Rights of the Debtor and Creditor to Retirement Plan Benefits: an Update
| Publication year | 1996 |
| Pages | 45 |
| Citation | Vol. 25 No. 5 Pg. 45 |
1996, May, Pg. 45. Rights of the Debtor and Creditor to Retirement Plan Benefits: An Update
This article is a sequel to a 1991 column that appeared in The Colorado Lawyer.(fn1) Reference should be made to the earlier article to understand the terminology used in this column and other background in this area.
Since 1991, the U.S. Supreme Court decision in Guidry v. Sheet Metal Workers National Pension Fund ("Guidry 1")(fn2) has been subject to further litigation.(fn3) In addition, the Colorado exemption statutes(fn4) have been modified. This article updates Colorado law with respect to certain retirement plan issues.
In Guidry I, the Supreme Court held that a union, of which Guidry was the chief executive officer, could not reach the assets held for Guidry's benefit in pension plans created by the union, even though Guidry was convicted of embezzling union funds. The Court found it inappropriate to approve any generalized equitable exception to ERISA's anti-alienation provision.(fn5)
In Guidry II, the issue was whether ERISA § 206(d)(1)(fn6) and Internal Revenue Code ("Code") § 401(a)(13)(A)(fn7) prohibited garnishment of Guidry's pension benefits once they were paid to him. The district court held that the exemption from garnishment applied to pension proceeds as long as the proceeds were clearly identified as such and were not commingled with other assets or used for the acquisition of other assets.
The Fund appealed, arguing that once benefits have been paid to the plan participant and he asserts dominion over them, ERISA § 206(d)(1) no longer protects the benefits from garnishment. Guidry claimed, in part, that Guidry I governed and protected the benefits from garnishment. He further argued that the purpose of ERISA is to safeguard a stream of income and that garnishment of the benefits was prohibited by ERISA § 206(d)(1).
The Tenth Circuit found Guidry I inapplicable. According to the court, no benefits had been paid to Guidry when Guidry I was decided. The Tenth Circuit determined that the Supreme Court had not considered what happens when the plan makes a distribution.
In Guidry II, the court analyzed ERISA § 206(d)(1).(fn8) While the Tenth Circuit believed Congress intended to protect plan benefits, it was not clear how far Congress intended to extend the protection. The court concluded that ERISA § 206(d)(1) did not establish the priority of the plan participant over creditors seeking to garnish retirement income once it had been paid to the participant.(fn9) It compared ERISA to other statutes such as the Social Security Act and the Veterans Benefits Act and concluded that Congress did not include explicit language in ERISA similar to these acts that clearly protected benefits once they had been paid to a participant.
In spite of the legislative history of ERISA, which provides that ERISA's primary purpose is to assure American workers that they may look forward to a retirement with financial security and dignity, and without fear that in this period of life they will lack the necessities to sustain them,(fn10) the court concluded that it was not clear at what point Congress intended the preemption of ERISA to end. Because the court found the intent unclear, it looked to the Treasury Regulations for guidance.
The Treasury Regulations clearly prohibit an assignment or alienation of plan benefits. However, they provide that an assignment or alienation is an "arrangement... whereby a party acquires from a participant or beneficiary, a right or interest enforceable against the plan."(fn11) The court interpreted this language to mean that the preemption applied only as long as the assets were held by the plan. Once the assets were paid to the...
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