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401(k) Plan Legal Claims

posted on:  5/8/2006     revised: 03/8/2010

 

A first glance, Revenue Procedure 2006-27 released May 5, 2006 indicates that there are at least three groups of people who will be pleased by the changes to 401(k) plan rules:

  • eligible employees who were not included in retirement plans

  • spouses whose partner forged their name on retirement plan withdrawals

  • the attorneys and accountants of the people listed above.

It has always been illegal to omit an eligible person from a retirement plan. Likewise, it has always been illegal for a retirement plan sponsor to disburse funds without consent of a spouse. But the fact is that both have been going on for years. When a victim complains, their attorney is likely to say that; a) the amounts in dispute are too small to justify litigation, and b) there is no way to clearly show economic damages.

 

Spousal Rights

The typical situation is that the former spouse (these are usually but not always divorce cases) has withdrawn and spent funds from a retirement plan and no longer has the ability to re-pay. The employer was responsible for obtaining consent (usually a bank guarantee of signature) but failed to do so. Both the employer and the plan participant refuse to pay the spouse, pointing the finer at each other. The victim is caught in the middle.

The new law includes two alternate methods of financial settlement for a spouse who has been short-changed makes it much easier for the victim's accountant and attorney to calculate the "damages" and provides flexible methods of cash settlement (This may be important to the accountant or attorney where there is no other source of funds for professional fees). Also the clarification provides assurance to employers that settlement is available in a prescribed manner as well as an implication of further harm by choosing to ignore the prescribed settlement.

Bottom line is that any attorney reasonable familiar with the law should be able to take an accountant's report and send a demand letter to the employer. The employer is less likely to fight the settlement knowing that legal absolution is available under the law and that the amount of damages is basically pre-determined. In other words, there is less to fight about.

The new law provides options, not requirements, for settlement of these problems. Also, the law applies to all retirement plans but these problem issues are far more prevalent in 401(k) plans due to increased employee access to deferred compensation.

Of course, this new law is good news for an accountant or adviser who focuses on retirement plan issues and divorced clients. We may see an increase in professionals who specialize in this area of practice. At this time it seems difficult to identify more than a handful who have national media recognition as an authority in this area.

 

Employees Omitted from Coverage

The detailed explanation of calculation of benefit makes it easier for a current or former employee to make a dollar demand and, in turn, for the employer to know that the issue is settled in the prescribed manner. Same logic as above.

 

keywords: pension, retirement, 401(k), legal claims, spousal rights, innocent spouse

 

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Copyright 2010 by Tony Novak. Originally produced and published for the "AskTony" column syndication prior to 2007. Edited and independently republished by the author in March 2010. All rights reserved.