ERISA doesn’t bar garnishment of 401(k) to satisfy restitution order

The court joined two other circuits in holding that the Employee Retirement Income Security Act of 1974, or ERISA, doesn’t prevent the government from garnishing the retirement assets of a defendant in order to satisfy a criminal restitution order under the Mandatory Victims Restitution Act of 1996, or MVRA.

Background

This appeal requires this court to decide whether and to what extent retirement benefits protected by the anti-alienation provision of ERISA are subject to criminal restitution orders under the MVRA.

MVRA

The central issue on appeal is whether the MVRA authorizes the garnishment of funds to satisfy a criminal restitution order when those funds otherwise would be protected from alienation by ERISA. Two other courts of appeals have addressed this issue. Relying on the clear language and broad sweep of the MVRA, both have held that ERISA does not bar the garnishment of retirement assets to satisfy a restitution order or fine under the MVRA. Two other courts of appeals have held that the MVRA permits the garnishment of retirement funds otherwise covered by anti-alienation provisions very similar to ERISA’s.

This court agrees with those decisions, which reflect a nationwide judicial consensus that such retirement funds like Frank’s can be used to satisfy criminal restitution orders. The court therefore holds that ERISA does not bar the seizure of retirement funds pursuant to a restitution order under the MVRA.

The MVRA provides expressly that restitution orders may be enforced against “all property or rights to property” and “[n]otwithstanding any other Federal law.” Largely for that reason, this court agrees with the district court that the MVRA permits the seizure of defendant Jon Lawrence Frank’s 401(k) retirement account, notwithstanding ERISA’s protections, in order to compensate the victim of his crime. Although Frank raises several arguments for why § 3613 cannot be read to make ERISA-protected retirement plans subject to restitution orders, this court, like other courts to consider these arguments, finds them unpersuasive.

Scope

The MVRA permits the government to take “all property or rights to property” held by Frank in his 401(k) account. That raises an additional question: What exactly is Frank’s “property” interest in his 401(k) account? When it enforces a tax levy, the government “steps into the taxpayer’s shoes” and acquires “whatever rights the taxpayer himself possesses.” It follows that the same rule applies here, so that the government’s rights to Frank’s 401(k) retirement funds are precisely the same as those of Frank himself.

Frank’s present right to access his 401(k) funds, in turn, depends in large part on the terms of his retirement plan. To the extent that plan allows Frank present access to all or some portion of his funds, the government has the same right of access. But the reverse is true as well: To the extent that Frank cannot immediately withdraw all or some of the funds from his account, neither can the government.

As the district court explained, because Frank is entitled to a lump-sum disbursement from his 401(k) account, so is the government. Frank argues, however, that there remain additional limits on his present ability to withdraw funds from his account. The district court should determine whether the terms of Frank’s plan in fact require Schwab to withhold 20% of any present withdrawal. If they do, then those terms would constitute a limit on Frank’s ability to presently withdraw from the account – which means, as explained above, that the government, too, would be so limited in garnishing the account’s funds.

The district court also should determine whether the government’s proposed lump- sum distribution would trigger an early withdrawal penalty. As the Seventh Circuit held, an early withdrawal penalty assessed against a lump-sum liquidation – whether withheld by Schwab under the terms of Frank’s plan or separately imposed by law – also would qualify as a limit on Frank’s right to access his 401(k) funds, and thus as a parallel limit on the government’s right of access.

Frank argues that there is one final limit on the amount of money the government may seize from his 401(k) account: Under the Consumer Credit Protection Act, Frank contends, the government may garnish only 25% of the account’s funds. Like the district court, this court disagrees. A lump-sum distribution of retirement funds does not qualify as “earnings” subject to the CCPA’s garnishment cap.

Vacated and remanded.

United States v. Frank, Case No. 20-6706, Aug. 10, 2021. 4th Cir. (Harris), from EDVA at Alexandria (Brinkema). Cadence Alexandra Mertz for Appellant. Laura Michelle Grimes for Appellee. VLW 021-2-280. 27 pp.