Plan sponsors and administrators face many issues when making disbursements from retirement plans. A recent court ruling on a payout based on a fraudulent claim should reassure those making distributions that if the distribution was in accordance with the plan terms, an employer may not suffer a penalty.
In Foster v. PPG Industries Inc. (No. 10-5123, 10th Cir Sept. 5, 2012), judges in the 10th U.S. Circuit of Appeals in Denver upheld a decision by the U.S. District Court for the Northern District of Oklahoma that the plaintiff’s right to his plan benefits was not forfeited in violation of ERISA when his ex-wife gained access to his retirement account and withdrew all the funds. The appellate court further concluded that the plan should not reimburse William Foster’s plan account for the amount disbursed fraudulently to Patricia Foster, his ex-wife.
Facts of the Case
Foster was a PPG employee from October 1988 to October 1999 and participated in the company’s 401(k) employee stock ownership plan. When Foster left the company, he was fully vested in the plan. He chose to defer receipt of his benefits, rather than to roll over his retirement savings from the plan at that time.
He was married to Patricia Foster from 1993 to July 2004, when the couple divorced and Foster moved out of their shared home. When he left PPG in 1999, he still resided in the home and that address remained on file with the company as his permanent address. Foster did not change his permanent address with PPG and the plan until September 2005, according to the appellate court decision. Patricia continued to live at their former shared address.
Before William moved out of the couple’s shared residence, PPG had instituted automated systems for plan participants to gain access to their accounts that used a combination of Social Security numbers and personal identification numbers to protect participants’ accounts. In March 2005, PPG mailed information on how to establish a new user ID and password, marked “To Be Opened By Addressee Only,” to the Fosters’ formerly shared address. Patricia received the letter and used the information it contained, along with William’s Social Security number, to gain access to his account.
PPG processed her password reset request and mailed it to the Fosters’ address, which allowed Patricia to gain access to the account, change its permanent mailing address to a Post Office box in her name and request a withdrawal of $4,000 to be deposited into her bank account. By September 2005, Ms. Foster had emptied the account, worth a total of $42,126.38.
In September 2005, William contacted the PPG plan service center and updated his permanent address. In January 2006, he became aware of withdrawals from his account when he received at his new home address a 2005 Form 1099-R from the plan’s fund manager reporting a distribution of $42,126.38. Later that month, he sent a letter to PPG’s plan administrator claiming “potential fraud, as I did not request withdrawal from my plan and I did not authorize any disbursement from this plan.”
In May 2008, the administrator denied Foster’s request for “additional benefits” on the grounds that (1) the plan had in place all the necessary and proper security measures, (2) the benefits were paid in accordance with all plan terms and requirements and (3) Foster’s loss of benefits was due to his own failure to comply with the plan’s address change requirements, as well as the fraudulent conduct of Ms. Foster. Foster challenged this determination in the district court, saying the money had been “forfeited” in violation of ERISA. The district court upheld the plan administrator’s decision. Foster then appealed.
Finding out More
For more general information on exceptions, such as fraud, to ERISA’s anti-assignment provisions, see the Guide to Assigning and Loaning Benefit Plan Money’s ¶120.
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