Jump to content

QDRO using % of assets?


Recommended Posts

I work on a plan that is an owner/spouse CB plan. The couple got divorced, and the QDRO says the AP gets X% of the owner's account balance as of a certain date.

The parties involved apparently all agreed to a dollar amount based on X% of plan assets.

However, when I look at the actual benefits as of that date, the AP should have received tens of thousands of dollars extra, if I take X% of the Participant's CB benefit as of that given date.

When I initially received the QDRO and reconciled the plan assets and determined more money was due, the attorney who drafted the QDRO came back and said there is nothing more due, because both parties received what they had agreed on.

I'm curious if anyone has opinions on this. I'm thinking it's a case of a poorly worded QDRO and/or a misunderstood attorney, but I suppose I let it go if everyone's happy? Are there legal ramifications to be wary of here? Or maybe the QDRO is perfectly fine, and the way they have handled everything is okay? Thanks in advance.

Link to comment
Share on other sites

Was the $ amount specified in the QDRO or just the % of the account balance?  If the $ amount was specified, I say, everything is fine.  However, if the % was specified in the QDRO, and you don't agree with the payment amount, then you should communicate your concerns to the Plan Administrator.  If you are acting as the Plan Administrator, you should consider sending both attorneys a letter expressing your concerns. If neither responds, then you have done your duty.

The attorney represents the individual and is trying to get the most of their client.  You represent all plan participants, include the AP.

Is it possible the valuation date used in the QDRO is not the same valuation date you used?  If the plan is still accruing benefits, maybe additional benefits earned after a certain date were not allocated to the AP?

  • Like 1
Link to comment
Share on other sites

As suggested by Effen, the determination and interpretation is the responsibility of the person who is the fiduciary with respect to QDROs. That may be you, the plan administrator, or someone else. That person must act based on the terms of the order.  If that person’s interpretation is not what the parties expected, the outcome (which might result in a revised interpretation or revised/new order) is determined through the plan’s claims procedures.

Link to comment
Share on other sites

Thanks for the replies.

The QDRO only specified a % of the "account balance." I'm just the actuary on the plan and not a fiduciary. But it's clear that the attorney, participant, and AP thought the thing to do was just take X% of the assets, and then everything is good. So, whether or not a QDRO "can" say just take a % of DB plan assets, that is clearly how they all interpreted it.

However, I still have the separate issue of the AP had accrued a decent benefit under the CB plan. They say that "everything is good" and that the AP is due no more money from the plan, but did they take into account that the AP would have her own benefit payout in addition to the QDRO payout? I have a feeling they just treated the CB plan as if it was all the owner's money, but this is something I'm still waiting to hear back on. If they come back saying that the QDRO payout was meant to completely pay out the AP from the plan (which is what I am almost certain they will say), and all parties are okay with it, do I just let that stand as well? For what it's worth, the payout she received was larger than her CB benefit. This would effectively mean that she received her CB benefit, in addition to a QDRO amount that was less than X% of the assets (it would basically mean that the QDRO's wording does not match the actual QDRO payment, even though all parties are okay with the payment).

I guess this all is a long way of asking - does it matter what the QDRO says if the attorneys, participant, and AP all agree with the payments?

Link to comment
Share on other sites

My thoughts are that I will send an email to the attorney expressing my concerns with the QDRO wording- that I think the AP would have a very strong argument for more money if she decided she wanted to fight for it.

Link to comment
Share on other sites

Couple things immediately jump to mind. 

1) This is a cash balance plan, not a defined contribution plan.  You can't just split the assets and pay the AP.  I don't see many cash balance QDROa, but I don't think you can just pay the AP unless the participant is otherwise eligible for early retirement.  You could establish an account for the AP inside the plan, but I don't think you can "pay" them until the participant is entitled to payment either by termination or becoming eligible for early retirement.  I might be wrong about this, but I have never seen it in practice. 

2) Your mixing up thoughts.  The QDRO should have absolutely nothing to do with any benefits the AP earned in the plan.  Any benefits earn by the AP are 100% hers, unless the participant has a QDRO attaching her benefits. 

3) Your letter should be addressed to the PA, but if you copy one of the attorneys, you should copy both the participant's and the AP's attorney.

4) I guess this all is a long way of asking - does it matter what the QDRO says if the attorneys, participant, and AP all agree with the payments?  A QDRO is really like a plan amendment.  If you rephrased your question I think you have your answer.  "Does it matter what the document says?"  

Link to comment
Share on other sites

3 minutes ago, Effen said:

I don't see many cash balance QDROa, but I don't think you can just pay the AP unless the participant is otherwise eligible for early retirement.

You can pay an AP immediately if the terms of the plan allow (e.g., an option in the FTW VSP is ability to QDRO in lump sum in any amount at any time - i.e., no limitations, unless you have 436 or top-25 HCE restrictions).

IMHO, if the QDRO says AP gets X% of account balance then AP gets X% regardless of the assets and independent of any benefit/account balance the AP has accrued under the plan as a participant. AP may or may not be able to get this distributed immediately, depending on terms of the plan and funded status. AP as participant cannot get her individual account balance/accrued benefit unless employment terminated or otherwise eligible.

  • Like 1
Link to comment
Share on other sites

1 hour ago, Effen said:

Couple things immediately jump to mind. 

1) This is a cash balance plan, not a defined contribution plan.  You can't just split the assets and pay the AP. I agree 100%, and it's clear to me that whoever drafted this QDRO has no clue about this.

2) Your mixing up thoughts.  The QDRO should have absolutely nothing to do with any benefits the AP earned in the plan.  Any benefits earn by the AP are 100% hers, unless the participant has a QDRO attaching her benefits.  I know they're two separate things - but it's another case of the attorney clearly has no clue. They think this QDRO takes care of completely paying the AP all money she could possibly get from the plan (at least I am 99% sure this is what they think - waiting on them to 100% confirm).

 

Link to comment
Share on other sites

1 hour ago, figure 8 said:

My thoughts are that I will send an email to the attorney expressing my concerns with the QDRO wording- that I think the AP would have a very strong argument for more money if she decided she wanted to fight for it.

Whose attorney are you going to contact? If it's the employer/plan attorney, then that's a good start. If it's the attorney for the AP, I don't think that's a good idea unless you get your client's permission first.

Link to comment
Share on other sites

2 hours ago, CuseFan said:

IMHO, if the QDRO says AP gets X% of account balance then AP gets X% regardless of the assets and independent of any benefit/account balance the AP has accrued under the plan as a participant. AP may or may not be able to get this distributed immediately, depending on terms of the plan and funded status. AP as participant cannot get her individual account balance/accrued benefit unless employment terminated or otherwise eligible.

This is exactly my understanding, and it seems pretty clear-cut to me. I just don't know what to do if the other parties involved don't agree. I had even calculated the proper amounts to be paid out, and they just ignored my calculations.

Link to comment
Share on other sites

1 hour ago, Bill Presson said:

Whose attorney are you going to contact? If it's the employer/plan attorney, then that's a good start. If it's the attorney for the AP, I don't think that's a good idea unless you get your client's permission first.

Good advice. Thanks.

Link to comment
Share on other sites

See my responses in bold type. 

I work on a plan that is an owner/spouse CB plan.  I am having a problem with your non-standard use of language.  In ERISA qualified plans you will have a Participant, an Alternate Payee, a Plan Sponsor, and a Plan Administrator. I don't understand what you mean when you say "CB" unless, as one of our members suggested below, you are talking about a "cash balance" plan.    I understand that you are acting as the actuary for the Plan, but I don't understand your role and how you got involved.The couple got divorced, and the QDRO says the AP gets X% of the owner's account balance as of a certain date.  Here is the DOL explanation of how cash balance plans work. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/cash-balance-pension-plans 

It is common in allocating defined contribution plans to direct that the Alternate Payee will receive a certain dollar amount as of a Valuation Date, or a certain percentage of the vested benefit as of the valuation date.  In addition, most of the QDROs I see provide that the amount payable to the Alternate Payee will be adjusted for gains, losses and investment experience from the Valuation Date until: (i) the date the Alternate Payee's share is transferred via tax free rollover to the Alternate Payee's IRA or other qualified account, or (ii) until the date the Alternate Payee's share is distributed directly (taxable but no 10% penalty), or, (iii) until the date the Alternate Payees share is segregated for the Alternate Payee's benefit.  These three events are often called the "Liquidation Date" or "Assignment Date".  With respect to the issue of whether or not the "gains and losses" language is implicit even if not set forth in the Marital Settlement Agreement or the Judgment of Absolute Divorce, see the attached Memo.  

I have prepared many QDROs for the cash portion of cash balance plans that are stated in the same way.  Gary Shulman's treatise, "Qualified Domestic Relations Order Handbook", provides two model QDRO at Chapter 36, one for a fixed amount and one for a percentage.     

The parties involved apparently all agreed to a dollar amount based on X% of plan assets. How were plan assets defined?  In a defined contribution plan it would be a percentage of the vested account balance (including or excluding loan balances).  In a cash balance it would be a percentage of amount of the cash balance which bears no true relationship to the defined benefit plan to which it is attached, nor does it reflect any realistic present value of the expected stream of  future annuity payments.  

However, when I look at the actual benefits as of that date, What are you looking at? An actuarial calculation?  Present value?  A percent of what? the AP should have received tens of thousands of dollars extra, if I take X% of the Participant's CB benefit as of that given date.  

When I initially received the QDRO and reconciled the plan assets and determined more money was due, the attorney who drafted the QDRO came back and said there is nothing more due, because both parties received what they had agreed on. This may or may not be true.  If the parties made a mistake of fact about how much was in the account to be divided, then the court may have to power to reform the agreement to reflect the actual intent of the parties.  Or one of the parties needs to call his/her malpractice carrier.  

I'm curious if anyone has opinions on this. I'm thinking it's a case of a poorly worded QDRO and/or a misunderstood attorney, but I suppose I let it go if everyone's happy? Are there legal ramifications to be wary of here? Or maybe the QDRO is perfectly fine, and the way they have handled everything is okay? Thanks in advance.  If you notify the parties of your uncertainty about how much is to be transferred, then you know what will hit the fan.  If you make that decision yourself while being uncertain of whether you are right or wrong, you may put the Plan assets in jeopardy.  I think you need to bring it to the intention of the parties.   

Gains, Losses, Ownership Interest and Constructive Trusts 7-16-2020.pdf

  • Confused 1
Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...