QDROphile

Go for it! You should take this opportunity to look at your QDRO procedures and your notice practices to make sure that what you do avoids problems and backs you up. I agree that you should not have to question every word of an order. However, there are certain circumstances that arise with enough frequency that you can anticipate them and get out ahead of them to avoid trouble, or a least liability.

It is not qualfied and therefore will not be given effect. It asks the plan to do something the plan is not designed (or permitted) to do in violation of IRC section 414(p)(3)(A), and possibly (B).

You have not provide enough information to convince me that the original distribution was in error. "Error" means "not in accordance with the QDRO or not in accordance with plan terms," not "not in accordance with an unexpressed or poorly expressed intention of the alternate payee." If the reason for the proposed "correction" is that the original intent was not achieved, there is nothing the plan should do unless what the plan did was wrong, such as use the November date when the order said the February date. If this is not the plan's error, the plan should not try to get involved in the solution to a problem that is not the plan's problem. This is akin to someone requesting an in-service distribution and then 100 days later deciding that the amount they asked for was more than they wanted. Tough cookies. Are you now questioning your interpretation of the order? Stick with it unless the interpretation was unreasonable. The plan's QDRO procedures should have default provisions that apply (such as earnings and losses will accrue from the effective date of the division unless the order specifies a different date or diffrent terms for earnings and loses) and the plan should include in its notice of qualification the basics of how the order will be implemented (in this case: earnings and losses will accrue from November 2010 until distribution) and wait for a time (30-60 days is typical) before acting. There are decent solutions to this if the AP rolled over enough to an IRA, but they do not involve the plan and I am not going to venture them because the plan has no business even proposing a solution that does not involve the plan.

Then what is the problem? If the participant got all the assets under an in-service distribution, there is no problem creating a new plan for new contributions. I question that it is really a new plan anayway under those circumstances.

Individual tax matters are confidential. There is no data base that makes closing agreements acessible. Some accounting firms purport to have enough experience that they have empirical insight. There are also informal understandings about the IRS bidding when it comes to proposing the figure in a voluntary negotiated settlement vs. an audit settlement. PLRs and some other IRS internal policy documents became available after FOIA requests, but I don't think there is a way to get to individual tax matters.

Why is the second plan at risk rather than the first? The first plan made an improper in-service distribution. What failure occurred with respect to the second plan? I would be tempted to ask the IRS to approve a transfer from the IRA to the second plan, with whatever restrictions would apply to the transferred amounts as if the transfer had been from the first plan. For example, the transferred amounts would be subject to the 401(k) in-service distribution rules, not the distribution rules for rollovers. The effect would be the same as if there had been a plan merger as of the date of the original distribution. That would make the Form 5500 correction rather strightforward if the second 401(k) plan had an effective date no later than the original distribution date.

The plan loan secures itself and a participant should not be able to withdraw amounts that seure a plan loan. This is all part of the principle that plan loans are supposed to be repaid and a participant cannot turn a loan into a distribution. If it were so easy, then the plan would not meet the rules that restrict in-service distributions. I realize that the "loan secures itself" and "amounts that secure a plan loan" are quaint notions that do not resonate with anyone and cannot be found in typical plan documents. But most peple also think that elective deferrals have to be suspended for six months after a hardship distribution. I agree that if the participant is eligible for a distribution that the entire loan can be distributed at the election of the participant, subject to plan terms concerning distribution.

1. Everybody is overlooking the securities law aspect of the circumstances. They should be considered if the arrangement is going forward. 2. What new terms does the plan document need to allow the arragement? If new terms are necesary, is it going to be necesary to have a retroactive effective date? The IRS position is that retroactive amendments, with very limited exceptions, must be effected through VCP. Based on a VCP filing for an employer that had members of the controlled group fail to execute participation agreements, the IRS believes that particpation agreements are plan documents with plan terms, and retroactive adoption is a retroactive plan amendment. 3. Forms 5500 have not be done correctly.

Should be concerned with a plan administrator that simply allowed the particpant to elect to default? The loan was issued with the understanding that it would be paid. That understanding is based in part on a payment mechanism, such as payroll deduction. The repayment expectation and terms behind it are part of the loan assset. The plan administrator has responsibilities with respect to that asset. I do not think the plan administrator can turn its back and allow default without consideration of reasonable actions for collection. For example, payroll deduction authorization should be irrevocable.

Surrender fees might be a valid expense, but it would likely be unreasonable to allocate the surrender fees with respect to an account to be allocated in any way except to the account. If not an expense, the surrender fee is a factor in investment return, likewise allocated to the account that holds the investment that is subject to the fee. Using forfetures is improper, but I don't think "discriminatory" would be the correct term for the impropriety, although the term does get across the idea of improper allocation of the forfeiture amounts. If the employer wishes to cover the cost of the surrender fee, you might explore the idea of a restorative payment. See Rev. Rul. 2002-45 and PLR 200317048 among others. Beware the narrow circumstances. The IRS is not giving a "get out of surrender charges free" card.

"The point of getting indemnification from one’s employer (or the business organization that asks one to serve as a plan’s fiduciary) is that such a person can indemnify its indemnitee for conduct that an employee-benefit plan cannot exonerate." While it is true that the plan sponsor can indemnify a plan fiduciary for liabiities that the plan cannot, the point that I was trying to emphasize is that there are public policy limits on indemnification. In matters governed by ERISA, I suspect that public policy would restrict indemnification if the fiduciary were not acting in good faith or in the interests of the plan participants and beneficiaries. I am not arguing about general limits or conditions as a matter of corporation law on the ability of corporations to indemnify. Those standards stand separately and are a separate public policy limit on indemnification. The two should not be confused. I think the ERISA concerns are the more relevant for a question about indemnifying an ERISA fiduciary in terms of what the ERISA fiduciary can expect by way of coverage.

When it comes to indemnifying fiduciaries, the standard is acting in the interests of the participants and beneficiaries, not in the interests of the employer. A small slip in a quickly worded message, but an important point under ERISA.

Compliance with 402(g) limit; not so many misunderstandings more recently. Timing of matching contributions. Definition of compensation subject to deferral elections.

1. If your model for bundled services is ADP, I hope your plan administrative services are not the same abomination. 2. There are certain areas in which payroll services and retirement plan administration services can conflict, especially if the retirement plan services involve consulting. I have never had a client change payroll providers because the payroll provider failed or refused to accommodate a recommended plan feature, but at least I felt that I could give appropriate advice without restraint. If I were associated with the payroll provider, would I consider giving the advice that would effectively be shot down on the payroll end?

No comment.

Although indemnification may cover litigation and defense costs, one should consider having the indemnitor cover the defense costs (subject to favorable outcome, or ?) up front, or to defend the fiduciary, because such costs may be substantial and an indemnity operates only after the fact. Indemnity is subject to public policy limits. Under ERISA, that probably means, among other things, that actions not taken in good faith or not taken in the interests of participants cannot be indemnified. The Department of Labor has a special view about indemnification of ESOP fiduciaries.

Assuming that you are interested because of a qualified trust, more information is needed about the what the trust owns. For example, if the trust owns C corporation stock of a company that owns oil wells and the trust gets "oil well income" in the form of dividends on the stock, then the income is not UBI. If the trust owns an oil well and gets "oil well income" in the form of sales proceeds from the sale of oil produced by the well, then the income is probably UBI.

My recollection is that if the plan is subject to the QJSA requirements, then spouse consent is required for loans. It was many years ago that the specific question was examined.

Depending on how bold or imaginative you are, you might believe there are other circumstance involving an election that fall short of a cash or deferred election.

The plan is a contract. Whether or not one party can unilaterally change a contract depends on contract terms and contract law.

Can you do what you want or are you stuck with an inflexible administartive system/provider?

It is still an ERISA plan, which generally means that the participant is entitled only to what the plan provides. As for "contribute," a lot of plans are poorly drafted and a better term would be "credit" to the bookkeeping account that measures the employer deferred compensation obligation. Leaves open the opportunity to dispute the meaning of a term that has no meaning under section 457(b).

The deferred compensation arrangement is a contract. The employer needs to evaluate the prospect of breaching the contract terms. Your message touches on some of the considerations.

Nonqualified plans are not subject to ERISA or tax code proscriptions that apply to qualified plans. All the more reason to get professional advice.

I bet that your plan administrator does not know. The plan administrator relies on a financial services provider, such as a mutual fund company (think Vanguard, T. Rowe Price), insurance company, or other provider (Flying Spaghetti Monster forbid, ADP) perform the calculation based on the instruction to compute related earnings. The financial services provider has a methodology that is usually some sort of algorithm. It would be good for the plan administrator's soul to understand and explain the methodology and break it down for you with actual numbers applicable to your account. You can frame your inquiry as a claim under your plan's claims procedure if the plan administrator is not forthcoming informally.