Federal Tax Liens: Does a Federal Tax Lien attach to a participant's

[KJohnson]

As a follow up. I know of one situation where a levy was received after a participant's death. IRS took the position that there was a lien on the participant prior to death and they could attach the account balance even though the plan did not receive the levy while the participant was alive. Plan took the position that there was nothing "owed" to the Participant only the beneficiary and therefore levy was invalid. After an interpleader was filed the IRS allowed the beneficiary to keep the distribution.

[Guest RMM]

A Federal Tax Lien is an exception to the anti-alienation rule, but does it attach to an individual's account or to an individual? Will the IRS collect immediatelty or wait until distribution?

I believe it attaches to the person's account and the IRS typically waits until distribution (although not sure of the source). This brings up interesting issues if the participant dies:

Assuming the IRS waits until distribution, what happens when the participant dies? Does it matter if the participant is in pay status or not? Does it matter if the participant retired or was terminated years earlier? Do the rules change if there is a federal tax lien against a BENEFICIARY instead of a participant?

[KJohnson]

The following is from CYBERERISA:

Plan may refuse to honor IRS tax levy against plan benefits if participant is not presently entitled to distribution; IRS may elect distribution on participant's behalf if participant has present right to distribution (added August 2, 1999; modified September 14, 1999).

Two recent internal memoranda at the IRS shed light on IRS' approach to tax levies against retirement benefits. In FSA 199930039, a field service advice memorandum issued by the IRS National Office, the plan administrator was refusing to honor the levy because the participant was not currently eligible for distribution under the terms of the plan. The IRS advised the field office that the plan may refuse to honor the levy until the participant is eligible for distribution. Nonetheless, the levy is valid with respect to the participant's vested benefits under the plan, because a levy reaches a present right (i.e., vested interest) against future benefits. Therefore, the levy will not be released regardless of the taxpayer's current inability to receive an immediate distribution from the plan. The IRS National Office recommended that the field office inform the plan in writing that the levy is not being released and that any funds which become distributable to the taxpayer are subject to the levy. In CCA 199936042, a Chief Counsel Advice memorandum, the participant was eligible to elect early retirement under the plan. The IRS' position under such circumstances is that the IRS may step in the participant's shoes and make the early retirement election! Where spousal consent is required for distribution in a form other than a qualified joint and survivor annuity, the IRS may levy only on the joint and survivor annuity payments, and may not elect another form of benefit without the spouse's consent.