Court Says ERISA Plan Custodian Had To Comply With State Order Attaching Plan Assets

A recent decision by the 7th U.S. Circuit Court of Appeals serves as a reminder to plan custodians that they cannot assume that federal law will always trump state law when it comes to assignment of plan assets. In Johnson vs. Merrill Lynch, Pierce, Fenner & Smith, Inc., 719 F.3d 601 (7th Cir. 2013), the court held that Merrill Lynch, as a custodian holding ERISA plan assets, had "no choice" but to comply with a state court order freezing payment of plan benefits and it dismissed a federal suit brought by the plan's administrator seeking to block the state court action.

ERISA's anti-alienation provision generally prohibits qualified retirement plan participants from assigning or otherwise encumbering their benefit proceeds from the plan. Although there are exceptions to this rule, it generally prohibits state courts from garnishing or attaching a participant's retirement benefits to satisfy state court judgments. This general prohibition, however, does not always stop state courts from issuing orders anyway that hinder a plan from complying with both the anti-alienation statute and the plan's anti-alienation provisions.

These state court orders can cause real problems for plan sponsors, trustees and custodians who become faced with a difficult choice of either violating the state court order and risking contempt- of- court...