Plan Must Pay Back Assets Wrongly Transferred to Ex-Spouse

In affirming a lower court decision, the appellate court said 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 of the Employee Retirement Income Security Act (ERISA), and 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. The plan sponsored argued repaying Robert W. Milgram, M.D. before first recouping the assets would violate ERISA’s anti-alienation provision by taking away assets from other plan participants.  

The plan also argued a close examination of the distinctions between defined contribution and defined benefit plans compels the conclusion that enforcement of a judgment against the former poses anti-alienation problems that enforcement against the latter does not. It suggests that the plan’s failure to recognize those dangers in previous cases is not because they do not exist, but because the historical dominance of defined benefit plans has prevented the issue from being litigated previously.   

The appellate court found this argument unpersuasive, saying 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, and beneficiary longevity, as well as 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,” the court wrote in its opinion, adding “it could well be argued that it is the failure to pay Milgram the money to which he is entitled as a plan participant that would violate the administrator’s fiduciary duties.”  

The court noted 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. As examples, the court pointed to the plan’s document which says investment losses are to be allocated proportionately to all participant and beneficiary accounts, and to ERISA § 404(a)(1)(A)(ii) which authorizes the plan administrator to use pension assets to “defray[ ] reasonable expenses of administering the plan.”  

Moreover, the section of the document from which the plan draws its definition of “benefits,” is entitled “Determination of Benefits Upon Retirement” and clearly states 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; prior to that point, a participant cannot truly be said to have a claim to any particular assets in the trust corpus. 

According to the court opinion, The Orthopedic Associates Defined Contribution Pension Plan, in 1996, erroneously transferred half the balance of Milgram’s pension account to his ex-wife, Norah Breen - $763,847.93 more than she was entitled to receive under their divorce settlement. Milgram did not discover the error until June of 1999 when his lawyer insisted he review his plan account statements. By that time, Breen has taken a distribution of her account.  

In October 1999 Orthopedic, acting as plan administrator, demanded Breen give back the excess distribution. When she refused, Orthopedic sued and two years of litigation failed to result in a settlement or a dispositive ruling by the district court. As a result, Milgram, who still had not recovered his money, sued. Following a bench trial, the U.S. District Court for the Northern District of New York entered judgment against the plan in the amount of $1,571,723.73, which included the principal amount, accumulated earnings and pre-judgment interest. The appellate court affirmed the lower court’s ruling.