IRS targets retirement plan funds.

A recent case shows how far the IRS will go to try to get retirement funds. Specifically, the Service tried (and succeeded) in getting money in a qualified retirement plan for taxes that were owed by someone other than the plan's beneficiary. (See Weintraub, S.D. Ohio, 1990.)

Background

The Employee Retirement Income Security Act of 1974 (ERISA) provided that a plan beneficiary could not assign his money in a qualified plan and that it was not subject to attachment, garnishment, levy, execution or other legal or equitable process. The IRS provided itself with a regulatory exception: under Regs. Sec. 1.401(a)-13(b)(2), these restrictions do not apply to the enforcement of a federal tax levy or to the collection by the United States on a judgment resulting from an unpaid tax assessment.

Until now, this meant that if the beneficiary owed taxes to the IRS, the Service could come after his retirement account. Although not always fair, it could be considered reasonable that the U.S. Government, through its own laws, would try to protect retirement benefits from other people but would try to protect itself as to debts it was owed.

The Weintraub case

The IRS takes this position much farther, though, in Weintraub, by going after a third party. In the facts of this case, individual A owed money to the U.S. Government. There was a tax lien and an unpaid tax assessment. Individual B had a Keogh plan. B owed some money to A. The tax law allows the IRS to levy against property of the delinquent taxpayer (i.e., A) held by other people (e.g., a bank holding the money in an individual's checking account). In this case, the Service levied against a debtor's tax-qualified Keogh plan because a creditor owed tax to the IRS.

It is quite obvious that A could not have attempted to collect his receivable from B by going after B's Keogh plan account. While there are some questions in bankruptcy (because of certain special rules that might apply to Keogh and other qualified plan accounts), the general rule in nonbankruptcy situations is that these are spendthrift trusts and are not subject to creditors' claims.

The provisions set forth in 1974 to protect retirement plan accounts seem quite straightforward. The provisions in both Sec. 401(a)(13) and ERISA Section 206(d) are designed to protect the employee's benefits on his retirement. The ability to enforce IRS tax collection against such plan accounts on behalf of the taxpayer/employee is questionable. Although potentially this might be a conflict between Secs. 401 and 6331, a conflict definitely does exist with other federal law, in that the ERISA provisions are being violated. To extend this principle not just to the employee who has a debt to the Service, but also to IRS collection efforts with regard to third parties that owe money to the U.S. Government, may be extending the interpretations of ERISA tax and labor rules beyond an acceptable level.