QDROphile

I am a rather simple sort. I look at section 414(p) and see that a QDRO gives an alternate payee the right to all or a portion of BENEFITS payable to a participant. The plan may have a problem with sufficiency of assets to pay accrued benefits, but you can't avoid consequences as manifested in terms of benefits. I can see sizing the alternate payee's interest, as specified in the QDRO or computed in a manner provided in the QDRO, to allow the AP to be paid from an agreed portion of available existing assets. If the plan paid 50% of its assets to the AP, the value of the the assets corresponds to the value of some portion of the participant's accrued benefit (determined in accordance with the plan's actuarial specifications and assumptions), so the particpant would lose that portion of the accrued benefit. You suggest that 50% of the value of the assets would be something like 25% of the value of the particpant's accrued benefit. Hooray! The participant avoided having to give up 50% of the participant's benefit (and all the assets). The remainder of the benefit after subtracting the alternate payee's benefit is the participant's new accrued benefit. In our example, the participant' benefit is now 75% of the original accrued benefit. The plan has 50% of the original assets. The funding got worse.

No, but I wonder about the wisdom of a DB plan (other than a cash balance plan) that allows an alternate payee to name a death beneficiary in the event of death before benefits start. Among other things, the "separate interest" arrangement sets up a great opportunity for adverse selection. Also keep in mind how the plan will comply with the rules under 401(a)(9).

Sorry, if you want a prototype, you have to make a choice and can't have it both ways. If you choose hours, then you have to find a way to record hours for those who do not otherwise report hours for payroll purposes. You can't "deem" a certain number of hours unless you use the equivalencies. Many use 2080 hours per year when they have elected the actual hours option and they are running the plan improperly.

The problem with that explanation is that the need is at the time of the distribution. Once the need is satisfied by the distribution (and the distribution is bigger than the next deferral), why would you assume that the person's economic ability to save from future income would indicate inability to fund the need at the time of distribution? I think the only way to explain it, other than admit it is just a rule, is that it is a penalty for lying about being destitute in order to get a distribution. The penalty was a real one under pre-EGTRRA rule. Now it is just a joke. You can lie and still get full deferral unless you get stuck because of year end timing.

The IRS apparently agrees with this theory. IRS speakers have said so with the usual disclaimers and we have received determination letters on plan terminations that made it clear the the participants of the terminating ABC plan were participating in the DEF plan by virtue of continued employment by C. I am unaware of any authority that you can rely on.

Have you considered the effects of unrelated business income taxes?

The issue of what "notice" of a domestic relations order suffices to cause the plan fiduciary to take protective action under the statutory provisions was not before the court in Stewart v. Thorpe Holding Company. The court discussed notice of the order in the context of its alternate ruling about standing and breach of fiduciary duty. Even in that discussion, the facts are so unusual that the opinion is no basis for a conclusion that informal "notice" of a domestic relations order triggers the statute. One of the trustees of the plan was a party to the domestic relations proceeding that divided the retirement benefits. The fiduciaries also took action on the divorce decree. No one tried to defend the egregious actions of the plan by claiming that the plan did not receive a domestic relations order. The decison espouses an extremely liberal view of interpretation of orders and the rules for qualification. While that view has merit and represents a trend, it also presents problems for plan administrators. For example, the decision says that lawyers should not be held to a standard of drafting domestic relations orders to comply with the statutory requirements and consequently plan administrators have to supply and correct missing and improper terms and have to become become familiar with the state law behind the order. Shame on the court on both points! Of course, a California court cannot imagine that there is any law other than the law of California, and concluded that a plan administrtor should have figured out how to divide the benefits based on a knowlege of California case law that was not even mentioned in the order. The Department of Labor believes the plan adminstrator should interfere with a participant's rights under the plan at the whisper of "divorce." It has some support for its position in legislative history. If a plan intends to bow to the DOL position and abandon the bright line of the statute, the plan's written QDRO prcedures should have express detailed terms about what will cause the partiicpant's account to be compromised pending the receipt of a domestic relations order.

How about the requirement that plans have to follow their terms? Plans can set lower limits than the IRS maximums. If the plan has established a lower limit, it must change the limit in order to allow the higher amount. The reverse is not true. If the IRS limit is lower than what the plan provides, trouble ensues if the IRS limit is not respected. I am not commenting on the details of the advice you got concerning timing of changes to the plan terms.

If the loans defaults, the plan administrator had better be prepared to foreclose on the real property.

mbozek: Could you identify that case? Since it would would be contrary to Schoonmaker, 987 F2d 410 (7th Cir. 1993), it would be important authority to consider.

Lots of cases and controversy on this issue. First, let me say that when the situation arises, the plan needs competent legal counsel to advise it. Then, I will go out on a limb and oversimply and project that the general rule is or will become that as long as the basic retirement plan property division is determined under applicable domestic relations law before the participant dies, the alternate payee should be able to get an effective QDRO after the participant's death. There are many implicit points, assumptions and limitations in that statement, so the statement is not a guide for deciding anything. One of the implicit points is that if the plan distributes before the plan receives adequate notice of the domestic relations proceeding (controversy on that point, too), too bad for the alternate payee as far as the plan and the amount distributed is concerned.

Elective deferrals are employer contributions.

Better check that 20% withholding.

This discussion is only one example of how ill-advised it is to have a discretionary match. Anyone who thinks through the reasons for a match and who the employer wants to reward should come to the conclusion that a discretionary match is a very poor way to accomplish any legitimate goal, except perhaps opportunistically putting a few more tax deferred dollars in the owner's account. Paranoia about insufficient funds to cover the match is a shallow excuse for inadequate analysis.

But what about the person who did not defer early in the year in reliance on the ability to defer later in the year (oh, sure!) and still get the full match that was promised by the announcement? A change in deferral now may not be enough to hit the intended target by the time the match changes.

If the employer announces to participants before the beginning of the year that a specified match will apply for the year, how is that different from a profit sharing plan that specifies a rate of contribution for the year or a money purchase plan? Don't cheat by assuming that the plan provisions and the announcement have express qualifications that allow changes in the contribution rate during the year.

Unless you are dealing with tax exempt member entities or member entities that have shareholders, the problem with nonqualified deferred compensation from LLCs is that you don't have chump shareholders to pay the taxes on the deferred compensation during the deferral period. The tax burden flows through to the members, including the member(s) who are getting the deferred compansation. Members usually don't like that and are greedy and informed enough to understand, eventually.

Would it help to observe that an unfunded nonqualifed plan is a subset of deferred compensation plans (if the plan provides for deferral of compenstation, which is implied in the passage) and that a qualified retirement plan is a subset of deferred compensation plans? As for the difference, contributions to qualified plans will have taken into account taxable compensation for the year related to the benefit accrual. For example, in addition to section 415, the section 401(a) (17) limit applies. Nonqualified deferred compensation is usually not taken into account for accrual under qualified plans, and is not included in taxable income, in the period of deferral, but then is included in taxable compensation upon receipt by the participant (or distribution by the plan if you prefer to see it that way). The receipt (end of deferral) can be at a time when the participant is actively employed and eligible for qualified plan benefit accrual. Since the formerly deferred compensation did not help the participant under the qualfied plan while deferred, it can help (at least for section 415 puposes) when it comes into taxable compensation. It is not much help under section 415 any more. I trust that you see no issue with excluding distributions from a qualified plan from income for section 415 purposes -- income was taken into account under section 415 when the benefit was accrued. Counting the benefit would amount to double counting the compensation on which the benefit was based, among other things The real reason that there is a difference in treatment is because Congress said so.

I am sorry, but I don't see the connection in Patton v Denver Post. Could you explain?

A nongovernmental organization may allow allow employees to participate in 403(b) arrangments and remain exempt from ERISA. It facilitates the arrangment by sending pay deferrals to one or more 403(b) providers. If the employer gets involved in documentation beyond its limited role as a conduit for deferrals from pay, it increases the risk that the arrangment will be subject to ERISA. A governmental employer's 403(b) plan is exempt from ERISA because of the exemption for governmental plans. ERISA does not apply and the Internal Revenue Code does not require a plan document in order to provide the tax benefits of a 403(b) arrangement. However, state law may require the government plan sponsor to have a written document and a written disclosure document that might be similar to an SPD. No comment on the wisdom of not having adequate documentation and disclosure.

If the plan is designed to have particiapnts direct investments, generally two approaches are possible: 1) The participants may selelect from investments designated by the fiduciary. In that case, the fiduciary is responsible for designating reasonable investment options that provide an opportunity to diversify. See the ERISA section 404© regulations. 2) The participants are allowed to select investments without restriction, except for legal restictions and certain administrative restrictions because of feasibility. For example, a participant might be restricted to publicly traded securities. The fiduciary is not responsible for evaluating how the participant is investing. The fiduciary is not reponsible for prudence or diversification of the participants investments, and should not get involved. If the fiduciary gerts involved, the fiduciary will undertake responsibility and the limit of that responsibility will be uncertain. Allowing participants to have unrestricted investment authority brings in some issues on which there is disagreement. If participants do not direct investments, the the fiduciary is responsible for all aspects of of investment. If the fiduciary delegates to an investment manager, the fiducicary must still monitor. If the invesment manager is not diversifying assets, the fiduciary may have to intervene.

Whose plan document would you want it to be? Unless ERISA does not apply because the employer is a government or governmental instrumentality, the employer would not want to get involved with any documentation.

The more I think about it, the published decison that allowed attroney's fees was probably a state cocurt decison.

Mr. Maldonado: An earlier published federal opinion allowed joinder and attorneys fees in a case where the plan seriously misbehaved, but I did no go back to find it. A more recent federal Central District decison supports your view, which is the correct one. AT&T Management Pension Plan v. Tucker, No. CV ABC 95-2263, 1995 WL 590256. After that decison was issued, I thought that the Califonia decisions were shaping up and I became less paranoid about attorney's fees. The confidence was undercut by an article published 2 to 3 years ago by lawyers who battled attorneys fees more recently. Although they won, it took a lot of effort and they claimed that the attorneys fees statute allowed the state judges to be a bit indiscriminate in awards. I regret that I could not find my copy to provide the publication reference. I have heard similar complaints informally from personal contacts. Until the state judges catch on, there is some risk that a plan will have to defend against a request for fees. The plan should win, but I still like the idea that the plan starts from the proposition that the state court has no jurisdiction over the plan. The Oddino decison is pretty scary, even though it, too, falls into your category of laughable.

The DOL is not looking to go after the plan for failing to resist the order. The DOL is looking (maybe) for the right case to get the court to rule that the joinder has no effect and the plan should not have to pay any attention to the formalities or consequences of being a party. By being "overbroad" in the assertion of no jurisdiction, the plan preserves all issues. The DOL has complained about its failures in its endeavors in past California cases by explaining that it got caught in the wrong procedureal posture. The DOL implied that if it saw the right case, it might jump in on the side of the plan. In the hyperbolic world of litigation, a response to a pleading that is overbroad is par for the course. Also, I do not think it is overbroad, because I do not think the plan can be joined as a party to a state court action and I think the state court has no power over the plan or the determination of qualification (contrary to the California Supreme Court's hilarious decision). The state court divides the benefit to determine the relative rights of the individuals under state law and that is the end of its authority. The order is presented to the plan and whether or not the plan gives it effect is a matter for the plan and federal law. However, I agree 100% that even if a court has no powers, you don't want to get crosswise with the court to test the proposition. Although I think no one (least of all the court) reads the response to the joinders because they are essentially meaningless except as a device to preserve the retirement benefits for later division. The statement that the plan will not distribute should defuse any adverse reaction by anyone who actually reads the response. As a practical matter, one could just return the form without special response and forget about it and everything would proceed without problems. There have been cases in California where the court has awarded attorneys fees against the plan because the plan had the audacity to tell the divorce lawyers that their orders did not qualifiy and needed some more work. The lawyers wanted attorneys fees to compensate them for having to fix the order. Faced with such a situation, I would prefer to have submitted a pleading that states that the court has no jurisdiction. It would give the plan more grounds for defense and the DOL might even jump in to help. Although the cases I know about finally got straighted out, it was a lot of work. At least a few California practioners remain apprehensive about the possibility.