Alternate Payee Defer Past Participant's Commencement?

[gregmk]

I have a seperate interest DRO for a DB plan that allows an alternate payee to commence benefits any time after the participant's earliest retirement date.

I was under the impresssion that alternate payees had to commence no later than a participant, as QDROs are commonly drafted to include that language, but I could not find a citation to back that up. This is not an RMD issue.

Any thoughts?

[QDROphile]

It is an RMD issue. If you can deal with that issue, it is a matter of design. If they thought about it, most plans would not choose a design that would permit part of the benefit to start later than the participant starts.

[My 2 cents]

It is an RMD issue. If you can deal with that issue, it is a matter of design. If they thought about it, most plans would not choose a design that would permit part of the benefit to start later than the participant starts.

If neither the participant nor the alternate payee are near age 70 1/2, why would it be an RMD issue?

[gregmk]

Right now neither participant nor alternate payee is nearing RMD age, but I think what QDROphile is getting at is that because the plan does not compell an alternate payee to commence no later than the participant does, a RMD issue could arrise if the AP decides to defer.

QDROphile, would you say that the reason plans commonly require APs to commence no later than participants is to avoid a potential RMD issue? Or is there another reason I'm not aware of?

[QDROphile]

gregmk

You are correct that requiring an AP to start no later than the participant avoids RMD problems without having to evaluate every situation and taking extraordinary measure when the circumstances require. It is just a good administrative rule.

The other fundamental reason, which is related, it that there is one benefit per participant, notwithstanding all of the misunderstanding behind the nonsensical use of the term "separate interest." When that benefit starts, there should not be a residual that starts later. On a more practical level, why deal with two benefits if it is not necessary?

I admit that "should not" is a value judgment and "two benefits" cannot be totally avoided -- only certain aspects. If the plan wants more administrative work, it is free to chose another path, but it cannot be compelled to allow a later start by an alternate payee. IRC section 414(p)(3)(A).

[My 2 cents]

Distinct from the issue of the applicability of RMD rules to the alternate payee's benefits, is it not really the case that if the QDRO identifies the alternate payee's benefits as a "separate interest", then those benefits are owned exclusively by the alternate payee, as though they never were part of the participant's benefit? If the plan says that they must commence no later (or no earlier) than the participant's benefits, then you would have to follow the plan provisions. But "separate interest" involves a legal status that makes the benefits assigned to the alternate payee his or hers rather than remaining part of the participant's benefits. Or at least that is how I thought it worked.

[gregmk]

The plan does not specify that the AP must commence when the participant does, which is the source of my problem.

I was thinking that maybe the plan could argue that allowing the AP to defer beyond the participant’s commencement date would be impermissible because it provides greater than the participant’s benefit because the participant is only entitled to one benefit commencement date under the terms of the plan.

I think it’s a pretty tenuous argument though.

[Calavera]

So under separate interest DRO participant started receiving his benefits, and AP allowed to defer. I don't see any issues here. The issue would be: how to calculate AP benefits?

1. What is the latest participant's age AP can defer (NRD or RBD)?

2. How does DRO describe the timing of the split (at NRD or at participant's commencement)?

3. Is AP entitled for ER subsidy?

4. If AP is entitled to a subsidy, do you calculate AP's benefit at participant's commencement and actuarially increase it to AP's commencement? Or do you simply calculate AP's benefits at her commencement applying the same level of subsidy that participant would get at that time?

[QDROphile]

My 2 cents:

Look at Treasury Regulation section 1.401(a)(9)-8 Q&A 6

I raise you another 2 cents.

gregmk:

The plan cannot be expected to have such provision for an alternate payee. The plan's QDRO procedures should cover the matter and provide the clarification that the plan means what it says: the benefit has an ultimate commencement date, and that is when the participant starts benefits. The phenomenon of a possible earlier starting date for an alternate payee (by design or because of the statute) does not detract from the ability of the plan to enforce the ultimate benefit starting date. With inadequate QDRO procedures, the plan administrator will have to interpret the plan and determine administrative policy from scratch.

[My 2 cents]

My 2 cents:

Look at Treasury Regulation section 1.401(a)(9)-8 Q&A 6

I raise you another 2 cents.

gregmk:

The plan cannot be expected to have such provision for an alternate payee. The plan's QDRO procedures should cover the matter and provide the clarification that the plan means what it says: the benefit has an ultimate commencement date, and that is when the participant starts benefits. The phenomenon of a possible earlier starting date for an alternate payee (by design or because of the statute) does not detract from the ability of the plan to enforce the ultimate benefit starting date. With inadequate QDRO procedures, the plan administrator will have to interpret the plan and determine administrative policy from scratch.

My apologies if I am not getting your point or correctly understanding the cite, but that Q&A appears to deal with benefits relative to the participant's required beginning date. I am not seeing anything there implying that there is a problem with the participant starting benefits on his or her portion of the benefit at (for example) age 58 and the alternate payee with a separate interest beginning benefits 2 years later at his or her age 62. Let us consider this based on the assumption that neither the participant nor the alternate payee is interested in deferring commencement until a required beginning date, but the alternate payee wants to wait a year or two after the participant's payments start before starting his or her portion. Is there a problem with that, if supported by the wording of the QDRO and the provisions of the plan?

[QDROphile]

There is not a problem when all benefits have started before the appropriate required beginning date. But if the plan allows the AP to start later than the participant, the plan has to pay attention to make sure that the "separate account" benefit is paid properly. But why bother with the possibilities? A plan is not designed to maximize anything for a former spouse of an employee. Would you be hoping for an actuarial gain by an untimely death after the participant starts benefits?