Can a plan's terms require distributions to be made via direct deposit

[Guest Ed F]

Has anyone seen any authority for (or against) the proposition that a plan may, by its terms, require distributions to be made via direct deposit, where the participant or beneficiary has a checking account to which the direct deposit may be made? The anti-alienation regs permit direct deposits, but are vague as to whether a direct deposit must be initiated by the participant. I'm guessing state laws probably require the employee's consent to direct deposit, but I'm also guessing these state laws would be preempted (I think the DOL opined several years ago that state laws concerning wage withholding were preempted to the extent they would frustrate an ERISA plan's recoupment of plan loan repayments). Any thoughts on the permissibility of requiring that distributions be effected through direct deposit?

[This message has been edited by Ed F (edited 06-23-2000).]

[Guest AngelaW]

I also am curious whether a governmental employer can requrie mandatory direct deposits of distributions even if the terms of the plan do not specify such and if the participant does not otherwise consent.

[Guest Ed F]

You're in a better place because, unless the plan provides otherwise, you're not subject to the 411 regs nor to ERISA's fiduciary duties. I can't recall whether you're even subject to the 401(a)(13) regs.

We concluded in the end that a private employer could not force a direct deposit.

[Guest WJW]

This thread is very old and I'm wondering if anyone has any new thoughts on this question? I have heard recently of pension plans paying annuities requiring that retirees receive their benefit only via direct deposit. Social Security's recent decision to transition its entire population to mandatory direct deposit is also increasing interest in this. I agree with Ed F re: the background on this issue - no changes there re: the anti-alienation regs or the preemption issue (I believe that state laws otherwise prohibiting this would be preempted by ERISA if the plan required direct deposit).

In Michigan, we had a statute that prohibited mandatory direct deposit of wages but that was recently changed to allow for mandatory direct deposit provided the employee is given the choice in advance between a payroll debit card or direct deposit to an existing account. Presumably this was to eliminate concerns about employees who have no banking relationship and who would be forced to incur account charges if the employer forced them to open a bank account. The arrangement also must protect the earnings of the employee from garnishment as required by 15 USC 1673, to the same extent they would be exempt while held by the employer, which seems difficult to implement, but that's another discussion.

These protections that are required for wages in our state make me consider similar concerns in a mandatory direct deposit of pension payments. If we force the payment into a bank account that is subject to levy or garnishment, have we violated anti-alienation?

[KimberlyC]

Three years later and this issue is gaining new interest by plans. Treas. Reg. Section 1.401(a)-13©(v) provides that a direct deposit in a bank, savngs and loan ass'n, or credit union is not an"assignement" or "alienation" (provided the arrangment is not part of an arrangement constituting an assignment or alienation). The reg doesn't say that particpant consent is required to make the direct deposit. Many states and other governmental employers are mandating direct deposits for payment of retirement checks and the IRS is making no objection, so it appears that mandating direct deposits may not violate the antialienation rules of the Code. However, the government plans arent subject to ERISA.

I still have concerns about mandating direct deposits under ERISA. It makes me nervous to let a plan fidicuiary withhold pension payments until a participant has set up a bank account. What if the particpant doesn't do so? Essentailly he/she would forfeit his/her pension. When a plan participant is missing, DOL rules require the Plan to take approriate steps to locate the missing participant, including mailing notices to the last known address, internet seraches, IRS locator program, DOL locator program, IRS letter forwarding stystem, etc. The DOL states ERISA's prudence requirements requires action particularly where it involves nominal expenses. Somehow I can't see the DOL permitting an employer to whithold a pension becasue it doens't want to incure the cost of curring a check and mailing it when the particpant's location is known and the particpant is demanidng the check.

Times are changing and the US government is going to mandatory direct deposits so maybe the DOL is OK with this for ERISA plans. I have seen mandates by multiemployer plans.

I would appreciate any one's thoughts.

[Guest EE Bene]

I wouldn't hold your breathe expecting the DOL to get on board with mandatory direct deposit. However, whether it would be permissible under ERISA is a separate issue.

I don't think you'll ever have an anti-alienation issue with direct deposit because (even assuming the account is subject to garnishment), the garnishment will occur after the money has been distributed. The anti-alienation provision effectively prevents someone from assigning their interest before a distribution has occurred. When you look at court cases that deal with ERISA accounts after a divorce, but without a QDRO, you will come to understand that once a participant has received a distribution, it ceases to be anything other than another asset of that particular individual, freely disposable like any other asset.

Additionally, if the plan is not a party to such a garnishment, it will have no way of impacting that agreement or order. The anti-alienation rule doesn't provide a complete bar from creditors (or others) to gain access to retirement plan funds, it simply bars them from accessing them at a certain point in the stream.

The DOL, on the other hand, would likely say that to the extent you could encourage participants to set up direct deposit, there must be reasonable exceptions for those who do not want to do so. At the end of the day, you have to remember who the money belongs to, it's not the employer, it's the employee. If there are additional administrative costs of mailing a check vs. direct deposit, there are legally permissible ways that the service provider can recover those costs. If the only argument is that it's an administrative burden, you aren't like to get the DOL on your side.