Court: Federal Restitution Rights Override ERISA 401(k) Plan Protection

In a recent advisory opinion, the US Fourth District Court of Appeals followed suit in the United States v. Frank followed the example of several other federal appeals and district courts to allow the federal government to access an individual’s 401 (k) plan account to comply with a criminal redress order issued under the Mandatory Victims Restitution Act of 1996 (MVRA).

The facts are clear. Jon Lawrence Frank pleaded guilty in federal district court to transferring fraud related to the $ 19 million embezzlement from his former employer. In addition to sentencing Mr. Frank to jail, the court sentenced him to repay the misappropriated amount. The government was only able to reclaim $ 7 million from Mr. Frank and attempted to seize approximately $ 480,000 under the MVRA that was held in a 401 (k) account in his name.

The MVRA allows the government to seize an individual’s 401 (k) account

Mr. Frank argued that garnishment was prohibited by the Employee Retirement Income Security Act of 1974 (ERISA), which provides that benefits from an employee benefit plan such as a 401 (k) plan “may not be assigned or sold.” The only exceptions are orders for domestic relationships, offsetting to offset errors made against the plan, and loans from the plan that are secured by the borrower’s plan benefits. ERISA Section 206 (d) (1). Tax Code Section 401 (a) (31) has a similar “anti-alienation” rule that an employer-funded retirement plan must meet in order to be tax-qualified.

The Fourth District concluded that the broad language of the MVRA, which requires courts to “order” defendants to seek redress “regardless of any other legal requirement,” overrides ERISA’s anti-alienation protections. Interestingly, the court did not discuss Section 403 (c) (1) of ERISA, which states that the assets of a Plan are “held for the sole purpose of providing benefits to participants in the Plan and their beneficiaries” or Section 401 (a) (2) which requires the assets of a qualifying retirement plan to be held under an instrument of trust that makes it “impossible. . . to be for any part of the corpus or income. . . for purposes other than the exclusive benefit of. used or redirected [an employer’s] Employees or their beneficiaries. ”Given the court’s view of the scope of the MVRA, these provisions – often referred to as the” exclusive benefit regulation “- likely would have had no effect on the court’s decision.

As part of its review, the Fourth District emphasized that if the government enforces an MVRA refund order against an individual’s 401 (k) account, the government will be in the position of the account holder and only “whatever rights” [401(k) account] he owns – no less, but no more either. “

This requirement means that under the 401 (k) plan, the account holder must have an up-to-date right to receive a distribution from their account. Since Mr. Frank was no longer employed by the company that administered the plan, he was entitled to receive payment from his 401 (k) account under the terms of the plan (as would normally be the case). The court pointed out that it didn’t matter that Mr. Frank preferred not to. The right to distribution counts.

What about the taxes?

Mr. Frank urged the Fourth District to reduce the amount payable to the government through state income withholding taxes of 20% and the penalty tax under Section 72