Disbursement of participant’s account balance incident to fraud by former spouse did not constitute forfeiture

The payment of a plan participant’s account balance to his former spouse, under fraudulent circumstances, did not constitute an impermissible forfeiture of his retirement account, the U.S. Court of Appeals in Denver (CA-10) has ruled. In addition, the disbursement of the funds, in compliance with established plan terms and procedures, was not arbitrary and capricious.

Theft of participant’s assets by former spouse

An employee participated in a 401(k) employee stock ownership plan maintained by his employer. Upon the termination of his employment in 1999, the employee’s rights to the plan account balance were fully vested. However, the employee did not withdraw money from the account, but elected to defer receipt of his benefit, thereby remaining a plan participant.

Subsequent to terminating employment, the employee, in 2004, divorced his spouse. However, the employee continued to live at the marital residence until July 2004. In addition, the employee did not change the permanent address on file with his former employer until September 2005.

In March 2005, the company mailed information to the employee’s residence on file, with instructions on how to establish the User ID and password necessary to access benefits. The employee’s former spouse used the information to drain the participant’s account of his entire $42,126.38 account balance.

The employee became aware of the theft in January 2006, when he received a Form 1099-R reflecting the distribution. The participant’s former wife admitted to stealing the funds, but the employee demanded that the plan replace the funds and rescind the Form 1099-R. The plan refused the request, claiming that it took proper security measures to ensure the safety of the participant’s plan assets.

In the ensuing litigation, the employee contended that, because he had not personally requested or received the funds and because the money had been paid to another person, the money had been forfeited in violation of ERISA §203(a). A federal trial court, however, affirmed the denial of benefits, noting that the concept of nonforfeitability does not apply to a situation in which the loss of benefits was due to the wrongful actions of third parties. The court refused to interpret the nonforfeitability rules as requiring the plan to insure against any and all wrongful actions by third parties.

Denial of claim for benefits was not forfeiture of benefits

In affirming, the Appeals Court initially explained that, under ERISA Sec. 203(a), an employee’s right to his or her “normal retirement benefit” is nonforfeitable upon the attainment of normal retirement age. However, the court noted that the nonforfeitability rules of ERISA §§3(19) and 203(a) do not entitle a participant to a fixed amount of benefit regardless of any and all later-occurring conditions, such as the theft of savings plan funds by a participant’s former spouse in possession of a participant’s Social Security Number. The employee’s right to claim benefits, the court stressed, was not abrogated by the plan. The fact that his claim, after full and fair review, was denied (in large measure due to his failure to maintain a current address with the employer), the court concluded, did not constitute a forfeiture.

Authorization of withdrawal in compliance with plan terms

The court further ruled that the plan administrator did not abuse his discretion in authorizing withdrawals in accordance with prescribed plan procedures. The employee was fully informed of plan procedures for accessing funds, including the explicit admonition to maintain a current mailing address. Accordingly, the plan was entitled to rely on the legitimacy of the electronic request made by the ex-wife and to treat it as a request from the participant.

The plan officers were not, the court advised, required to make additional inquiries as to the identity of the requester. Absent any showing of fraud on the part of plan or company officials, the court found, it was neither arbitrary nor capricious for the plan administrator to determine that the participant’s benefits were paid in accordance with plan terms and that the plan was, therefore, not obligated to reimburse the participant for his loss.

Source: Foster v. PPG Industries (CA-10).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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