QDROphile

And if your financial advisor is so valuable to you as to justify such big hits to your investment returns, why didn't he or she explain all of this to you, including the irrelevance of mutual fund distribution dates when the funds are in a tax exempt vehicle? For the big money you should be getting excellent service, advice, candor and integrity. I would feel better about an advisor who explained that the funds were more loaded with loads and management fees, compared them to some others for you, and then explained why you should pay more -- the advice, service, etc. I don't think you will find that the AMEX fund returns are better than comparable funds with lower charges, expecially on a net return basis. You advisor should demonstrate this and either prove me wrong or otherwise justify what you are paying for. The advice you get may well be worth paying for, and even paying a premium. But you should evaluate that separately and based on a clear understanding.

How does an employer acquire stock "through an ESOP loan"?

So what do you do for the 63 year old who is in a safe fund? Announce the change, wait two years and then change the system? Then what about the 62 year old who was in a safe fund who became 64 in those two years? A two year period may not be enough to assure that a managed fund will outperform a fixed investment fund. Where do you draw the line unless you simply add a new managed fund and go to the system described by FREE401k, at least for a full investment cycle (whatever that is these days)? I don't suggest that advance notice and communication are not important. I don't know what an adequate notice period would be. What I suggest is that the plan will get many mistaken comments about investment timing.

B2kates is correct, and that is why you can't do a direct rollover of a loan. A direct rollover is not a transfer of a loan. While it is true that a direct rollover might not be touched by the participant, a rollover, by definition, involves a distribution -- otherwise it would be a transfer. If it involves a distribution, legally the particpant touches, or is entitled to touch (sort of like constructive receipt), the asset. But the IRS says that you can do a direct rollover of a loan. A practical position, but legally incorrect. Still, we all do do direct rollovers of loans beause the IRS says we can. But we don't do rollovers that put the loan in the hands of the participant to carry to the new plan; the loan would be extinguished and the rollover would fail.

And what time is not "a really bad time" for those people who don't understand investments and think they don't want to sell until the price comes back? That is essentially what you are talking about (or some variation on it) and that is why the average investment return on self directed accounts is so poor. Unless the plan offers a so-called brokerage option, it is very unlikely that that the plan has a type of investment that is so time sensitive. You could have a more exotic investment such as a futures contract or option that could be extremely sensitive to timing. Otherwise the importance of timing of a sale is a dangerous delusion.

I would be interested in the applicable idiot jokes, because this is really the right thing to do in concept. Or perhaps you were referring to a joke to the effect that it is about time that people recognize that idiots should not be forced (or allowed) to invest their retirement funds. You will hear all sorts of balderdash about how exit timing is critical and unilateral action will defeat the great investment strategies in place and cause great losses. I don't buy it. You will be working with a professional investment manager in the transition. Get a good one and a good lawyer and then quit worrying about all the flak you will get (and you will). This is actually not a bad time to be making this move. Fewer people think they are investment geniuses these days.

If he directs the investment of his account he is a fiduciary under section 4975 of the Internal Revenue Code. Read the Flaherty's Arden Bowl case. I think it could be a prohibited transaction under 4975 because the investment enhances his position with the company that he serves, which is good for him in a personal capacity. He could be using plan funds indirectly for his personal interests. All of the facts and circumstances are important. It may not be a prohibited transaction, but it is not beyond question by any means.

The well advised plan administrator responds to questions concerning possible distributions to persons who are not participants or beneficiaries (whose rights have ripened) as follows: "We can send you the plan's written procedures on qualified domestic relations orders (for free) and the plan's summary plan description (for which we may charge you)." Sometimes you don't make available the SPD unless they can tell a legitimate story (such as they are a former spouse). The well advised plan administrator has good written QDRO Procedures (somewhat rare). The QDRO Procedures should not provide for any correspondence, except review of draft orders, provisions describing availability of information about a participant's benefits, notices as required by law, and review of the plan administrator's interpretation and determination of qualification of the order. Resist the urge to help. You will be punished for helping.

The most important question is the one you did not ask --"Should I be advising (or even discussing with) the former spouse what to do or what her rights are?" If you are a plan fiduciary or involved in running the plan or a representative of the former employer, can you guess the answer?

Since the receiving plans can require whatever they want to reach their comfort levels, convincing them they don't "need" what they request might be difficult. They may be more careful and diligent than others, and proud of it.

You need competent professional help on this one. The popular press is full of misinformation and the issues are subtle. It can be done in certain ways and under certain circumstances.

Look at ERISA section 408(B)(1) for one aspect. That does not address your question about discrimination. Perhaps termination falls on the just and the unjust alike, despite your empirical observations. Perhaps payroll deduction is simply an economic condition of the loan. If the program had to suffer the burden of dealing with more cumbersome repayment it would be offered to none.

They usually are no longer parties in interest.

It also has not stopped the Tax Court from upholding the IRS in Flaherty's Arden Bowl v. Commissioner, 115 TC 269, or the Circuit Court from affirming the Tax Court.

I know I am asking for trouble, but I simply could not resist observng that the the IRS is legally wrong about its position that loans are rollable. Even the IRS forgot forgot a fundamental difference between rollovers and transfers. Don't get me wrong. It is a very practical position and you can do it with impunity subject to IRS rules, but the IRS position is unprincipled. It is a policy cramdown.

Has anyone considered the FICA consequences of the distribution/contribution suggestion? Is someone in for double FICA taxation -- the the contribution to the top hat plan is subject to FICA taxes currently unless it falls into one of the exceptions.

I agree that is a defensible approach, but when it comes to a sensitive and fundamental feature of a plan -- distribution provisions -- a plan term is preferable and perhaps required. A plan administrator cannot have discretion over distribution form or timing. Isn't the design of QDRO procedures an exercise of discretion when the plan administrator decides whether the procedures will provide for distribution to alternate payees before the plan says the participant is eligible? An if you say that the sponsor adopts the QDRO procedures, I will say the the QDRO procedures are a plan document and thus satisfy the need to have the plan state distribution terms. Do you think think the initial question would have been asked if the QDRO procedures had terms that disposed of the question? At very least the QDRO Procedures have to make the statement about the timing and the plan has to provide for the opportunity by stating that distributions pursuant to a QDRO will be in accordance with QDRO Procedures. Your approach is very elegant, and I use a variation on it. But how many plans out there are sophisticated enough live up to it?

Correct. But the same regulation tells you that the distribution cannot be made under a QDRO until the participant is eligible unless the plan has a distribution provision that allows for the earlier distribution. Generally a plan cannot make a distribution earlier than the plan terms allow. I realize that you can interpret the poorly worded regulation differently, but I read the regulation consistent with that rule rather than as an exeption to that rule. Otherwise, why would the regulation talk about a plan term that provides for an earlier distribution? If the exception was to be broad, the regulation should say "even if the plan does NOT provide for payments ... prior to the time it may make payment to the participant."

I agree with the summaries of MWeddell and mbozek, with the following qualifications: 1. I have yet to see a fully supported analysis that concludes that you can always cash out an alternate payee if the alternate payee's benefit is not over the section 411 limit. Practicality and general principles lead most people to do it without splitting hairs on the analysis. 2. No distribution can be made to an alternate payee, regardless of the terms of the order, before the particpant is eligible for a distribution unless the plan terms allow for an earlier distribution to an alternate payee. The plan MUST say so. The exception to the requirement for a plan provision to allow early out for an alternate payee is the "earliest retirement age" provision of section 414(p)(4).

Let us assume for discussion that the terms of the QDRO do not make it easy for us. I have not been able to find a clear path to the conclusion that an alternate payee can be forced out if the alternate payee's interest is not above the $5000 limit. The legislative history (always a dicey environment) of the Retirement Equity Act is a bit troubling. Treas Reg section 1.411(a)-11© (6)is ambiguous. Even if it means that you can distribute to an alternate payee without anyone's consent, a well drafted order will say that the alternate payee elects when to get a distribution. The cashout would be practical and consistent with the principles behind the rule. The IRS issues determination letters to plans that expressly provide for cashout of small amount to alternate payees. So maybe we just get practical and quit fussing about little stuff. It is unlikely that a regulatory agency would get excited about it and an alternate payee does not have enough at stake to sue. But I cannot connect the dots in the analysis with the same confidence as I would like.

Please tell me more.

The law is not perfectly clear, but most likely the plan cannot require an alternate payee to take a distribution until the participant is paid or the order says to distribute. This may also be true for amounts less than $5000, although the IRS issues determinatioon letters on plans with provisions for forcing out amounts less than $5000.

You effectively have two plans, a safe habor plan for those that meet the age and service requirements and one that does not. The one that does not gets tested. This is expressly covered by IRS guidance.

You must comply with Treas Reg 1.411(a)-11(e)

Better check EGTRRA on that.