James M. Steinberg, ERISA attorney, reviews IRS levy powers, and how and when they can apply to an ERISA plan.
If you are a plan administrator, read this and consult with your plan's attorney when you receive a notice of levy.
Section 6321 of the Internal Revenue Code provides the Internal Revenue Service ("IRS") with the authority to levy against the property rights of any individual who has failed to pay taxes. The code states that:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property, whether real or personal, belonging to such person.
The lien created by Section 6321 was always intended by Congress to be broad and "meant to reach every interest in property that a taxpayer might have." Once the IRS establishes its right to levy, any person in possession of property or rights to property subject to a levy must surrender such property or the rights thereto.
On occasion, an ERISA Annuity or Pension Plan receives a tax levy from the IRS demanding that monies from a participant’s individual account be forwarded to the IRS to satisfy an income tax payment deficiency. Most often, the Notice of Levy on Wages, Salary and Other Income is a Form 668-W(c) or Form 668-A(c). For a Notice of Levy to be recognized by the Plan Administrator, the participant’s interest in the annuity or pension account must be property as identified in Section 6321. Numerous federal courts have recognized that regardless of whether or not the account in question is in pay status, the attachment of a federal tax lien is executed immediately. Case law explains that a vested interest in an ERISA retirement plan is property intended to be liened under Section 6321 of the IRC. In addition, at least one federal court has found that the contractual right to receive pension or annuity payments in the future is a property right in itself. Therefore, the participant’s interest in the subject plan constitutes "property" or "rights to property" that are subject to a federal tax lien under Section 6321.
However, although the IRS is authorized to levy against the participant’s ERISA benefits, for the IRS to be presently entitled to any monies, the participant must presently have an unqualified, unconditional right to demand payment from the plan. The IRS may then only recover monies to the extent of the participant’s present right. If the only present right in the plan that the participant possesses is a right to receive payments in the future, the IRS is not presently entitled to receive any monies in furtherance of the levy. However, once a participant has the unconditional right to withdraw his annuity account monies or receive pension payments, the IRS may properly be forwarded the monies demanded in its levy.
By honoring the levy, the ERISA qualified plan does not violate the anti-alienation provision of ERISA. Treasury Regulation Section 1.401(a)-13(d)(1) states that anti-alienation provisions do not apply to IRS levies:
(b) No assignment or alienation--
(1) General rule. Under section 401(a)(13), a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process.
(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:
(i) The enforcement of a Federal tax levy made pursuant to section 6331.
This standard has also been recognized by several federal courts. In In re Raihl, 152 B.R. 615 (9th Cir. BAP 1993), the circuit court opined that "the inalienability of the pension interests does not destroy their character as property or immunize the interest from the attachment of a federal tax lien."
Lastly, a Plan Administrator will not expose its ERISA plan to potential liability if he honors a levy served by the IRS. Section 6332(e) of the Internal Revenue Code provides that:
Any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the Secretary, surrenders such property or rights to property (or discharges such obligation) to the Secretary (or who pays a liability under subsection (d)(1) shall be discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment.
Conclusion
With tax deficiencies becoming more prevalent as individuals file for protection under the federal bankruptcy law, Plan Administrators will become more and more familiar with the levy discussed above. In that the IRS clearly is allowed to levy against a participant’s individual annuity account and his pension benefits, an ERISA Plan must be sure that it is only honoring a levy when a participant has a present right to the property held in the account. Otherwise, the Plan Administrator must acknowledge the legitimacy of the levy and then execute upon the levy when such a present right exists. Under these circumstances, neither the Plan nor the Plan Administrator will incur any liability.
