withholding issues but if you're taking deductions in pay that are not going into your 401k you are a victim. Stop your exposure immediately.

Very good idea, I'll pass that along.

Contracted payroll services are so inexpensive,....
If the business owner wants to get legit again, they need to call in outside help asap, before they dig themselves a major tax violation they exceeds just getting fined and a wrist slap.

Owners possibly pocketing all the money they can with the plan on walking away from the business? ....

I've got more information that leads me to think they aren't trying to pocket the money and walk away nor are heading for bankruptcy, but are simply being very stupid with their payroll handling. It turns out I was mistaken when my friend said she talked to "her" I thought it was the co-owner (wife), but it was just an employee in charge of doing the payroll. Also, she said they were not entirely not sent in, but were inconsistently and irregularly sent in. That's a slightly different picture.

So since I last talked to my friend, she went to HIM, the owner and told him about it. He said, "Oh, well you'll have to straighten it out with HER (the employee in charge of payroll)." (!!!! Er, no, that's YOUR job, Mr. Boss.) Keep in mind this is a man who is recovering from a closed head injury.

So possibly what's going on is a clueless peon failing to do the transmittals and a very inattentive owner who might not be aware things aren't being done properly or just how much legal trouble he could be getting himself into. In this case, Jeff you might have hit the nail; it's time for this couple to hire an outside payroll service to handle this stuff. On the other hand, maybe the owner is playing dumb.

 

[KA550]

Oh the drama

 

[Let'sgoflying!]

https://www.irs.gov/retirement-plan...ns-were-not-made-to-all-appropriate-employees

 

[Shepherd]

This predates the creation of the 401K by a number of years, but it's the same deal.
My dad worked for the same construction company from 1946 until 1976. Except for family members, dad was their only full-time employee.
One Monday, dad decided he had had enough. He was a a heavy equipment operator, tall cranes, mostly, and they contracted him out all over the world at times. It was very dangerous work, and he wasn't getting any younger.
That morning, dad went into the office and told the owner he wanted to retire effective on November 30, just over 3 months away. They sat around and talked about the good old days, and how much dad meant to them, he was like family, yada yada. The old guy told him come back tomorrow, and they would start filling out the papers.
The next day, Tuesday, they owner gave him a stack of forms to fill out and told him that he (the owner) and his youngest son had to go to a meeting that Wednesday next day so bring everything back with him the next Monday.
The next Monday, dad goes into the office, which was all family, wives daughter, sons, etc, and there is no one there, except police and FBI.
On Wednesday past, the old man had transfered millions of dollars off shore and he, his wife, the youngest son, the daughter, and all the grandkids, had flown off to the land of no extradition.
On Thursday, the oldest son had walked into the FBI office, accused the father of theft, racketeering, mopery and dopery, bad breath and offered to turn States evidence against his entire family in exchange for immunity. The head FBI guy in NYC wet himself with glee and gave the kid total immunity. The kid in turn turned over all the company records and spilled his guts against the entire family.

They had never paid a penny into the union pension fund for my dad or anyone else that worked for the company.
The union claimed they had no knowledge of this because son #2 was the union pension guy.
They can't extradite anyone, and number 1 son has total immunity.
Nothing was seized because everything had been transferred into the name of #1 son, who had immunity.
No one ever got arrested or went to jail.
As soon as the investigation ended, #1 son sold off all the assets, and joined the family in the land of no extradition.
The entire thing had been planned down to the smallest detail.
The Justice Department crowing about their huge success and essentially told dad (and everyone else who got screwed) "Tough shet"

The union came to my dad, and told him if he didn't press charges or make a scene, they would take care of him.
He ended up having to work another 10 years to qualify for a full pension.

I hate f'ing unions. I'm not real fond of the DOJ, either.

 

[Zeldman]

This predates the creation of the 401K by a number of years, but it's the same deal.
My dad worked for the same construction company from 1946 until 1976. Except for family members, dad was their only full-time employee.
One Monday, dad decided he had had enough. He was a a heavy equipment operator, tall cranes, mostly, and they contracted him out all over the world at times. It was very dangerous work, and he wasn't getting any younger.
That morning, dad went into the office and told the owner he wanted to retire effective on November 30, just over 3 months away. They sat around and talked about the good old days, and how much dad meant to them, he was like family, yada yada. The old guy told him come back tomorrow, and they would start filling out the papers.
The next day, Tuesday, they owner gave him a stack of forms to fill out and told him that he (the owner) and his youngest son had to go to a meeting that Wednesday next day so bring everything back with him the next Monday.
The next Monday, dad goes into the office, which was all family, wives daughter, sons, etc, and there is no one there, except police and FBI.
On Wednesday past, the old man had transfered millions of dollars off shore and he, his wife, the youngest son, the daughter, and all the grandkids, had flown off to the land of no extradition.
On Thursday, the oldest son had walked into the FBI office, accused the father of theft, racketeering, mopery and dopery, bad breath and offered to turn States evidence against his entire family in exchange for immunity. The head FBI guy in NYC wet himself with glee and gave the kid total immunity. The kid in turn turned over all the company records and spilled his guts against the entire family.

They had never paid a penny into the union pension fund for my dad or anyone else that worked for the company.
The union claimed they had no knowledge of this because son #2 was the union pension guy.
They can't extradite anyone, and number 1 son has total immunity.
Nothing was seized because everything had been transferred into the name of #1 son, who had immunity.
No one ever got arrested or went to jail.
As soon as the investigation ended, #1 son sold off all the assets, and joined the family in the land of no extradition.
The entire thing had been planned down to the smallest detail.
The Justice Department crowing about their huge success and essentially told dad (and everyone else who got screwed) "Tough shet"

The union came to my dad, and told him if he didn't press charges or make a scene, they would take care of him.
He ended up having to work another 10 years to qualify for a full pension.

I hate f'ing unions. I'm not real fond of the DOJ, either.

Sheppard, both my experiences are similar but on a smaller scale. The owners had every detail planned down to the last penny. I did not lose near as much as your dad, but it was enough. The second time, when I walked out, I grabbed some assets knowing the family would not do anything about it. At least on the last experience the owner paid out payroll on a closed account. That was easy to take care of, but not a single employee, except me, wanted to pursue getting back pay. At that time 600 bucks was a lot of money to me.

Rushie, For your friends sake I hope you are right. Just I am a lot more suspicious when it comes to money owed to me, and taxes that should have been paid out. I heard all the lies from my two experiences. At this point I would not trust the payroll clerk right now, either.

Property taxes may not mean that much. Taxes paid for the present year are due at the end of the year.

 

[Rushie]

This predates the creation of the 401K by a number of years, but it's the same deal.
My dad worked for the same construction company from 1946 until 1976. Except for family members, dad was their only full-time employee.
One Monday, dad decided he had had enough. He was a a heavy equipment operator, tall cranes, mostly, and they contracted him out all over the world at times. It was very dangerous work, and he wasn't getting any younger.
That morning, dad went into the office and told the owner he wanted to retire effective on November 30, just over 3 months away. They sat around and talked about the good old days, and how much dad meant to them, he was like family, yada yada. The old guy told him come back tomorrow, and they would start filling out the papers.
The next day, Tuesday, they owner gave him a stack of forms to fill out and told him that he (the owner) and his youngest son had to go to a meeting that Wednesday next day so bring everything back with him the next Monday.
The next Monday, dad goes into the office, which was all family, wives daughter, sons, etc, and there is no one there, except police and FBI.
On Wednesday past, the old man had transfered millions of dollars off shore and he, his wife, the youngest son, the daughter, and all the grandkids, had flown off to the land of no extradition.
On Thursday, the oldest son had walked into the FBI office, accused the father of theft, racketeering, mopery and dopery, bad breath and offered to turn States evidence against his entire family in exchange for immunity. The head FBI guy in NYC wet himself with glee and gave the kid total immunity. The kid in turn turned over all the company records and spilled his guts against the entire family.

They had never paid a penny into the union pension fund for my dad or anyone else that worked for the company.
The union claimed they had no knowledge of this because son #2 was the union pension guy.
They can't extradite anyone, and number 1 son has total immunity.
Nothing was seized because everything had been transferred into the name of #1 son, who had immunity.
No one ever got arrested or went to jail.
As soon as the investigation ended, #1 son sold off all the assets, and joined the family in the land of no extradition.
The entire thing had been planned down to the smallest detail.
The Justice Department crowing about their huge success and essentially told dad (and everyone else who got screwed) "Tough shet"

The union came to my dad, and told him if he didn't press charges or make a scene, they would take care of him.
He ended up having to work another 10 years to qualify for a full pension.

I hate f'ing unions. I'm not real fond of the DOJ, either.

WOW.... just I don't even know what to say....

 

[Rushie]

Sheppard, both my experiences are similar but on a smaller scale. The owners had every detail planned down to the last penny. I did not lose near as much as your dad, but it was enough. The second time, when I walked out, I grabbed some assets knowing the family would not do anything about it. At least on the last experience the owner paid out payroll on a closed account. That was easy to take care of, but not a single employee, except me, wanted to pursue getting back pay. At that time 600 bucks was a lot of money to me.

Rushie, For your friends sake I hope you are right. Just I am a lot more suspicious when it comes to money owed to me, and taxes that should have been paid out. I heard all the lies from my two experiences. At this point I would not trust the payroll clerk right now, either.

Property taxes may not mean that much. Taxes paid for the present year are due at the end of the year.

You're right to be suspicious and sometimes I'm not suspicious enough, I'll give people the benefit of the doubt because I find it hard to believe others can screw you over like that because it's not in me to do that, I can't see it sometimes in others.

Yeah their taxes for 2017 are unpaid, due at the end of the year but really no penalty until end of January 2018. But all prior years are paid. So that county letter might be nothing, but she said the letters with the IRS return address were "certified". Also, found out the owner after that conversation went and looked at HIS account and low and behold his were not paid either. So either he is lying and playing dumb because the company is in trouble, or the employee is stealing from everyone including the owner, which would be pretty stupid, or the employee is just really messing up the job and the owner has stupidly not been supervising her properly.

 

[PaulS]

Sounds like incompetence, hopefully no one is stealing.

 

[Sundancer]

This predates the creation of the 401K by a number of years, but it's the same deal.
My dad worked for the same construction company from 1946 until 1976. Except for family members, dad was their only full-time employee.
One Monday, dad decided he had had enough. He was a a heavy equipment operator, tall cranes, mostly, and they contracted him out all over the world at times. It was very dangerous work, and he wasn't getting any younger.
That morning, dad went into the office and told the owner he wanted to retire effective on November 30, just over 3 months away. They sat around and talked about the good old days, and how much dad meant to them, he was like family, yada yada. The old guy told him come back tomorrow, and they would start filling out the papers.
The next day, Tuesday, they owner gave him a stack of forms to fill out and told him that he (the owner) and his youngest son had to go to a meeting that Wednesday next day so bring everything back with him the next Monday.
The next Monday, dad goes into the office, which was all family, wives daughter, sons, etc, and there is no one there, except police and FBI.
On Wednesday past, the old man had transfered millions of dollars off shore and he, his wife, the youngest son, the daughter, and all the grandkids, had flown off to the land of no extradition.
On Thursday, the oldest son had walked into the FBI office, accused the father of theft, racketeering, mopery and dopery, bad breath and offered to turn States evidence against his entire family in exchange for immunity. The head FBI guy in NYC wet himself with glee and gave the kid total immunity. The kid in turn turned over all the company records and spilled his guts against the entire family.

They had never paid a penny into the union pension fund for my dad or anyone else that worked for the company.
The union claimed they had no knowledge of this because son #2 was the union pension guy.
They can't extradite anyone, and number 1 son has total immunity.
Nothing was seized because everything had been transferred into the name of #1 son, who had immunity.
No one ever got arrested or went to jail.
As soon as the investigation ended, #1 son sold off all the assets, and joined the family in the land of no extradition.
The entire thing had been planned down to the smallest detail.
The Justice Department crowing about their huge success and essentially told dad (and everyone else who got screwed) "Tough shet"

The union came to my dad, and told him if he didn't press charges or make a scene, they would take care of him.
He ended up having to work another 10 years to qualify for a full pension.

I hate f'ing unions. I'm not real fond of the DOJ, either.

What a horror story - that is just grim as it gets. . .being an IT guy for many decades, when in private industry I was as mercenary as they come; my employment was never, ever anything except a mercantile arrangement. "We're like a family here" sounds good, gives a warm and fuzzy, but it isn't real, and not something to buy into. I did my best, looked out for my employer's best interest, honored the employment contract - but I'd walk in a heartbeat if it served my needs.

 

[Everskyward]

At this point I would not trust the payroll clerk right now, either.

Years ago, my stepfather took care of the accounts and payroll for a large local farm. When he passed away, the farm owners hired an internal person to do their payroll and finances. The person they hired was embezzling; not sending the employee withholding to the IRS, but keeping if for themselves. That person was convicted. However the farmers had to come up with the back taxes which eventually sent them into bankruptcy. It was obviously the farmers' financial responsibility even though their employee was doing the embezzling, but it was sad because they were older and they trusted this person. I don't know what the consequences were for the employees. I'm sure there was no 401(k) involved because this was before they were popular and these were mostly seasonal workers.