QDROphile

If the loan is secured by a mortgage, the mortgage should be foreclosed and the proceeds applied to repay the loan. There will be no loan to offset, it has been paid. There will have been a deemed distribution because the payments will have failed to comply with the quarterly payment rule. If the distribution occurs at about the same time as the default, instead of much later, it may be OK not to foreclose on the mortgage and have an offset distribution, but I note that only as a possiblity to think about.

Since a partnership can't have an ESOP, could you clarify your question?

If a person had a loan and through bad investment choices or simply a down market reduced the remaining account balances to below the loan amount, would you have an adequate security problem? One could argue that adequate security is measured at the time of the transaction. But it is still better to deal with this in a way that is comfortable to the plan in the plan's written QDRO procedures. What is comfortable? Ask an appropriate advisor. The plan could restrict aa distributions to the AP until the security issue evaporates or resrict distributions in amounts in excess of the loan balance if the plan worried about the security issue. But the restrictions need to be in the QDRO procedures and the plan document can't be contradictory.

Take a look at PLR 9146004. It is old and it is only a PLR, but I haven't found a more recent statment to the contrary.

I assume you are serious in asking this question. You will not find the situation in real life. The loan would be made only if the plan were designed to allow participant loans from a pooled investment fund as one of the investments of the fund (where else would you get funds in excess of the participant's account?) If the loan defaulted, the pooled fund would experience an investment loss. It would be the same as if the pooled fund had invested in a bond that defaulted. Don't forget the adequate security requirement for participant loans. A pooled fund loan should require security beyond an assignment of the participant's pay if the fiduciries are doing a reasonble job. The practical meaning of the statute is that a $17,000 account could support a loan of $10,000 rather than $8500. You won't find many plans designed that way, either. Most go with the 50% limit.

No comment on the specific circumstances in your message. But if a deemed distribution occurs, the plan at least has a reporting requirement. A Form 1099 must be issued. Failure to handle and report distributions properly deprives the public of tax revenues. It may even be a tax evasion conspiracy. Don't take reporting requirements lightly. Also, sometimes botched loans can lead to disqualification. S corporations come to mind.

Loans are usually assets of the participant's account. The big problem is that it is not a liquid asset and not a readily divisible asset. If all or part of a loan is allocated to an alternate payee, the asset keeps its inherent properties, such as maturity, defaut provisions, interest rate and the like. Your question sounds like you want to modify the loan or partially default the loan for convenience of QDRO administration. Be very careful about that. Nothing about QDROs overrides the loan rules or the contractual rights associated with the loan. Also the plan and its written QDRO procedures should be designed to deal with attempts to assign all or part of a loan to an alternate payee. I generally design documents to discourage assignment and maintain status quo for the plan. For example, the entire loan remains payable through payroll deduction under my documents.

Technically, not if the plan is a top hat plan, which most are. Section 206 of ERISA does not apply; neither does 414(p) of the Internal Revenue Code. But the plan may allow for it and is not required to use the QDRO rules. The interesting question is whether state law will purport to force it if the plan does not allow it (California does). The IRS seems to say that a division under a domestice relations oder will not cause tax problems, at least in community property states.

There is no time limit under federal law. State domestic relations law may not allow you to resurrect the distant past. And without a state domestic relations law order, you can't get to the plan. At least two federal circuit courts have issued incorrect decisions to the effect that if an alternate payees waits too long (until after the participant has remarried, retired and statred benefits, died)the alternate payee's interest may be compromised or lost. So delay may have a negative effect, depending on the circumstances. Also, depending on how you wish to divide the pension benefits, no one may have adequate records from that far back, and you may have to estimate to arrive at a division rather than have a precise and objective division based on benefits accrued during the marriage. You start by going to a lawyer who is competent in domestic relations law to answer the state law question and then a lawyer who really understands QDROs. In order to really understand QDROs, you have to understand qualified plans. Unfortunately, it is seldom the same lawyer who can handle both with the level of understanding that you may need.

See section 401(k)(2)(2) of the Internal Revenue Code. Termination of the plan is not an event that allows distribution unless it is an event described in setion 401(k) (10). 401(k)(10)(A)(i) lists termination of the plan "without establishment or maintenance of another defined contribution plan ***." So if your employer has another defined contribution plan, termination is not an event that allows distribution. "Employer" means not only the company that employs you, but also the related group of corporations that includes your company. So if the parent of your company has a defined contribution plan, no distributions. There are other events listed under 401(k)(10). And listing under 401(k)(k)(10) doesn't necessarily give participants rights to distribution. The plan sponsor may choose not to distribute, depending on the circumstnaces.

You couldn't get a distribution under the old regime until you terminated employment. You haven't terminated employment. What makes you think you should be able to get a distribution?

You may have a disqualification event that can be remedied, but you also have a prohibited transaction. Prohibited transactions are not handled in VCR.

No exemption from Part 5. You need a claims procedure.

The authority is under . A plan provision that death is a default event is unusual. The plan may have other unusual provisions, so take this response subject to plan provisions to the contrary. I would expect death also causes the participant's account to be distributable (to the beneficiary). Because the account is distributable, the loan is offset and treated as an offset distribution. See Q&A-13 of the proposed regulations and compare (a) and (B). Because distributions are taxed to recipient, the beneficiary gets the offset distribution and is responsible for the taxes on the distribution. Could you get a different result by treating the offset distribution as a distribution to the participant, and therefore the participant is charged with the income for income tax purposes? Maybe. But one would expect all distributions after a participant's death to be made to the beneficiary. What does the plan say about that? [This message has been edited by Dave Baker (edited 12-07-1999).]

RLL: I found a 1998 PLR that had all the right facts for the ruling you describe, but it ruled only on the primary benefit issue. It stated that it would rule on two other issues under separate cover. I assume that one of the two other issues is the annual addition limit. But I have found no such published ruling in 1998 or 1999. Do you have a citation or other suggestion for finding the PLR that follows the TAM?

A plan does not have to use the safe harbor suspension. Abandoning the safe harbor requires more attention from the administrator, so the big systems don't like them and often people are told that the suspension is required by law. Not so.

You don't have a deemed distribution. You have an offset distribution to the beneficiary, who is responsible for the taxes on the distribution, which includes the amount of the loan.

Don't mess with sham terminations.

You might fit under section 401(k)(10) if the Branch Operation could be itself a trade or business and substantially all of the Branch assets were acquired. Check the letter rulings for what constitues a separate trade or business.

Why bother with a SIMPLE? A SEP is easier and can get you the same thing and more as long as there are no other employees.

Though there are probably exceptions, if the employer is simple enough to need a simple 401(k), the employer should not have employer stock in the plan. If the employer is an exception, it will already have access to the answers through its regular legal counsel or other professional advisors.

Depends on what the QDRO says and possibly what the interpretation policies are, as set forth in the plan's written QDRO procedures. Generally, if a QDRO awards an alternate payee a portion of the benefits accrued during a period and the plan upgrades the benefits accrued during the period, the alternate payee's portion of the benefits would be upgraded unless the QDRO provides otherwise. If an alternate payee is awarded a percentage of each benefit payment rather than a portion of the accrued benefit, you get a similar result. But it is ultimately a matter of interpreting the plan and the QDRO.

While I am a big fan of close and literal readings, I don't think the Notice requires using age and service requirements that are both below the statutory minimums in order to disaggregate. That would be rather tricky and the IRS should be more forthcoming if they really mean it that way.

Check Rev Proc 98-22. In Walk-in CAP you may be allowed to amend the plan retroactively to conform to prior administrative practice. You might have some luck in VCR, but not with the conforming amendment. The VCR correction would be to write a letter to the alternate payees and request that they return the contribution, perhaps warning them that the Form 1099 will report the distribution as nonrollable, but not pursuing the return. Call the VCR people first to get some guidance. A plan must have express provisions if it wishes to permit alternate payees to get distributions before the former spouse participant is eligible.

It is better practice to treat alternate payees who are also participants the same way that nonparticipant alternate payees are treated. So an account or subacount separate from the alternate payee's participant account should be established. The rules governing alternate payees are different and the QDRO may have terms that cause the QDRO money to be handled differently. Examples: Alternate payees are not subject to a 10% tax on withdrawal of QDRO money before age 59 1/2; alternate payees usually can get a distribution right away (the alternate payee, as a participant, may not be able to get in-sevice witdrawals); alternate payees often must start distributions when the participant starts; if the plan has a j&s annuity distribution option, the QDRO money can't be distributed as a j&s annuity (unless the former spouse is the named survivor beneficiary, which is unusual). Depends on what you mean by commingle, but the plan had better be able to identify the QDRO money and its related earnings.