QDROphile

This part of your message confuses me: "Participants receive cash contribuition then purchase stock at the encumbered price? The encumbered price is higher than the current market value, so they pay more for the stock then it is currently worth. Is this correct? The interest payments on the note go out of each participant's account as an interest expense? Is that correct? No one was paid so there is no stock to buy back from terms." If the employer contribution is sufficient to cover the debt service payment, the shares that are released because of that payment are allocated as provided in the plan document, usually in proportion to pay or to cover a match. The allocation does not involve participant accounts except for the ultimate credit. If the plan uses cash from a participant's account to pay debt service, some special rules apply, but that cash does not come from the employer contribution that you mentioned. That cash might come from dividends on employer stock already in the participant's account.

Please explain. I infer that "deem the loan" means that you treat the balance as a distribution for tax purposes. Section 72(p) governs tax consequences. I don't recall seeing an excess number of loans as failure under section 72(p). The loan amounts are another matter. If you take the position that the loan policy terms are effectively plan terms (see ERISA Reg. section 2550.408b-1(d)), you may have plan disqualification and a prohibited transaction if the terms are violated. Disqualification of the plan has tax consequences, but not specifically with respect to the errant loan. Prohibited transactions ultimately have tax consequences, but I don't think treating the loan as distributed is one of them.

Kevin: You wrote, "Here is another question. I just had a PA reject a QDRO because it awards the AP a flat amount without adjustment (actually, it says the AP gets the lesser of the flat amount or 100% participant's vested benefits on the date of distribution)." This could be a problem with the record keeper, for example, Fidelity. As crazy as it seems, the Fidelity system cannot pay a fixed amount without adjustment. I think this is illegal, but who is the 900 pound Gorilla? Fidelity creates an account for the AP when instructed, but the AP can't get a distribution until after the account is set up and the AP gets a PIN and all the rest. Meanwhile, the account has to be invested. Therefore, the AP's amount has to get investment earnings (and perhaps losses, but in this situation the plan administrator has to provide for investment in the money market fund). Will Fidelity solve the problem by not investing the amount? No (Does this make Fidelity a fiduciary? Yes, but they don't believe it). How about sweeping the earnings and returning them to the the participant's account? No. How about not creating the account for the AP until the instant before the distribution? No. My solution to the problem is to have the QDRO procedures say that the order won't be disqualified, but that the AP's account will be invested in the money market fund and the AP will get earnings despite the terms of the order. Too bad for the AP. The procedures also say the the AP has to get out as soon as practicable and will be forced out. Is this all legal? Not quite, but it is usually unobjectionable to the parties. If the AP balks at getting out quickly (why?), the administrator can delay setting up the account and force the AP to communicate initially about desire for distribtuion with the adminstrator rather than Fidelity. The administrator will then instruct Fidelity to set up the account. That will minimize the earnings, but not eliminate them. Your language about the "lesser" is critical to make this approach work. This is extra work for the administrator and I would consider imposing charges for it.

I don't object to the revised language, but I would hope you don't need it. Anything that is allocated to the account as of a date before the Valuation Date will show up on the valuation date if the terms "allocated as of" and "valuation date" mean what I think they should mean. Mike Preston: A domestic relations order comes in March 2004 to a discretionary profit sharing plan. The contribution is determined and delivered to the trust August 1, 2005. What do you tell the plan administrator in March 2004? What do you tell the plan administrator in September 2005? When can the AP take a distribution? More than one? How much? Do you prorate and how? Do you take into account a 1000 hour of service or year end employment requirement? Remember that the order does not give you any instructions on these subjects. You are inventing fiduciary answers, so they had better be good. And make sure that the parties got what they "intended."

I would advise a plan administrator to refuse to accept the following language: "including any amounts allocated to Participant after the Valuation Date that are attributable to Participant’s services on or prior to the Valuation Date." Despite its fair and logical intent, that language is unreasonably burdensome, probably ambiguous, and perhaps impossible to implement within the time required under other terms of the order. I think refusal is justified under section 414(p) (3)(A). An alternate payee who wants some benefits that have not been credited as of the valuation date will have to determine or estimate the amount with greater specificity, such as by dollar amount. With respect to the vesting language, you have to be careful about distributions. For example, if the plan only offers a lump sum distribution, the alternate payee might not be able to take a vested amount and come back later to get the amounts that vest subsequently. The plan should have worked how it will deal with these details, e.g. no distribution to an AP who is not fully vested until the participant is eligible for a distribution. If the AP is agressive, the AP can try to get the 50% out of the vested portion.

A QDRO should be able to name an alternate payee as a surviving spouse under a DC, but usually it is not necessary to get death protection as it is in defined benefit plans. As you have observed, there are other legitimate reasons to do it. I am sorry I don't have time now to pontificate about vesting. I sort of agree with Mike Preston, but I think his statement leaves a lot more to be said. I have had to work through some of the issues, which are more interesting from the plan's perspective than what one writes in the order. The QDRO procedures should speak to vesting and the order should try to comply.

Did anyone die in the process?

If you need nunc pro tunc you are sunc.

Make it very clear that they can't use the form except as a very rough guide, almost like an issues checklist. They commit malpractice if they don't understand the law and the plan. Most will not understand the law. Most will not take the time to understand the plan, because it is not ecomomic. The model, no matter how good it is, will not make up those gaps. The model cannot anticipate all plan designs. For example, some DC plans don't allow immediate distribution to APs even though everyone thinks that is a God-given right. The Texas bar published an abominable form with a provision that is almost incomprehensible and the "drafters" have no clue what it means. But, everything is different in Texas, isn't it? You might warn that the model has to be modified to take into account any local court rules. The DC model should deal with vesting, allocation of earnings, plan loans (included in the calculation of the amount to be divided or not). Can plan loans be divided or assigned to the AP? Legally, they can but it is tougher than sounds and many systems, such as Fidelity's, can't accommodate. How are investments allocated -- usually prorata. Don't allow the order to give the AP an amount and not earnings from some point of creation of the AP's interest. Many systems, including Fidelity, can't do that correctly. The model needs to take into account that not all plans are daily valued -- the division of benefits has to take into account valuation dates. I don't think you can produce a decent model for a DB plan unless it is for a specific DB plan. The best that can be done is guidelines and a description of issues that must be addressed, with some suggested approaches.

Patton can only be justified based on the failure of the plan administrator to disclose the plan benefit when the divorce proceeding was dividing the benefits. The proceeding did not have the opportunity to include the benefits in the division of marital assets. The fact the the plan had a hand in the problem makes it easy to argue that the plan can't object to the post-death fix. The courts are in conflict over post death determinations, but I think the correct rule is emerging: If the division of the benefits is determined and set forth in a domestic relations order before the participant's death, then the order can be effective. If the plan benefits are not in the domestic relations order before death, the court cannot go back and create an interest for the spouse. Under this rule, one must consider the Tise decision, which says the an alternate payee must have a reasonable opportunity to correct qualification defects in a domestic relations order. For example, if a divorce decree has a general statement that retirement benefits are to be divided 50/50, that decree might well fail to be qualified. But because the domestic relations order was entered during the participant's life, if the participant dies and then the defective order is presented to the plan, the alternate payee can go back and get a new or amended order that can qualify. The interesting question will be how much lattitude the new or amended order has. The new order should not change the original division. It cannot redivide the benefits to be 75/25. But can it create an interest in the death benefit when the original decree said nothing about the death benefit? Samaroo says no, and I tend to agree because we can't be sure whether the parties would have settled on a death benefit for the spouse (or what it would be -- I have seen significant disconnect between percentage of regular benefits and percentage of death benefits in the same order) and it is unfair to a subsequent spouse or the plan to allow the alternate payee unilaterally to capture an uncertain benefit at the expense of the subsequent spouse or plan. It is a close call, however, because one might be comfortable inferring that reasonalbe persons would divide the death benefit proportionately unless expreslly provided otherwise, but merely omitted that detail from the decree and would have included it in a later but expected "real" order for the plan. The state court would merely be interpreting the decree rather than adding a new benefit feature or modifying the benefit. Or not. The Patton case can be reconciled because an uncontested error, or perhaps fraud, prevented the court from dividing the retirment benefits properly in the first place, so the alternate payee got a post-death opportunity to fix the problem with the fundamental division of benefits. Such cases will be touchy, but that is what courts are for, if only the courts could be trusted to undersatnad what they are really doing and not forget that the interest of more than the participant and alternate payee may be at stake. The state courst cannot be trusted. The federal courts are coming along. A paramount rule in this scheme is that the plan has no obligation unless it is properly notified of the domestic relations order before it makes distributions or otherwise takes action that affects its assets. If the plan acts reasonably upon the death of the particpant before proper notification of the domestic relations order, whatever happpens after the the tardy notice will have to work around whatever the plan did and the plan will not have to suffer because of the tardiness of the alternate payee. For example, if the plan has no proper notice of the order and has distributed the benefits to the beneficiary in regular course, the alternate payee is out of luck with respect to the plan. What constitures proper and timely notice has been discussed in other posts.

Why do you need to educate the lawyer, especially one who appears to be an idiot or worse? Just disqualify and give the reason (the statute) and be done. Plan administrators who try to help too much are asking for trouble. If yours is a DC plan, consider educating the lawyer about the ability of the plan to charge expenses against the benefits of the troublemaker, but first give serious consideration to the fiduciary sensitivies involved with a subjective allocation and appropriate plan or procedure provisions. A domestic relations order can qualify if it provides for benefits in excess of what the partiipant has accrued as long as the provisions assure that the amount that is actually paid to the AP is not more than is payable to the participant at the time of payment. In other words, the AP can capture future accruals, but only to the extent they actually accrue by the time of payment. Whether or not a state court would issue such an order is another matter. But your question does not seem to involve this issue.

See 403(b) (12)

It seems to me that you are getting into a lot of complicated stuff indirectly and all that complicated stuff will not make any difference in the end. Why don't you just ask the plan administrator to explain to you why OT is excluded and why there is a 20% limit in the plan? I can imagine only a few answers that are reasonable from a policy perspective, and even those are weak. I can imagine more answers about exclusion of OT with respect to contributions that are not elective deferrals (e.g. matching contributions or other employer contributions) because inclusion of OT will increase the cost of benefits to the employer. But for elective deferrals, allowing you to increase deferrals does not increase the cost of contributions. A more liberal policy might be more complicated and increase administrative cost.

Although there is a correlation of sorts, the tax attributes of a retirement plan do not depend on ERISA. For example, there are 403(b) plans that are ERISA plans and 403(b) plans that are not. Both have essentially the same tax characteristics. If you are describing it correctly, it does seem a bit odd that your retirement plan is funded on an after tax basis. Lots of questions arise from your description, including why the plan is exempt from ERISA.

For testing purposes, plans may be aggregated or disaggregated, subject to the applicable rules. That means that two or more plans can be put together and tested as a single plan and a single plan can be broken into two or more units and the units tested separately rather than together. One common disaggregation is to separate a part of a plan that covers a unit of collective bargaining employees from the part that covers nonunion employees or a different bargaining unit. Sometimes a plan must be either aggregated or disaggregated for certain tests. Once you look at the disaggregated bargaining unit as a separate plan for testing, you then often have special rules that say that the plan automatically passes. You don't even have to test. Example: You have a plan that provides for a contribution of 5% of pay for nonunion employees and 4% for the collective bargaining employees. The plan will not fail the discrimination tests even if the nonunion employees have disproportionately more highly compensated employees because the plan can be disagrregated into a 5% plan and a 4% plan. Tested separately, each plan is not discriminatory. These rules are complicated and different situations fall under different rules and have different outcomes. I suggested that, despite the apparant discrimination, the plan might not have a qualification problem because you are in a bargaining unit. This is only a suggestion, because I have not tried to apply the rules to your specific situation.

Unpaid leave does not happen in a vacuum. The employer has leave policies. Most leave policies require permission to go on leave, except for certain mandated leaves such as FMLA. If the absence is not within the leave policy, it is not a leave. I have been told that strike is treated as employment for various NLRB purposes. This may affect interpreation of plan documents and leave policy statements. As usual, you have to see what the plan document says. Layoff is another interpretation issue, and can be influenced by the employers's facts and circumstances, including patterns of layoff and rehire. A good plan document with have detailed terms on the subject.

Sorry I forgot to add the subsection reference. Section 414 is a doozy. First, the bad news. If you are a highly compensated employee (HCE), the discrimination rules don't help you. In fact, limiting contributions of certain HCEs helps all the other HCEs with applicable tests. From your description, it looks like the limits on elective deferrrals will cause the plan's definition of compensation to fail to be a safe harbor definition. In colloquial terms, it is unfair to use a definition of pay that is lower than real pay. Certain definitions are deemed to be fair, but those defintions are quite comprehensive. If a definition fails to be a safe harbor definition, then it call still pass if it is fair. The test looks at the average percentage of actual compensation that the plan considers for highly compensated employees and the average percentage of actual compensation the plan considers for nonhighly compensated employees. If the percentages differ by only a "de minimus" amount, the plan still passes. SeeTreasury Regulation section 1.414(s)-1(d), and the test in (d)(3) in particular. But don't bother because there is more bad news. The union group will be tested as if it had its own plan and union plans are treated as nondiscriminatory. It looks like the qualification rules will not help you. Perhaps you have some hope in interpretation of the collective bargaining agreement. Although a plan limit is legal, there is very little reason these days for a 20% limit on elective deferrals. That limit was justifiable before a law change a few years ago, but not now. A deferral system that is based on base pay could be justified for administrative reasons, but the 20% limit is overly restrictive.

Nabrin: The limitation on the catch up is not in line with the regulations if the limitation could prevent the participant form deferring the full dollar amount of the catch up for the year. As noted in a prior post, the regulations have a safe habor plan limit for deferrals (regular plus catch-up) of 75%. You have a good argument that a separate 20% plan limit applicable to catch up is OK as long as the participant has eligible compensation of at least $15,000. But why not change the limit to avoid the question? There are also other ways to comply with the regulation.

Depending on how the limit is implemented, the exclusion of OT could cause the definition of pay to be discriminatory. See section 414 of the Internal Reveune Code.

One consideration, but not the only one, is a letter ruling request for an extension of the rollover deadline.

What if you looked at the payment of the fee outside the account (no withdrawal from the account) as the equivalent of a contribution to the account?

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Short answer is negative.

Dealing with a family member is always touchy because it is a PT for a fiduciary (the IRA owner) to receive anything of benefit other than the proceeds to the account. Especially within families, there are lots of things going on both over and under the table that could be seen as tangible or intangible benefit to the IRA owner outside of the account itself. Among other things, valuation will be suspect.

The regulation is simply an example of the IRS saying that a rollover of a loan is OK. And so it is OK. What the IRS misses is the distinction between a rollover and a transfer. You cannnot have a rollover without a distribution. The invention of the direct rollover erased most of the practical differences between a transfer and a direct rollover. However, since it is a rollover, it still involves a distribution. If there is a distribution, the loan is extinguished. The IRS overlooked that basic principle. When you give a note to the debtor, the debt is extinguished. I will not respond to the observation that the particpant never holds the note in hand in a direct rollover, among other reasons because it is not necessarily so. Legally, a distribution gives the assets to the particpant. The direct rollover is an artifical procedure that relates mostly to withholding. I don't quarrel with the practicality of the IRS position. The position is consistent with the almost complete erosion of the differences between a transfer and a direct rollover. I object to the intellectual cheating that occurs within the layers of artificial (although practical) rules that disregard legal principles. It would have been better to call direct rollovers something other than a rollover. The confusion between transfers and rollovers has only become worse because of the blurring around the edges when direct rollovers are thrown into the mix. Or perhaps we just recognize that this whole area is entirely artificial and exists by virtue of tax rules. The principles, when consistent with the rules, are just rationalizations. Who would argue that plan loans are really loans as we know them outside of plans? They are artificial, too. So why not roll over artifical loans under an artificial rule and not get worked up about the fact that the arrangements do not fit the principles that apply in the outside world?