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I don't think it's a coincidence that your set of roles for this hypothetical adviser matches with the list of persons described in Circular 230. With regards to providing written advice to a taxpayer, Circular 230 § 10.37(a)(2)(vi) instructs that a practitioner must "Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit." I read this, perhaps expansively, to mean that a practitioner may not discuss the subject of "getting away" with questionable transactions. Under that guideline, I would find it inappropriate to discuss the capabilities (or the lack thereof) of the IRS to detect this issue. Even were I not myself subject to Circular 230, I would still not discuss it, as the only possible result of bringing it up would be to serve to encourage them to illegally treat the distribution of excess deferrals and earnings thereon as a qualified Roth distribution. My job is to help my clients get the tax results they desire, within the bounds of law and regulation.

Ha, let's hope that practitioner weighs in to set us all straight, Kenneth. Agreed, the distributions already made will just be recharacterized as taxable income. Here's an overview of the approaches that I've posted: https://www.newfront.com/blog/the-dependent-care-fsa-average-benefits-test Correcting an ABT Failure Where HCEs Have Already Exceeded the Reduced Limit In some situations, employers will not discover an ABT failure in time to impose a reduced HCE contribution limit prior to HCEs contributing to the dependent care FSA in excess of that limit. For example, suppose the ABT pre-test results show that HCE elections must be reduced by 20%, resulting in HCEs who elected the $5,000 maximum having to drop to $4,000. If those HCEs have already contributed $4,375, there is a $375 excess that must be made taxable income before the last day of the plan year. There are two basic approaches to converting excess HCE dependent care FSA contributions to taxable income: Refund/Return: The employer can distribute the excess contributions back to the HCEs through payroll as taxable income subject to withholding and payroll taxes by the end of the year, thereby reducing the amount available in the HCEs’ dependent care FSA account balance. Note that this approach will not work for HCEs that have already received reimbursement of the excess amount. Recharacterize: The employer can recharacterize the excess contributions as taxable income subject to withholding and payroll taxes without directly refunding the excess to HCEs. The downsides of this approach are that the employer will need to a) take the withholding and payroll taxes from other income, and b) inform the HCEs that they may take a distribution of the excess contributions (which no longer have pre-tax status) from the FSA without the need to submit qualifying dependent care expenses. With either approach, the employer will need to coordinate with the FSA TPA to ensure proper administration of the correction. As always, the employer will need to take action before the end of the year to ensure a passing result as of the last day of the plan year.

Other than asking a good CPA... Perhaps this will help a bit? And I believe you can maybe deduct a theft loss on a Form 4684? But this is way out of my area of knowledge. My deepest sympathy to the poor lady with a loser of a Son. Theft losses A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

The wife might want her lawyer’s advice about whether to pursue remedies more immediate than merely seeking an ordinary domestic-relations order. Consider also that, beyond delay in getting a DRO, such an order might have limited or no effect regarding an ERISA-governed retirement plan if the participant’s account was distributed before the plan’s administrator receives the order. This is not advice to anyone.

Your observations are right. That Amoco ignored Schoonmaker’s direction to redeem his interest in employer securities might have resulted in his account’s loss. Also, ignoring a direction to redeem shares or units of a US large-cap stock fund might have resulted in a somewhat similar loss. Depending on which measures and days one looks to, US large-cap stocks had around a 30% drop in mid-October 1987, when Amoco had applied a hold. After reading Schoonmaker (if not earlier), many practitioners—whether working for plans’ sponsors and administrators, or for service providers—wrote or edited plan-administration procedures, including QDRO procedures, to make clear that, even if the plan puts a waiting-for-a-DRO hold on a participant’s right to a distribution, a participant continues to direct investment. To do otherwise would make the plan’s administrator the fiduciary responsible for investing the participant’s account. If a participant remains responsible to direct investment for her account, such a participant’s loss is not about her account’s investments. Rather, it’s a delay of one’s opportunity to take a distribution or loan the plan would provide absent the QDRO procedure’s (or some other) hold. For reasons you’ve mentioned and some more, few participants might pursue that claim. And for those who pursue it, the harm from the delay might be slight, or might be difficult to prove. All that observed, legal, practical, and economic restraints on a liability exposure to affected participants is only one of many factors an administrator might consider in designing its QDRO procedure.

Here is a link to a case with similar facts: https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/individual-not-liable-for-taxes-penalties-on-ira-distributions-obtained/1psdb I don't think the participant would be entitled to a theft deduction. The tax basis in the IRA is considered to be $0 since the income has not been subject to income taxes - unless there are non-deductible contributions.

One of the "ifs", as long as he is a NHCE.

So in this case the "hold" that the plan administrator put on the account was not just on distributions, but investment changes. The participant had Amoco stock in his account and was barred from selling it, resulting in an investment loss. He won the litigation. Query whether in a typical 401(k) where investments are in mutual funds and the hold is only on distributions, not investment changes, by participant, you would have any compensable loss.

If the proposed alternate payee is homeless, here’s a detail one might tend to. An order is a QDRO only if the order, along with meeting other conditions, “clearly specifies . . . the name and mailing address of each alternate payee[.]” ERISA § 206(d)(3)(C)(i), 29 U.S.C. § 1056(d)(3)(C)(i). The address recited in an order need not be the address of a place where the alternate payee resides. It is enough that the address is a mailing address at which the alternate payee could receive mail. See Mattingly v. Hoge, 260 F. App’x 776 (6th Cir. Jan. 8, 2008). In my experience, such an address sometimes is an address of a lawyer, paralegal, certified public accountant, enrolled actuary, investment adviser, or other person who has the alternate payee’s authority to receive mail, at least regarding the domestic-relations-order matter. I’ve also seen such a method used when an alternate payee has a residence address but prefers that the information not become known to the participant.

The PEO situation should not be confused with the rules which require those who have met the definition of Leased Employee to be counted as employees of the plan. Within the definition of Leased Employee is the exception for the leasing agency which provides a 10% money purchase benefit. A PEO should not be viewed through the Leased Employee rule lens. That will take you down the wrong path. A PEO is considered to be the employer for payroll purposes (paying wages and filing Form W-2) and it may sponsor a MEP which its clients adopt as participating employers. However, the PEO's client (here, the laundry) is considered to be the employer, too. This is a unique concept of co-employment that is widely misunderstood. The laundry is the employer that provides the workplace, the direction and control of the employees. It also is the sponsor of a retirement plan for those employees -- as a participating employer in the PEO MEP. The portion of the MEP that covers the laundry is a plan in the controlled group with the original S-corp. Just take it from there and apply all the controlled group retirement plan rules to the S-corp plan and the laundry's portion of the PEO MEP.

Schoonmaker v Employee Savings Plan of Amoco Corp (7th Cir 1993)

Do those "standardized" prototype documents even exist in the wild anymore? I haven't seen one in years.

About a paucity of courts’ decisions: Does anyone know of a Federal court’s written opinion that faults a plan’s administrator, when it had notice to expect a domestic-relations order but before the administrator received an order, —for not protecting a prospective alternate payee from the participant’s act? —for denying or delaying a participant’s claim because the administrator sought to protect a prospective alternate payee’s interest?

Such an excellent discussion of a very practical topic on which, as far as I know, there is very little law. My take on this issue when I have had to advise clients is that while ERISA and the DOL's guidance unfortunately does not provide protection to a plan administrator that wants to do the right thing (i.e., hold up a distribution when it has notice that a QDRO will be coming), such that a participant who has the right to take a distribution has a good case on paper that the plan should pay him or her, how practical is that lawsuit actually? It's an ERISA claim for benefits, so the most the plan has at stake is the benefit amount, and that's not really at risk because the plan is not paying it to anyone, but rather simply holding on to it until the state court has decided whether and how it should be divied. The issue is only the timing of the payment. So, a participant who, for whatever the reason, wants to take a large distribution that would drain their account before the nonparticipant spouse can get a QDRO would have to hire a lawyer to go to court under ERISA and claim that the plan's delay in paying the benefit was a violation of ERISA. Best case scenario for the participant is they win that lawsuit and the plan pays the benefit. I doubt the plan would have to pay attorney's fees. But by that time the nonparticipant spouse will have had months of notice of what the participant is trying to do and the QDRO will probably have been served anyway. In other words, the participant's lawsuit seems more like a hypothetical than a realistic scenario. (Of course, I am excluding here a situation where the nonparticipant spouse is acting unreasonably, e.g. making an unrealistic claim regarding the benefit and slow-walking the QDRO process.) So, while the law on its face is against the plan that wants to delay the distribution, I think the law in practical effect poses little risk for the plan.

A good CPA or maybe even a tax attorney would be a wise move. She could probably take legal action against her son but I'm guessing the odds of recovery on that front are quite small.

I can only speak from the perspective of an attorney who has been involved in the preparation of pension and retirement orders for the past 37 years. There are a number of factors in play. 1. In most cases the most valuable assets owned by the family unit are the equity in the marital home and their pension and retirement assets. You cannot treat them lightly. An Alternate Payee's loss of benefits can be financially catastrophic. 2. Most lawyers, and I do mean MOST, have no idea of the complexity if this area of law as applied to the vary narrowly focused question: "How to I make sure my Alternate Payee client receives the proper share of the Participant's benefits." They are, for the most part, ineducable. 3. Most of the judges in my State have had minimal experience as family lawyers. They have been prosecutors or criminal defense lawyers, personal injury lawyers, or even real estate, corporate, tax or administrative lawyers. As competent as these lawyers may be, they don't understand family law, and the nuances are entirely lost on them. 4. I advise my attorney colleagues to have the QDRO's prepared, approved by the parties, and ready to initial and sign at the same time they sign the Marital Settlement Agreement ("MSA"), and then present it to the court at the final hearing and get the certified copy in the mail to the Plan Administrator ASAP. Even before that happens, I suggest that at the earliest possible moment they send a "Notice of Adverse Interest/Claim" to every Plan Administration they can identify, the purpose of which is to give them "actual notice" that a QDRO is or will be on the way. 5. Plan Administrators have a fiduciary duty toward both Participants and Alternate Payees. See 29 U.S.C. § 1104. 29 U.S. Code § 1002(8) defines "beneficiary" as follows: "(8)The term “beneficiary” means a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder. See 29 USC 1132(c) for penalties imposed upon a Plan Administrator for failure to provide information to a Participant or a Beneficiary. Pursuant to 29 USC 1132(a)(1)(B) a Participant or an Alternate Payee (who is classified as a beneficiary), can sue "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan". 29 USC 1132(e)(1) states that: "(e)Jurisdiction: (1)Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, fiduciary, or any person referred to in section 1021(f)(1) of this title. State courts of competent jurisdiction and district courts of the United States shall have concurrent jurisdiction of actions under paragraphs (1)(B) and (7) of subsection (a) of this section." 6. What does all of this mean? If you are a Plan Administrator and receive "actual notice" that a DRO is coming your way, you attorney will counsel you to put a freeze on the Participant's benefits until the matter is resolved by the parties or by the state court. Failing to implement a freeze may get you involved in a lawsuit that you may very well lose. I have seen this happen at least 100 times. Defined benefit plans will not commence the payments of benefits to a retiree. 401(k) plans will not permit loans, or hardship withdrawals, or in-service withdrawals or post termination withdrawals. 7. It is a rare case that a Participant is happy about paying pension or retirement benefits to an Alternate Payee. One of the ways to avoid may some of all of such benefits is to DELAY the entry of the QDRO by any means possible. See attached a Memo I recently prepared recounting the consequences of delay. I would welcome anyone with additional scenarios that I may have missed. DSG CONSEQUENCES OF DELAY 04-15-24.pdf

I've had this discussion over the years with several people and do have some thoughts to share. first, if the plan and/or QDRO procedure provides for a freeze, I think the plan terms control. Of course, if the participant must receive a distribution (e.g., an RMD), the plan can't interfere with those legal limitations or mandates. Of course, the purpose of a freeze for a divorce is to protect the nonparticipant spouse, who is presumed (whether it is accurate or not) to be a nonworking wife, if the participant is dastardly and wants to drain the account before she can get a hold of half his account. While I have all kinds of thoughts about stereotypes, paternalism, and the like, I agree with David Schultz about it not being the plan's place or responsibility to control the participant's behavior. Further, in many (if not all) jurisdictions, when you file for divorce, the court issues a court order requiring the couple not to impair any potential marital assets. So, usually, once the divorce is final, the participant is likely in contempt of court if he or she raids the plan, and there are remedies for that which the court can impose. The former spouse has no rights at all to the participant's plan interest in absence of a QDRO. And, the Supreme Court said in one case that it is inappropriate to use a QDRO to state that the spouse has no rights to the participant's account, as that is the status quo. So, if you do put a hold on the participant's account, when does the hold end? When the participant shows you his/her divorce decree? that requires a sharing of information that is really not the business of the employer/plan administrator. And, if it is decided in the first five minutes of the divorce process that the nonparticipant spouse is not interested in sharing in the participant's benefits, the presumed protection of the nonparticipant spouse is not needed. So, from a practical standpoint, the plan administrator really doesn't have access to or shouldn't have access to enough information to know when the hold should be started and when it should end. For no other reason than the practicality of the hold (or lack thereof), I recommend that they plan only place a hold on the account during the period between the provision of the proposed QDRO to the plan, and the determination by the plan that the QDRO does or does not quality. The nonparticipant spouse should use his or her lawyer and the courts to control the behavior of the participant vis-a-vis their marital assets.

If you've contributed $X YTD then I think the cash refund you'll get is $X less whatever claims have been paid to you. If your paid claims were more than $X, I don't think the excess can be clawed back (like if you terminated and your YTD claims exceeded your YTD contributions). But that is just the cash flow issue. Whatever you had contributed YTD will all be taxable to you regardless of cash refund amount and also subject to FICA and Medicare taxes. There is a very smart health and welfare plan practitioner in this forum who hopefully will see this and either confirm my understanding or set me straight and give you the correct answers.

I think the fundamental question is: Is there ANY language in your plan documents that authorizes the Plan Administrator (or any other party) to freeze a participant's account based only on knowledge that a DRO is being discussed? In most states, the filing of a divorce petition results in an automatic stay preventing the parties from unilaterally taking/transferring marital assets. If the participant does something improper - prior to the plan being aware of an actual DRO - then the court can deal with the participant's improper actions. It isn't the plan's place to intervene; the court can do that. The plan's duty is to follow its terms and provide benefits to participants, not to protect either party in a divorce proceeding. My belief is that such freezes are an operational failure (not acting within the plan terms) and potentially a fiduciary breach. I'd tread carefully (or preferably not at all).

Sounds correct if it is a retroactive corrective amendment under EPCRS rev proc 2021-30 which does allow correction for early entry via amendment if the correct parameters are met. But there are a lot of ifs there.

See Reg. 1.402(g)-1(e)(8)(iv): "(iv) Distributions of excess deferrals from a designated Roth account. The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402(c)(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income." Short version as I understand it: Excess Roth deferrals and related income are taxable and cannot be rolled over. Shorter version: less like a loophole, more like a snare.