Antialienation

[Guest tonjer]

We have a situation where a participant is seeking a distribution from his retirement plan. He owes money to another company which is related to the company maintaining the plan. The company would like the check made out to both the man and the company. I think this would violate the antialienation provision... any thoughts or support for my thoughts?

[2muchstress]

What I have done in the past is make the check payable to the participant, but then mail it to the company. That way the company can have the participant come in and sign the check over.

Probably still not technically correct, but it skirts around the antialienation issue.

[david rigby]

The original post did not specify that the participant had severed employment.

We can assume that he is actually entitled to a distribution under the terms of the plan?

[mbozek]

Could someone explain how sending the check to the company is consistent with the exclusive benefit rule? Also what if the participant does not come in to sign the check. The participant can ask for another check to be mailed to him. I dont think that the pa can send a distribution to a third party without the participant's written consent. The pa is not a bill collector for the participants creditors. The remedy for the creditor is to start a collection action.

[Guest merlin]

There is an exception to the antiassignment rules for voluntary payments to a third party. See 1.401(a)-13(a)(1). But one caution: one of the requirements is that the third party file a written acknowledgement with the plan administrator that states that the third party has no enforceable right in,or to, any plan benefit payment. This leads to the question : if the employer is both the assignee and the plan administrator,is there a true third party relationship?

Obviously,none of this should be done without the advice of counsel.

[mbozek]

Ther is no need to go through the procedure in the non alienation rules if the participant is willing to sign the distribution payment over to the creditor becuase the non alienation rules do not apply after payment is made from the plan. The problem lies in the plan admin becoming an agent for a creditor which is inconsistent with the exclusive benfit rule if the check is sent to the creditor without the particpant's consent.

[Guest merlin]

I'm not an attorney,so educate me. If it's that easy why are the rules there in the first place? If the antialienation rules don't apply after the benefit is distributed,why couldn't the Goldman family collect part of their $32M judgement against O.J. Simpson by attaching his retirement income? It's my recollection that their attorney made the same argument. Simpson's attorneys countered with the argument that the protection was meaningless if it stopped at the plan border.ASPA submitted an amicus brief in support of Simoson's position and the court bought it. I think. I could be wrong.

[mbozek]

I dont know anything about OJ simpson but I do know that there is case law which has allowed seizure of pension benefit payments after the payment is deposited in the participant's bank account. Non alienation only applies while the funds are held in the tax exempt trust. Maybe simpson's claim was that the value of the accrued benefit held in the plan was not subject to seizure under state law. I also believe that there is a different rule for SS benefits which cannot be seized after payment is received bya retiree.

[R. Butler]

I tend to agree w/ mbozek that the antialienation rules would not apply after the money is distributed, however, the ERISA Outline Book does indicate the issue is not clear. Sal cites Guidry v. Sheet Metal Workers Local No. 9, 10 F.3d 700 (10th Circuit 1993) in support of the proposition that the antialientation would not apply after distribution. He US v Smith, 47 F.3d 681 (4th Cir. 1995) in support of the proposition that antialienation does apply, even after distribution.

[mbozek]

I dont know how a ct could extend the non alienation provison beyond the contours of the plan/trust since under the non alienation rules of ERISA 206(d) benefits provided under the plan that cannot be assigned or alienated. Once the assets are paid to the participant, the nonalienation requirement no longer applies because the benefits are not plan assets. They are no different than amounts held in the employees bank account.

[mbozek]

One more point-- the non alienation rules do not apply to IRS tax liens which may be enforced to collect taxes owed by a plan participant.

[Kirk Maldonado]

merlin:

Isn't the voluntary assignment limited to 10% of the participant's account balance?

[Guest merlin]

Kirk,

It's my understanding that the 10% limitation applies only to the assignment of future benefits in pay status.

[Kirk Maldonado]

Merlin:

You last posting could be interpreted as meaning that there is no limitation on assignments of benefits that are not currently payable. I don't know whether or not that is what you meant.

In any event, here is the relevant portion of Code Section 401(a)(13):

"For purposes of the preceding sentence, there shall not be taken into account any voluntary and revocable assignment of not to exceed 10 percent of any benefit payment made by any participant who is receiving benefits under the plan."

Treasury Regulation Section 1.401(a)-13 expands upon this point a bit:

"a plan may provide that once a participant or beneficiary begins receiving benefits under the plan, the participant or beneficiary may assign or alienate the right to future benefit payments provided that the provision is limited to assignments or alienations which--

(i) Are voluntary and revocable;

(ii) Do not in the aggregate exceed 10 percent of any benefit payment; and

(iii) Are neither for the purpose, nor have the effect, of defraying plan administration costs."

Thus, no assignments may be entered into before the benefits are payable, and the maximum portion of any payment that can be assigned is 10%.

[Guest merlin]

In his discussion in the ERISA Outline Book Sal Tripodi discusses voluntary assignment with respect to lump sums and benefits in pay status. His lump sum discussion makes no mention of the 10% limitation,and his example is of a $40,000 lump sum of which $8,000 is being assigned.He doesn't talk about the 10% limitation until he gets to benefits in pay status. He also makes it clear that only future benefits may be assigned.

[Kirk Maldonado]

Merlin:

Are you suggesting that Sal Tripodi's outline takes precedence over the statute and the regulations?

I'd like to see you try to convince either the IRS or the courts of that point. I think that Congress wouldn't be pleased at that result.

[mbozek]

Doesn' t Reg. 1. 401(a)-13(e) permit payment to a thrid party of all or any portion of a benefit to a third party?

[Guest merlin]

Kirk, the 10% limitation is contained in 1.401(a)-13(d) which talks about a participant "receiving benefits under the plan" assigning the rights to "future benefits". That sounds like some form of ongoing payments to me.

As mbozek points out,1.401(a)-13(e) talks about a participant directing the plan to pay "all, or any portion, of a plan benefit to a third party". I can't read "a plan benefit" any way except as a lump sum without conflicting with -13(d).

[Guest Reywal]

Regarding the matter of OJ…

The protection does stop at the plan border…however, OJ lives on credit cards. He makes his credit card payments by taking a distribution from his pension plan and depositing it directly to the credit card as payment… you see the end result… there is never any credited to his bank account

[Steve72]

All right, I'll bite.

Is OJ then voluntarily assigning his benefits to the credit card company?

[mbozek]

No if the payment is made to him. He is endorsing the check over to the credit card co after he receives the check. It is possible that OJ has arranged for EFT directly to his credit card account so that there will never be a credit balance for a creditor to seize. Also there is a state ct case, Brosamer v. Mark, Indiana ct of appeals, 11 EBC 1365 ( 1989), which holds that the nonalienation provisions of ERISA, unlike the provisons for Social Security benefits do not protect plan benefits from seizure after the payment is made to the participant.