Finance Blog

Why It’s Not Okay to Forgo 401(k) Contribution

The Department of Labor (DOL) is known to go after companies that violate overtime rules. Meanwhile, the IRS pursues companies that fail to make tax payments. Did you know there is another issue that Washington has a problem with? That issue is forgoing 401(k) contributions as promised by employee benefits packages.

A recent judgment by the U.S. District Court for the Eastern District of Virginia found that a now closed Virginia company failed to make 401(k) contributions for five months during the 2016 calendar year, despite withholding money from employee paychecks. That company, Mahan Consulting Group LLC, has been ordered to make total restitution in excess of $21,800.

A Contract Is a Contract

Retirement plans structured as 401(k) programs constitute contractual agreements between employers and employees, explains Dallas-based BenefitMall. Such a contract stipulates that employers withhold employee contributions and contribute them to the plan. In some cases, employers also make a matching contribution. The employer is obligated to honor contractual agreements for as long as affected 401(k) plans remain in effect.

In the case of Mahan Consulting Group LLC, the company did two things wrong. First, they did not make promised contributions even after withholding from employees. Second, they did not inform affected employees. Workers had no idea the contributions were not being made. As such, they had no recourse.  Had they known they might have made other arrangements.

Unfortunately, this particular company chose not to meet its fiduciary responsibility. They also chose to not inform employees of their failure to meet obligations. Restitution will be forthcoming, but will it be adequate? Could the employees have done better, financially speaking, had the money been invested at the time it was due? We will never know.

A Fiduciary Responsibility

It is important to note that the court also removed Mahan Consulting Group LLC and company president Shaun Marzett as fiduciaries of the affected 401(k) plans and permanently barred them from acting as fiduciaries for any future plans. A new fiduciary was appointed to take over the existing plans.

The fiduciary responsibility a company has over a 401(k) plan is not just a moral and ethical one. It is also a legal one. In other words, fiduciaries have a legal responsibility to protect the best interests of plan members at all times. A failure to live up to that responsibility can lead to serious consequences.

As previously mentioned, Mahan Consulting Group LLC must make full financial restitution. The amount they pay will cover missed contributions, interest, and uncovered medical costs that resulted from a lapse in employee health and life insurance policies.

Unfortunately, it doesn’t appear as though any additional fines and penalties were assessed. Had the company failed to pay its taxes, it is a safe bet the IRS would have tacked on significant penalties. Furthermore, interest would continue to accrue as long as taxes remain unpaid. Why no additional penalties were assessed here is unclear.

It’s Employee Money

One thing this particular court case demonstrates is that it is not okay to forgo 401(k) contributions. First and foremost, any money withheld from employee paychecks is their money. Companies do not have the right to withhold it and pocket it for themselves.

Moreover, employees have a reasonable expectation that their 401(k) contributions will actually be added to their retirement plans. By forgoing those contributions, the employer effectively put employee retirement plans at risk. With markets as robust as they were in 2019, how much money did employees lose because 401(k) contributions were not being made?

It is not okay to forgo 401(k) contributions. Doing so is as serious as not paying taxes.

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