Law Offices of J. Edward Shillingburg


Anti-Alienation Provisions and Embezzlement

(Reproduced by permission from the  National Association of Public Plan Attorneys Newsletter
 (Winter 1999) all rights reserved)


     For a plan adviser THE migraine moment is when the advisor learns that a plan participant has stolen funds from the employer and is told to arrange to have the plan withhold the amount stolen from the participantís benefit payments. What is likely to happen?
    1. Private Sector Plans.  If the plan were an ERISA plan, the benefits are likely to be immune. Section 206(d) of ERISA provides that ìbenefits provided under the plan may not be assigned or alienated.î And see I.R.C.§ 401(a)(13). There are exceptions for voluntary assignments, federal tax levies, and QDROs. The latest exception, added by the Taxpayer Relief Act of 1997, permits an offset for an amount that a participant must pay the plan on account of a crime or breach of fiduciary duty.
     It seems presently clear that the anti-alienation rule bars an entity other than a plan from recovering from the participantís benefits. United States v. Smith, 47 F.3d 681 (4th Cir. 1995) (defendant pled guilty to wire fraud, was sentenced to 21 months imprisonment and ordered to make restitution out of his ERISA plan benefits; held, with one dissent, restitution order vacated in view of ERISA § 206(d)); Guidry v. Sheet Metal Workers, 493 U.S. 365 (1990) (union official pled guilty to embezzling funds from his union and a constructive trust was imposed on his plan benefits in a civil action to repay the union; held, constructive trust violated the ERISA § 206(d) policy of preserving retirement benefits for the participant and his family).
    2. Government Plans
     (a) Code Requirements. While the anti-alienation rule of § 401(a)(13) is expressly made inapplicable to government plans, most qualified plans, government and otherwise, have had such provisions for many years, well before ERISA made it a condition of tax-qualified status for private sector plans.  Basically, I think that these provisions were prompted by interest in (i) avoiding constructive receipt of plan benefits for Federal income tax purposes (prior to ERISA benefits were taxed when ìmade availableî to the participant, rather than when ìpaidî), and (ii) limiting the persons with whom the plan would have to deal.
     Section 401(a)(2) of the Code has required since prior to ERISA that no part of the planís assets may, prior to the satisfaction of all of its liabilities, be ìused for, or diverted to, purposes other than for the exclusive benefit of the employeesî participating in the plan. In Rev. Rul. 56-432, 1956-2 C.B. 284, the IRS ruled that the inclusion in a planís anti-alienation provision of an exception for ìany indebtedness owing to the Companyî did not adversely affect the qualification of the plan.  The IRS reasoned that a provision allowing all creditors to attach the benefit would be consistent with the exclusive benefit rule because it would be to the participantís benefit to have his debts reduced.  Consequently, the fact that the plan only permitted the employer as creditor to attach the benefit was consistent with the exclusive benefit rule.  Rev. Rul. 56-432 was declared obsolete in Rev. Rul. 80-27, 1980-1 C.B. 85 (plan will continue to be qualified if it complies with a court order to pay distributions in pay status to a participantís spouse to meet support or alimony obligations).  In GCM 39267 (August 2, 1984) and PLR 84-261-24 (March 30, 1984), the IRS concluded that the qualification of a State government plan would not be adversely affected if the plan paid a portion of the participantís monthly benefit to a trustee in bankruptcy, reasoning that
§ 401(a)(13) did not apply to the plan and that such payment was consistent with the exclusive benefit rule in §401(a)(2), relying on Rev. Rul. 56-432.  Thus, the IRS thinking in Rev. Rul. 56-432 is still vital, and the Code does not provide a barrier to an employerís recovery from participant benefits.
     (b) Federal Plans.  In United States v. Comer, 93 F.3d 1271 (6th Cir. 1996), cert. denied. 519 U. S. 1033( 1996), a U. S. Postal Service employee was convicted of stealing jewelry and bearer bonds from the mail and was ordered to make restitution from her retirement benefits. Postal employees participate in the Civil Service Retirement System (ìCSRSî) and more recently the Federal Employees Retirement System (ìFERSî). The Sixth Circuit rejected her argument that the restitution order violated ERISA because § 206(d) is inapplicable to a government plan. However, the court pointed out that CSRS and FERS each has an anti-alienation provision (5 U.S.C., §§ 8346 and 8470) and remanded the case for a determination of the effect of those provisions.
     On remand, before the Merit Systems Protection Board, Comer withdrew her request to reopen the case. Comer v. United States, 1997 MSPB LEXIS 1384 (Dec. 18, 1997). She probably acted in view of the Debt Collection Act of 1982 (31 U.S.C. § 3716), which has been interpreted to be an implicit exception to the anti-alienation provisions for CSRS and FERS.  The Act authorizes the head of a Federal agency having a claim against a person to ìcollect the claim [from the person] by administrative offsetî against amounts due to the person from the Federal government. Offset procedures are detailed in U.S. Department of Justice regulations, including express provision for applying the offset against CSRS and FERS benefits. 4 C.F.R. §102.4.  And the Federal Office of Personnel Management (ìOPMî), which administers CSRS and FERS, has regulations further detailing procedures for an offset. 5 C.F.R. Part 845D. See United States v. Wallace Kau Chang, 1995 U.S. App. LEXIS 9998 (9th Cir 1995) (a Navy employee plead guilty to defrauding the government; he was imprisoned, a fine was imposed and he received an OPM notice that  50% of his monthly benefits would be offset for 105 months; held, on direct appeal to the Ninth Circuit, appeal dismissed on the ground that the defendant had not exhausted his administrative remedies); cf. King v. Merit System Protection Board, 105.F.3d 635 (Fed. Cir. 1997) (Act described); Malone v. OPM, 1992 MSPB LEXIS 309 (Feb. 14, 1992) (benefit offset procedures applied).
     (c) State Laws. While my survey was not exhaustive, I found few cases involving State and local government plans. I think that an adviser would follow the following points:
          (i) First, is there an express exception in the planís anti-alienation provision for amounts owed to the employer or for theft from the employer?
          (ii) Next, have the Stateís courts recognized (or would they recognize) an implicit exception based on one of the following:
                   (A) another statutory provision of the State, such as an offset provision. In Bonelli v. State of California, 139 Cal. Rptr. 486 (Cal. App. 3rd Dist. 1977), the estate of former State legislator and tax official and his surviving spouse brought an action to require the State controller to release pension benefits withheld under the State offset statute (Cal. Govt. Code §12419.5) to recover bribes received by the official; held; pension funds released because (a) anti-assignment statute (Cal. Govt. Code § 9359.3) prevailed over the offset statute and  (b), while the pensioners hardly had clean hands to maintaining such an equitable action, the State had been dilatory in establishing its claim to the funds held by the Controller.
                   (B) constructive trust. There are Federal decisions that adopted a constructive trust rationale to permit ERISA plan benefits to be attached in civil proceedings arising out of criminal activity.  E.g., St. Paul Fire and Marine Ins. Co. v. Cox, fn. 2,  supra, (exception recognized for embezzlement  of employer funds). While these cases were overruled by the U.S. Supreme Court in Guidry for § 206(d) purposes, a State court could use their reasoning to adopt an exception. One should also look to see to what extent the State has made retirement benefits subject to creditors generally.
                   (C) the Stateís policies regarding victimís rights and criminal justice.  In  State of New Jersey v. Pulasty, 612 A.2d 952 (N. J. App. Div. 1992), the defendant pled guilty to embezzlement from his employer and agreed to pay restitution from his employerís plan benefits, an ERISA plan. On appeal from the trial courtís denial of his motion to exempt his pension benefits on the basis of § 206(d), the Appellate Division affirmed, holding that while the goal of that section is to protect the participant from squandering his pension, ìit is not to eliminate a legitimate sentencing tool of the state criminal court.î See also the dissent in United States v. Smith, supra.
     3. Conclusions. The courts have been greatly troubled about how to resolve the conflict between preserving pension assets and not permitting a wrongdoer to benefit. However, without an exception in the plan the employerís case is best presented on a broad front, with the criminal restitution rules the stronger argument, and the outcome is not presently clear.

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