IRS Levy on 401-k Plan

[Guest pstowers]

We have a DC plan with Safe Harbor Hardship Withdrawal language only. We have received an IRS levy on an active employee's account. Our company legal group is saying we must honor the IRS levy; the legal group with the recordkeeper is saying we cannot honor the levy. Has anyone ever had this problem? Help!!!

[Guest Paul McDonald]

Look for your plan documents "anti-alienation" of benefits language. Should be somewhere close to where you have any Qualified Domestic Relations Order language. An IRS tax levy can get through the rules to attach plan assets. Your plan administrator is required to follow plan rules so make sure to follow the plan rules first.

[Guest]

This area of law is unclear. I think that if the plan balance would otherwise be distributable (by an in service distribution or otherwise), you should distribute it. I mean is the IRS going to raise a disqualification issue if the money is going to the IRS? I also think the administrator should honor what the customer is requesting.

[KJohnson]

Have your folks look at the followin recent guidance--this was posted on Cybererisa:

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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.

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Although I have not seen the IRS take this position, I suppose they may say they can "step into the shoes" of the participant and if the participant could take a hardship, they are entitled to a hardship. However, unless the participant can "get" his money at this time, the IRS will have to wait.

[Guest dobsonlaw]

I have a twist on this issue: Employer was served with the Levy--levy was not issued in the name of the plan. Employer is, however, the plan administrator. Employee separated from service in 2008. Distribution is available in the first plan year after separation. Plan year is a calendar year. Do you think the employer is obligated to honor the levy? Has anyone encountered this issue?

[Guest CinC]

Dobson: You need to read the levy very carefully and very literally. A qualified plan is a separate legal entity from the employer, so if the levy is addressed to the employer, it relates to funds owed BY THE EMPLOYER to the employee (e.g., wages). With a qualified plan, legally the funds are not owed by the employer, but by the plan; thus, any amounts that may be payable from the plan are generally unaffected by the levy. One wrinkle that I seem to recall, however, is that for this reason, some levy forms have a box that may be checked to cover distributions possibly owing from a qualified plan maintained by the employer (can anyone with more recent knowledge confirm or correct me on that?), so if that is checked, the answer might be different. My recollection is that a surprising number of levies either did not include that language or did not have that box checked.

[Guest dobsonlaw]

That is very helpful! Thanks.