QDROphile

Paragraph #2: the IRS says that the participant may not roll over the distribution, notwithstanding that it is taxable. I cannot recall when and in what form the statement was made -- I think it was not within a release that may be formally relied upon by taxpayers, such as a revenue ruling or even a notice. This is not an issue for the plan. As you point out, this is something the participant would do with an IRA and out-of-plan money. Paragraph #1: Allowing the the participant to exercise the payee's options for withholding at the time of distribution is exactly what will make a mess for the plan administrator. What would the administrator do when the participant elects withholding of 100%? The alternate payee would surely complain. The administrator can strong-arm the issue as a matter of qualification and should do so.

A well-advised plan administrator or special QDRO fiduciary will require the order to speak about how the withholding will be administered, primarily whether or not the distribution will be net of withholding. If the distribution is to be net of withholding, then the order should specify the applicable withholding percentage, both federal and state. If these terms are not established in the order, the matter is open for controversy at the time of distribution. This is a qualification matter because if the terms do not specify (or allow the plan administrator to compute by formula) the amount the AP actually will receive, the amount awarded is ambiguous. The plan administrator doe not want to be in the middle of resolving disagreement over the actual amount to put in the hands of the AP at the time of distribution. The plan administrator controls the issue at the stage of qualification.

That would be my first guess, too. ERISA parrot will check whether elective deferrals are a condition of getting the loan assistance. It may be that participation in elective deferrals is not required, but receiving loan assistance will nix getting the match on whatever the elective deferrals are. Another thing to consider is that a choice of loan assistance appears to be an election against a match. So reframe the question to ask if it is permissible directly or indirectly to elect a taxable benefit in lieu of a matching contribution.

Yes, the plan needs to hire a valuation expert who is competent with respect to the asset. The comments of My 2 Cents suggest that some competent adviser or independent fiduciary consider whether or not the investment and the maintenance of the investment (such as the valuations used for past years that have affected distributions) involve a breach of fiduciary duty. I am not suggesting it is; that would be determined by the circumstances. The plan seems to be a bit small to carry significant illiquid real estate investments.

My approach is to consider the plan to provide two mutually exclusive benefits, the "regular" retirement benefit and the death benefit. The AP gets no part of the death benefit unless the QDRO says so expressly and says what the AP's benefit is. Of course the AP gets the portion of the regular benefit that the order describes. But the plan pays no regular benefit if the participant dies before starting benefits. It might help to understand that there is really no such thing as a true separate interest under a DB plan. "Separate interest" is not a term under section 414(p). It is an imprecise label that carries with it incorrect implications.

Read IRC 414(p)(5): "To the extent provided in any [QDRO] ... ." I read the statute to mean that the order (if otherwise a QDRO) may award a portion of the surviving spouse benefit to the AP. The portion is not prescribed or limited. The terms of the order have awarded of a portion of the QPSA and instructions about how to calculate it: 50% of the regular benefit awarded to the AP. The question for the actuary is whether or not this could be more than the entire surviving spouse benefit at the time of death of the participant. The order would be fine if it had awarded the lesser of the 50% or the entire spouse death benefit.

Let me emphasize a point in ESOP Guy's excellent response. This situation is fraught with difficult fiduciary issues and the fiduciaries could already be in deep trouble. As painful as it may be, you may need lots of lawyers (one for the company and one or more for the fiduciaries, depending on how the fiduciary arrangements were designed). You may also need a new independent fiduciary and financial advisor(s). Professional advice even about how to get started would be a good idea. This is a tough situation. Did you really say that the DOL is auditing? If so, serious consideration should be given about what to say to the DOL at each step of remedial action. Engaging an independent fiduciary is always pleasing to the DOL, not that the DOL will say anything pleasant about this situation, no matter what.

There are different approaches to determining the terms of an order. In the end, the plan administrator (or special fiduciary) has to adopt an interpretation of the order and decide qualification and administration accordingly. If the plan administrator wishes to base the interpretation on some agreed assistance by the interested parties, that should be acceptable as long as the PA adopts the interpretation and the interpretation is reasonable. Many PAs will not take this approach and even a provision in the order that says the parties may agree on terms cannot require the PA to accept an outside interpretation.

Except for the thought in the next paragraph, this is not a QDRO issue, it is a general income tax issue. If taxes are owed, the IRS can go after assets of the taxpayer. A distribution from a retirement plan becomes an asset of the recipient. You are probably aware that a distribution to a former spouse under a QDRO is an eligible rollover distribution to the extent not subject to required distributions rules. As such, federal withholding at a 20% rate applies and state withholding may apply. The withholding applies to the ultimate tax liability of the taxpayer; the net distribution is an asset of the recipient. By policy (although the IRS is not bound) IRS will not levy on funds held in a retirement plan until the funds are distributable or until distribution (interpretations vary). You appear to think that a distribution is necessary now to set up care for the taxpayer, so holding off on distribution or trying to determine the status of protections if the funds are rolled over directly may not be worthwhile. You do not say anything about the contract for care. It is possible that if the distribution funds are used to purchase long-term care before the IRS is in the picture, the IRS may not be able or inclined to try to invade the contract. You would need to engage other expertise to see if any possibilities lie in that direction.

No breach.

It is commonplace, and a prudent practice, for divorce lawyers to hire a specialist to draft or obtain a QDRO as part of the divorce proceeding,

Any time a plan receives a divorce decree or a similar document under domestic relations law, it has to respond to the receipt of the domestic relations order in accordance with the statutory requirements. The decree cannot simply be disregarded. If the domestic relations order accompanies another domestic relations order that wants to be a QDRO, the plan administrator has the following options, perhaps among others. Usually I prefer the first, but it depends on the circumstances and terms of the documents: 1. The notice of qualification (or failure to qualify) defines the DRO at issue to be the combined decree and related order, but states that the provisions of the decree have not been considered in the qualification of the order and will not affect the administration of the QDRO. 2. Same as #1 except the combined terms of the decree plus other order are considered to be the terms of the QDRO. This will not work if any relevant conflicting terms cannot be reconciled. 3. Separate review and notices are afforded each DRO. I presume that the decree will fail to qualify. If it fails, the good QDRO will be held up pending the required reasonable time for correcting defects in the failed decree. If people are smart, they will just formally accept disqualification and proceed; people in the circumstances are not smart and will be totally confused. Shame on the lawyer in particular. If the decree qualifies, any number of things can happen that I will not spell out in speculation. Resort to #2.

I got in hot water with a corporate patriot when I revealed my bias against company stock as a investment option in a retirement plan. When questioned, I said that there is nothing wrong with that company's stock or company stock in general in a plan, but the company should not push the stock on employees. I heard from some friendly employees that the patriot was giving thought to firing me. About three months later Enron blew up, and Enron was close to that company's home in ways that cannot be described here. I heard after that about how the patriot had mumbled a concession to the friendly employees that my comment was not such an outrageous insult after all. A company with its stock as an investment option in a retirement plan is automatically in the danger zone. What is said about investment in the company stock should be limited to what ERISA and securities law disclosure rules require. Embellishment only increases the risk.

From the words on the page in the tax code and the regulations, use of forfeitures to fund elective contributions is OK; elective contributions are employer contributions. However, the IRS denies this when questioned. Perhaps the reason the IRS denies this is that ERISA looks at elective contributions as employee contributions (unlike the tax code), so the employer can never retain the elective deferral amount (see Mike Preston's comment about theft) even if the employee participant is credited under the plan with the amount, funded from forfeitures. This is an example of an awkward reconciliation between the way the tax code rationalizes certain things and ERISA's different take on the same things. The status of "pre-tax" elective deferrals as employer contributions under the tax code is artificial, but is consistent with the deductibility of the contributions (employer contributions are deductible) under general tax principles. Contrast after-tax "employee contributions" that are not deductible. ERISA sees all contributions from the employee's pocket or paycheck as employee contributions and does not indulge in the artificiality about elective deferrals being employer contributions because the employee did not receive the contributions. ERISA is closer to our gut understanding of whose money is involved. Treasury and DOL do not like to fight over differences even if they have to be intellectually dishonest. Compare the "new" 403(b) regulations with the DOL's awkward attempt to preserve its traditional position about what constitute employer involvement for purposes of determining if a plan is exempt form ERISA.

Assuming that all the deferral amounts for the next pay period are identical to the excess amounts mistakenly deposited, that leaves investment earnings to evaluate. Chances are that the interim earnings are immaterial and the "do nothing" approach (other than documenting the error and the consideration of correction) could be reasonable. A participant with even an immaterial amount of negative earnings might complain, but that is another question for another time. Keep in mind that one of the primary principles of correction is that the plan be put in the same position as if the error had not occurred, so some serious attention and thinking should be applied to the interim earnings. The IRS has no express "de minimus" standard for these circumstances.

"IRS will allow just about anything" Does that include doing nothing other than not truly doubling the contributions, as suggested by the post (although I don't really understand what "change the effective date" of the deposit means)?

Are you not worried about the risk to the employer, such as disqualification? Disqualification would not serve the participants very well, either.

A former spouse gets nothing unless provided in a QDRO. Unless the participant dies before the plan determines the QDRO, the QDRO can invade the "rights" of the second spouse. The formula you describe is conventional and is not regarded as overreaching with regard to the second spouse. This a bit complicated, and one could quarrel with the articulation, but you, as subsequent spouse, do not "vest" with repect to a QDRO until the participant dies. As a matter of value judgment on my part, you have nothing to complain about if the former spouse is awarded half of the benefit accrued during the time of marriage to the first spouse, including the survivor benefit that goes with that half. To get closer to your question, the terms of the QDRO determine the disposition of the survivor benefits. As subsequent spouse and designated beneficiary, you have all of the survivor benefits that are left over after the QDRO alternate payee's survivor benefit (as expressed in the QDRO) is honored. You may have some portion and the former spouse may also have a portion.

You may have a question about whether or not the persons are properly classified. Are they common law employees who should be getting a W-2 rather than a 1099? If the employer is inclined to allow participation, it may be from a gut feeling that they are more like employees than contractors, and that gut feeling may be borne out of a relationship that IS an employment relationship (based on the applicable factors) rather than a contractor relationship. Misclassification is also a problem if they are common law employees and not effectively excluded by plan terms. See plan section 2(c).

One aspect of what Mr. Preston is saying is that a revision to a property settlement in a divorce is first a matter of state domestic relations law that must be addressed before anything "QDRO" is considered.

Monetary damages are rare under ERISA. The usual remedy is to put participants in the position that they should have been absent a violation. In technical terms, ERISA looks to equitable remedies rather than legal remedies (damages).

However it is accomplished, it must be remembered that the benefit is the participant's benefit to which the beneficiary is entitled. It makes a difference and it makes a difference if the beneficiary is the spouse or someone else.

Was there supposed to a distribution? Was there a sloppy use of the term "transfer" to mean that the plan will now recognize the beneficiary as controlling the benefit, including determination of timing of distribution? Plan terms will dictate when distributions to beneficiaries must occur. Do not presume immediate distribution. I venture that it is common allow spouse beneficiaries to maintain the account of the participant subject to the limits of the required distribution rules.

No early distribution tax on distributions pursuant to QDRO. The AP is trying to receive a distribution in a form that appears to be unavailable under the plan, although the original poster has not provided adequate information about plan terms; this is all about plan terms.

Subject to a reading and understanding of all the plan terms, it would be reasonable to interpret the plan to allow a disclaimer. I venture that few plan administrators are both capable and familiar enough with plan terms to make a solid determination. I also doubt that it is a high risk proposition.