QDRO distribution from multiple sources

[Belgarath]

Say a QDRO specifies a lump sum of "X." Participant has several sources - deferrals, match, Roth, Pre-tax, etc.

QDRO and plan are silent on the issue of which source(s) from which the funds would be distributed. My answer would be proportionately from all sources - but does the Participant or Plan Administrator have the right to then dictate the source(s) from which the distribution is made? For example, all from Roth, or none from Roth, etc.?

Thanks.

[ESOP Guy]

I can't imagine a Plan Administrator would ever want to take on that burden of picking. 

As for the participant if the document doesn't give them the power to pick I would say "no".   I have never seen a document that gives such power to a participant. 

I can't cite anything but that would be my answer every time. 

[Belgarath]

Gracias - that was my answer, but I thought it would be good to get the opinions of QDRO experts.

[C. B. Zeller]

This may be an inadequately drafted DRO if it does not address the division of the after-tax basis in the participant's account. Has it already been accepted as a QDRO by the plan administrator?

[Belgarath]

Nope. But why should the Plan Administrator be tasked with determining (or questioning) this? If it is done pro-rata, seems like that question takes care of itself?

[C. B. Zeller]

Determining if a DRO is qualified is one of the duties of the plan administrator. If the DRO does not contain enough information to divide the participant's benefit, then it might not be qualified.

[Peter Gulia]

Beyond checking that a domestic-relations order “clearly specifies” enough details that one can follow the order without discretion, a plan’s administrator also might check whether the order’s division is one the recordkeeper would implement within the recordkeeper’s obligation under its service agreement.

[Adi]

Was there anything in the Plan's QDRO procedures addressing this? One plan I've seen has a default pro-rata rule, unless the QDRO specifies otherwise. Most QDROs I come across are either silent or split pro-rata. 

[Belgarath]

Silent.

[Peter Gulia]

Assuming a plan administrator has not escaped the problem by furnishing its preferred form of court order, what do BenefitsLink people think about which is the better or worse way to handle an account division’s allocation problem:

Include in the plan administrator’s QDRO procedure defaults for how the alternate payee’s award is allocated between non-Roth and Roth subaccounts?

This way risks that a participant or an alternate payee is unhappy with the default allocation, and claims the administrator somehow breached its responsibility.  Even if such a claim is meritless, it’s an expense to respond to the claim.

Insist that a court order specify all details for all allocations, including between non-Roth and Roth subaccounts?

This way often incurs expenses to respond to inept domestic-relations lawyers.

What do you think: which path is more painful, or more expensive?

[Adi]

59 minutes ago, Peter Gulia said:

Assuming a plan administrator has not escaped the problem by furnishing its preferred form of court order, what do BenefitsLink people think about which is the better or worse way to handle an account division’s allocation problem:

Include in the plan administrator’s QDRO procedure defaults for how the alternate payee’s award is allocated between non-Roth and Roth subaccounts?

This way risks that a participant or an alternate payee is unhappy with the default allocation, and claims the administrator somehow breached its responsibility.  Even if such a claim is meritless, it’s an expense to respond to the claim.

Insist that a court order specify all details for all allocations, including between non-Roth and Roth subaccounts?

This way often incurs expenses to respond to inept domestic-relations lawyers.

What do you think: which path is more painful, or more expensive?

I think an administrator is far more likely to come across a silent order than a situation where the parties do not want a pro rata allocation.  As a result, I think it's easiest to include a default rule (pro rata) in the Procedures.  Assuming it can be administered, the Procedures can include a caveat of "unless a QDRO provides otherwise."  I'd argue there are other similar default rules that should be identified in the Procedures but wouldn't necessarily be needed in a QDRO (e.g., timing for segregation, how the account will be initially invested if no election is made, what gains and losses encompasses, etc.). I can only recall only one or two situations where a participant has sought a different allocation than the default pro rata after a QDRO was preliminarily approved.  If that were to happen, the participant could just object to the determination letter (assuming the plan gives the parties an opportunity to do so) and then get a new QDRO that clearly articulated the allocation. Otherwise, by taking a hard-line approach and requiring an order to specify the allocation, I'd imagine the administrator will have to do a lot of additional back and forth and the parties will have to undergo additional time and expense to get a new order (which ultimately will probably allocate pro rata).

[Peter Gulia]

Adi, thank you for your cogent explanation.

[Luke Bailey]

Peter, I also vote for default. And in Belgarath's actual case, since there is no actual policy in place now, I would send the participant and alternate payee a letter saying that the plan would apply a pro rata allocation unless they wanted to resubmit a modified QDRO that might provide otherwise.

[QDROphile]

No one has suggested amending the QDRO procedures. If one is timid, integrate the amendment with Luke Bailey‘s suggestion.

And while the administrator is at it, add provisions for dealing with a non-spouse QDRO and with withholding on the distribution to the non-spouse AP.

[JM]

Also, the tax cost basis must be pro-rata under IRC 72(m)(10) and if there is a brokeragelink (brokerage window) then those funds would need to be converted back to standard investment options as they will not pay the alternate payee anything from a brokeragelink sub-account.

[BG5150]

What about sources that are not 100% vested?

Do the funds that go tot he AP come from both vested and non-vested portions of the account?

For example, PS only.  Participant has $10,000 and is 50% vested.  DRO calls for 50% of vested account balance.  After the transfer, is the participant left with:

A) $2,500 vested and $5,000 unvested?

B) $3,750 vested and $3,750 unvested?

Choice A would be much harder to record keep, IMO.

[Mike Preston]

8 hours ago, BG5150 said:

What about sources that are not 100% vested?

Do the funds that go tot he AP come from both vested and non-vested portions of the account?

For example, PS only.  Participant has $10,000 and is 50% vested.  DRO calls for 50% of vested account balance.  After the transfer, is the participant left with:

A) $2,500 vested and $5,000 unvested?

B) $3,750 vested and $3,750 unvested?

Choice A would be much harder to record keep, IMO.

I think it has to be A.

[ESOP Guy]

9 hours ago, BG5150 said:

What about sources that are not 100% vested?

Do the funds that go tot he AP come from both vested and non-vested portions of the account?

For example, PS only.  Participant has $10,000 and is 50% vested.  DRO calls for 50% of vested account balance.  After the transfer, is the participant left with:

A) $2,500 vested and $5,000 unvested?

B) $3,750 vested and $3,750 unvested?

Choice A would be much harder to record keep, IMO.

I don't see how it can be B.

Think of it this way.   If the participant quit the day after the AP got paid choice B would mean you pay him $3,750.  That would mean between the AP and participant they would be paid $6,250.   I assume you agree the AP gets $2,500 under your fact set.    The total vested was $5,000 now they are getting paid more then that.  So getting the QDRO just hurt the rest of the participants by reducing the amount of forf that are available to them for fees or reallocation.....

 

[JM]

It would be A because you cannot award an AP an unvested benefit in a QDRO.  So AP gets $2500 and P has $2500 vested and $5k unvested.  However, the QDRO could say AP gets 50% of the total (so $5k) and that would be paid from the vested source only leaving P $5k all unvested subject to future vesting.  While that's not necessarily fair you could also draft one QDRO awarding AP 50% of vested ($2.5k) and reserve jurisdiction over unvested and later on enter a supplemental QDRO to capture the additional amount due AP once that part of the account vests.