QDROphile

What is the big hurry?

Our approved volume submitter plans provide that the surviving spouse may consent after the participant's death to the participant's designation of another beneficiary.

I don't think that is the correct interpretation. The regulation says that a one-time election is not available if the person has previously been eligible under another plan of the employer. Nothing about the election affects participation in any other plan, subject to plan terms. However, a zero election would not make the employee ineligible under the plan for purposes of allowing a later one time election under another plan of the employer. One opportunity is all you get.

Not until the divorce. Search Benefitslink for the brand new revenue ruling on this point.

mbozek: I think you are both not reading what I posted and reading too much into what I posted at the same time. I expressly limited my comments to a situation in which the order does not say anything about a date that is identified with the creation of an alternate payee's interest. It the order has a provision for time, then time value is presumed and that implies some sort of investment measure. Interpretaton of the terms of the order is still required to decide how to deal with the time value. Nothing about what I posted suggests that a plan administrator would not observe proper formalities such as sending a rollover notice and collecting a social security number and the rollover election of the alternate payee as part of the distribution process.

See PLR 8440085

When the terms of the order say "pay $15,000" I don't see how that means "segregate $15,000 and invest it and pay the net amount." "Pay $15,000" does not seem to be so difficult that we can be sure that another result is "pusuant to" the terms of the domestic relations order, as required by IRC section 401(a)(13)(B). I did not claim that anyone would take adverse action based on the literal reading, but it is an issue and I think it is silly for a system to be unable to pay a specified amount as instructed by the order. Conceptually, that is the simplest course of action. We are not discussing a situation where the order assigns any time value to the distribution by specifying a date or otherwise, or gives the alternate payee any choice over timing of payment. An order that specifies an amount to be paid to an alternate paye and then gives the alternate payee a choice about when to take it should not be qualified. Among other things, if the account loses value, the plan may have insuffcient assets to pay the specified amount. Persons who draft domestic relations orders can easily provide for creation of an amount for an alternate payee that is segregated and invested and distributed at a particular time, including a time specified by an alternate payee. When they draft it differently, it must be presumed that they meant what the words say and it is not for the plan administrator to decide if it makes sense. Either follow the terms of the order or disqualify it because it asks the plan to do something that the plan cannnot. With respect to the comment that the earnings do not belong to the participant, that may be exactly what the order was meant to deal with (however unintelligently). The order may intend that any delay in the actual distribution be completely at the risk of the participant. If the money is hanging around and invested, the participant can claim that every penny of gain or loss belongs to the participant when the order says "pay $15,000 to the Alternate Payee." Faced with a Fidelity or a Microsoft, we all have to be practical and the world will not end. There are ways to protect the plan under these circumstances without disqualifying orders right and left. But we can recognize a 900 pound gorilla for what it is.

Someone has to decide if the original termination was a bona fide termination. The IRS has issued some guidance that might call that into question. Without a bona fide termination, you don't get to re-entry questions.

Think about it this way. Aren't you describing an annuity for the life of another? Does the plan offer that form of distribution? Not any plan I have seen. But you can get to a similar result if the participant starts a joint and 50% survivior annuity with the alternate payee (presumably former spouse) as the contingent annuitant. If the QDRO provides, and the plan allows, the annuity payments during the participant's life can be split in two between the participant and AP. If the participant dies, the AP continues to get the same amount, not from the divided payment, but as the survivor. If the AP dies first, the full payment is thereafter restored to the particpant. When the partipant dies, all payments stop. Or vice versa.

According to Fidelity, its system requires that they set up an account for the alternate payee before they can make a distribution. Evidently, this is so they can get things in line for Form 1099, etc. The account has to be invested in some way for some period of time. That time can be longer or shorter, depending. I have tried asking if the account could be set up with a money market investment, then be charged with the $15,000 distribution, and then return the earnings to the participant's account, but they declined. I worked very hard to get a different answer, but failed. This is not the only compliance probelm with the Fidelity system. If a plan is not using full outsourcing to Fidelity, there are opportunities to get around the system. One client tells me that T. Rowe Price will go through the process all in one day to get the desired result, if you are very careful with timing and instructions. But they had at least one instance where it did not all come together and ended up with earnings. There is a practical solution, and I don't think anyone would get too ruffled about it, but from a rigid literal and technical perspective, it is a problem.

Please explain the formality that makes a bonus arrangement into an ERISA plan.

I agree with the response from mbozek, but I will focus in a different way. The terms of the order determine what the alternate payee gets. If the order says that the alternate payee gets something as of a particular date, the presumption for interpretation of the order is that some time value of the "something" must be computed form that date until distribution or actual creation of an account for the alternate payee (upon creation of the account, the time value take care of itself accrding to the investment of the account) . Generally, that computation is bsed on the investment returns of the account (probably prorated to account for multiple investment funds) that will be charged to actually create the amount for the alternate payee. But the order may have other instructions, such as a prescribed interest rate to apply from the "as of" date. The terms of the order control, and it is OK to disqualify if the terms are ambiguous or nonsense or perhaps even just missing. Good written QDRO Procedures are helpful in setting standard interpretations if the order lacks certain terms. If the order simply specifies "pay alternant payee $15,000" and is silent about any earnings adjustments, then the plan pays the alternate payee $15,000 as soon as practicable (or when the order says) no matter when the order was written, entered or delivered. By the way, outfits like Fidelity can't follow an order like that if they are providing fully outsourced services to a plan. Violation of the rules does not seem to bother them. If the order says "pay the alternate payee $15,000 on December 31, 2002" and the plan gets the order, or would determine that the order is qualified, on January 20, 2003, the order is not qualified. You don't try to fix it by imputing interest or a share of earnings.

Everyone gets 3% no matter how much service unless the plan to excludes persons who have not met permissible age and service requirements and the person never go into the plan. Once the person gets in, the person gets 3% per year without condition.

The Tax Court has ruled, and the Circuit Court has upheld the ruling, that a participant who directs investment of the participant's account is a fiduciary under IRC section 4975(e)(3). Flahertys Arden Bowl, Inc. v Commissioner. Both courts expressly acknowledged the difference from ERISA.

I think it is prohibited, at least from a tax perspective. Because the participant in the XYZ plan can direct investments, the participant is a fiduciary for tax purposes (not ERISA purposes). The investment in the LLC benefits the participant as an LLC member (I presume that additional capital is a good thing for an LLC and therefore benefits the LLC members) . The investment of plan assets by the fiduciary in a manner that benefits the fiduciary's personal interest (as an LLC member) is prohibited. Conclusions could change if the facts and presumptions change.

The participants in the nonunion plan are parties in interest, therefore they must be able to take a loan. The practice of not allowing loans to persons who are not active participants is based on the person no longer being an employee and thus no longer a party in interest. That practice, when employed unconsciously (which is 99+% of the time) is dangerous because you can run into an inactive participant who is still a party in interest.

You are correct. The issue is an audit issue. The audit issue arises when the employer calls something a leave of absence when it is not a leave of absence. In conventional parlance, this is also called a "lie."

I think that employers who use leave of absence as a bridge usually do it in a way that is so sloppy and internally inconsistent that it is easy to see the sham. That is why care must be taken when using leave of absence for what is really not a leave of absence, even putting aside the moral issue.

Be careful about sham leaves of absence. Vacation is better if the employee is entitiled to it.

Then take a close look at ERISA section 404(a) (1). If a fiduciary thought that participants were missing out on an opportunity for additional benefits because of ignorance of the opportunity for restoration, would the fiduciary be performing adequately if the fiduciary did nothing about it, even something as simple as giving a piece of paper to rehires? Usually I don't have a lot of sympathy for persons who do not read summary plan descriptions. One would think that if the participant left money behind, the participant might inquire or read the SPD upon return to find out where the money is. But these rules are complicated and not intuitive, so it might be too much to expect the SPD to be an effective communication about restoration Fiduciary duty is serious stuff. I get a bit peeved at the amount of effort that goes into finding out the absolute minimum required by law. I can't say that direct, individual notice is required after rehire, but it is the right thing to do.

Why do you need some authority to back up doing the best administration you can?

Assuming you get over all the other problems, the income from the nursing home business could be taxable to the plan, depending on the form of organization of the business and the actual property that the plan owns.

A discussion of an alternate payee's interest in a loan is beyond the scope of this thread, but it is good to be aware that many issues arise if the AP has an interest in the loan. Many of the big systems, like Fidelity do not even allow for an alternate payee to have an interest in a loan, except maybe the entire interest. The Fidelity system is not compliant with what the law would require. Even if a system can "split" a loan, there are many subtle issues to consider. For example, although the alternate payee could be allowed to make loan payments, I think that the participant must remain liable for the payments if the alternate payee misses any and that the payroll deduction feature needs to stay in place to cover the back up obligation. I think it would be a fiduciary breach to give up the support of an original obligor on the loan because loss of that support increases chances of default. I dodn't expect universal agreement with my proposition and I don't intend to explain or debate any issue. The point is that granting an alternate payee an interest in a loan is tricky and won't be appreciated by the persons who think it is a good idea in the first place.

I think you can get the comfort that Mr. Maldonado wants in an efficient mannner. The plan issues a determination that is conditioned on interpretation of the order as set forth in the notice of qualification The notice includes a description of how you arrived at the alternate payee's interest, the dollars allocated to the alternate payee and where the loan ends up (with the participant). All QDRO determinations should have some reasonable period between the notice and any actual effect and state it in the notice. The period allows either the alternate payee or the participant to dispute the determination or interpretation before any money gets moved. If the expectation of both is the usual expectation described above, once that period has expired without objection, you put the determination into effect and proceed. For example, you would then allow distribution to the alternate payee if the order provides for it. If either of them object, then you respond by saying that the order is not qualified because the interpretation was incorrect (at least in someone's view) and the order fails to adequately specify the award to the alternate payee becuase it does not address the disposition of the loan. Odds are in favor of acceptance of the original interpretation and you have saved time and work if you win. It helps if you have QDRO procedures that deal with the issue. The participant and alternate payee will have a hard time with any quarrel with the plan administrator if they don't take into account the procedures before they draft the order.

That is usually the result and would be a reasonable interpretation of the order. However, the plan could have policies and procedures for interpretation and administration that produce a different result. A plan is required to have written procedures for dealing with QDROs and good procedures will cover this issue. The order must be read very carefully to understand what it may say about the issue. Finally, it would be proper to refuse to qualify the order unless the order itself spoke to the details, but I would not recommend that hard line approach.