QDROphile

I don’t think one can be too exacting about plan terms. Sometimes I wonder if I should be chagrined at the number of my posts that that assert something like, “the plan document sucks.” That said, sometimes it is appropriate to be vague, though not ambiguous. The issue with an artfully vague provision is that the fiduciary responsible for interpreting the provision has to apply it and might not be cued in to the intent behind the vagueness, and eventually may have to solidify the meaning over time as the provision is consistently applied. Also, the fiduciary may be uncomfortable with interpretation, especially if the fiduciary is unskilled or inexperienced (such as “the employer”, whoever that is at the moment — a dig at those who think it is OK to designate the employer as plan administrator). I hope you are not the fiduciary responsible for interpreting plan terms. As you describe the terms, the plan document sucks. If you are not, consult the poor fiduciary who is, as questions come up. If you are the fiduciary, consult the plan sponsor to determine the intent behind the provision, then to the extent feasible and consistent with qualification requirements and any history of interpretation/application, create a written interpretation that implements the appropriate intent and eliminates the uncertainties.

Please disregard the second paragraph of my response above. I am rethinking the matter. As the award language stands now, I am in line with the idea that the former spouse receives nothing. The question is whether or not a post-death order in this case can remedy the omission of a pre-death provision that the alternate payee is to be treated as a spouse. And I am doubling down on my criticism of the DOL.

This is another opportunity to rant about the abject failure of the Department of Labor to provide helpful guidance concerning post-death QDROs despite being directed to do so. Done. I do not understand when the participant terminated relative to the divorce judgment, which contains the award of the participant’s entire benefit. Also, the award language could be better. However, I don’t think it makes any difference. The former spouse was awarded the participant’s entire benefit, not the participant‘s death benefit. The participant was alive when this happened. Pre-QDRO death after a pre-death award in the divorce judgment should not change anything.* When a qualifying DRO is submitted, the alternate payee should receive a benefit in whatever form the participant could receive if the participant started benefits before death (actuarially adjusted for the AP). I do not address whether or not that includes the new lump sum benefit. Otherwise, a pension plan with only a QPSA would defeat QDROs whenever a participant dies before benefits start to the AP, and that cannot be what was intended under the law. *I am troubled by opportunities for adverse selection, but explanation of that concern will have to wait until another day. However, I will repeat that this is an area where the Department of Labor was directed to provide guidance and it did essentially nothing in the regulations that it issued. Done again. BTW, if the former spouse “gave” to the plan a copy of the divorce judgement that included terms of the pension plan settlement, that is a domestic relations order. Processing that order, even though the order will not qualify, provides the plan an opportunity to follow david rigby’s practical advice to inform the former spouse about its conclusion concerning the availability of any benefit whether or not a subsequent domestic relations order that covers the formal requirements for qualification is submitted.

Thank you for framing the arrangement in terms of the “constructive trusts that were mentioned in the original post. Do you think the constructive trust is enforceable if the trustees so not voluntarily administer as described? ERISA preempts and has been held to favor the spouse (now former spouse) who has been designated as the contingent annuitant in accordance with the ERISA mandate.

I reach the same conclusion and for the same reasons as david rigby. I hope you both have the same good faith and resolve because the best I can envision for what you want to achieve is that when the participant dies, the beneficiary will give the participant’s children as gifts what is received by the beneficiary from the plan — after retaining the amount necessary to pay the beneficiary’s income taxes on the distributions. That will be a royal pain to (self) administer, but probably the payment amounts and the number of children will mean no gift tax/lifetime exemption issues. Unfortunately, artificial inflation of income may have other complications, such as the effect on calculation of Medicare premiums. Estate planning trickery in connection with pension plans is not in my wheelhouse. Maybe someone else can come up with something better.

It might help to clarify the status of the benefits: 1. Are you asking with respect to one pension or both? You seem to be talking about your pension, and then switch at the end to talk about your ex spouse’s pension. 2. You state that you are the designated beneficiary under X’s pension. Is X is the designated beneficiary under your pension? Please confirm. 3. What is the form of benefit that has been elected under each relevant pension? 4. Do the pensions have a form of benefit for a non-spouse beneficiary? What are the forms of benefits available under the pensions? 5. Who has terminated or retired? Who has a pension in pay status? 6. What would be the disposition of survivor benefits if the designated beneficiary at the time of payment disclaimed benefits? You would have to ask the plan administrator(s) about that because plans take different approaches.

One stand-alone thought is that, although a participant’s engagement with the plan can be expected to involve various administrative or investment service providers, confidentiality would apply to the employer. The employer should not be informed. This general principle is subject to a fairly common (and questionable) practice of naming the employer as some sort of fiduciary, which would engage the employer in its administrative/fiduciary capacity. if the employer serves in some fiduciary capacity that involves it in the matter, the employer is subject to fiduciary responsibilities with respect to its actions, which would cover some of the concerns that you mention. The unlikelihood that the employer would actually have any idea about its fiduciary responsibility (as opposed to how it reacts in its employer interests) in this regard is one reason why employers should not be named fiduciaries.

I have am aware of medical providers that asked about coverage status with it in mind to establish or maintain COBRA coverage for the patient to make sure that the medical bills are covered. It is much easier and more efficient to get paid when the patient is covered. COBRA can be the bird in the hand. I think the provider would be willing to assist with election and payment in those few cases where the COBRA window is open at the time of the services, but the patient would overlook or be unable to maintain coverage that would pay the bills. This experience is some years old and I have not kept current in the area, so I don't know where such practices stand.

A nice summary, Peter. The important practical point is that it should be a very conscious decision about which fiduciary is responsible for investments. Then, work through the plan terms to make sure that that fiduciary is is named by following the correct procedures for identifying the various fiduciaries and their roles. The worst thing that can happen is that someone becomes a fiduciary without knowing that they bear that responsibility, by default, by mistake, or by ignorance. One hopes that plan terms, or trust terms, provide express authority with respect to appointment of fiduciaries. Sometimes the authority to appoint is implicit. A recent question in the message boards about use of custom documents is relevant here. Custom documents, drafted with regard for fiduciary and other ERISA concerns, rather than simply tax compliance, will probably have more understandable and accommodating provisions with respect to management of investments and other fiduciary duties. The IRS is not looking out for those aspects that apply to plan operation and liabilities. Also remember that most of the time a fiduciary that appoints another fiduciary for a specified purpose, such as identifying and managing investments, still has some responsibility to monitor the activities of that fiduciary.

Last time I looked, a long time ago, rent payments were not taxable UBI, so better rent than certain other types of income that could be generated by the property.

One of my favorite state supreme court decisions (the state does not matter) held that the state taxing authority’s proposed treatment of a particular item (the item does not matter) would not prevail because the regulation on which it was based was quite unclear, at least as to the matter in dispute. The reasoning of the court was that, since the state taxing authority had the ability to write the regulations, failure to write the regulations to provide adequate guidance a the taxpayer who wanted to comply with the law meant that any reasonable good faith position by the taxpayer would be upheld. On a darker note, this industry works under the knowledge that enforcement is lax and marginally competent, so fear over a technical nitpick should not keep anyone up at night. The private sector professionals I know don’t like to resort to this reality but sometimes it is legitimate rather than shady.

Examples of plan shooting themselves in the foot with ammunition from the DOL.

I think these messages are talking at cross purposes. No one is suggesting looking behind a DRO. The absence of a DRO is the fundamental problem.

Agree with Artie M (although and neither of us know what we want to know) that communication about proposed treatment and short deadlines for response is the right approach here. If the plan has been communicating directly with the lawyers for both parties, then direct things to the lawyers. If not, direct them to the participants.

This is exactly why plans should follow the actual law rather than the shallow, ill-informed, Department of Labor suggestion for the plan not to follow the law (to take action only upon receipt of a domestic relations order) and instead follow some some wispy notion or information that maybe there will be a domestic relations order someday or maybe there won’t, and thus the plan should interfere with plan terms and legal provisions otherwise clearly applicable.

The plan document should specify the beneficiary if there is no designated beneficiary. The plan document must be followed. So, no to your question. If the plan provides that, in the absence of a designated beneficiary, the eldest child of the participant is the beneficiary, and said daughter is the only child of the participant, then the daughter is the beneficiary, but not a designated beneficiary. I doubt that the plan provides that the eldest child of the participant as the default beneficiary. The plan might provide that the children of the participant are beneficiaries, and equal shares. The plan might provide that the estate of the participant is the beneficiary. If the daughter is the administrator of the estate, then the daughter will manage the plan benefit.

IRAs are not subject to IRC section 414(p). See section 408(d)(6). State court domestic relations proceedings determine the portion of a pension benefit awarded to a participant's former spouse. Assuming the plan is subject to ERISA, the award must satisfy the requirements for qualification under IRC section 414(p), including section 414(p)(3) (A), which means that plan terms matter. The Department of Labor website has a publication entitled "QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders." It has mistakes about the law, but is generally helpful.

“Peter, I can only say never underestimate the persuasiveness of investment salespersons.” Or the duplicity.

Multiple employer 401(k) plans do not have a presumptive exemption from registration under the Securities Act or the Investment Company Act. The relationship (not well defined at all) between/among the employers may be such that they still qualify for an exemption or a no-action position of the SEC. State securities laws often look to or parallel federal law exemptions, so registration under state law must be considered. If your multiple employer plan is exempt because of an ownership relationship (short of a controlled group, as you report) the exemption may be lost because the ownership relationship will gradually change as the ESOP gradually acquires more and more shares of the ESOP sponsor. But who knows? And who cares? I am unaware of any action based on failure of a multiple employer 401(k) plan’s failure to register.

You assert that the two employers are unrelated with respect to the ERISA and tax qualification aspects of maintaining the plans. Will the two employers remain related enough to avoid the securities law and investment company law issues with jointly maintaining the 401(k) plan as the ownership of A shifts because of the ESOP? There is a recent thread that addresses the uncertainties about what “related enough” means.

A competent plan document will deal with mid year distributions when there are questions about valuation of pooled assets. One of the provisions that goes with competent terms is the ability to perform a mid-year valuation at the discretion of the fiduciary. Liquidity is definitely one of the issues that should be addressed by plan terms relative to distributions. As suggested by others, you should be instructed concerning what to do pursuant to plan terms as interpreted by the appropriate fiduciary in accordance with that fiduciary’s prudent discretionary determinations.

I have an educated guess, but interpretation of plan provisions is up to the plan administrator or other fiduciary charged with the authority and responsibility. Check with them.

I have no argument about use of a promissory note as best practice. A promissory note is a device that facilitates enforcement/collection as a matter of civil procedure. It is not essential for creation of a valid, enforceable obligation to pay. As suggested by Lucky32, it is taken for granted in commercial lending practice, which is the standard for plan loans. So why would a fiduciary not employ one?

1. What do the loan documents provide? For example, is fraudulent application a breach? Does the loan have an acceleration provision for the breach? Does any fiduciary have any discretion over remedies for breach? 2. What do the plan documents, broadly considered, provide? Does the employer have any say in this? I know that everyone presumes that the employer is the, or a, fiduciary with such powers. I have asserted now and then that that is not a good design, especially for a larger organization. 3. Do you have any say this? What do your engagement documents provide? Or are you just curious?

Layering on Peter Gulia’s excellent summary, it is difficult to determine when the relationships among the participating employers not are related (or whatever) enough to qualify for the exemption from registration. However, in one arrangement in my experience, the decision was to disassemble and have some of the employers go their separate ways with their-spun off plans. I am not aware of any enforcement action or participant claim of violation.