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CCH® PENSION — 06/12/12

Foreign participants could not recover taxes from their employer/plan service providers that were wrongfully withheld from their benefits

Retired employees, who had never worked or resided in the United States but whose plan benefits were reduced by withholding for U.S. taxes, could not recover monetary damages from their employer, plan administrators, and other plan service providers because Code Sec. 7422 prohibits lawsuits to obtain tax refunds from private tax collectors before filing for refunds with the IRS, according to a U.S. District Court in Illinois. The court determined that all of the participants' damages, missed benefits, expenses, and requested surcharges were tax refunds in disguise because they were all based on the employer, plan administrators, and other service providers improperly withholding taxes.

Two retired employees were participants in several of their employer's ERISA-covered plans, including pension plans, a life insurance plan, an income deferral plan, and a stock-option program. Both participants were citizens of, and worked in, foreign countries. Neither participant ever worked or resided in the United States. Thus, their employment income and benefits from their retirement plans were "foreign source" benefits that were not subject to U.S. taxes.

After the participants retired and began receiving benefits, amounts were withheld from their benefits for U.S. taxes. The participants, in a series of communications (including letters) with the employer and plan administrators both before and after the start of the receipt of benefits, explained their tax status and provided documentation. Despite this series of communications and the employer admitting to errors with their processes, amounts continued to be withheld from the participants' benefits. One of the participants filed a complaint with the employer's claims review unit, which denied his claim.

The participants filed a class-action suit under ERISA, with a number of counts that included a claim for benefits, allegations of breaches of fiduciary duties, a request for an injunction, and an allegation of a failure to furnish requested plan documents.

Code Secs. 7421 and 7422 and ERISA

The court noted that, although ERISA allows participants to bring suit under a number of statutes, where an issue has federal tax implications, the tax code, specifically Code Sec. 7421 and Code Sec. 7422, come into play. Code Sec. 7421 (Anti-Injunction Act) prohibits suits to restrain the assessment or collection of taxes, and Code Sec. 7422 forbids lawsuits before filing a claim for refund with the IRS. The court explained that "[t]hese sections have been interpreted to foreclose lawsuits against private parties who over-collect taxes on behalf of the federal government."

According to the court, although there is no room for exceptions under Code Sec. 7422, courts may impose an injunction concerning tax collection practices under Code Sec. 7421, but only if it is apparent that the U.S. cannot establish its claim to funds and if the taxpayer shows that collection would cause him irreparable harm. This narrow exception also applies to the Declaratory Judgment Act (28 U.S.C. Sec. 2201), which allows courts to issue declaratory judgments "except with respect to Federal taxes." The court further explained that earlier court cases have established that Code Sec. 7421 and Code Sec. 7422 control in ERISA cases.

All requested monetary damages were attempts to obtain tax refunds

The court determined that all of the monetary damages sought by the participants were attempts to obtain tax refunds from the employer, plan administrators, and other plan service providers, even though that was not literally stated in the participants' complaint. The court found that all of the participants' damages, missed benefits, expenses, and requested surcharges were tax refunds in disguise because they were all based on the employer, plan administrators, and other service providers improperly withholding taxes. Thus, because the court believed that Code Sec. 7422 provided an absolute prohibition from seeking tax refunds from private tax collectors and that there was no form of repleading that could evade Code Sec. 7422, to the extent the participants sought any monetary damages stemming from withholding of taxes, the participants' complaint was dismissed with prejudice.

In addition, because almost all of the participants' requested relief would be declaratory judgments or injunctions affecting the collection of taxes and would, thus, run afoul of Code Sec. 7421, the court dismissed, without prejudice, those portions of the participants' complaint. The court stated that the participants' complaint, viewed in the most favorable light, adequately alleges the first requirement of the Code Sec. 7421 injunction exception --that the U.S. cannot establish its claim to funds. However, the participants have not alleged irreparable harm. The court explained that it might be possible for the participants to replead in a way to meet the exception.

Source: Mejia v. Verizon Management Pension Plan (DC IL).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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