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In upholding a district court judgment, the 2nd U.S. Court of Appeals said the text of the Employee Retirement Income Security Act (ERISA) makes clear that Robert Milgrim is permitted to sue the plan for its misapplication of his funds to an account for his ex-wife and to seek enforcement of the resulting award against plan assets. The plan argued the anti-alienation provisions of ERISA prohibit plan funds from being used to satisfy the district court’s judgment, as it would take away from other participants’ benefits. The appellate court disagreed both because undistributed funds held in trust for the members of a defined contribution pension plan do not constitute “benefits” within the meaning of the anti-alienation provisions, and because the anti-alienation rule does not prevent pension plan assets from being used to satisfy a judicial judgment that has been entered against the plan itself. “If it were true that, once credited to a particular participant’s account, Plan funds become 'benefits' whose alienation and assignment is prohibited by ERISA, then the plan administrator would be prohibited from debiting participants’ accounts even to cover expenses that ERISA and the Plan specifically contemplate they will bear,” the court wrote in its opinion. The court pointed out that Section 6.1 of the plan’s document, from which the plan draws its definition of “benefits,” is entitled “Determination of Benefits Upon Retirement” and clearly states that the relevant calculations are to be performed “[u]pon [the plan participant’s] Normal Retirement Date or Early Retirement Date.” Plan assets therefore become “benefits” only when they are finally distributed to the participant at the time of retirement. “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,” the court said. In addition, according to the opinion, 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 argued that ERISA was passed at a time when defined benefit pension plans were the most common and defined contribution pension plans were rarely used, and the distinction between the plan types and how they are funded requires the court to apply this nuance to its ruling. The consequence of these distinctions is that, whereas satisfaction of a judgment from the corpus of a defined benefit plan may not affect individual participant benefits, in the case of a defined contribution plan, it will almost certainly do so, since the employer is under no ongoing obligation to fund the plan to maintain benefits at a set level. The plan argued that imposing these costs on pension beneficiaries undercuts ERISA’s policy goals and violates the anti-alienation provision. However, the court said it is the distinctive feature of defined contribution plans that they require the employee rather than the employer to bear the pension risks associated with investment instability, underfunding, beneficiary longevity and litigation. By design, participants in a defined contribution plan bear the risk that the value of their accounts will be reduced as a result of actions taken by the plan administrator; just as the anti-alienation provision does not protect participants against poor investment decisions by the plan administrator, it does not protect them against the risk that poor management decisions will expose the plan’s assets to liability.
In upholding a district court judgment, the 2nd U.S. Court of Appeals said the text of the Employee Retirement Income Security Act (ERISA) makes clear that Robert Milgrim is permitted to sue the plan for its misapplication of his funds to an account for his ex-wife and to seek enforcement of the resulting award against plan assets.
The plan argued the anti-alienation provisions of ERISA prohibit plan funds from being used to satisfy the district court’s judgment, as it would take away from other participants’ benefits. The appellate court disagreed both because undistributed funds held in trust for the members of a defined contribution pension plan do not constitute “benefits” within the meaning of the anti-alienation provisions, and because the anti-alienation rule does not prevent pension plan assets from being used to satisfy a judicial judgment that has been entered against the plan itself.
“If it were true that, once credited to a particular participant’s account, Plan funds become 'benefits' whose alienation and assignment is prohibited by ERISA, then the plan administrator would be prohibited from debiting participants’ accounts even to cover expenses that ERISA and the Plan specifically contemplate they will bear,” the court wrote in its opinion.
The court pointed out that Section 6.1 of the plan’s document, from which the plan draws its definition of “benefits,” is entitled “Determination of Benefits Upon Retirement” and clearly states that the relevant calculations are to be performed “[u]pon [the plan participant’s] Normal Retirement Date or Early Retirement Date.” Plan assets therefore become “benefits” only when they are finally distributed to the participant at the time of retirement. “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,” the court said.
In addition, according to the opinion, 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 argued that ERISA was passed at a time when defined benefit pension plans were the most common and defined contribution pension plans were rarely used, and the distinction between the plan types and how they are funded requires the court to apply this nuance to its ruling. The consequence of these distinctions is that, whereas satisfaction of a judgment from the corpus of a defined benefit plan may not affect individual participant benefits, in the case of a defined contribution plan, it will almost certainly do so, since the employer is under no ongoing obligation to fund the plan to maintain benefits at a set level. The plan argued that imposing these costs on pension beneficiaries undercuts ERISA’s policy goals and violates the anti-alienation provision.
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