Fixing a Mistaken QDRO

[Fielding Mellish]

Multi-employer defined contribution plan.

I represent the Plan. I received a QDRO in June, 2014. I reviewed it and everything looked good. The QDRO assigned the AP a lump sum (let's just say $100,000 for sake of ease) as of November 1, 2010 (not the true date, but just for ease of use) plus interest/earnings accrued since November 1, 2010. I contacted the custodian and plan and told them to segregate the account per the QDRO terms, etc. Very easy and standard. The account was segregated and the AP withdrew the money. All proper.

Two months later, I get a note from the attorney for the AP that, in fact, the segregation should have been $100,000 as of February 1, 2014 plus interest/earnings accrued since February 1, 2014. Considering the amount of interest/earnings that accrued since November, 2010, the AP received an extra about $60,000 in her distribution.

The new QDRO that has the correct segregation date looks fine. My question is, what can the Plan do?

Can the AP just write a check for the excess amount back to the Plan?

Does the Plan have an issue because of a wrongful payment (even though it was following a Court Order)?

What do you recommend as the best practice to make this right?

To me, a problem is that the original QDRO assigned essentially $160,000 to the AP and now the new QDRO assigns approximately $110,000 to the AP. That's not an additional $110,000, but a "negative" $50,000. It's almost as if there's no use creating a new account since that would be pointless.

Instead, the AP should just pay back the excess amount and everything should be ok. But that seems way too easy and logical, and we all know that dealing with these things, easy and logical usually means wrong.

Your thoughts? Thanks.

[CADMT]

The most significant issue is the loss of future earnings on the $60,000n. The Participant cannot really be made whole. The Plan, of course, has no fault since they complied with a certified order. The Participant shares some of the responsibility because they should have reviewed the draft QDRO to ensure it was correct.

That said, the easiest way to make the Participant whole again would be for the Plan to allow a deposit of the of the $60,000 into the Participant's account. Many plans have a feature that allows for extra contributions/deposits. But some do not.

If this is a plan that does not allow for it, then the AP would have reimburse the P directly. If the AP received her distribution and deposited into a retirement vehicle such as an IRA, then via court order, the amount could be rolled over into a retirement vehicle for the Participant.

Third and more complex and costly, is if the distribution were not deposited in a retirement account, the AP would have to direct reimburse the P, who may or may be able to redeposit the funds into his account (or a new retirement account), but there remains the matter of the lost earnings (and losses) as well as the tax implications of a distribution.

[Fielding Mellish]

Thank you for your reply CADMT. I believe we can somewhat easily figure out how much the Participant has lost in earnings/interest (the Plan has a mechanism for determining this). So, let's just assume we can do that easily.

My thinking is to just have the AP write a check for the amount to the Plan, and the Plan deposit it in the P's account. It would be similar to if a distribution should have been for $1,000 but there was a mistake and the check was made out for $10,000. The Plan can recoup that overpayment.

In this case, the Plan was following a Court Order, so the Plan did nothing wrong. I'm not worried about that part. I just want to pick all of your brains to make sure I'm not missing some adverse consequence if we just have the P's account reimbursed.

[QDROphile]

You have not provide enough information to convince me that the original distribution was in error. "Error" means "not in accordance with the QDRO or not in accordance with plan terms," not "not in accordance with an unexpressed or poorly expressed intention of the alternate payee." If the reason for the proposed "correction" is that the original intent was not achieved, there is nothing the plan should do unless what the plan did was wrong, such as use the November date when the order said the February date. If this is not the plan's error, the plan should not try to get involved in the solution to a problem that is not the plan's problem. This is akin to someone requesting an in-service distribution and then 100 days later deciding that the amount they asked for was more than they wanted. Tough cookies. Are you now questioning your interpretation of the order? Stick with it unless the interpretation was unreasonable.

The plan's QDRO procedures should have default provisions that apply (such as earnings and losses will accrue from the effective date of the division unless the order specifies a different date or diffrent terms for earnings and loses) and the plan should include in its notice of qualification the basics of how the order will be implemented (in this case: earnings and losses will accrue from November 2010 until distribution) and wait for a time (30-60 days is typical) before acting.

There are decent solutions to this if the AP rolled over enough to an IRA, but they do not involve the plan and I am not going to venture them because the plan has no business even proposing a solution that does not involve the plan.

[Fielding Mellish]

That's an interesting point. What about the fact that now a new QDRO has been issued that changes what the distribution "should" have been?

[QDROphile]

It is not qualfied and therefore will not be given effect. It asks the plan to do something the plan is not designed (or permitted) to do in violation of IRC section 414(p)(3)(A), and possibly (B).

[Fielding Mellish]

I don't know if it would violate (B) because this is actually calling for decreased benefits, not increased.

But, I see what you're saying about (A). It would be like if a Participant applied for a partial distribution of $50,000, but they really only wanted a partial distribution of $5,000. Upon receiving the $50,000, they couldn't just give $45,000 back to the Plan, correct?

[david rigby]

QDROphile has captured my thoughts very eloquently. I like his emphasis: if the plan did nothing wrong, then the plan should stay out of it.

Of course, it's reasonable for the plan to review that question of "wrong", but that is an internal review, not involving the P or the AP.

[Fielding Mellish]

Thanks David Rigby. The Plan did nothing wrong here, you guys are right. We have no idea what the intent of the parties is when we review the QDROs. Here, the language was very clear on what the segregation date was supposed to be. I think it was just a clerical error in preparing the QDRO, but we can't know that. And I'm not about to start calling attorneys on every QDRO I get to say "this says this amount of money. Is that right? This says this date. Is that right?"

Right now, I'm leaning toward saying the new QDRO is not qualified and advising the parties that they need to figure out what to do with this.

[QDROphile]

Go for it!

You should take this opportunity to look at your QDRO procedures and your notice practices to make sure that what you do avoids problems and backs you up. I agree that you should not have to question every word of an order. However, there are certain circumstances that arise with enough frequency that you can anticipate them and get out ahead of them to avoid trouble, or a least liability.

[david rigby]

We have no idea what the intent of the parties is when we review the QDROs.

Yep. However, it seems your QDRO procedures could allow for common sense. For example, you might raise a red flag if the employee had been hired one day prior to the reference date in the draft QDRO.

[My 2 cents]

Just wondering: If the revised QDRO called for allocating more of the account to the alternate payee (but not more than what remains in the account), it might legitimately be considered to be qualified. However, how could a court order to pay a total less than has already been correctly paid be qualified? The plan cannot pay out minus $50,000. If anything is to be done, money should be changing hands (directly or through account transfers) between the alternate payee and the participant. If the decision is made (by them!) to do so and the request is made to the plan administrator to have the difference rolled back into the participant's account in the plan, then perhaps there is a decision (in light of the plan language and administrative practice) to be made by the plan.

[Fielding Mellish]

That's the way I'm going right now, too. The Plan does not allow for rollover contributions, so that's not an issue we'd have to deal with.

I had originally reached out to the attorney for the AP with the thought that it would be ok to have a new QDRO. But I'm going to tell him my interpretation has changed as I've thought about it more and looked into it a little more. If he doesn't like that, well, that's kind of too bad.

Thanks again all.

[Fielding Mellish]

Thought about it over the weekend a little and just wanted to throw this out there...again.

What if the AP was willing to write a check to the Plan for the overpayment, and then that amount could be deposited back into the P's account. What would prohibit that?

[QDROphile]

Plan terms, which are based on qualification requirements. I suspect that the only permissible ways to a credit a participant account are (1) allocation of employer contributions, (2) allocation of investment earnings, (3) loan payments, (3) possibly employee after-tax contributions, and (4) corrective or restorative contributions. I do not think a payment to a plan by a former alternate payee is a corrective contribution unless there has been some error, such as distributing to the alternate payee more than a QDRO provided. That is where we got started.

[Fielding Mellish]

Ok, that makes sense. The problem here is that the P is getting totally screwed. I understand his attorney should have reviewed the QDRO to make sure it had the correct segregation date, but it's just a mess for him, and frankly, the AP, too.

[Fielding Mellish]

So I kind of stumbled on DOL Advisory Opinion 2004-02A.

http://www.dol.gov/ebsa/regs/aos/ao2004-02a.html

That's helpful in this case, especially this part:

Because, in this case, the plan administrator had previously determined the 1997 Order to be a QDRO, the plan was required to make benefit payments in accordance with the 1997 Order. The plan administrator took no steps to preserve the amounts that would be affected by the 2002 Order during its consideration of that order's qualified status, but continued to make the payments required by the 1997 Order. Subparagraph (I) of section 206(d)(3) of ERISA provides that, if a plan fiduciary, acting in accordance with its fiduciary duties, treats a domestic relations order as being qualified, and pays out benefits in accordance with its determination and the 18-month segregation rules of subparagraph (H), the plan's obligations to the participant and any alternate payee are discharged with respect to such payments.⁽²⁾ Accordingly, under these circumstances it is appropriate to treat the 2002 Order as prospective only. There does not appear to be grounds on which the plan could seek repayment from the alternate payee of the benefits paid out in accordance with the 1997 Order.⁽³⁾

[david rigby]

The problem here is that the P is getting totally screwed.

Possibly, but not necessarily. Again, consider very carefully how this is the plan's concern.

While it might be generous of the plan to help fix the situation, many of us have gotten in deep do-do (that's a technical term) by trying to help when it's none of our business. BTW, assuming the plan could and did help to resolve this, there may be an administrative cost for the plan; if the other participants share in that expense, might that be a fiduciary violation?

[Peter Gulia]

I concur with others that needlessly involving the plan easily could become a no-good-deed-goes-unpunished situation.

Why does not the participant's lawyer negotiate for a payment from the alternate payee to the participant (with the amount negotiated to reflect intervening investment changes and tax consequences)?

Or if the divorced parties do not succeed in negotiating their arrangement between them, Fielding Mellish's description of the facts suggests a likelihood that the domestic-relations court still has continuing jurisdiction to order a payment from the alternate payee to the participant.

[jpod]

My guess is that the parties' lawyers never told the judge all the facts when they went back with a revised Order. If the judge gets wind of this he/she is liable to smack their heads together a la the 3 Stooges, or worse. I think if you tell the lawyers that the Order is not a good QDRO and if necessary you will write a letter to the judge to explain why that's the case, they will come up with a resolution that does not involve the plan.