QDROphile

Section 72(p) and the related regulations say the loan amount is taxable because payments were not made in time. See regulation section 1.72(p)-1, Q&A 10 and Q&A 13. If you maintain that the loan is not offset, it would still be taxable as a deemed distribution. One penalty for not paying the loan within the time required by the rules is taxation. The plan can provide for a shorter cure period than specified in the regulations, but no a longer one. I don't think the rollover rules have anything to do with taxability at this point. The loan is taxable income in 2004.

You cannot prevent taxation for the same reason that you cannot prevent taxation by late repayment after a loan is required to be treated as a deemed distribution. Whether or not you can accept payment at this point is an interesting question (I doubt it), but if it is possible, it will be after tax. Loans are treated as taxable. Section 72(p) provides an exception if the 72(p) rules are followed. Failure to pay the loan within the rules (level amortization at least quaterly) causes the loan to fall out of the exception and become taxable.

Are you saying that the plan cannot provide for a form of benefit available only to alternate payees or only pursuant to QDROs?

What plan summary?

Mr. Maldonado: I don't know all the opportunities a spouse may have to waive a survivior benefit after the annuity starting date. I believe that a domestic relations order cannot force the plan to recalculate the participant's benefit and give the participant a single life annuity with higher than current payments instead of the J&S annuity that has commenced. Can a plan administrator allow a domestic relations order to provide for the recalculation of the benefit and replacement of the J&S annuity with a single life annuity to the particpant if the plan terms are silent about the reformation of the benefit pursuant to a QDRO? I am not so sure. I would not do it. Can a plan provide for recalculation of the benefit and replacement of the J&S annuity with a single life annuity to the particpant pursuant to a QDRO? Yes, but I would not advise to have such plan provisions.

That is a liberal reading of the regulation. I think the QDRO reference merely says that the statement in the regulation about the former spouse's rights do not trump the QDRO rules. I don't think it goes so far as to say that a QDRO can overcome the annuity provisions of the plan. The QDRO rules themselves say that an order is not qualified if the order provides for any benefit or option not provided under the plan. Is that merely a permissive shield for a plan administrator who wants to disqualify or is that mandatory and a confirmation of the general rule that the plan must be operated in accordance with its terms? I would be very wary about a post-annuity starting date change in the form of benefit if the plan does not provide for such a change.

The spouse just learned she is terminal and they are using the divorce to adverse select on the benefit. I don't advise that the plan be amended to allow change of benefit form after benefits start. I agree that the plan probably does not allow this now and would need to be amended.

I assume that you are taking into account the employer's FICA tax savings when the employee chooses the health benefits rather than the cash.

Please explain the point of the "choice between long term care insurance and cash." You can't offer a meaningful choice between cash and a nontaxable benefit unless the arrangement complies with section 125 of the Internal Revenue Code. Section 125(f) disqualifies long term care insurance, although you can get there through an HSA because of the special rules applicable to HSAs.

The issue for custom plans is how specific the plan terms or other written standards have to be in order to identify what quailifes. When the IRS first published audit guidelines, it said that the determination must be objective rather than subjective. Does that mean you have to have a specific list of hardships, similar to the safe list in the regulations, or can you have a description of characteristics and the withdrawal will be permitted if the circumstances fit the characteristics? Is the general definition in the regulation an objective definition itself? It is very broad.

A government plan can include or exclude anyone because coverage and discrimination rules don't apply for federal tax qualification purposes, with one big exception for deferrals under 403(b) plans. You may have state law restrictions on what the plan can provide.

That was not the question. The answer to your question is affirmative, but then the next natural question will ask about the consequences of the impropriety.

The loan is a contract. The plan cannot unilaterally change the terms of the contract to create a new event of default unless the terms of the contract give the plan this extraordinary power.

Thoughts: How could you agree with me on something something I did not say? If a contribution was required and not made, then a proper correction is required. Nothing can be determined about contributions or corrections from the information that has been posted.

A refinement to Tom Poje's response. Participants elect to defer. The plan document can put a limit on deferrals and that limit does not have to be the 402(g) limit. There are many ways to express deferral elections and the limits on them, including a separate election above the basic 402(g) limit. It appears that you have a plan document interpretation issue and you have a communication of election issue. The analysis of the issues depends on close reading of all the documentation involved, something that cannot be easily done in this forum. In any event, if the participant was entitled to defer $14,000 and properly elected the deferrral, the participant is not "owed" $2000 if the employer improperly reduced pay by only $12,000. The participant already has $2000 (less taxes) too much. Perhaps your question is whether or not the participant should be credited with additional amounts of contribution. Or perhaps you are asking if the participant has a claim for some amount of damages for insufficient contributions.

The paln administrator will have some tough decisions about how to handle the default. Will the plan try to collect by other means? If the plan does not intned to enforce loan obligations, are the loans prohibited transactions? It IS like a bank deciding what to do about an unsecured debt in many respects.

Put another way, the plan has to act as a commerically reasonable lender. If it just winks at defaults, it is not meeting the terms of the exeception when it makes the loan.

And you will still look to him for any advice or services of any kind after that incident? Ignorance is one thing. Irresponsibility is another. The broker was irresponsible.

Until you can come up with a plausible explanation why it is not a prohibited transaction, why look further? Among other things you have to explain away Flaherty's Arden Bowl, Inc. v Commissioner. "The owner of the rollover money will also be the owner of the business ... ." The trust will be the owner of the rollover money. I assume that you mean that the beneficiary of the trust account that holds the equity interest in the business will manage the business (e.g. be a director, officer, employee).

So you think the hurricane is evicting the homeowners?

No letter agreements. Terms are either in the order, determined by the terms of the plan or written QDRO procedures as a default, or determined by interpretation of the responsible fiduciary. If eyes get opened by the interpretation and the parties don't like the interpretation they can get an amended order. Otherwise I agree generally with the description. If the plan tracks investment earnings to assets, then the loan interest is earnings on the loan and is credited to the participant. Many systems (e.g Fidelity) do not allow alternate payees to have an interest in a loan. A QDRO can give an alternate payee an interst in a loan, but it is more complicated than it first appears if done correctly.

I think it is agressive to use 414(p)(3) to justify a rule for QDROs that is different from the "regular" rules of the plan, especially when used to trump Treas. Reg. 1.411-11©(6). For example, it is fine to use 414(p)(3) to disallow distribution to an alternate payee at a time when the amount is not distributable to the participant, subject 414(p)(4). A QDRO cannot upset the general administration of the plan. But if you believe that the plan can create a separate scheme of more restrictive administration for QDROs, you have to wonder where the limits are. I do not agree with several of the DOL's postions on QDROs, but you have to take them into account when deciding how to proceed. Q3-8 of the DOL QDRO book takes into account 414(p)(3) and still states: " ... a QDRO may ... give the the alternate payee the right that the participant would have had under the plan to elect the form of benefit payment." Could you justify a plan provision under 414(p)(3) that says alternate payees can receive only a lump sum distribution when there are other options for participants? The DOL seems to say no. Timing is different from form, but the distinctions get very fine. If a plan is going to force out alternate payees, some serious thinking had better go into the decision and great attention must be given to plan terms and review of the orders.

To the extent that the Branco decison says anything that makes sense, I think you have to take it in context and strictly limit it to the facts. The opinion is very difficult to understand and appears not to state or make use of some very important facts. When that happens, it indicates that the judge did not understand. Reading behind the opinion, the question was whether Mr. Branco would get only a partial pension payment, to the gain of the plan, or would the plan have to pay the full pension. Seen that way, the outcome was correct and predictable, but the opinion is obtuse, either in the analysis or the explication. The key to the decision is that the AP died before the AP was entitled to payment. In most DB plans that terminates the AP's interest because of the design of the plan. The opinion took an overly convoluted and probaly incorrect route to that observation. And isn't it ironic to see once again the lengths that a union plan will go to in order to avoid paying benefits to the member!

You represent a person trying to get a QDRO and who has failed because the person was previously represented by incompetent lawyers. And you would be what? Not a lawyer? A lawyer who is basing advice on some rather general questions asked of persons unknown to you?

The plan administrator is responsible for delivering an SPD, not the employer or plan sponsor. The employer or plan sponsor could also be the plan administrator but that should be given serious consideration and usually avoided. The products from insurance companies that most plans use as SPDs (even those that have the ERISA rights language) typically fall short of the SPD requirements or are not accurate in some way. The pan administrator will probably have to wrap the product with addtional explanation in order to be compliant.