Does a participant/decedent’s creditor go after her retirement plan account?

Those of us who advise retirement plans’ administrators often turn to two articles of faith:

1.    Federal law generally, and ERISA particularly, supersedes and preempts most State laws.

2.    A retirement plan’s benefit cannot be assigned or alienated (except for a QDRO or the plan’s offset against a breaching fiduciary’s benefit).

Those points often frustrate people who deal with accounts not so privileged.

Imagine a participant dies with an almost-zero bank account and no other asset beyond her individual account under a retirement plan.

Imagine a creditor recognizes the only way to get paid what the decedent owes is by pursuing the retirement plan.

Has anyone experienced a situation in which a creditor tried to get a retirement plan to hold off on paying a beneficiary, asserting some right against the retirement plan?

If so, did the plan’s administrator get rid of the creditor’s effort quickly and easily?

Or was it a pain-in-the-neck to make the creditor go away?

Did the plan’s administrator act by itself, or did they use a lawyer to shut down the creditor?

I have only a thought/question to offer. If the participant has named the participant‘s estate rather than an otherwise named beneficiary, it might get more interesting for the creditor. I know nothing about the estate administration, but once the distribution is made, the ERISA protections are lost. Can the estate be compelled to satisfy a claim against the participant with the distributed plan funds, or can the estate try to shield the funds and dodge the creditor for the benefit of the estate beneficiaries while the creditor tries to catch the funds in transit or to retrieve the funds from the recipients?  This should not work against a designated beneficiary (presumably protected by the anti-assignment law) — or should it?

4 hours ago, Peter Gulia said:

Those of us who advise retirement plans’ administrators often turn to two articles of faith:

1.    Federal law generally, and ERISA particularly, supersedes and preempts most State laws.

2.    A retirement plan’s benefit cannot be assigned or alienated (except for a QDRO or the plan’s offset against a breaching fiduciary’s benefit).

Those points often frustrate people who deal with accounts not so privileged.

Imagine a participant dies with an almost-zero bank account and no other asset beyond her individual account under a retirement plan.

Imagine a creditor recognizes the only way to get paid what the decedent owes is by pursuing the retirement plan.

Has anyone experienced a situation in which a creditor tried to get a retirement plan to hold off on paying a beneficiary, asserting some right against the retirement plan?

If so, did the plan’s administrator get rid of the creditor’s effort quickly and easily?

Or was it a pain-in-the-neck to make the creditor go away?

Did the plan’s administrator act by itself, or did they use a lawyer to shut down the creditor?

Often, and with extreme pleasure, I've told creditors to pound salt when attempting to claim assets in a retirement plan to satisfy a debt - either pre-death or post.  I've even enlightened a creditor on their ability to actually file an estate when no one else would (particularly for my Stepfather, who through astute estate planning died with no assets other than retirement plan assets, but leaving a $4k credit card debt).  They insisted that we open an estate, and I told them if I did, I'd get paid long before they would, and since there were no assets, I wasn't going to do it (and they declined).

I even once refused to turn money over to the IRS when a deadbeat taxpayer owed money.  The rules are clear.  even the IRS can't get to the money until distributable.  They threatened me personally, then denied it, then hung up and left me alone after I offered to play them the recoding of the threat (being in a "single party consent state" I never talk to an antagonistic regulator without recording the conversation).

Beating up on creditors attempting to grab plan assets is one of the small pleasures I get in my job.

QDRO for child support.  QDRO for alimony.  QDRO to adjust marital property rights.  

In some cases the IRS can reach retirement accounts for unpaid tax obligations.  But commercial creditors cannot. 

As long as you make a distribution to the named beneficiary per Kennedy v. Dupont - 

  https://scholar.google.com/scholar_case?case=16253581861885772265&q=Kari+E.++Kennedy,+Executrix+v.++Plan+Administrator+for+Dupont+Savings+and+Investment+Plan,+129+S.Ct.+865+(2009)&hl=en&as_sdt=20000003

You should be okay. 

And keep in mind: 

 Advisory Opinion No. 1999-13A , the DOL Division of Fiduciary Interpretation Office of Regulations and Interpretations  The full Opinion can be found at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1999-13a.  The first line of the Opinion states

       "This is in response to your request on behalf of the UAL Corporation (UAL) and United Air Lines, Inc. (United) for an advisory opinion. Specifically, you ask how a plan administrator should treat domestic relations orders the plan administrator has reason to believe are "sham" or "questionable in nature."

Later on the Opinion continues:

        "You have asked for an advisory opinion as to whether, and if so when, a plan administrator may investigate or question a domestic relations order submitted for review to determine whether it is a valid “domestic relations order” under State law for purposes of section 206(d)(3)(B) of ERISA."  

The response was as follows inter alia:

        "When a pension plan receives an order requiring that all or a part of the benefits payable with respect to a participant be paid to an alternate payee, the plan administrator must determine that the judgment, decree or order is a “domestic relations order” within the meaning of section 206(d)(3)(B)(ii) of ERISA — i.e., that it relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of the participant and that it is made pursuant to State domestic relations law by a State authority with jurisdiction over such matters. Additionally, the plan administrator must determine that the order is qualified under the requirements of section 206(d)(3) of ERISA. It is the view of the Department that the plan administrator is not required by section 206(d)(3) or any other provision of Title I to review the correctness of a determination by a competent State authority pursuant to State domestic relations law that the parties are entitled to a judgment of divorce. See Advisory Opinion 92-17A (Aug. 21, 1992). Nevertheless, a plan administrator who has received a document purporting to be a domestic relations order must carry out his or her responsibilities under section 206(d)(3) in a manner consistent with the general fiduciary duties in part 4 of title I of ERISA."

        "For example, if the plan administrator has received evidence calling into question the validity of an order relating to marital property rights under State domestic relations law, the plan administrator is not free to ignore that information. Information indicating that an order was fraudulently obtained calls into question whether the order was issued pursuant to State domestic relations law, and therefore whether the order is a “domestic relations order” under section 206(d)(3)(C). When made aware of such evidence, the administrator must take reasonable steps to determine its credibility. If the administrator determines that the evidence is credible, the administrator must decide how best to resolve the question of the validity of the order without inappropriately spending plan assets or inappropriately involving the plan in the State domestic relations proceeding. The appropriate course of action will depend on the actual facts and circumstances of the particular case and may vary depending on the fiduciary’s exercise of discretion. However, in these circumstances, we note that appropriate action could include relaying the evidence of invalidity to the State court or agency that issued the order and informing the court or agency that its resolution of the matter may affect the administrator’s determination of whether the order is a QDRO under ERISA.5(5) The plan administrator’s ultimate treatment of the order could then be guided by the State court or agency’s response as to the validity of the order under State law. If, however, the administrator is unable to obtain a response from the court or agency within a reasonable time, the administrator may not independently determine that the order is not valid under State law and therefore is not a “domestic relations order” under section 206(d)(3)(C), but should rather proceed with the determination of whether the order is a QDRO." 

In other words it is safe to pay out the funds to the named beneficiary.  

OR 

You can file an interpleader* under FRCP 22, and offer to deposit the money in question into the Registry of the Court and let the other claimants fight it out. 

*Read https://legal-dictionary.thefreedictionary.com/interpleader  

David

An amount paid into a probate estate might become available to the decedent’s creditor.

That is among the reasons not to name one’s estate as one’s retirement plan beneficiary (and to affirmatively name beneficiaries so a plan’s default provision won’t apply).

I have experienced this a few times over the years.

If the inquiry is just a letter from the creditor and not a court order, a letter from the plan administrator should suffice stating that benefits may not be assigned or alienated, and that death benefits under the plan are only payable to the beneficiary designated by the participant (or pursuant to the plan's default beneficiary rule in the absence of the participant making a valid affirmative designation).   

If it's a court order (e.g., a bankruptcy court issuing an injunction against the plan distributing the benefit), the plan administrator would typically have the plan's attorney reply along similar lines (possibly citing Patterson vs. Shumate:  https://www.law.cornell.edu/supct/html/91-913.ZS.html ) 

I agree with all of the comments in the scenario where the funds remain in the retirement plan.

However, if the funds are transferred to an inherited IRA (for any beneficiary other than the spouse), I think the creditor may prevail.  Clark v. Rameker (U.S. 2014) found that inherited IRAs are not considered “retirement funds” as defined in 11 U.S.C. 522(b)(3)(C) of the Bankruptcy Code. Therefore, inherited IRAs do not have the same protection from creditor claims as other retirement accounts.

That may be true for creditors of the IRA owner (the designated beneficiary of the plan participant that rolls over to the IRA). But creditors of the participant …. ?  Why would there be a difference if the distribution is rolled over or not? 

3 hours ago, QDROphile said:

That may be true for creditors of the IRA owner (the designated beneficiary of the plan participant that rolls over to the IRA). But creditors of the participant …. ?  Why would there be a difference if the distribution is rolled over or not? 

I don't know the answer, but my guess is that QDROphile is correct. But if QDROphile is correct, then excluding the case in which the estate is beneficiary, as already analyzed above, the attempted garnishment or lien is DOA. As long as the participant is drawing breath, it's defeated by ERISA's antialienation. The nanosecond following the participant's death, it's no longer the participant's property. No opportunity for a lien or garnishment to ever attach is my guess. But I've never dealt with exactly this situation, so throw it out there to see what the rest of you think.

My focus is not on what the law of the property rights is, but rather about the burden and expense of responding to a creditor that seeks something.

So, here’s a not-so-hypothetical question that might help illustrate that point:

Imagine a “3(16)” agreement allocates to that service provider responsibility and discretionary authority to decide all claims, and to direct the directed trustee and its custodian to pay claims the 3(16) administrator approved.

Does this mean the 3(16) administrator responds to claims of bankruptcy trustees and commercial creditors (and does so within the fee the agreement provides)?

Or does a 3(16) agreement provide that responding to those claims is not allocated to the 3(16) administrator, and remains with the hiring plan administrator?

Oh, Mr. Gulia, what a set up. It is a matter of what is in the agreement, and interpretation of the agreement when not expressly covered by the agreement. Some fiduciary is responsible for everything and agreements among fiduciaries allocate the responsibilities. The most fun comes when the fiduciaries disagree about who has the responsibility — the Uber fiduciary either asserts control or delegation and the sub fiduciary is either asserting or abdicating. But you well know all that.   The ultimate question is adjudication of the agreement. If I were the Uber fiduciary and delegating claims functions, I would try to delegate all of them, with the ability, but not obligation, to step in with ultimate authority.  I am not of the mind of the usual fiduciary who is inclined to delegate in the first place. 

Thanks. Your next-to-last sentence describes some of what I seek if I act for or advise the plan's top-level fiduciary.

But it sometimes is protective or helpful for the top-level fiduciary to lack authority, instead getting involved only when ERISA 405(a)(3) requires efforts to prevent or remedy the co-fiduciary's breach.

If I advise the 3(16) provider, I suggest considering all the ways the provider might be called to respond to something, do cost accounting on those activities, and use the information in quoting the fee.

Many kinds of costs can be lessened if the 3(16) provider can use scale and efficiencies in a way the plan's sponsor/administrator might not achieve.

Yep.

Peter, under 3(16), you're the plan administrator in the fiduciary, discretionary, "I take care of everything not otherwise specifically allocated out to anyone else by agreement" sense, so I would think that unless this was carved out the 3(16) fiduciary would be the person responsible for beating off the misguided bill collector.

I'm going to fall back upon, what does the Plan Document say?  If a designation was filed, the PA must distribute the benefit as directed.  If none, then the default priorities would be followed.  If a court-order was presented, does it qualify as a QDRO? No.

I've had child services successfully file for back child support; but even the IRS should be rebuffed unless they have a court order.  And that means a federal circuit court, not their kangaroo tax court.(I give that as much courtesy as I do a DOL or PBGC "subpeona")

If the PA absolutely requests a creditor response be provided, I ask them to setup the call with the creditors attorney, and then spend about 10 minutes laughing at them.  Always more fun when its a DB plan and I'm the first to tell them that no one has any monies, all the assets belong to the Plan itself!