Mistaken QDRO Overpayment Requires Plan Administrator to Charge Remaining Accounts
The US Court of Appeals for the Second Circuit recently held ERISA’s anti-alienation provision does not prevent a defined contribution plan from paying assets owed to a plan participant because of a previous overpayment to the participant’s ex-spouse before the plan recovers the overpayment from the ex-spouse.
Due to an administrative error, the employer, acting as plan administrator of a money purchase pension plan, overpaid the ex-wife of a retired plan participant by $763,848 from the participant’s account in carrying out the terms of a qualified domestic relations order. These orders, called QDRO’s, are usually used to divide plan benefits between divorcing spouses. After the ex-wife refused to return the overpayment, suit was brought against her to recover the overpayment. After two years of litigation failed to resolve the matter, the participant sued the plan and others involved in the administrative error that resulted in the overpayment for payment of the account balance to which he was entitled, plus lost earnings resulting from the mistaken payment to the ex-wife.
The trial court entered judgment against the plan and the ex-wife for $1,571,724, the amount of the overpayment, plus earnings t. The plan appealed. (The ex-wife did not appeal, but apparently did not pay the judgment against her by the time the appeal was heard.) The key issue on appeal was whether the plan was required to be made whole by the ex-wife before making a payment to the participant from the general assets of the plan because ERISA provides that “benefits provided under the plan may not be assigned or alienated.
The appellate court upheld the trial court judgment against the plan. The court held that ERISA’s anti-alienation provision that precludes the assignment of “benefits provided under the plan” did not apply. The court reasoned that funds in a plan account are not “benefits” subject to the anti-alienation rule until they are payable to the participant. In addition, the court treated the judgment against the plan in the same manner as an administration which can be charged to participant accounts.
The correctness of the appellate court decision is questionable. Although ERISA permits the plan administrator to charge reasonable administrative expenses and investment losses against participant accounts, there is no similar rule that would permit a claim for benefits to be satisfied by charging the accounts of other participants. In effect, the court is incorrectly equating a claim for benefits with the payment of a plan administrative expense.
The court did not consider the impact of its decision on the qualification of the plan under the Internal Revenue Code. Benefits that accrue to a participant may not be cut back or reduced except in specific circumstances not applicable here. Ultimately the plan has a claim against the employer as plan administrator, or the persons hired by the plan administrator to do the calculations who made the actual error. But the value of that claim is of no comfort to another participant who becomes entitled to a distribution of his or her account. At worse, his or her account has been permanently reduced, or at best he or she must wait for any recovery by the plan to receive the amount charged against the account to satisfy the judgment.
Plan administrators and fiduciaries of defined contribution plans may be required to satisfy a judgment against it for benefits due from general plan assets even if the plan is owed monies attributable to that judgment from another person.