Edgar P. Harney Spirit of Excellence Academy has delayed employees’ retirement contributions for weeks, sometimes months. The practice could have deprived employees of investment gains and could violate federal guidelines for retirement accounts.
In a similar case in Baltimore, delayed payments like this resulted in a federal conviction and a two-year prison sentence.
The Central City charter school held onto at least $55,000 earmarked for retirement accounts for months last fall. That included about $24,000 withheld from employees’ paychecks for October, November and December. The rest was contributions from the school.
“I was shocked that this kind of thing could happen,” said a Harney employee who asked not to be identified because she’s worried about losing her job for speaking out.
She wanted to know what happened to her money in the interim.
“That money has to be placed in somebody’s bank,” she said. “Where is the money? Where is the interest going?”
The problem affects at least 40 employees, according to payroll records.
Retirement contributions for October, November and December last year weren’t deposited into employees’ MassMutual retirement accounts until mid-February, after The Lens asked the school for records of its retirement transfers. When the school deposited the funds months late, it didn’t include any interest or money to account for what the employees may have made in investments.
John Weiler, a local tax attorney, said employees’ withholdings should be transferred to a 403(b) plan within 15 days of the end of each month. (A 403(b) plan is the equivalent of a 401(k) plan for schools and tax-exempt organizations.)
Guidelines from the Internal Revenue Service say transfers must happen “within an administratively feasible period,” which is generally 15 days.
“It’s a violation of the Internal Revenue Service requirements” for the school to hold onto the money for so long, Weiler said.
Weiler said the school’s retirement transfers shouldn’t take any longer than the payments it makes for other purposes.
“It’s the employees’ money that they’re holding,” he said.
Similar delays at a Baltimore addiction and mental health treatment center led to two civil lawsuits against the group’s CEO, William Kristen Hathaway.
He was later charged with theft for taking $53,000 from his employees’ 403(b) accounts in 2009 and 2010, using the money to pay company expenses. Hathaway eventually repaid the money to the retirement accounts, but he did not include interest or additional money to make up for what employees would have gained in investments. In 2015, Hathaway pleaded guilty to the theft charge, as well as an unrelated charge for failing to pay employee taxes, and was sentenced to two years in prison.
Harney has been flagged for financial issues by the Orleans Parish school district and the Recovery School District. Its chief financial officer, Brent Washington, is under a state ethics investigation for being paid to do accounting work for the school on the side.
Independent auditors have raised concerns about the schools financial practices, specifically noting the school’s one-man finance department as a weakness
Harney’s board president, Rev. Charles Southall III, charged $1,514 in fine dining over six months in 2016.
School officials haven’t said why the retirement contributions were delayed. The Lens asked Southall about it at a board meeting last week. He declined to comment, saying he was unaware of the issue.
Southall referred The Lens to Washington. Washington is in charge of the disbursements, but you wouldn’t know that from the paperwork. Documents provided to The Lens show the name of Harney’s former accountant, who left the school in 2013.
We contacted her for this story. She was so alarmed about being associated with the tardy transfers that she showed up at Harney’s board meeting last week to deliver a letter asking the school to remove her as the listed contact for the school’s retirement accounts.
“I should not be associated with anything after 2013,” she told them. The woman asked not to be named in this story, citing a concern for her professional reputation.
Washington met privately with the former accountant during the meeting. But he would not speak with The Lens. A security guard said he was busy.
Deposits were delayed for weeks, sometimes months
The school provided payroll and retirement records to The Lens detailing how much employees were paid in October, November and December and what was withheld from their checks. The retirement deposits for those months weren’t made until Feb. 19 and Feb. 20.
“I think the major concern is the safety of the money,” Mehmet Dicle, a finance professor at Loyola University, said in an interview. As long as the money remained with the school, it could have been used for something else. And there was no guarantee the school would have been able to pay it back.
“What do they do with the money in the meantime?” Dicle asked. “How safe is it?”
Generally speaking, the more money an employee invests in a retirement account, and the sooner they do so, the better off they are, Dicle said.
“If you’re talking about a three to four month deferment to the employees — that actually has a value and that adds up,” he said.
The employees’ money, which was destined for 403(b) retirement accounts, could have been used to buy mutual funds during a period in which the stock market steadily increased in value.
Employees’ mid-October contributions weren’t deposited until mid-February. In that time, the S&P 500 index rose about seven percent.
It would be complicated to make up for that lost time, Dicle said.
“The remedy, I think, would be to make sure those deposits are made on time,” Dicle said. “And going backward, this is where you get your forensic accountants involved to calculate how much loss accrued for the employees.”
The Harney employee agreed.
“Yes I think there’s something they could do,” she said. “They could reimburse me the amount of money and the interest they have gotten from the amount.”