Feds Can Seize Plan Assets Payable as Lump Sums for Restitution

February 23, 2007 (PLANSPONSOR.com) - In an unusual ruling involving all of its 15 judges, a federal appellate court has declared that federal officials can seize a criminal defendant's retirement benefits to the extent those benefits are payable as a lump sum.

The 9 th  U.S. Circuit Court of Appeals issued the split 10 to 5 decision Thursday asserting that theMandatory Victims Restitution Act of 1996 (MVRA) came out ahead of anti-alienation provisions in the Employee Retirement Income Security Act (ERISA), which allowed the federal government to seize certain benefits of ERISA plans.

The majority found that lawmakers intended when they enacted the MVRA to allow federal government seizure orders against “all” property or rights to property, “notwithstanding” any other federal law. Circuit Judge Marsha S. Berzon, in writing for the majority, said that meant Congress intended to allow its full use despite ERISA protections.

According to Berzon,   MVRA specifies that one of the federal laws included in the “notwithstanding” clause is the Social Security Act, which contains an anti-alienation provision similar to that of ERISA.   While the MVRA does not explicitly list ERISA as coming under the “notwithstanding” clause, lawmakers intended that all of a criminal defendant’s property should be open to seizure – a conclusion the majority said is supported by the fact that the law did specifically refer to the Social Security Act.

Stolen Phone Equipment

The ruling came in a case involvingRaymond Novak who pleaded guilty to charges he and his former wife, Norma Ortega Nance, stole and resold $3.3 million worth of phone equipment from Nance’s former employer, the Nestle Food Company. Novak was sentenced to a two-year jail term and ordered to pay restitution of $3,360,051.67 under the MVRA.

According to the appellate court’s 67-page ruling, a federal court issued a document ordering Novak’s former employer, May Department Stores Company to pay more than $150,000 from Novak’s accrued benefits under the May Department Stores Company Retirement Plan and The May Department Stores Company Profit Sharing Plan.

Under the retirement plan, Novak’s annual accrued benefit payable as a single life annuity at age 65 was $10,836.00, while Novak’s various index fund and company stock holdings in the profit sharing plan had a total value of $142,245.11 as of September 30, 2003, according to court documents.

Novak fought the move, citing his ERISA rights to retain his retirement assets and Chief District Judge Consuelo B. Marshall of the U.S. District Court for the Central District of California agreed and blocked the seizure.

In March 2006, a 9 th  Circuit three-judge panel reversed Marshall’s decision and declared that the federal government could seize Novak’s pension benefits under the MVRA. The majority in the split decision found that Congress created an exception to ERISA’s anti-alienation provision (See  Pension Can be Garnished to Pay Criminal Restitution ).

After that decision, the 9 th  Circuit decided to reconsider the issue – in an unusual move – to have all of the court’s judges rehear the case together.

In the latest ruling,   Berzon said the court recognized that ERISA only guarantees participants the right to take payouts sixty days after the close of the year in which they turn 65, complete ten years of service with the company, or leave the company, whichever occurs latest.

"A participant's right to receive cash from his retirement plan at any given time is thus limited to the right to receive the amount then available under the terms of the plan," Berzon wrote. "We hold the government can immediately garnish the corpus of a retirement plan to satisfy a MVRA judgment   - rather than merely obtain postretirement payments that otherwise would have gone to the defendant   - if, but only if, the terms of the plan allow the defendant to demand a lump sum payment at the present time."

Even then, there are still limits, Berzon noted. The government will not be able unilaterally to cash out a retirement plan when ERISA requires that lump-sum payments be made payable only with spousal consent, the court said. To the extent ERISA does not require certain retirement plans to provide survivor annuities, the government does not need to receive spousal consent to cash out those plans, Berzon said.

Appellate judges sent the case back to Marshall to determine how the May Department Stores plan provisions fit into the new ruling and determine how much federal officials can seize.

The ruling in United States v. Novak, 9th Cir., No. 04-55838, 2/22/07 is  here .