In its opinion, the appellate court rejected business owner Steven Whiting’s argument that the payroll deductions held in his companies’ general accounts were not to be considered plan assets until such time as they were forwarded to insurance companies or 401(k) trusts. While ERISA does not give a specific definition of plan assets, the appellate court used a Department of Labor regulation and other circuit opinions to conclude payroll deductions for benefit plans were considered plan assets the moment they would have otherwise been payable to the employee.
Whiting also argued to the court there was insufficient evidence to prove he used employee deductions for other purposes, saying the deductions remained in the companies’ general accounts. However, the court said the evidence showing payroll deductions entered the general account, insurance premiums were not paid, and Whiting paid himself management fees and expenses during this time would lead a reasonable jury to determine the assets were converted.
Evidence also showed personal expenditures made by Whiting during the time of the violations including: a $135,195 recreational vehicle Whiting purchased; a $1.1 million home in Brookfield, Wisconsin; a vacation home in Florida with a market value of $1.6 million; and a $1.3 million airplane.
Whiting was the owner of Badger Die Casting, Inc. and Western Rubber, Inc. Initially he provided his employees with health insurance through policies with United Healthcare and Humana. However, when the companies started having financial problems, he failed to pay insurance premiums and the policies were cancelled.
Whiting then switched employees to a self-funded policy and hired an administrator to pay claims at his direction. Whiting did not authorize payment of any medical bills, only payment of prescription drug expenses, the court opinion said. When the companies went out of business, employees at Badger were left with $414,775 in unpaid medical bills and employees at Western were left with $375,530 in unpaid claims.
In addition to not paying premiums for the previous health insurance policies using employee payroll deductions, Whiting failed to forward 401(k) contributions deducted from employee pay to investment manager Strong Funds. Payroll deductions included $7,163 for December 2001; $7,379 for January 2002; $2,460 for February 2002; $3,011 for March 2002; and $739 for April 2002.
A jury convicted Whiting of converting funds withdrawn from employee paychecks and making a series of false statements relating to health care matters at the two companies, sentenced him to 90 months of incarceration and three years of supervised release, and ordered him to pay $922,875.44 in restitution.
While the 7 th Circuit upheld the conviction, it determined the lower court erred in calculating the restitution by including the amount of unpaid medical claims. The case was remanded back to the lower court for resentencing.
The opinion in US v. Whiting is here .