QDROphile

This is a question that should not have to be asked because it is a reprehensibly stupid thing for an employer to contemplate, even if the employer is willing to skate on the thin ice of the 20 hour rule. Are we going to hear about the Big Bad Budget Wolf?

You seem to saying that your plan has 4 types of "employee" contribution that will be matched by the employer: 1. "Pre-tax" elective deferrals; 2. After-tax employee contributions ( "Basic"?); 3. Supplement -- you will have to explain that, the word does not conform to usual notions of employee contribution; I suspect "Supplement" is an employer contribution and not subject to matching. 4. Roth contributions. You seem to be asking which one, or combination, of the "employee contributions" you should choose, given that they are all matched equally by the employer. If that is the question, you cannot get much of an answer here. The choice between "pre-tax" deferrals and after-tax (both traditional after tax contributions and Roth contributions) depends very much on individual circumstances (e.g. income and wealth, use of Roth IRAs, section 529 accounts, and HSAs), assumptions about future effective investment earnings rates and after-retirement effective tax rates, and plan differences among the options, such as eligibility for loans. A common conclusion is that, other things being equal, Roth contributions are preferable to traditional after tax contributions because the earnings on traditional after tax contributions (the increase in value of the after tax account over the basis) are subject to taxation at ordinary rates while the earnings on Roth contributions are not subject to federal income tax if distributed in a qualifying distribution. But that conclusion is a generality. You really do need to explain better. I hope my attempt at unpacking your post gives you some framework or ideas for better communicating your circumstances (what the plan options are) and your question about what to do or choose. I repeat that you are not going to get any specific answer that is backed by high confidence. An entire sub-industry exists to help individuals with the choice between "pre-tax" and after-tax elective contributions. The optimal choice may also change with time and circumstances.

Private employer securities in the account of an owner of the plan sponsor very often involves some dirt along the way somewhere, which is why extrication can be difficult. One path to resolution is to distribute the securities, being very careful about valuation. But that requires a distribution event.

Nonpublic stock of the employer is about the MOST sensitive asset for purposes of prohibited transactions. "Qualifying employer securities" actually enjoy some exemptions from some PT rules. What does this mean: "If these participants elect to change their RO investments to cash and get out of the stock, could the plan then sell it to the FA?" How does stock "change" to cash without a sale or exchange? But to answer your question, one type of PT is a sale or exchange of property between a plan and a party in interest. A person who provides services to the plan, such as valuing the stock, is a party in interest.

I agree substantively with Larry Starr. However, any time a participant or beneficiary asks for a benefit, such as a loan without a specified hardship as provided by the plan, and is denied informally, there is always the consideration of reminding the person about the plan's formal claims procedures. This will avoid a later assertion that the plan denied a claim for benefits without following the plan's claims procedures. The explanation that the loan is not available should be in writing, or confirmed in writing, with the explanation that the negative answer is informal and the person may wish to submit a formal claim as described in _____ of the SPD.

The person is asserting that the plan document should not have that feature, contrary to the belief of the poster, who is somehow involved in administration. The poster should not have to scour to educate a plan participant who happens to hold a false belief. The owner of the false belief has the responsibility to support that belief with authority. The process of finding support for that belief will reveal both the falsity and the unreasonableness of the belief -- not the administrator's job.

Burden of proof is on the person who asserts a restriction on plan design.

Just so you have some perspective, a lot of what you are concerned about is a matter of state corporate law and is not directly governed by ESOP considerations. The ESOP is a shareholder (being a majority shareholder is nice; minority shareholders just get screwed). As an ESOP participant, most of your rights relating to how the business of the company is run is derivative of shareholder rights. Shareholders of private corporations have surprisingly few rights and most state corporate law gives management a lot of latitude (the "business judgment rule") about how to run the business, albeit tempered by conflict of interest rules. Majority shareholders have the right to control management by electing or dismissing board members, not by evaluating business decisions. ERISA and ESOP rules come into play through the fiduciary. The shareholder rights of the ESOP are exercised by a fiduciary, who is charged with acting in the best interests of the shareholder (the ESOP participants). If the fiduciary is not attentive or is not properly exercising its rights (electing and dismissing board members) based on prudent attention, thus allowing management to go beyond the usual disgusting bounds of greed, the the fiduciary may have liability and the Department of Labor may be interested in fiduciary malfeasance. The Department of Labor is particularly sensitive about ESOPs, but not always very savvy about limitations on ESOP rights based on corporate law. You may not like what is going on as business conduct, but it may well be within corporate law propriety. If it is not, and the fiduciary is either not paying attention or is one of the band of thieves and not taking appropriate action to replace the wrongdoers, the DOL might be of some assistance or might be a saber to rattle if concerned participants want to confront the fiduciary or management. The DOL is also interested in inappropriate valuation of shares, but valuation is a very mushy subject.

If you are interested in protective practices, for both hardships and loans for home purchases, the distribution/loan arrangement should be included in the closing escrow for the home purchase, with appropriate conditions and escrow instructions. If the sale fails, there is a much better (I think winning) argument that the conditions of the distribution/loan were not satisfied, so there was no distribution or loan. The return of funds to the plan is not reversing a distribution or repaying a loan. Of course, this requires real plan administration, not the automated, no brain, arrangements that many employers get with the bundled package of documents and services.

If you are looking for help in this situation, the Department of Labor is not your best pursuit. Because you ceased being a spouse while the participant was still employed, your rights really originate under state law, specifically state domestic relations law. The Department of Labor has no interest in matters of state law. While your friend is correct that you had certain limited rights under the plan according to federal law (which is the province of the DOL) that was because you were a spouse of the plan participant. When you ceased to be a spouse, that changed. Federal no longer cares about you, except to require a plan to give effect to a qualified domestic relations arising out of your divorce proceeding. Federal law also provides you some rights if you are named as a beneficiary independent of your former status as a spouse. Your friend is probably right that the 401(k) plan is an asset that can be divided in a divorce, thereby providing you with a potential right under the plan, but that has to be established in the divorce proceeding. Because you are post-divorce, your only recourse, if any, is under state law. You need lawyer in your state to advise you about what is still possible under state law. You are wasting your time and the DOL’s time if you go there. And the DOL will also do nothing until you have contacted the plan and been rebuffed.

If you divorced during his employment you would be entitled to benefits under the 401(k) plan only if any of the following apply: 1. You were awarded an interest under the plan in connection with your separation or divorce as part of the divorce proceeding. Other conditions also apply under this item, including submitting a domestic relations order to the plan that is determined by the plan to be a qualified domestic relations order (QDRO). 2. Your ex did not remarry, left you as a designated beneficiary after the divorce, and the plan does not have terms that automatically designate someone other than you (former spouse) as a consequence of the divorce. 3. Your ex designated you as a beneficiary after the divorce and either did not remarry or complied with spouse consent rules of the plan if he did remarry. My guess is if you did not get formally awarded an interest in the plan as part of the divorce proceeding (#1), you have no right to anything under the plan. It may be possible to get a court to award you an interest now, but that is unlikely under the law in most states. I know nothing about the domestic relations law of the F state. If awarding you an interest under the plan was not contemplated in the divorce proceeding and you were represented in the divorce proceeding by a lawyer, you might have a claim against the lawyer for malpractice. That would also be a matter governed by state law.

Excellent response, not less true just because almost no one truly complies with the DOL non-enforcement policy. I have not heard of the DOL taking action.

Government 457(b) plans are subject to state law and possibly collective bargainig agreements, political concerns, and entitlement mentality. The answer to your question requires familiarity with the applicable local concerns. Even if you disclose the locality, the chances of getting an informed response are reduced, but you might get lucky. Then if you get a response that there are no legal impediments, you are going to have to decide if the response is reliable and ask if competent counsel is needed in any event.

You can argue fair all you want. The rule has a lot of logic. One looks at the vehicle that holds the funds to determine status. Record keeping is thus simplified. Record keeping for carryovers is a lot more work. “Unfair” can be counterbalanced by well-informed planning. Open a token Roth IRA when contributions to the Roth 401(k) account start. Then the rollover has the benefit of parallel aging. Not everyone can open a Roth IRA, but I shed no tears for the disqualified wealthy. And hindsight is 20/20.

There are prior posts relating to withholding on distributions to APs that are not spouses or former spouses. They do not cover the question as posed, but they deal with the relevant rules and principles. Some of those have been touched on already in this post piecemeal, but not in a particularly coherent way for an overall picture. It is a matter with little prescriptive guidance in the literature and requires understanding of both the relevant local domestic relations law and QDRO law and federal tax withholding law in order to achieve a particular outcome. Competent counsel is required, but it would be enlightening to wait for Larry Starr to return and ‘splain it all for y’all. Mike Preston holds one key — the ability and willingness of the court to order the participant to elect zero withholding on the distribution (and do not overlook state tax withholding, BTW), and to enforce the order. But his is an example of a post that does not express the concept in a prescriptive manner.

The investment adviser should provide the authority, not you.

Making decisions other than ministerial decisions will make someone a fiduciary. Is that your job? A ministerial act is to follow plan terms about what happens when an employee terminates when the appropriate authority certifies that an employee has terminated. If the service provider suspects that all is not what it seems on its face, then a fiduciary should be consulted for guidance.

And that is only the beginning of the questions. If you are asking about plans, plans are only interested in the terms of the QDRO. What are the terms? Payment to an alternate payee until remarriage is a very unusual term, and the terms of the QDRO should specify how the plan is to be notified about remarriage. No sane plan administrator is going to take responsibility for monitoring status or evaluating veracity.

"hard to detect" meaning that the IRS audits few plans and the reporting done by plans and employers does not flag very well the suspicious circumstances for closer scrutiny.

There are other issues with reimbursement, depending on how it is done.

But the question is whether the reimbursement is a contribution subject to section 404, section 415, and the allocation provisions of the plan. Generally, reimbursable “TPA expenses” that are reimbursed by the employer are not contributions and are deductible as business expenses under section 162.

It leads to another question. Are you concerned about the prohibition in IRC section 4975(c)(1)(F): "receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan." ? Determining qualification of a domestic relations order is a fiduciary function; a fiduciary is a disqualified person. Receipt of payment for assistance to the lawyer who is drafting/submitting a domestic relations order is receipt of consideration for your personal account,* in connection with a QDRO, which may be a transaction involving the income or assets of the plan. I have not researched the meaning of "transaction" under section 4975(c)(1) (F), but I imagine high scrutiny is applied under the self-dealing provisions of the prohibited transaction rules. Also, payment by the for your services in administering the QDRO could be a "transaction" involving plan assets under (F). There is an exemption for reasonable compensation for necessary services. That covers pay to a QDRO fiduciary for the services to the plan relating to the QDRO. I do not know what happens when that gets tangled up with other compensation to the disqualified person relating to production of the QDRO. *The opportunity for personal outside-the-plan compensation is solicited from another plan fiduciary, which would make me nervous in context and by itself, but that involves further consideration and the prohibited transaction maze make my head hurt.

When the order comes in, who determines whether or not it meets qualification requirements?

Yes, thank you for the response. I am always curious about ways to implement QDROs effectively and efficiently for everyone involved, including the plan. The domestic relations lawyers, by themselves, generally do not do a very good job. The combination of your technical expertise and your knowledge of the plan certainly is a shortcut to the goal. How do you establish contact with the lawyer who wants to submit an order to the plan of your client? Often the first the plan knows of an order is the submission of a draft order. And you can call me Querly. Now if we can only find Moe, we may have an act.

There are several threads about this situation and "killer" statutes. The plan may need a lawyer to advise about the existence and applicability of such statutes. ERISA says to pay the designated beneficiary. ERISA says nothing directly about killer statutes and the statues are state law, which sets up issues about what the plan should do. The plan is not going to be able to rely on what you may learn from this board; the issues are too complicated. The plan should also have a lawyer to advise about the appropriate way to address the claims for benefits that have already occurred. The plan is required to have a claims procedure and the procedure should be followed in response to any request for distribution. Proper handling of the claim is essential to avoid fiduciary liability.