Duty to recoup benefits where no damage to plan

[Guest StephenJ7976]

Does a plan have to recoup fraudulently induced benefit payments when the plan cannot show damages (i.e., if the money that was paid out pursuant to a fraudulent QDRO had stayed in the plan, its value would have decreased significantly due to current market conditions)? Accordingly, the plan actually benefitted from the money not being in the plan. Does the plan still have to recoup such payments? Is full restitution always required even where the plan benefits from the fraudulent payments due to a precipitous market downturn?

[WDIK]

Accordingly, the plan actually benefitted from the money not being in the plan.

Perhaps I'm not looking at the whole picture, but this statement does not ring true to me. Unless the losses due to investments would have exceeded 100%, how is it possible for the plan to be in a better situation.

If the payments should not have been made they should be returned.

[JanetM]

I agree with WDIK, the assets were out of the plan when they should have been in the plan. Regardless of the direction of the market. You are required to recoup fraudulent payments. If you don't you have qualification issues.

Yes you need to get back exactly what you paid out.

[J Simmons]

I agree with WDIK and JanetM. If the QDRO was fraudulent and payout wrong, then the benefits yet belong to the EE. You have a 401a13 violation.

The plan has been harmed as WDIK has pointed out because it does not have the assets with which to honor the benefits promised to EE. Get them back into the plan.

[WDIK]

I agree with WDIK, JanetM and J Simmons.

[Guest StephenJ7976]

Get back full amount paid out even if only would now be worth 50% of that amount?

[WDIK]

Why should the responsible party be entitled to keep half of the fraudulantly obtained monies?

[JanetM]

Plan sponsor has fiduciary duty to make the plan whole. The means getting 100% no more no less of amount back. Now is the market had gone up the fraudulent distributee could have kept the earnings and only returned the $ amount distributed. Oh, then the plan would have to make up for earnings to participant who lost out due to the transaction.

[tymesup]

Pursuing this crook may convince other participants not to try any shenanigans.

[Guest mjb]

Does a plan have to recoup fraudulently induced benefit payments when the plan cannot show damages (i.e., if the money that was paid out pursuant to a fraudulent QDRO had stayed in the plan, its value would have decreased significantly due to current market conditions)? Accordingly, the plan actually benefitted from the money not being in the plan. Does the plan still have to recoup such payments? Is full restitution always required even where the plan benefits from the fraudulent payments due to a precipitous market downturn?

I dont think the can be any discussion by supposedly knowledgable persons about recovery without knowing the pertinent facts.

What was the fraud? Was this a case where an employee presented a DRO which allowed for a distribution to the spouse which is now being questioned because the parties have remarried or are still living together at the same addres as when they were married?

If the plan desires to pursue recovery how much of the plan's assets is the plan administrator willing to spend on legal fees?

There are court cases that have required the plan to trace the distribution to determine that the funds paid are still in the participant's possession as the date the action is commenced. If the distribution has been spent there can be no recovery by the plan.

[WDIK]

I dont think the can be any discussion by supposedly knowledgable persons about recovery without knowing the pertinent facts.

First of all, I'm not even "supposedly" knowledgable.

While the points you bring up with respect to determining actual fraud, cost in legal fees and whether or not recovery is even possible are pertinent, the main issue at point here is with respect to the restitution amount if there is a market downturn.

Setting aside the other points, if the plan were to pursue recovery, do you think that the recipient of the funds could reasonably argue that only the "adjusted market value" is recoverable?

[Guest mjb]

I dont think the can be any discussion by supposedly knowledgable persons about recovery without knowing the pertinent facts.

First of all, I'm not even "supposedly" knowledgable.

While the points you bring up with respect to determining actual fraud, cost in legal fees and whether or not recovery is even possible are pertinent, the main issue at point here is with respect to the restitution amount if there is a market downturn.

Setting aside the other points, if the plan were to pursue recovery, do you think that the recipient of the funds could reasonably argue that only the "adjusted market value" is recoverable?

I dont think you will ever get to that question because the answers to the questions I posed will preclude recovery by the plan. For example there is a DOL opinion that states that the Plan adminstrator can accept a DRO from a participant without having to review the circumstances of the divorce to determine if it is valid. What benefit is there to the plan to attempt recovery of the payment and expend plan assets?

The answer to your question depends on who benefits- is this is a DB or a DC plan? If its a DC plan then only the employee benefits from a recovery. So why should the plan spend funds it doesnt have to recover the distribution to benefit the employee (which assumes it can prove the distribution was fraudlent which is a difficult standard to meet and that the participant still has possession of the assets).

[Belgarath]

"There are court cases that have required the plan to trace the distribution to determine that the funds paid are still in the participant's possession as the date the action is commenced. If the distribution has been spent there can be no recovery by the plan."

Wow. MJB - can you cite one or two of these cases? As a non-lawyer, our legal system never ceases to amaze me! I'd like to read up on how this is done, so that I can hopefully somehow fraudulently obtain a distribution from a plan. Then apparently all I have to do is spend it and I'm home free! Except for the criminal charges, I suppose...

[Guest StephenJ7976]

Yes, please provide cites to the cases that have required tracing. This is a DB plan.

[J Simmons]

I'm not sure distributing benefits based on a QDRO that is facially non-defective relieves the plan from taking reasonable steps to recoup the distributed amount if the plan later learns that the QDRO was fraudulent. Would not a prudent fiduciary attempt to correct for a beneficiary (here, the employee) what the fiduciary unwittingly did in error?

[Guest Sieve]

That begs the question, John. Just how would a fidicuairy determine that a QDRO was fraudulent? Was it fraudulent because asset disclosure within the divorce proceedings wasn't complete? That certainly is not anything that the administrator can take note of. Was it fraudulent becuase the parties divorced only for purposes of obtaining a distribution from the plan? Again, nothing that the administrator need be concerned about.

If there is a legitimate court order, properly signed and entered by the court--and that is the extent, I think, of the administrator's "investigative" powers--then all this other stuff is superfluous and outside of the administrator's consideration. The QDRO is valid unless and until another court order vacates or revises/augments it.

[Belgarath]

Ignoring my previous tongue-in-cheek response, I find this fascinating.

Let me try this on as a hypothetical situation. Someone gets a fake seal, and produces a supposedly authentic cout order or QDRO, with forged signatures, etc... (I don't know if such a thing is really even possible, but let's suppose for the moment it is). Under this, there is a substantial payout to an alternate payeee, who is in fact entitled to no such thing.

All this comes to light at some future date, 1 month or 3 years or whatever down the road. A legitimate court order/QDRO is now presented to the Plan Administrator.

What happens? Let us say that the alternate payee has spent the whole $200,000, but has other assets. Does the Plan no longer have any obligation to attempt to recover? Perhaps not - is the obligation only if there was an error on the part of the Plan Administrator, and this isn't necessarily considered an error? Etc. etc...?

Is the real question whether the Plan Administrator acted prudently and properly in making the distribution, and if so, the plan's obligation ends?

[J Simmons]

That begs the question, John. Just how would a fidicuairy determine that a QDRO was fraudulent? Was it fraudulent because asset disclosure within the divorce proceedings wasn't complete? That certainly is not anything that the administrator can take note of. Was it fraudulent becuase the parties divorced only for purposes of obtaining a distribution from the plan? Again, nothing that the administrator need be concerned about.

If there is a legitimate court order, properly signed and entered by the court--and that is the extent, I think, of the administrator's "investigative" powers--then all this other stuff is superfluous and outside of the administrator's consideration. The QDRO is valid unless and until another court order vacates or revises/augments it.

Are you saying that if the PA found out, after making the distribution on the QDRO that facially looked okay, that the order was fraudulently signed by a non-judge the PA could simply say c'est la vie? I don't think the PA has to go to the ends of the earth to get the money back, but I think a little effort is in order for prudent action.

[Guest Sieve]

John --

I really have no idea what the administrator's standard of care would be with regard to a QDRO that is fraudulent in the manner you describe. I would suspect, however, at a minimum, that a facially proper QDRO ought not be relied on without further due diligence--at a bare minimum, contact/communication with the attorneys, participant, maybe even the court. Without some reasonable due diligence, I think the adminstrator has a problem and is liable for the loss occasioned by the lack of due diligence (that's what the ERISA bond should cover).

Remember, too, that there is a stautory obligation to contact the participant re: the receipt of the potential QDRO & the QDRO determination process (which I assume can be met by communication with the participant's attorney of record). That communication, if properly performed, should protect the administrator because it presumably will allow the participant to discover the existence of the type of fraud you describe, stopping it in its tracks (unless the particiant also is taking part in the fraud).

[GMK]

I thought I recently read about the PA's QDRO due diligence responsibilities, at least at the front end, and I found it (surprise) here:

http://benefitslink.com/boards/index.php?s...n+administrator

Not really about chasing the bad guys, but IMHO, worth the review.

[Guest mjb]

"There are court cases that have required the plan to trace the distribution to determine that the funds paid are still in the participant's possession as the date the action is commenced. If the distribution has been spent there can be no recovery by the plan."

Wow. MJB - can you cite one or two of these cases? As a non-lawyer, our legal system never ceases to amaze me! I'd like to read up on how this is done, so that I can hopefully somehow fraudulently obtain a distribution from a plan. Then apparently all I have to do is spend it and I'm home free! Except for the criminal charges, I suppose...

In Kroop v. Rivlin 2004 WL 2181110 (SDNY) Rivlin, the son of a retiree used a power of attorney to cash his fathers retirement plan checks for about 16 years after his father died. The Trustees (Kroop) sued Rivlin for damages in the amount of $98,646 to recover the payments and made a motion for summary judgment because Rivlin admitted cashing the checks (but he also admitted that he had spent the pension checks and and was unable to repay the funds).

The court held as follows "The Trustees motion therefore seeks to recover money that is no longer in Rivlin's possession, for which no equitable remedy is available. This legal claim is not authorized under ERISA 502(a)(3) (i.e., other equitable relief). The trustees motion for summary judgment is denied."

There is also a case where a court denied a plan's demand to recoup excess benefits on the grounds of latches because the plan did not discover the mistake for 9 years.