Creditors of retirement plan participants sometimes try to tap into a participant’s supplementary benefits under various legal arrangements, including garnishment and domestic relations orders. If a plan administrator or adviser is faced with the prospect of a participant’s deferred compensation being assigned to a creditor, the administrator must be familiar with a number of complicated tax and ERISA rules to handle the request properly.
Supplemental Executive Retirement Plans, one of several types of supplemental “unfunded” plans known as a “top-hat plans,” sometimes are offered to highly compensated employees and management as part of their compensation package. As such, these plans usually are considered exempt from ERISA anti-alienation provisions. Plan sponsors may opt to offer an anti-alienation provision to employees eligible to participate in its SERP.
However, a judge in the U.S. District Court for the District of Maryland recently ruled in Sposato v. First Mariner Bank, (No. 1:2012-cv-01569, March 28, 2013) that such protection for deferred compensation may not be assumed, despite the plaintiff’s argument that his SERP was protected in this way by his former employer. But because top-hat plans are designated for HCEs, they are exempt from certain ERISA protections, including anti-alienation, Judge Catherine C. Blake reminds in her ruling on the plaintiff’s claim. This finding especially applies to creditors not party to the anti-alienation protection agreement that may exist as a contract between plan sponsor and participant.
Charles F. Sposato formerly was chairman of Cecil Bank in Maryland and participated in a SERP there. First Mariner Bank brought three actions against Sposato in the Circuit Court of Baltimore City to enforce judgments against him to receive proceeds through garnishment from Sposato’s Cecil Bank SERP as a debt Cecil Bank owes Sposato.
Sposato, in his case in federal district court against First Mariner, claimed that his SERP benefits aren’t subject to garnishment because of ERISA provisions and also because Maryland’s state law enforcing garnishment can’t preempt federal ERISA regulation. First Mariner requested the district court dismiss the case because Sposato’s SERP lacked ERISA protection, and that motion was granted.
Judge Blake disagreed with Sposato’s assertion that Maryland law was not applicable in his case. “(Maryland’s garnishment law) does not interfere with the administration of plans like SERP but merely provides a process by which a plan participant’s creditor can access benefits to which they have a lawful claim when the SERP would otherwise distribute to the plan participant,” the judge wrote in her decision.
Blake ruled that because Sposato’s SERP benefits are not protected by ERISA, they are “at least partially subject to First Mariner’s writs of garnishment.” Sposato’s requests for summary judgment were denied both on the issue of ERISA protection and partial protection by another law.
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