Anti-alienation vs MVRA

[Nate S]

Background: ERISA provides anti-alienation protection to qualified retirement plans; early Supreme Court cases deferred exemptions back to Congress, 1984 Congress allows QDRO's, 1997 Congress allows reimbursement for fiduciary breaches or criminal activity involving the Plan.  Mandatory Victims Restitution Act ("notwithstanding" any other Federal law) has otherwise been used as end-around of anti-alienation for variety of other restitution-based claims against 401(k) accounts.

1.  Has a MVRA based appeal been heard by the Supreme Court and what was the result if so?

More recently, appeals have sprung up concerning the mandatory 20% withholding and the 10% early withdrawal penalty.  Apparently, the IRS has opinioned that the 10% penalty does not apply in instances of forced distributions, easy enough to understand since that's a facts and circumstances determination anyway.  However, the caveat with MVRA is that the government is only "standing in the shoes" of the participant, meaning the participant directs the withdrawal to themselves, but the government receives the monies so demanded by the restitution order.  In general, the Plan is required to withhold 20% for federal income tax withholding, which shorts the restitution order; and since the participant is still the "recipient" before remanding the funds to the government, they're also stuck holding the bill for the taxable income!  So, where the participant is following court-ordered direction, they are then triple-penalized, 1) the restitution payment itself, 2) the restitution order is now short 20%, and 3) the participant now has to recognize taxable income often reaching hundreds of thousands of dollars, at a time when they are incarcerated, or otherwise destitute following liquidation of any available assets before reaching into their 401(k)

2.  Is anyone aware of a final resolution to any of the 20% withholding appeal cases?  Anything I saw noted them being remanded back to the originating district court by the circuit court to address these deficiencies.

(Caveat- Yes, I fully recognize that these are actions to correct a wrong committed by a convicted individual.  I'm merely looking for commentary or known resolution to the issues of MVRA abuse to circumvent the sacred anti-alienation provision and basic justification for ERISA; and any procedural establishments for handling the 20% mandatory withholding)

[Nate S]

@MoJo In the following thread from 2017, you noted a DOL position that MVRA should not provide access to qualified retirement plan assets, can you provide a cite for that position?

 

[Luke Bailey]

I've been watching this issue for many years. I will only say generally that the tide of the cases seems to be in favor of MVRA enforcement against 401(a) plans. I'm pretty sure that if there had been any guidance or case law going the other way in the last 5 years, I would have noted it, but I don't think there has been any. Very recently MVRA was enforced in connection with a Shkreli/"Pharma Bro" case. You might want to Google it, Nate S.

[Nate S]

I did see that one had been remanded back to the district for a determination on the 10% early withdrawal penalty, but also something about a garnishment cap associated with earnings?  Seems like most of the Circuits are rubber stamping the MVRA challenge; has anyone managed to appeal past the Circuit to get an SC ruling on MVRA vs ERISA?  Seeing as how these are individuals stripped of all other assets already, doesn't seem like anyone has the means to fight this very far...

[Luke Bailey]

2 minutes ago, Nate S said:

Seeing as how these are individuals stripped of all other assets already, doesn't seem like anyone has the means to fight this very far...

Nate S, totally go to the mat for your client, or friend, or whatever, I get it, but there is another side to the story, right? To get to this point the individual has to have been convicted of a federal crime that involves monetary damages to a victim.

There is another federal statute that limits garnishments to the extent they would impoverish a person. Those may be involved here. It's been a while since I looked at that.

[Nate S]

1 hour ago, Luke Bailey said:

Nate S, totally go to the mat for your client, or friend, or whatever, I get it, but there is another side to the story, right? To get to this point the individual has to have been convicted of a federal crime that involves monetary damages to a victim.

Yep, that was my initial caveat.  Although to be fair, the "victims" are a venture capital firm and their E&O provider who audited an acquisition.  It went federal because of SEC/FINRA issues and tax evasion.  My client, the Plan Sponsor being served the order, is unrelated except for holding a significant balance for the defendant from their employment many years ago.  His major concern is the ERISA protections being stripped away and his own Plans' balances being exposed by a single word.

 

[Luke Bailey]

12 hours ago, Nate S said:

Yep, that was my initial caveat.  Although to be fair, the "victims" are a venture capital firm and their E&O provider who audited an acquisition.  It went federal because of SEC/FINRA issues and tax evasion.  My client, the Plan Sponsor being served the order, is unrelated except for holding a significant balance for the defendant from their employment many years ago.  His major concern is the ERISA protections being stripped away and his own Plans' balances being exposed by a single word.

 

OK. Good luck, Nate S. Lawyers' Permanent Employment Act strikes again.

[Peter Gulia]

To find court decisions that interpret and apply regarding a retirement plan the United States’ enforcement of a judgment imposing a fine or restitution regarding a crime, a researcher might use a publisher’s annotated version (for example, Westlaw, LexisNexis, Bloomberg Law) of the United States Code. Also, one might use treatises and other secondary sources in Wolters Kluwer’s VitalLaw.

One would look for annotations under 18 U.S.C. §§ 3316, 3556, 3663, 3663A, 3664; 28 U.S.C. §§ 3001-3308.

To learn some arguments that were presented and rejected, one might read a Second Circuit decision BenefitsLink posted. https://benefitslink.com/src/ctop/us-v-greebel-2dcir-08242022.pdf

The participant, Evan Greebel, was a partner in Katten Muchin Rosenman LLP. He was represented by Gibson, Dunn & Crutcher LLP.

The appeals court held that the Mandatory Victims Restitution Act authorizes garnishment of the convict’s retirement plan account, and that the Consumer Credit Protection Act’s 25% limit on a garnishment does not apply. The appeals court did not decide whether the extra 10% tax on a too-early distribution is imposed on garnishment.

If an effort an ERISA-governed plan’s administrator, trustee, or other fiduciary might consider would be at the plan’s expense, the fiduciary might want its lawyer’s advice about how much effort and expense is loyal and prudent for the plan’s exclusive purpose of providing the plan’s retirement benefits.