On November 29, 2011, the US Court of Appeals for the Second Circuit issued an opinion in Milgram v. Orthopedic Associates Defined Contribution Pension Plan, holding that a profit-sharing plan must pay plan assets it owes to a former participant because of the plan's erroneous overpayment of a portion of the participant's account to his ex-spouse, regardless of whether the ex-spouse first repays the plan the excess amount. The key issue in the case was whether the plan was required to be made whole by the ex-spouse before making a payment to the participant from the general assets of the plan under ERISA Section 206(d)(1), which provides that "benefits provided under the plan may not be assigned or alienated."

Milgram was an orthopedic surgeon who participated in two ERISA-governed pension plans during his affiliation with the medical group Orthopedic Associates of 65 Pennsylvania Avenue (Orthopedic). In 1996, Milgram and his wife, Breen, divorced. The divorce settlement and the qualified domestic relations order (QDRO) entitled Breen to one-half of the balance in one of the plans (a shared value of $326,082 at the time of the QDRO) and a fixed sum of $47,358 from the other plan. Due to an administrative error, the plan transferred one-half of both plan accounts to Breen, which resulted in her receiving $763,847.93 more than she was entitled to receive under the QDRO. For more information on QDROs, see Practice Note, Qualified Domestic Relations Orders: Overview.

Shortly after, Milgram terminated participation in the plans and rolled his remaining account balances to an IRA. Breen withdrew the balance of her account in September, 1998. Milgram did not discover the overpayment that was made to Breen until June, 1999. In October, 1999, Orthopedic, acting as plan administrator, demanded Breen repay the excess distribution. She refused and two years of litigation ensued without a settlement or dispositive ruling. As a result, Milgram sued Orthopedic, the plan, the trustees and several others asserting both contract and fiduciary duty claims under ERISA.

The district court consolidated the cases and Milgram moved for summary judgment, relying on a theory of contractual liability under ERISA and seeking a judgment for both the principal amount that was erroneously transferred to Breen and associated earnings. After cross-motions for summary judgment and a bench trial, the district court entered a judgment against the Plan for the principal amount ($763,847.93). The court later added accumulated earnings and interest to the judgment for a total of $1,571,723.73. The Plan appealed, arguing that the payment of the judgment before the plan recovered from Breen would violate ERISA's anti-alienation provisions.

The Second Circuit affirmed the district court judgment, upholding the award to Breen of both the principal amount, and the accumulated earnings and interest. The court held that ERISA's anti-alienation provision that precludes the assignment of "benefits provided under the plan" did not apply because:

Milgram asserted that a participant's inalienable "benefit" under ERISA Section 206(d)(1) consists of all assets held by the plan that are attributable to that participant, whether or not the participant is currently entitled to receive them. The court disagreed, finding that plan assets become "benefits" attributable to a particular participant only when they are finally distributed to the participant at the time of retirement. It reasoned that:

The court distinguished two cases cited by Milgram where the courts refused, on anti-alienation grounds, to permit the garnishment of pension assets from participants due to court judgments, reasoning that both cited cases dealt with creditors' efforts to levy on pension assets to satisfy obligations that had allegedly been incurred by pensioners themselves and not by the plan. Here, the court reasoned, it was the plan itself, and not the participant, which was responsible for the debts associated with the erroneous payment.

Milgram also argued that a defined contribution plan poses anti-alienation problems that a defined benefit plan does not because a satisfaction of a judgment from a defined benefit plan may not affect the value of an individual participant's benefits, whereas, in a defined contribution plan, it will. The court disagreed, noting that by design, participants in a defined contribution plan bear the risk that the value of their accounts will be reduced as a result of actions taken by the plan administrator, including both poor investment decisions and poor management decisions.

The court also rejected Milgram's breach of fiduciary duty claim, concluding that the payment of a judicial judgment that the plan must satisfy in favor of a participant whose rights have been violated by the plan, is a proper plan expense related to performing its fiduciary duties under ERISA Section 404(a).

The Second Circuit's opinion puts administrators and fiduciaries of defined contribution plans on notice that a plan may be required to satisfy a judgment against it from general plan assets even if the plan is owed monies attributable to that judgment from a third party. The court did not address the mechanics of that payment or its impact on other plan participants' accounts. Finally, the case also fails to address possible qualification issues under the Internal Revenue Code and whether the plan sponsor may be required to subsequently reimburse the plan for erroneous plan distributions.

For more information on ERISA fiduciary duty issues, see Practice Note, ERISA Fiduciary Duties: Overview and Paying Employee Benefit Plan Expenses Chart. For a comprehensive primer on QDROs, see Practice Note: Qualified Domestic Relations Orders: Overview.