QDROphile

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.

Here is what I do: Fill out and send back the paperwork. Include a statement that the plan asserts that the court does not have jurisdiction, but that the plan will not distribute any amounts pending further orders of the court or other applicable process. By the way, this is what the DOL recommended. The DOL is still sort of looking for the right case to get a decision that the joinder is pre-empted, sou you can be their test case if you preserve all rights. I think they have really given up. California is a sovereign nation that will never admit that its laws are limited, and even the federal courts in California think this way. The statement that the plan will not make distributions is what the joinder is really trying to accomplish, so probably no one will get excited about the other statement. By not making distributions (and perhaps not loans) the plan is not obeying the joinder because of California law (the plan is asserting no jurisdiction). Instead, the plan is obeying ERISA and 414(p) of the tax code because it has received a domestic relations order (the joinder). You and I both know that the joinder is not a QUALIFIED domestic relations order, but the plan administrator has a "reasonable" amount of time to decide qualification. Even if the plan disqualifies the order, the Tise case (9th Circuit) says that the would-be alternate payee has a reasonable time to cure qualification defects. What this all boils down to in most cases is that it is "reasonable" for the plan to sit on the joinder order, not make distributions, and wait for a "real" domestic relations order that it can process in the usual fashion. It gets a littel sticky if the participant is eligible for a distribution and asks for a distribution or loan. That will trigger the 18 month periond, and you might have to start communication with the parties at some point if the divorce proceeding drags on. I realize that this is artificial and a stretch, but it is my best effort to reconcile the applicable law with the inapplicable law and stay out of controversy. Maybe I am just lucky, but this has never been a problem over quite a few years and a large number of joinder orders. At one time I sent letters to at least one of the divorce lawyers so I could get the lawyer to buy in to the scheme, but I quit doing that years ago. They don't want extra trouble either. The only problem has arisen when the divorce got completed and they decided not to divide the retirement benefits, so no QDRO. Then the poor participant asked for a distribution and we had to tell him tha the plan needed some appropriate evidence that the proceeding had resolved and that there would be no further orders concerning the plan benefits. That turned out to be tricky.

I am not surprised that you did not find a section that covers in-service withdrawals by 45 year-old 50% owners, but the Rev. Proc. states principles of correction and does cover improper distributions. If there were specific guidance, I would not expect to find it anywhere but the Rev. Proc., unless you are looking for unofficial guidance, like in the Benefitslink Q&A column. You should also consider whether a breach of fiduciary duty or prohibited transaction occurred.

Same as an "umbrella plan," if that term is more familiar to you. A single plan covers component plans. The component plans often have their own documents that are incorporated by reference. One Form 5500. Of ten, the document for the section 125 plan serves as the umbrella plan document, even if not all of the component plans are section 125 plans.

I was hoping for insight on the zip code for St. Peter, or maybe Mephistopheles. Since you obviously know your stuff, here is a useless policy thought. I would like the rule for DC plans to be that the plan does not care how the order came about. As long as the plan has the assets to divide (the order did not arrive after distribution to the beneficiary), the plan simply follows the terms of the order and the qualification rules. The plan administrator has only two concerns. Don't disqualify the plan by inappropriate distributions and don't create a fight that will drag the plan into court, especially into state court. The plan does not care who gets the money; let the interested parties fight it out in state court. And maybe that IS the answer in most jurisdictions. The DOL has issued an opinon that the plan administrator does not have to be concerned that state domestic relations law has been followed. The plan administrator can take the order at face value. Unfortunately, the DOL is wrong on several QDRO issues, so I don't know what we make of the opinion if we try to stretch the "face value" comfort to cover these issues. I don't see a big difference between a beneficiary getting a reduction because of an after death QDRO compared to a before death QDRO unless one believes that the beneficiary "vests" because of the death, as described in Hopkins. I think Hopkins is wrong becuase the statute allows a QDRO to award benefits "in respect of" the participant and death benefits are "in respect of the participant" even though they would be delivered to someone else. Also, given that the law prefers spouses, and QDROs are designed to get spouses whatever state law decides is their proper share after the end of the marriage, why should after the death make such a big difference? A spouse would not be thwarted by death. A former spouse should not be, either. DB plans provide a greater challenge. Most DB plans want the participant to die and to pay less benefits (zero, in some cases). To the extent that benefits get assigned to an alternate payee, the death is not so rewarding for the plan. If the division is not adjudicated before death, the plan can get screwed. In the worst set of facts, the divorce occurs, the decree does not mention benefits except that they will be divided pursuant to a subsequent order, the particiant dies unexpectedly soon after, and then the former spouse attends to the QDRO. At that point, no one except the plan would object to an order that gives the former spouse 100% of the benefit. No one else would be getting anything because the plan pays benefits only to participants and spouses. The plan would rather pay nothing, but certainly wants to argue that if the participant had been around to negotiate and argue about the division of benefits, the former spouse would have received something like 50%, not 100%. We have cases that either say or strongly suggest that if the court did not decide the award based on pre-death considerations, the QDRO can't raise the benefits back from the dead. If you drag this through court, try to see if you can get us a published opinion, preferably a correct one.

This addresses only a small portion of your questions, but I think that death benefits are still "with respect to" a participant. The benefits would not be paid to the beneficiary if the benefit was not accrued by and payable through the account of the participant. And in this case tha participant also designated the beneficiary. "With respect to the participant" has to be broader than "of the participant." Hopkins vs. AT&T is to the contrary, but I think that case is just wrong. You did not specify if the pan is a defined contribution plan or a defined benefit plan, but it sounds like a defined contribution plan. That can make a big difference. I think it matters what circuit you are in because of some of the court decisions, but I also think that the right answer depends on if the benefits were adequately divided before the death. I think the Tise case in the 9th Circuit is correct. If a pre-death court adjudication got the basic division down, the details can be resolved for qualification of an order after death. As long as the plan gets a domestic relations order before it distributes the assets, the alternate payee has a reasonable time to satisfy the qualification requirements. Plus, it will be interesting to see what address is given for the deceased. I suppose they will have to resort to the "last known" address. If the division of benefits was not adjudicatd before death, it gets more dicey. In that situation "nunc pro tunc" translates to "nobody knows what to do and the situation is unfortunate so let's try some Latin." The issue about consequences of designation of the mother in violation of the order, by itself, is not for the plan to worry about. It is a state law issue, and the designation cannot be affected if the designation passed under propoer plan provisions. I hope that the state court does try to change its ruling on the division of the benefits. That sort of post death division would be extremely problematic for the plan. It would be a lovely set of facts for guidance from the DOL or IRS.

The only way to be sure that you have protected yourself from the risk that your former spouse will receive money from the plan pending recognition of your interest under a qualified domestic relations order is to submit to the plan a domestic relations order that mentions your interest under the plan. The divorce decree is a domestic relations order and it sounds like it mentions splitting the plan account. While the plan is determining whether or not the order is qualified, it is required to hold back the amount that would go to you if the order turns out to be qualfied. According to at least one federal court decision (but not a literal reading of the statute) even if the plan determines that the order is not qualified, it should continue to protect you for a reasonable time in order to allow you to correct qualification defects. Three years is not a reasonable time, so you should stay on track with submission of another order to prolong protection. You should ask the plan for a copy of its written procedures on qualified domestic relations orders. Those procedures should state what is necessary to know for an experienced person to draft a good order. However, if the plan even has written procedures, they probably suck. For example, the procedures should explain that it has a cut off of July 1998 for calculation of account changes (probably a change in plan administrators). You can probably get account balance statements from the plan from before 1998. From the statements, you can calculate a good approximation of what you are after. You may need a subpoena or other legal process to get the account information if your former spouse will not consent to release of it. It may also be possible to describe what you should get without reference to the account balance numbers. Unfortunately, I doubt that you will be able to carry through with this mess without competent and experienced legal help. Yours is no longer a garden variety situation and most divorce lawyers barely get by in the most simple of these matters.