justanotheradmin Posted July 9, 2014 Share Posted July 9, 2014 A 401(k) plan payed out a distribution to an Alternate payee (ex-spouse) based upon a draft DRO. Two weeks later the DRO was entered into the court. Assuming the DRO is reviewed and found to a QDRO, what corrective action is needed to make it so that the plan is in compliance? The DRO specifically provides for the amount awarded to be eligible for distribution to the alt. payee after the date of the Order (if the Alt. Payee so elects). Problems The plan paid out a substantial amount before there was a DRO If the DRO is followed today - the participant would get another substantial payment Normally, I would say the plan needs to try to recover distribution #1, Review the DRO, if it is a QDRO, then segregate and make pmt #2 (alt payee wants the $). I don't really see the point in putting the money back in just to take it out, so I think the only other option to avoid that is VCP asking the IRS if they will just call it good. The other alternative is to get the DRO amended so that that payment #1 counts, but then the plan is still out of compliance since it made the distribution prior to the QDROs existence. Any thoughts? Any options other than VCP? I think even if the plan goes through VCP the DRO needs to be amended to account for the earlier payment, probably by taking out the language that the distribution be made after the DRO date. I'm a stranger on the internet. Nothing I write is tax or legal advice. I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say? Link to comment Share on other sites More sharing options...
Lou S. Posted July 9, 2014 Share Posted July 9, 2014 If you can get the QDRO amended to make the first payment satisfy the order, that's probably the best but I'm not sure the parties will want to pay an attorney to draft that amendment. What about getting both parties to simply sign a statement saying that reciept of payment #1 on dd/mm/yy fully satisfies QDRO order? And keep that in the file with the QDRO? Lastly you could take the no harm-no foul approach assuming the QDRO is all good and the payment recieved is what the alt payee was supposed to get anyway and treat it as an "minor administartive error" that is who ever processed it thought the draft was final. Anyway those are just some ideas, not sure is any is "best answer". Link to comment Share on other sites More sharing options...
QDROphile Posted July 9, 2014 Share Posted July 9, 2014 How is this any different from any other premature distribution, except for finding the the order is qualified to allow any distribution? It is an operational failure, details to be provided by plan terms. You have the same spectrum of practicality to formality to consider in how you ultimately dispose of the payments, and the same question about use of SCP or VCP. Link to comment Share on other sites More sharing options...
david rigby Posted July 9, 2014 Share Posted July 9, 2014 Regardless of what you do about the first payment, you (someone) still has to review the DRO (perhaps that is a 2nd draft?). BTW, this situation screams about the flaws in the plan's/administrator's QDRO procedures; don't overlook the process of updating and/or enforcing them. I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice. Link to comment Share on other sites More sharing options...
My 2 cents Posted July 9, 2014 Share Posted July 9, 2014 Regardless of what you do about the first payment, you (someone) still has to review the DRO (perhaps that is a 2nd draft?). BTW, this situation screams about the flaws in the plan's/administrator's QDRO procedures; don't overlook the process of updating and/or enforcing them. Agreed - process should be qualify order, then pay out based on it, not the other way around! Have a sound process for qualifying DROs and follow it! How did this one get paid out so quickly? This would seem particularly straightfoward in dealing with QDROs in a 401(k) plan (where there would be no changes in equivalency rates and no actuarial adjustments for differences in ages or any of the other complications that must be handled when there is a QDRO for a defined benefit plan). Always check with your actuary first! Link to comment Share on other sites More sharing options...
justanotheradmin Posted July 9, 2014 Author Share Posted July 9, 2014 Thanks everyone for the feedback. I'll give them their options and as always, its up to them to decide what to do. As to how it got paid out so quickly, one of the other service providers frequently bypasses the step where distributions are supposed to go through us (TPA). I guess the alt payee really wanted to money quickly and the other provider got all the appropriate paperwork signed for the financial institution to make the distribution. We were not informed until well after the fact. The plan's QDRO procedures were not followed. After short conversations with the plan sponsor, and the other service provider, the other service provider and plan sponsor now are reminded that the plan must follow its procedures! I'm a stranger on the internet. Nothing I write is tax or legal advice. I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say? Link to comment Share on other sites More sharing options...
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