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In Service Alternative Rollover?


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I recently came across the ISAR or In-Service Alternative Rollover.  It seems there is an investment management company and another company offering to "certify" advisors to walk clients through this process, apparently involving hiring an attorney to facilitate an in-service distribution of 100% of assets with no adverse tax consequence and continued participation in the plan while employed. Must be married and is a one-time event.

According to their marketing material, "This additional legislation expanded the ERISA recognition of a plan participant’s marital estate and made the ISAR transaction possible. The ISAR has technically been allowed since 1984 for plans subject to ERISA, and was first used successfully in California in the mid 1980’s."

Has anyone heard of this or have experience with it, or know what they are actually doing to facilitate this kind of event? I'm not asking because I would recommend it...frankly it sounds sketchy to me and would introduce at least a perception of an inherent conflict of interest for any advisor or insurance agent recommending it to a client. However, I try to stay current on industry trends and this is one I've never heard of before today.

Thanks.

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How has the the sham divorce QDRO been shot down?  Last I saw, the courts have said that the plan does not have to (and may not) look behind a state law proceeding as to the bona fides of the intent of the parties.  Facts in cases included admitted remarriage after distribution from the plan.  This is what plans would want, except for the airline DB plan that had unfortunate  distribution alternatives that allowed the scam to seriously game the plan from an actuarial perspective.  

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If it is about using a domestic-relations order to defeat a retirement plan’s distribution restriction, a fiduciary’s duties might be unclear.

 

According to the Employee Benefits Security Administration, when faced with circumstances that strongly suggest what a plan’s administrator believes might be a “sham” to defeat the plan’s distribution restriction, an administrator may inquire about a court order to evaluate whether it is a domestic-relations order under State law; but it’s unclear whether a plan administrator must do so.  ERISA Adv. Op. 99-13A (Sept. 29, 1999).  And an administrator “may inquire” only if, in the circumstances, doing so is prudent and does not burden the plan with an expense beyond a reasonable expense of administering the plan.

 

In a somewhat similar situation, trial and appeals courts held that, even assuming a 100% allocation to the nonparticipant, continued cohabitation of the former spouses, not informing family or friends about the divorce, other facts inconsistent with the “break-up” of a marriage, and remarriage promptly after the plan’s QDRO distribution, a plan’s administrator may not consider the participant’s and alternate payee’s motive for, or good faith in, obtaining a divorce.  Brown v. Continental Airlines, Inc., 647 F.3d 221 (5th Cir. 2011).

 

The 1999 Advisory Opinion is somewhat inconsistent with an earlier interpretation that an administrator need not (and, at least in some circumstances, should not) inquire into the correctness of an order under state law.  ERISA Adv. Op. 92-17A (Aug. 21, 1992).  Perhaps EBSA’s dividing line was that a fiduciary should not “sit idly by” in the face of what seems an obvious falsehood that does not require significant legal reasoning.  But a fiduciary persuaded by the court’s reasoning in the Continental Airlines opinion might find that it need not, and perhaps should not, consider the participant’s and alternate payee’s motive for, or good faith in, obtaining a divorce.  Further, because a court often may end a marriage with no showing of any grounds beyond either party’s assertion that the marriage is broken, a litigant might obtain a court’s order making no false statement of fact.  If so, a plan’s administrator might not have “nformation indicating that an order was fraudulently obtained[.]”

 

The information (not advice) above is about a plan administrator’s need to get its lawyer’s advice about circumstances of the kind described.  I don’t condone using a divorce or separation to defeat a retirement plan’s distribution restriction if the litigants otherwise would not seek or assent to the divorce or separation.  And I don’t condone sales practices built on such a method.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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4 minutes ago, Fiduciary Guidance Counsel said:

If it is about using a domestic-relations order to defeat a retirement plan’s distribution restriction, a fiduciary’s duties might be unclear.

 

According to the Employee Benefits Security Administration, when faced with circumstances that strongly suggest what a plan’s administrator believes might be a “sham” to defeat the plan’s distribution restriction, an administrator may inquire about a court order to evaluate whether it is a domestic-relations order under State law; but it’s unclear whether a plan administrator must do so.  ERISA Adv. Op. 99-13A (Sept. 29, 1999).  And an administrator “may inquire” only if, in the circumstances, doing so is prudent and does not burden the plan with an expense beyond a reasonable expense of administering the plan.

 

In a somewhat similar situation, trial and appeals courts held that, even assuming a 100% allocation to the nonparticipant, continued cohabitation of the former spouses, not informing family or friends about the divorce, other facts inconsistent with the “break-up” of a marriage, and remarriage promptly after the plan’s QDRO distribution, a plan’s administrator may not consider the participant’s and alternate payee’s motive for, or good faith in, obtaining a divorce.  Brown v. Continental Airlines, Inc., 647 F.3d 221 (5th Cir. 2011).

 

The 1999 Advisory Opinion is somewhat inconsistent with an earlier interpretation that an administrator need not (and, at least in some circumstances, should not) inquire into the correctness of an order under state law.  ERISA Adv. Op. 92-17A (Aug. 21, 1992).  Perhaps EBSA’s dividing line was that a fiduciary should not “sit idly by” in the face of what seems an obvious falsehood that does not require significant legal reasoning.  But a fiduciary persuaded by the court’s reasoning in the Continental Airlines opinion might find that it need not, and perhaps should not, consider the participant’s and alternate payee’s motive for, or good faith in, obtaining a divorce.  Further, because a court often may end a marriage with no showing of any grounds beyond either party’s assertion that the marriage is broken, a litigant might obtain a court’s order making no false statement of fact.  If so, a plan’s administrator might not have “nformation indicating that an order was fraudulently obtained[.]”

 

The information (not advice) above is about a plan administrator’s need to get its lawyer’s advice about circumstances of the kind described.  I don’t condone using a divorce or separation to defeat a retirement plan’s distribution restriction if the litigants otherwise would not seek or assent to the divorce or separation.  And I don’t condone sales practices built on such a method.

Thank you for your thoughtful and detailed response. And thanks to all others who have chimed in as well. I was able to confirm with the marketing company that this process does indeed involve a QDRO, and I completely agree with your final assessment.

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2 hours ago, SwimmingInBowelsOfERISA said:

I thought it might be QDRO related as well...may I attach a marketing document for you to look at from the vendor or is that not allowed?

Closer to "not allowed" than "allowed".  Can you post a redacted version?

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This reminds me of back in the '80s people who would market trips to Mexico in late December.  It included a quick divorce on December 30th and remarriage on January 2nd.  Back then if you had a high enough income each the saving by undoing the marriage penalty in the married filing joint status vs single could more then pay for the trip. 

There is now an IRS regulation about this and sham divorces for tax planning reason. 

I was working of the IRS back then and the cynics would always joke but what happens if one party doesn't agree to get remarried.

It would be interesting how these people manage that risk.  How does it stop the :  Thanks for 100% of your million dollar 401(k) plan but I am not remarrying you and going to the tropics with my 25 year old lover says the Alt Payee!

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QDROphile is correct.  Here is an earlier discussion about the "sham divorce".

 

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.

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If we assume it’s impractical to deny QDRO treatment to a court’s order merely because circumstances suggest an intent to game a plan’s distribution restriction, let’s consider a related plan-design question.

 

For the retirement plans involved in the request for the 1999 advisory opinion or the litigation described above, both employers had an economic stake in not too easily allowing an alternate payee to get something the participant could not get.

 

With a defined-benefit pension plan’s sharing of risks, guarding against adverse selection might matter.  And with an employee stock ownership plan, an employer/issuer’s interests in markets for its securities (or, if the securities are not publicly traded, a repurchase or redemption obligation) might lead an employer to care about when an employee or former employee (or his or her beneficiary or alternate payee) gets a right regarding the securities.

 

Imagine an individual-account (defined-contribution) retirement plan that has no investment in employer securities.  Can smart BenefitsLink people imagine a situation in which an employer has an economic stake in restraining an opportunity to use a QDRO to get a distribution the participant could not get?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Maybe they're not going after "sham" divorces, or at least not mainly, but in their endless drive to bring more assets in for their broker-dealer they are trying to find real alternate payees, who have been part of a legitimate divorce, that (for whatever reason) have left their money in the participant's plan and they're pointing out to these alternate payees, and the plan sponsor, that the alternate payee can roll out even while the participant spouse stays employed.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On ‎2‎/‎14‎/‎2018 at 4:07 PM, Mike Preston said:

Closer to "not allowed" than "allowed".  Can you post a redacted version?

I suppose I could but in light of what I've read in this discussion, I think it would just be easier to recommend to anyone who wants to see some of this material for themselves to simply google "ISAR rollover" and it shouldn't take you long to find it; the copy has a name that sounds like it might a TPA but I don't believe they are.

3 minutes ago, Luke Bailey said:

Maybe they're not going after "sham" divorces, or at least not mainly, but in their endless drive to bring more assets in for their broker-dealer they are trying to find real alternate payees, who have been part of a legitimate divorce, that (for whatever reason) have left their money in the participant's plan and they're pointing out to these alternate payees, and the plan sponsor, that the alternate payee can roll out even while the participant spouse stays employed.

Luke might be on to something...as a follow up the group promoting this claim they can get a QDRO issued without divorce or separation and denied it was any type of "sham" of the latter.  

Either way...that dog won't hunt in this office.

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4 hours ago, Fiduciary Guidance Counsel said:

Imagine an individual-account (defined-contribution) retirement plan that has no investment in employer securities.  Can smart BenefitsLink people imagine a situation in which an employer has an economic stake in restraining an opportunity to use a QDRO to get a distribution the participant could not get?

 

Not too difficult to conjure up.  In service distributions stick around for Top Heavy testing for a limited time. Hence, a plan that might otherwise not be Top Heavy might find itself subject to Top Heavy minimums and increased vesting.

Also, a plan that used Accrued to Date testing might find that the inclusion and projection of previously distributed funds would have materially different non-discrimination test results.

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If an IRS-preapproved document's "adoption agreement" allows a choice to preclude a QDRO distribution until the ERISA 206(d)(3) / IRC 414(p) earliest retirement age, how would you advise an employer about whether it should select that provision?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Frankly, the vast majority of small plans are better off not selecting such a provision.  If it happens that the top-heavy or 401(a)(4) considerations are important to a client I would recommend selecting the provision.  I doubt that there are any 411(d)(6) considerations.

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11 hours ago, RatherBeGolfing said:

In small plans / sponsors, I want as few accounts as possible attributable to participants who are not active employees.  It is just one more opportunity to miss a notice or disclosure or for the participant to go "missing".  

Yup never increase the chance for lost participants. 

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Absent employer securities, I often suggest an employer might prefer to get rid of obligations to alternate payees as quickly as allowed.

Any different views?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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