QDROphile

You summarized very nicely, so it is with some reluctance that I embellish on a technical point. I think there are two safe harbors, one for the reason and one for the financial need. The list is the safe harbor for the reason, and the 6 month suspension is the safe harbor for the financial need Based on an old statement in the IRS manual (which I have not checked since the new 401(k) regulations) to the effect that subjective criteria for the reason are not acceptable, I find it daunting to operate under F&C for the reason unless the plan has its own list of reasons. If you have a custom list, where does it end? I find it easier just to say that we use the IRS list, end of discussion about whether or not the list should be expanded today for some new good reason. I am not so concerned about using F&C for the financial need because the IRS gives us a crutch -- the statement by the participant. Yes, it requires use of a brain for administration, and that is not what makes the administration world go around right now.

The fiduciary would have to determine that the distribution was necessary to satisfy the financial need under Tres. Reg. section 1.401(k)-1(d)(iv), but can rely on a statement of the participant described in subparagraph © with respect to the unavailability of other resources (as required under subparagraph (B)). The participant can furnish the information required by subparagraph (A), which goes with showing a need under the safe harbor list of needs. For example, to show a need to pay burial expenses, the participant would show a bill from a mortuary. The amount of the bill would demonstrate the financial need under (A). The participant would provide a statement under © with respect to the requirements of (B).

I get all my information from Emily Latella.

The six month suspension is not related to the list of reasons. A good design for F&C will keep the list because individual determinations of adequate reason are problematic for compliance and morale. Determination of financial need can be covered by an appropriate statement of the participant. The six month suspension is the safe harbor related to finacial need. The stupidity of the six month suspension is the most compelling reason to not to adopt the financial need safe harbor and the alternative for compliance is not awful, as it is for determination of reasons.

Back up a bit to ask the right questions. Q: Why do you want a rabbit trust? A: Because you are afraid that you are, or will be, dealing with an employer that will not keep its promises about the benefits. Now ask the question, "Who do you want to be the trustee?" After you answer that question, and if the answer is not a financial institution that is permitted to conduct trust business under state law, you may still want to ask the question you posted.

And if the particpant does not pay the loan in full after default, what actions must the fiduciary take to collect?

The loan terms should cover prepayment. If they do not, the provider of loan documents is incompetent. It is common to allow prepayment, but only if the entire balance is prepaid. I think there is some limitation on absolute prevention of prepayment, but I am not sure it applies in plan loan context.

You could, and I would, argue that any reasonable method of calculation is permitted. I don't think it overstretches the proscription on asking the plan do what it is not designed to do to defend against the "perfect" approach unless the plan uses the perfect approach for some other functions of plan administration. If you add some sort of weighting adjustment, I think an earnings rate approach is OK. Maybe even if you don't add weighting. I would also defend a plan that would not retroactively try to adjust for earnings, as long as the plan would make all of the investment data available to someone who would provide a figure for earnings adjustment for the time prior to the implemenation of the division, so you may question my judgment.

Thoughts, no conclusions: 1. The fiduciary has a duty to review, understand, and agree with (at some level) the valuation. The fiduciary is ultimately responsible for the price that is determined. 2. The valuation process always involves discussion with management. Even though the valuation is typically a snapshot at a past date, the valuation includes forward looking elements. Discussion with management can lead to adjustments because misunderstandings can be corrected and new iformation can come out. Review of a draft valuation can be a useful tool for the discussion.

It is not destroyed. As you say, it is converted, and it can be converted back. So the bond can be converted to cash, if it has value. And the cash can convert to a bond, but somewhat more slowly than at the speed of light.

What makes you think you need specific authority to prevent you from disregarding value of an asset? I recall from physics that matter cannot be destroyed. Assets have a value, and there are accepted ways of determining value. It is possible, using acceptable methods, to determine that an asset has no value, but absence of a market does not mean the asset has no value. Your problem with the policies of the successor trustee cannot be solved by inappropriate actions or determinations of value.

I only said that the latches argument would usually be more appropriate for court consideration than plan administrator consideration. I did not say anything was wrong with the doctirne or it use nder ERISA. Do you think a plan administrator should choose not to try to correct an operational failure of overdistribution from a plan because of its own conclusion that laches applies?

Except in extreme cases, as plan administrator I would put the burden on the person who depends on the laches argument to be the one to go to court to assert it. I know we disagree on the law, so you will be unimpressed with my desire for the plan administrator to favor the statute in making decisions, and forcing those who do not like the outcome provided by the statute to bear the burden of bringing the lawsuit based on the exceptional circumstances. A laches argument is a bit too exotic in light of a statue that makes no express provision for time limits and no good regulatory guidance on the subject. The new regulation contemplates many months of delay in determining qualification, with no suggestion of outer limit. That is differrent from delay in reporting the domestic relations order to the plan administrator, but we have no sign of time sensitivity in the regulatory guidance.

Why are loans serviced through payroll deductions? Because the plan administrator, through some contract, will not lend the plan money unless the the payroll deduction arrangement is put in place. That creates a relationship among the employee, the employer and the plan. Since the plan is allowed to make loans only with the expectation that they are to be repaid, and since the payroll deduction is the repayment mechanism that has been chosen, the plan administrator should make sure that the arrangement (contract) serves it purpose properly to support the administrtor's duty to arrange for loans to be paid. Commercial lenders do not make loans with optional payment.

By contract, the same way the payroll deduction arrangement is implemented in the first place.

I think the doctrine of latches is alive under ERISA, so it could have effect. Do you think a plan administrator would be in a position to make the call?

We disagree about whether or not AT&T v. Hopkins in correct.

I think it is a breach of fiduciary duty to let a participant default when the fiduciary can reasonably prevent the default, such allowing the participant to cancel payroll deduction when the participant does not have an overriding right to do so. Then the fiduciary has to decide if the fiduciary must try to collect on the debt by other means even if the participant managed to arrange a default.

The investment company only has to comply with the terms of its agreements. It can agree to extraordinary matters on any terms that it likes.

I think the new regulations allow an order issued before death to be modified to correct qualification defects. I would not accept an order that originated after the death of the participant. A plan could be designed to accommodate such an order, but I would not design a DB plan to do so.

The payment of the property taxes would probably be treated as a contribution to the plan. That might cause problems. If the company had no income, the owner probably had no compensation. If you want to treat anything as a loan, you probably have a prohibited transaction. I don't know where you get the idea of tax basis out of a loan.

Participant direction of investment of accounts is the not a good idea; the asset should be managed by a fiduciary. The prevailing practice of participant direction is misguided.

Don't forget the securities law violations that occur in a mulitple employer 401(k) plan that is not registered.

I second Bird.

The 409A regulations define "employer" and generally use a controlled group approach. Check the regulations. A separate question is what happens if one or another controlled group members becomes insolvent. Can one protect the employee by putting the deferred compensation obligation with the stronger sister? What is the protection against creditors, considering that the benefit must be unfunded?