For all those involved with qualified plan administration in some way, add this to your to-do list: print out or bookmark recently issued Private Letter Ruling 200426027 [pdf] and place it in your files for future reference. The PLR expresses the IRS’s views regarding many of the questions practitioners have had in connection with a recent phenomena in the benefits world–that of U.S. attorneys seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1977 (“FDCPA”). Read about it in a previous post–U.S. Attorneys Seeking To Levy Against Qualified Plan Assets Under the FDCPA. In the previous post, I mentioned that Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS had remarked at an ALI-ABA Annual Fall Employee Benefits Law and Practice Update that there were “still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA.” The IRS has answered many of these “unanswered questions” in this PLR.
The IRS makes it clear in the PLR (courts could differ, I suppose) that the U.S. Government cannot garnishee or otherwise collect against a plan participant’s or beneficiary’s benefit until the participant or beneficiary has a right to a distribution under the terms of the plan at issue. In addition, the IRS states that the U.S. Government steps into the shoes of either the participant or beneficiary and can make an election on his or her behalf when such person is eligible for a distribution but has not elected the same. The government is also subject to the qualified joint and survivor annuity rules and other plan provisions to the same extent as either the participant or beneficiary.
Other nuggets of information in the PLR:
(1) Payments made pursuant to the garnishment are not subject to the 10-percent additional income tax imposed under section 72(t) of the Internal Revenue Code.
(2) Lump sum payments made pursuant to orders of garnishment obtained under the Act constitute eligible rollover distributions and are subject to the mandatory 20-percent tax withholding. If payments are in the form of periodic distributions, they are not eligible rollover distributions and are not subject to mandatory withholding.