A pension benefit plan attempts to wriggle out of a $1,571,723.73 judgment in favor of a participant with a novel defense: that it would violate ERISA’s anti-alienation provision, § 206(d)(1), codified at 29 U.S.C. § 1056(d)(1), for the plan to pay the prevailing plaintiff what he is owed. The Second Circuit addresses and rejects this argument.
Milgram v. Orthopedic Associates, No. 10-1862 (2d Cir. Nov. 29, 2011): The participant Milgram, a doctor in the Orthopedic Associates practice, divorced his spouse, named Breen. A Qualified Domestic Relations Order (QDRO) issued in state court authorized the plan to pay the spouse out of the participant’s defined contribution plan (i.e., 401(k)) and a profit-sharing plan in the total amount of $373,440. Unfortunately, the plan misinterpreted the QDRO and wrote Breen a check for $763,847.93, wiping out half of the 401(k). The participant noticed the error when he reviewed his plan account statements three years later. The plan demanded that Breen return the excess, but she refused, leading to litigation.
Milgram then sued the Plan (and Theres) to recover the money wrongfully paid to Breen, with earnings and interest. After cross-motions for summary judgment and a bench trial, the district court entered a judgment against the Plan for the principal amount ($763,847.93), later tacking on accumulated earnings and interest for a total of $1,571,723.73. The Plan appealed.
The principal argument made by the Plan is that it could not pay Milgram until it first recovered the money from Breen. It based this argument principally on the anti-alienation provision of ERISA § 206(d)(1), which mandates that a pension plan “shall provide that benefits provided under the plan may not be assigned or alienated.” 29 U.S.C. § 1056(d)(1). The Plan argued that for it to satisfy the judgment absent recovery from Breen, it would be compelled to compensate Milgram out of the general assets and “all of the assets currently held in the Plan constitute ‘benefits’ allocated to Plan participants There than Milgram or Breen. Therefore, the Plan argues, the anti-alienation provisions of ERISA, the [Internal Revenue Code], and the plan document prohibit those funds from being used to satisfy the district court’s judgment.”
The Second Circuit affirms. In a defined contribution plan, such as a 401(k), where each employee manages their own retirement account, the funds still remain the property of the plan, and not of any particular participant. “[A]ll of the Plan’s undistributed assets are legally owned by the trustee and managed for the benefit of all plan participants, with gains and losses shared by them on a pro rata basis. A single participant’s ‘account’ is merely a bookkeeping entry that is used at the time of his retirement to determine what benefits he is entitled to receive.”
Hence, a plan is not barred from satisfying a judgment against the plan out of those assets.
“Indeed, the structure of the statute strongly suggests a distinction between using plan assets to satisfy the debts of the plan and using plan assets to satisfy debts of plan participants. ERISA § 206(d) outlines several carefully circumscribed exceptions to its general prohibition on the alienation or assignment of pension benefits. See 29 U.S.C. § 1056(d). Each of these exceptions addresses restrictions that the anti-alienation provision places on pension beneficiaries; no mention is made of similar restraints on plan administrators.”
The Plan invokes There provisions of ERISA, the plan instrument itself and state law to avoid paying the judgment, but the panel knocks these down in turn.
The panel also affirms the award of earnings and interest, as a straight construction of the plan provisions: “In concluding that accumulated earnings and prejudgment interest were available in this case, the district court noted that the plan document specifically recognizes the right of a beneficiary to recover accumulated earnings where a portion of his account has been segregated for some time pursuant to a Qualified Domestic Relations Order (QDRO) that is ultimately declared invalid. The existence of this provision, along with general fairness considerations, led the court to conclude that ‘implicit in the Plan’s terms is the commonly held notion that There is a time value to the extended period that Milgram has been without money the Plan owed him.’ We agree.”