At the ALI-ABA Annual Fall Employee Benefits Law and Practice Update mentioned in a previous post, Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS, discussed a new phenomena in the benefits world–how U.S. attorneys are seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1990 (“FDCPA”). The Act authorizes the federal government to collect against all property of individuals for payment of criminal fines or for restitution to victims of crimes. Mr. Holland stated that the IRS did not know that this practice under the FDCPA was going on until they received a request for a private letter ruling from a federal district court. When they received the request, they discovered that there had already been two federal district court cases on the subject allowing the garnishment, and holding that garnishment should not disqualify the plan under the anti-alienation provisions of section 401(a)(13) of the Internal Revenue Code or under the anti-alienations provisions of section 206(d)(1) of ERISA.
In response, the IRS issued Private Letter Ruling 200342007 (via Benefitslink.com) which held that “the general anti-alienation rule of Code section 401(a)(13) does not preclude a court’s garnishing the account balance of a fined participant in a qualified pension plan in order to collect a fine imposed in a federal criminal action.” The IRS accepted the reasoning of the courts which had held that section 3713(c) of the FDCPA (which provides that “an order of restitution . . .is a lien in favor of the United States on all property and rights to property of the person fined as if the liability of the person fined were liability for a tax assessed under the Internal Revenue Code . . .”) was to be treated as if it were a tax lien so that it fell within the exception to the anti-alienation provision as enunciated under Treasury Regulation section 1.401(a)-13(b)(2)(ii). That exception provides:
(b) No assignment or alienation–(1) General rule. Under section 401(a)(13), a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process.
(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:
(i) The enforcement of a Federal tax levy made pursuant to section 6331.
(ii) The collection by the United States on a judgment resulting from an unpaid tax assessment.
Mr. Holland stated that there are still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA. In the Private Letter Ruling, the garnishment had to do with a defined contribution plan and sought immediate payment from the plan. The Private Letter Ruling stated that the participant had an account in the 401(k) plan, but also stated that “[c]urrently, Participant A [had] no right to a distribution of amounts standing to his credit under Plan X.” However, the IRS went ahead and allowed the garnishment despite the fact that the participant did not have a right to an immediate distribution.
Mr. Holland stated that there were issues pertaining to defined benefit plans that had not yet been addressed, and that the issues can be difficult, especially when plan administrators are being threatened with contempt if plan monies are not turned over.
What about the tax consequences to the individuals involved? The panel stated that the amounts garnished would be includible in the income of the participant, but that it would not be subject to the section 72(t) early withdrawal penalty since levies are exempt from section 72(t). However, the question was asked about an obligation to withhold, and the answer was that it was unclear at this point since the question had not yet been addressed.
The following may also be relevant: