Federal Criminal Garnishments

[New to Erisa]

Are there any tax withholding requirements when it comes to Federal criminal garnishment distributions from a plan?

[MoJo]

Just had two "turnover" orders from two federal district courts ordering the turn over of participant balances as restitution for their criminal activity.  Each of those orders contained language indicate that only the net after withholding of required taxes needed to be forwarded to the clerk.  So, yes, I believe taxes are withholdable from such distributions, and would think so even if the order didn't specify (not much trumps tax withholding rules).

By the way, I've followed through the statutory authority specified in orders we've received and I don't believe the feds actually have authority to hit a qualified retirement plan.  The orders specified the turn over of all funds not specified as exempt in a slew of statutes - which in turn references other statutes, etc., one of which is the general bankruptcy exemption list - which exempts qualified retirement plans.  I've raised this issue with the prosecutors involved and they never heard of anyone ever questioning their authority.  Bottom line, we complied - but in both cases the victim was the plan sponsor (and employee embezzled funds) and the "fiduciary" directed us to comply.

[RatherBeGolfing]

7 minutes ago, MoJo said:

By the way, I've followed through the statutory authority specified in orders we've received and I don't believe the feds actually have authority to hit a qualified retirement plan.  

No authority in general, or in the orders you received?

 

[MoJo]

1 minute ago, RatherBeGolfing said:

No authority in general, or in the orders you received?

 

The orders I've received (from two different jurisdictions) were virtually identical and both contained language indicating 1) the statutory authority to "generally" order financial institutions to turn over assets in their control/custody (the federal victims restitution law); and 2) a provision indicating "unless" exempt under a list of several statutes (I don't have them in front of me so I can't cite them now specifically).  The list of "exemptions requires following through because one of them says x, y, z, and anything in subsections a, b, or c, of this other statutes.  Tracking it all back, you get to the bankruptcy code general exemptions of things not subject to attachment for payment of debts, and one of those is qualified retirement plans (with some caveats).

[RatherBeGolfing]

11 minutes ago, MoJo said:

The orders I've received (from two different jurisdictions) were virtually identical and both contained language indicating 1) the statutory authority to "generally" order financial institutions to turn over assets in their control/custody (the federal victims restitution law); and 2) a provision indicating "unless" exempt under a list of several statutes (I don't have them in front of me so I can't cite them now specifically).  The list of "exemptions requires following through because one of them says x, y, z, and anything in subsections a, b, or c, of this other statutes.  Tracking it all back, you get to the bankruptcy code general exemptions of things not subject to attachment for payment of debts, and one of those is qualified retirement plans (with some caveats).

Gotcha thanks.

My very limited understanding was that federal court could order garnishment because it would be treated as a tax.  But now that I think of it, that would probably be limited to fines ordered by the court since it is payable to the government rather than a third party.

[MoJo]

1 minute ago, RatherBeGolfing said:

Gotcha thanks.

My very limited understanding was that federal court could order garnishment because it would be treated as a tax.  But now that I think of it, that would probably be limited to fines ordered by the court since it is payable to the government rather than a third party.

Yea.  That's why I followed it back.  Anti-alienation has but two exceptions - QDROs and tax liens (when distributeable).  This is neither - and to date, I've not seen anyone who was willing to challenge (as I said, both victims were the former employer/plan sponsor).   Since we are a non-discretionary directed bundled shop, when they said "pay it" (after we gave them a caution and told them to talk to ERISA counsel), we paid it.

[CuseFan]

I agree w/MoJo, my understanding is that only tax levies other than QDROs. But my understanding is that tax levies can also compel distribution.

Also, fiduciary fraud against the plan can trigger a forfeiture of benefits as restitution, but only for the plan. I've had clients who were victims of employee embezzlement who wanted to withhold retirement funds for restitution, but could not do so unilaterally. But as part of plea deal, they could request distribution and then use for restitution.

This is a timely discussion given OJ Simpson's pending parole release, with his $5M retirement account in the Screen Actors Guild plan and $100,000+ annual NFL pension as that all relates to the mostly unpaid civil suit settlement owed the Goldmans.

http://money.cnn.com/2017/07/20/news/o-j-simpson-retirement-income/index.html

[david rigby]

3 hours ago, MoJo said:

... in both cases the victim was the plan sponsor (and employee embezzled funds) and the "fiduciary" directed us to comply.

Non-lawyer question: would you have acted and/or "cautioned" any differently if the plan and/or plan sponsor was not involved?  If so, how?

[MoJo]

3 minutes ago, CuseFan said:

This is a timely discussion given OJ Simpson's pending parole release, with his $5M retirement account in the Screen Actors Guild plan and $100,000+ annual NFL pension as that all relates to the mostly unpaid civil suit settlement owed the Goldmans.

http://money.cnn.com/2017/07/20/news/o-j-simpson-retirement-income/index.html

Timely, but probably short.  OJ wasn't convicted of the murders - and the state court civil judgments against him wouldn't qualify for the "FEDERAL" criminal victim restitution forfeiture law.  He's in the clear as far as the monster judgment is concerned - unless and until he takes distributions.  But, still timely....

[MoJo]

2 minutes ago, david rigby said:

Non-lawyer question: would you have acted and/or "cautioned" any differently if the plan and/or plan sponsor was not involved?  If so, how?

I don't know the counsel or the caution would have been different - nor our taking direction to pay it should an appropriate fiduciary direct us to do so, BUT, I probably would be more strenuous in advising them to seek guidance from ERISA counsel - as I believe that if this is not an appropriate attachment of plan benefits, it becomes a qualification issue for the plan.  Both of the ones I recently received had counsel representing them - both to protect their interests in the criminal case against the former employee - as well as with civil recovery - and those lawyers were from large firms with robust ERISA practices.  I suggested they engage an ERISA attorney to discuss - and whether they did or not I don't know.  I documented that "guidance" on my part in writing in emails to the plan sponsor and their counsel, well, just for CYA.

[Luke Bailey]

If the conviction is for a federal crime, most courts (maybe now all circuits; I'd have to check) have held that the Mandatory Victim Restitution Act of 1996 (MVRA) provides a Congressional exception to ERISA’s anti-alienation provision with regard to the enforcement of a restitution order against a criminal defendant. So the turnover orders if coming from a federal prosecutor are likely enforceable and not a violation of ERISA or the Code. Because the money satisfies a debt of the plan participant, the distributions are taxable to the participant and would be subject to withholding. In a case several years ago where the order was initially for the gross amount, we negotiated with the federal prosecutor on behalf of the plan to have the amount paid net of withholding.

[RatherBeGolfing]

1 hour ago, Luke Bailey said:

If the conviction is for a federal crime, most courts (maybe now all circuits; I'd have to check) have held that the Mandatory Victim Restitution Act of 1996 (MVRA) provides a Congressional exception to ERISA’s anti-alienation provision with regard to the enforcement of a restitution order against a criminal defendant. So the turnover orders if coming from a federal prosecutor are likely enforceable and not a violation of ERISA or the Code. Because the money satisfies a debt of the plan participant, the distributions are taxable to the participant and would be subject to withholding. In a case several years ago where the order was initially for the gross amount, we negotiated with the federal prosecutor on behalf of the plan to have the amount paid net of withholding.

A does not prove B.  Just because it comes from a federal prosecutor does NOT mean it is enforceable.

For what its worth, the EOB only mentions the 9th as having adopted this position.  That doesn't mean that other circuits haven't, but Sal is pretty good about updating things like that.  

As to the original question, withholding does apply, but there is no penalty for premature distribution.

For your reading pleasure, see the 2017 ERISA Outline Book Chapter 3B - Part 2 - Section XI - Part A. 

[Luke Bailey]

The language of the MVRA (18 USC sec. 3613(a)) is pretty explicit:

 

The United States may enforce a judgment imposing a fine [or an order of restitution]1 in accordance with the practices and procedures for the enforcement of a civil judgment under Federal law or State law. Notwithstanding any other Federal law (including section 207 of the Social Security Act), a judgment imposing a fine may be enforced against all property or rights to the property of the person fined, except that - -

(1) property exempt from levy for taxes pursuant to sections 6334(a)(1), (2), (3), (4), (5), (6), (7), (8), (10), and (12) of the Internal Revenue Code of 1986 shall be exempt from the enforcement of the judgment under Federal law;

(2) section 3014 of chapter 126 of title 28 shall not apply to enforcement under Federal law; and

(3) the provisions of section 303 of the Consumer Credit Protection Act (15 U.S.C. 1673) shall apply to enforcement of the judgment under Federal law or State law.

 

Of course, the ability of the IRS to reach a 401(a) plan benefit for unpaid taxes, at one time a subject of controversy, is by now well established. When I researched this several years ago I found the 9th Cir. case (U.S. v. Novak, 2007) convincing. There is at least one other district court case that follows, probably several more. I know of no case that has gone the other way. Again, the language of the federal statute seems very clear.

 

[My 2 cents]

22 minutes ago, Luke Bailey said:

The language of the MVRA (18 USC sec. 3613(a)) is pretty explicit:

 

The United States may enforce a judgment imposing a fine [or an order of restitution]1 in accordance with the practices and procedures for the enforcement of a civil judgment under Federal law or State law. Notwithstanding any other Federal law (including section 207 of the Social Security Act), a judgment imposing a fine may be enforced against all property or rights to the property of the person fined, except that - -

(1) property exempt from levy for taxes pursuant to sections 6334(a)(1), (2), (3), (4), (5), (6), (7), (8), (10), and (12) of the Internal Revenue Code of 1986 shall be exempt from the enforcement of the judgment under Federal law;

(2) section 3014 of chapter 126 of title 28 shall not apply to enforcement under Federal law; and

(3) the provisions of section 303 of the Consumer Credit Protection Act (15 U.S.C. 1673) shall apply to enforcement of the judgment under Federal law or State law.

 

Of course, the ability of the IRS to reach a 401(a) plan benefit for unpaid taxes, at one time a subject of controversy, is by now well established. When I researched this several years ago I found the 9th Cir. case (U.S. v. Novak, 2007) convincing. There is at least one other district court case that follows, probably several more. I know of no case that has gone the other way. Again, the language of the federal statute seems very clear.

 

Sorry, but is it clear that non-tax levies can be imposed on qualified 401(a) plan benefits notwithstanding spendthrift rules or clear that non-tax levies cannot be imposed?  It has been unquestionably established, has it not, that IRC Section 401 benefits can never be reached under bankruptcy laws absent active fraud (such as large contributions being made in anticipation of declaring bankruptcy, to shield those assets).

[MoJo]

1 hour ago, Luke Bailey said:

The language of the MVRA (18 USC sec. 3613(a)) is pretty explicit:

 

The United States may enforce a judgment imposing a fine [or an order of restitution]1 in accordance with the practices and procedures for the enforcement of a civil judgment under Federal law or State law. Notwithstanding any other Federal law (including section 207 of the Social Security Act), a judgment imposing a fine may be enforced against all property or rights to the property of the person fined, except that - -

(1) property exempt from levy for taxes pursuant to sections 6334(a)(1), (2), (3), (4), (5), (6), (7), (8), (10), and (12) of the Internal Revenue Code of 1986 shall be exempt from the enforcement of the judgment under Federal law;

(2) section 3014 of chapter 126 of title 28 shall not apply to enforcement under Federal law; and

(3) the provisions of section 303 of the Consumer Credit Protection Act (15 U.S.C. 1673) shall apply to enforcement of the judgment under Federal law or State law.

 

Of course, the ability of the IRS to reach a 401(a) plan benefit for unpaid taxes, at one time a subject of controversy, is by now well established. When I researched this several years ago I found the 9th Cir. case (U.S. v. Novak, 2007) convincing. There is at least one other district court case that follows, probably several more. I know of no case that has gone the other way. Again, the language of the federal statute seems very clear.

 

If  you follow through the exemptions, and the other statutes referenced in the exemptions list above, you will find that included in the list of exemptions is the "federal" exemptions from bankruptcy estates (i.e. property that is not considered available to pay creditors in a bankruptcy).  ONE of those exemptions is the "debtors" interest in a qualified retirement plan.  By the way, the DOL's position is that retirement plan assets are NOT attachable under the  MVRA.  Not sure I want to get in between the DOJ and the DOL on this one, but I just confirmed the DOLs opinion (informally) this morning.

[Luke Bailey]

I admit this is complicated, but the only reference that I see to the bankruptcy code is the statement in paragraph (2) that "section 3014 of chapter 176 of title 28 shall not apply to enforcement under Federal law," which seems to say the bankruptcy exceptions do NOT apply. If it overrides Section 207 of the SSA (which, as required by Section 207, it explicitly does), so they can get your soc sec benefits, don't you think they intended to also get at your private pension benefits? Remember, the purpose of the MVRA is to require a person convicted of a federal crime to make restitution to the victim(s) of that crime. This is not a fine or penalty.

[Benefits to all]

Just to chime in, I agree with Luke here.  The Ninth Circuit summarizes the IRS position from a PLR:  

In advising retirement plans that they do not violate the tax laws by responding to garnishment demands pursuant to MVRA, 24 IRS Priv. Ltr. Rul. 200426027, at 11 (June 25, 2004), 2004 PLR [**66]  LEXIS 315, at *20-21, the IRS noted that "the government is subject to the same constraints when enforcing its garnishment order that the Service is subject to when collecting a tax. The government steps into the shoes of the taxpayer . . . ." Id. at 12, 2004 PLR LEXIS 315, at *23. 25 "Though letter rulings are not binding, we think the Commissioner's position makes eminent sense." Jombo v. Comm'r, 365 U.S. App. D.C. 73, 398 F.3d 661, 665 (D.C. Cir. 2005) (citation omitted).

 

This analysis from E.D. of Pennsylvania in U.S. v. King is also helpful:

B. The Anti-Alienation Statutes of ERISA and the IRC

Defendant argues that the retirement accounts sought to be garnished in this case are exempt due to the anti-alienation provisions of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1056(d)(1), and the Internal Revenue Code ("IRC"), 26 U.S.C. § 401(a)(13). The Defendant relies on Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 376, 110 S. Ct. 680, 107 L. Ed. 2d 782 (1990) and U.S. v. Smith, 47 F.3d 681, 684 (4th Cir. 1995).

In Guidry, the United States Supreme Court held that any attempts to garnish pension benefits to satisfy a judgment, even where the beneficiary committed criminal acts, were barred by ERISA section 1056. 12 Guidry, 493 U.S. at 376. Specifically, the Supreme Court noted that:

ERISA erects a general bar to the garnishment of pension benefits from plans covered by the Act. . .We see no meaningful distinction between a writ of garnishment and the constructive trust remedy imposed in this case. That remedy is therefore prohibited by § 206(d)(1). . .Section 206(d)  [*14] reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them. 493 U.S. at 371-72, 376.

 

In neglecting to find exceptions to the anti-alienation provision, the Court asserted that this was not within their prerogative, but rather, "if exceptions to this policy are to be made, it is for Congress to undertake that task." Id.

In 1996, Congress did just that with the enactment of the Mandatory Victims Restitution Act ("MVRA"). Though the Third Circuit has not had the opportunity to rule on what effect the MVRA has on the anti-alienation provisions of ERISA and the IRC, we find that the MVRA supersedes these protections. Our decision soundly rests on several grounds.

First, the language of the MVRA supports this result. Section 3613(a) of the MVRA  [*15] uses the clause, HN7 "notwithstanding any other Federal law. . .a judgment imposing a fine may be enforced against all property or rights to property of the person fined." See 18 U.S.C. 3613(a) (emphasis added). HN8 The Supreme Court has acknowledged that the use of a "notwithstanding" clause signals Congressional intent to supersede conflicting provisions of any other statute. Cisneros v. Alpine Ridge Group, 508 U.S. 10, 18, 113 S. Ct. 1898, 123 L. Ed. 2d 572 (1993). Thus, the "notwithstanding" clause, as written in the MVRA, removes the "general bar" erected by ERISA and the IRC to the garnishment of retirement accounts. See DeCay, 620 F.3d at 540; US v. Irving, 452 F.3d 110, 126 (2d Cir. 2003); Novak, 476 F.3d at 1053. This finding is further reinforced by the fact that Congress explicitly exempted certain retirement plans, not relevant to this case, from garnishment under the MVRA. 13 See 18 U.S.C. § 3613(a)(1).

Second, HN10 the MVRA directs that criminal fines should be enforced in the same manner as a tax liability. 18 U.S.C. § 3613(c). Accordingly, the only property that cannot  [*16] be garnished in restitution is that which the government cannot seize to satisfy the payment of income taxes. 18 U.S.C. § 3613(a). Courts have recognized that ERISA and the IRC do not shield retirement benefits from being levied to collect unpaid taxes. See Shanbaum v. U.S., 32 F.3d 180, 183 (5th Cir. 1994); Irving, 452 F.3d at 126. Thus, it is consistent with the statutory scheme, language and intentions of Congress that the anti-alienation provisions of ERISA and the IRC should not protect retirement accounts from garnishment.

Third, there is a clear consensus of judicial opinions that the MVRA has superseded the anti-alienation provisions of ERISA and the IRC. See Irving, 452 F.3d at 126; DeCay, 620 F.3d at 540-41; U.S. v. Hosking, 567 F.3d 329, 335 (7th Cir. 2009); Novak, 476 F.3d at 1053. These decisions are well reasoned and persuasive.

In sum, we find that HN11 the MVRA supersedes the anti-alienation provisions of ERISA and the IRC. Thus, the Defendant cannot rely on them to protect against the garnishment of his retirement accounts as restitution for his criminal actions.