Opinion ID: 619740
Heading Depth: 2
Heading Rank: 1

Heading: Plan Liability and ERISA's Anti-Alienation Provision

Text: ERISA provides that [a]n employee benefit plan may sue or be sued under this subchapter as an entity and that any resulting money judgment shall be enforceable only against the plan. ERISA § 502(d)(1)-(2), 29 U.S.C. § 1132(d)(1)-(2). The Supreme Court has recognized that this language clearly contemplates the enforcement of money judgments against benefit plans. Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 832, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988). Although Mackey concerned a welfare benefit plan rather than a defined contribution pension plan like the one at issue in this case, the plain language of Section 502 does not distinguish between types of ERISA-governed plans. The text of the statute thus appears to make clear that ERISA permits Milgram both to sue the Plan for its misapplication of his funds and to seek enforcement of the resulting award against plan assets. Nonetheless, the Plan asks us to read an exception into the unqualified language of Section 502. Although implicitly acknowledging that the sue or be sued language applies on its face to all ERISA-governed plans, the Plan argues that distinctions between types of plans that are drawn in other sections of the statute operate to constrain the remedial authority of the district court in proceedings under Section 502. The starting point for this argument is ERISA's so-called anti-alienation provision, which applies only to pension plans. ERISA § 206(d)(1) mandates that a pension plan governed by the statute shall provide that benefits provided under the plan may not be assigned or alienated. 29 U.S.C. § 1056(d)(1). The Internal Revenue Code likewise conditions preferential tax treatment on a pension plan's prohibiting alienation and assignment of participant benefits. See 26 U.S.C. § 401(a)(13)(A). In conformity with these requirements, Section 9.3 of the plan at issue here provides: Subject to the exceptions provided below, no benefit which shall be payable to any person (including a Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge. . . . The Plan argues that, although Mackey's unqualified assertion that money judgments may be enforced against plan assets may have been a correct statement of the law with regard to welfare benefit plans, when the plan being sued is a pension plan, limitations like those in Section 9.3 and the provisions of federal law that mandate their inclusion in the document require a more nuanced approach. The Plan does not dispute that under certain circumstances a defined contribution pension plan may be subject to a money judgment under Section 502. Rather it argues that, in this particular case, the district court erred by requiring the Plan to make good on its debt to Milgram before it had recovered the equivalent funds from Breen. That is because, in the Plan's view, all of the assets currently held in the Plan constitute benefits allocated to Plan participants other than Milgram or Breen. Therefore, the Plan argues, the anti-alienation provisions of ERISA, the IRC, and the plan document prohibit those funds from being used to satisfy the district court's judgment. We disagree 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. As to the first point, the Plan takes its definition of benefits from Section 6.1 of the plan document, which provides that, upon retirement, a plan participant is entitled to collect all amounts credited to such Participant's Combined Account. Elsewhere, the Participant's Combined Account is defined as the account established and maintained by the Administrator for each Participant with respect to his total interest under the Plan resulting from the Employer's contributions. See Plan Document § 1.48. Reading these provisions together, the Plan maintains that a participant's inalienable benefit consists of all assets held by the Plan that are attributed at any point to that participant, whether or not the participant is currently entitled to collect them. But the Plan's argument proves too much. 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. For example, in years in which the trust corpus suffers an investment loss, Section 4.3(c) of the plan document requires the administrator to debit each participant's account in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants' and Former Participants' nonsegregated accounts. Similarly, Section 4.3(d) provides that Participants' Accounts shall be debited for any insurance or annuity premiums paid, and ERISA § 404(a)(1)(A)(ii) authorizes the plan administrator to use pension assets to defray[] reasonable expenses of administering the plan, 29 U.S.C. § 1104(a)(1)(A)(ii); Pension and Welfare Benefits Admin., Advisory Opinion 97-03A (Jan. 23, 1997). Moreover, the Plan's reading of the plan document is highly selective. Section 6. 1, 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. Indeed, prior to that point, a participant cannot truly be said to have a claim to any particular assets in the trust corpus. A defined contribution plan is not merely a collection of unrelated accounts. LaRue, 552 U.S. at 262, 128 S.Ct. 1020 (Thomas, J., concurring). Rather, all of the Plan's undistributed assets are legally owned by the trustee and managed for the benefit of all plan participants, with gains and losses shared by them on a pro rata basis. 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. See id.; see also O'Toole v. Arlington Trust Co., 681 F.2d 94, 96 (1st Cir.1982) (distinguishing between trust corpus and benefits to conclude that ERISA's anti-alienation provision does not prevent a creditor of the plan from garnishing pension trust funds). In this regard, it is significant that each of the cases that the Plan cites to support its anti-alienation argument concerns an effort to levy against pension income already being received by plan members. Thus, in Guidry v. Sheet Metal Workers National Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990), the Supreme Court cited ERISA's anti-alienation provision in refusing to allow a union that Guidry had defrauded to satisfy its judgment against him by garnishing current pension income. And, in Kickham Hanley P.C. v. Kodak Retirement Income Plan, this Court refused, on anti-alienation grounds, to permit the withholding of attorney's fees from pension plan benefit payments to which the plan participants [were] presently entitled. 558 F.3d 204, 214 (2d Cir.2009). Nor do these cases support the Plan's claim that if undistributed account funds could be considered benefits, their use to satisfy a court-ordered judgment against the Plan would be prohibited. Both Guidry and Kickham Hanley concerned a creditor's efforts to levy on pension assets to satisfy obligations that had allegedly been incurreddirectly or indirectly by pensioners themselves. Neither case stands for the proposition that ERISA's anti-alienation provision would prevent the attachment of pension assets in order to satisfy the debts of the plan. Indeed, 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. Cf O'Toole, 681 F.2d at 96 (making a similar point). Treasury Department regulations that interpret the corresponding provisions of the Internal Revenue Code tell a similar story. See 26 C.F.R. § 1.401(a)-13(c). [2] In short, we find no authoritystatutory or decisionalto support the argument that ERISA's prohibition on alienation impairs a plan's ability to pay its own debts. [3] The Plan argues, however, that the absence of authority in support of its position should not end our inquiry. It notes that the alienation issue it identifies is particular to defined contribution pension plans, which, until relatively recently, were far less popular (and therefore far less likely to be the subject of litigation) than defined benefit plans. See LaRue, 552 U.S. at 255, 128 S.Ct. 1020; see also Edward A. Zelinsky, The Defined Contribution Paradigm, 114 Yale L.J. 451, 471 (2004) (discussing the significant reversal of historic patterns under which the traditional defined benefit plan was the dominant paradigm for the provision of retirement income). The Plan maintains that 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 our 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 argument is unpersuasive. The Plan is correct that the two types of pension plans differ in important respects. Defined benefit plans promise participants a specified, periodic benefit at retirement. Although the investment pool from which those benefits are drawn may be funded in various ways, the employer typically bears the risk associated with operating the plan and must cover any shortfall. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999). In contrast, in a defined contribution plan, the employer contributes a fixed sum on a periodic basis. The employee's benefits on retirement are a function of the contributionshis own and those of his employerthat have been credited to his account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account. ERISA § 3(34); 29 U.S.C. § 1002(34). Under such plans, by definition, there can never be an insufficiency of funds in the plan to cover promised benefits, since each beneficiary is entitled to whatever assets are dedicated to his individual account. Hughes, 525 U.S. at 439, 119 S.Ct. 755 (internal citation, quotation marks and brackets omitted). A 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, [4] 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 argues that imposing these costs on pension beneficiaries undercuts ERISA's policy goals and violates the anti-alienation provision. Yet 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, indeed, litigation. See Zelinsky, supra, at 458-69. 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, [5] it does not protect them against the risk that poor management decisions will expose the plan's assets to liability. Contrary to the Plan's suggestion, then, the relative novelty of defined contribution plans does not explain our failure heretofore to recognize limits on the litigation risk that participants in such a plan can be required to bear on the plan's behalf. Rather, it is the fact that defined contribution plans eschew any such limitation that is, at least in part, responsible for their increasing prevalence. See id.