QDROphile

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.

mbozek: You are correct that a plan does not have to provide an annuity option to an alternate payee after the benefit starting date. The alternate payee may have to be consoled with receiving a portion of each payment that is made under the form of payment in effect. But a QDRO is still available to provide direct payments to the alternate payee. Entering the QDRO after the payment starting date reduces the options and eliminates some important protections, such as protection against the participant's death. There is a new case that says that a court can enter a QDRO after the death of the participant. Not the same circumstances that we are discussing. The validity and effect of that decision have yet to be worked out. You are also correct that state law may affect the options at this point. State law may also provide a remedy against the participant for starting benefits in a manner contrary to the intent of the decree (if any one had any intent or thought in the first place).

I think it is best to follow mbozek's approach. The coincidence of the beneficiary having an account should be disregarded and all the rules for distributions to beneficiaries should be observed. No shortcuts. If the rollover or transfer by the beneficiary (assuming eligibility for a rollover or transfer) wants to come back to the same plan, then the plan's rules should be observed for accepting the funds as well. For example, the funds should be accounted for as a rollover or transfer in the beneficiary's account under the plan.

1. It is not true that QDROs cannot be issued and effective after payments start. How they can apply is often different after payments start. State law is a concern. The court may not be able to issue an order or change a settlement after a procceding is closed. That will vary from state to state and circumstance to circumstance. 2. You have various sources for referral to lawyers who will prosecute a malpractice claim -- some are on the internet and I will vouch for none. It is very difficult to know if you are getting a good steer. Some state and local bar associations provide referrals and may provide other assistance through their lawyer discipline or client protection programs.

It may be possible that under the rules applicable to taxation of property division and payments in a divorce you would be the one to include the payments you receive in taxable income and your ex-spouse may be able to exclude the amounts. But you need expert advice on the subject. Even if true, it would probably be better to get a QDRO, because then the tax reporting would be much more simple and direct, plus you won't have to rely on your ex to forward the payment to you each month. That is worth something all by itself. If you go to another lawyer to help with this, you should also discuss whether or not to claim against your first lawyer for malpractice. A divorce decree that provides for division of retirement benefits needs appropriate follow-up to be effective. Your first lawyer might simply need a gentle reminder that the job is not yet done.

The participant does not contribute anything. The Company contributes. The participant merely makes investment decisions. There's the rub. Perhaps you could look at the issue as one in which the participant chooses in which which plan to participate. But you might get into even more trouble there.

You can't borrow against an IRA. You may be able to borrow from the 401(k) plan where the money is now, but I would not count on it. You would be able to borrow only half of the balance, at most. Borrowing has more subtle drawbacks. Search for discussions about borrowing from 401(k) plans in other threads on this site.

If you want the money, you pay the taxes, including the extra 10% if under age 59 1/2. You at least appreciate how much it costs to get this money now. The money is far more valuable if you allow it to grow tax deferred. Try to find some way to avoid use of the money.

Your reading is better if the company is not a public company. My reading makes sense only if the company stock is traded, allowing a company stock investment fund.

Mike Preston: I may have read between the lines incorrectly, but I think the problem is that the plan has a company stock fund that is a participant directed investment option. The plan now says that anything invested in company stock is the ESOP. Some participants elect to have elective deferrals invested in company stock, some don't. So the question is, which elective deferrals are ESOP contirbutions and which are not? ESOP contributions are disaggreaged from the others for pruposes of the testing. Are all elective deferrals not ESOP contributions because they are made in cash and then later (but not much later) invested in company stock? Or are the contributions directed into company stock ESOP contributions (even though at the end of the year -- or even the next week -- they are transferred to another investment fund)?