Both the Internal Revenue Code and the Employee Retirement Income Security Act have rules that prevent assignments of retirement benefits in order to ensure that retirees actually receive the benefits that they were promised.

ERISA flatly states that “each pension plan” must provide that benefits under the plan cannot be “assigned or alienated.” There are certain statutory exceptions, but, generally, ERISA prevents any legal process to collect a commercial debt.

N.L.R.B. v. HH3 Trucking, Inc., 755 F.3d 468 (7th Cir. 2014)

In N.L.R.B. v. HH3 Trucking, Inc., the U.S. Court of Appeals for the Seventh Circuit reviewed an attempt by the N.L.R.B. to enforce a contempt order against two business owners for the failure to pay a fine in excess of $190,000. The owners had no current income other than retirement benefits, and asserted that income was protected by ERISA’s anti-assignment protections.

Federal statutory anti-assignment provisions

Reviewing other statutory anti-assignment provisions, the Seventh Circuit noted that these provisions concerned only legal process, meaning the proceedings in an action in court. Thus, for comparison to the Social Security Act, the anti-assignment prohibition prevents garnishments, attachments, and similar legal devices but not debt collection by other means. In this proceeding, the N.L.R.B. was not asking for any legal procedure to collect the debt automatically, but only for a judgment stating that the couple owed the debt personally to the N.L.R.B.-as opposed to the corporate entity HH3 Trucking. The pension funds would have no bearing upon the liability question at all; the only relevance of the funds is the couple’s ability to pay any judgment issued by the court.

Are pension funds forever shielded?

The Seventh Circuit is the seventh federal circuit court of appeal that has considered whether ERISA’s anti-alienation provision protects funds after distribution to retirees. The Fourth Circuit decided in 1995 in United States v. Smith that an order of restitution requiring a convicted felon to remit his entire $1,188 monthly pension benefits for five years after his release from prison violated the ERISA anti-alienation provision. The argument that the funds had been disbursed was expressly dismissed by the Fourth Circuit- “the government should not be allowed to do indirectly what it cannot do directly.”

However, the Seventh Circuit joined the five other circuits forming the majority view and decided that ERISA’s anti-alienation provision does not protect funds once they have been paid out. Simply put, the statute only deals with the administration of funds under the government’s administration.

By comparison, several “pension” funds provided by the federal government do expressly provide protection of monies after disbursement-protections not provided by ERISA. For example, the Veterans Benefits Act protects funds “either before or after receipt by the beneficiary.” Also, the Social Security Act provides that monies “paid or payable” are subject to legal process or to bankruptcy or insolvency law. The U.S. Supreme Court has decided that the use of the term “paid or payable” protects funds that can be traced back to Social Security benefits. The Railroad Retirement Act similarly has a broad reach.

Simply put, the difference in the statutory language has different results. The Smith case has been criticized, however, by HH3 Trucking for example, for not paying attention to the authorities it cited and the different statutes discussed.

Seeking legal assistance

In the legal world, small differences may often have drastic consequences- for example, “paid” versus “paid or payable.” If you have questions whether your pension plan meets federal standards, you should contact DeBofsky Sherman Casciari Reynolds P.C. at 312-561-4040 to assist you with any questions you may have regarding ERISA and other federal laws and regulations governing pension plans.

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