QDROphile

The establishment of a nominal Roth IRA in anticipation of rolling over a Roth account later was also done to be able to get the Roth money out of the qualified plan before it got caught up in required distributions. The change in law that allows Roth accounts to be excluded from the required distribution calculation obviated the need for the technique.

I am glad that you owned up to being unable to explain why interest payments on both defaulted and undefaulted loans, all originating outside the plan, would have different treatment for tax purposes once paid to the plan by the participant. I am sympathetic to the additional complexities for recordkeeping, but I think that treating the interest as “pre-tax” in the plan as is all undefaulted plan loan interest would be simpler compared to the alternative. However, I have never had to do recordkeeping, so I do not know how accounts are best set up to track sources and earnings. The basis of the repaid defaulted loan alone is a monkey wrench in most plans. Interest on a regular plan loan does not smell like a deferral, though much has been argued about how plan loans are more or less tax favored in the repayment. I haven’t seen that argument in a long time and hope to never see it again.

Lou S: I am going to take an uninformed and unresearched shot at guessing that interest payments on the defaulted and taxed loan are “pre-tax” amounts, just as are regular plan loan interest payments, and also earnings on other after – tax amounts, such as voluntary contributions (excluding Roth).

And if the participant pays the loan, the plan will have to track basis. Wheeeee!

Plans do not run on undocumented intentions. You say there are no relevant documents submitted. What does the plan (and relevant participant documents, such as beneficiary designations) say about payment of benefits on the death of the participant, taking into account that the participant was subject to required distributions in 2023?

A 401(k) plan can be designed to allow investment in individual stocks. It depends on the product that the provider is offering. Plans with fewer assets and fewer participants tend to have fewer options and less flexibility because they cannot support the related greater administrative complexity and attention - or greed of the provider, depending on your point of view. This is a subject that an adviser should cover. The first questions should be about what you want or are trying to accomplish.

How is the adviser, or her affiliates or friends, being compensated with respect to your new 401(k) plan? If it is based on assets under management, you would understand why she would want the IRA assets in the fold. Also, there are some providers that have a minimum threshold expectation of volume before accepting a small plan because they get compensated based on assets, such as 12(b)(1) fees. But you should have been told all of this in contemplating the arrangement.

You have to know what the plan says and what the QDRO says. As a general principle, a remarriage by either the participant or the participant’s former spouse after the plan approves and recognizes the QDRO will not cause an alternate payee to lose the awarded interest. For example, most plans will not qualify an order that provides for lapse of interest upon remarriage. However, especially with government plans, what happens in any particular case depends on plan terms and the terms of the QDRO. And many things can affect the actual amount received under the interest awarded under the QDRO. See the most recent message before yours in this category.

What you were told about the benefit -- you get nothing after he dies, is not necessarily inconsistent with the divorce decree. The form of benefit appears to be a life annuity, which is common for pension plans. When he dies, nothing further is payable from the plan, so 50% of that provides you with nothing also. Something may have gone awry with the selection of the form of benefit that puts you in a position where you may not get what you expected. But there may not have been a form of benefit that would get you literally what the decree says. The benefit options and how to apply the words of the decree are complex.

You need to deal with the Plan Administrator. You need to get a copy of the QDRO. You may have to initiate a claim for benefits to get the Plan Administrator to clarify the benefits for the participant and currently designated spouse beneficiary and to get the relevant documents (such as the QDRO). With respect to a claim for benefits, request a copy of the plan's claims procedures. Though it would be a shame, you may need professional assistance to push this through if the Plan Administrator is not forthcoming with the information you would like so you can understand the benefit and the effect of the QDRO.

To to make sense of this, one must know the terms of the QDRO. One can infer some things by your statement that both the participant and the alternate payee were offered elections, but inference is not a good basis for understanding, and certainly not assurance. You could ask the current administrator now to state your husband's benefit. If you get the same answer: "Total Monthly Benefit $2,857.28; Benefit to Spouse After Your Death $1,857.23" and you are identified as the spouse, that should be it unless there is some mention of the effect of a QDRO on the benefit. If there is no mention of the QDRO, that would be consistent with the inference described in the preceding paragraph, that the former spouse's benefit under the QDRO is a separate interest that was dealt with separately at the the time of the benefit election and has no connection with your husband now. You cannot rely on anything in this message.

I would not allow a distribution after rehire in 2022 under the circumstances you described. I interpret the circumstances to be that he is expected to continue employment, although on again, off again. If there were not an expectation that he would be working again, maybe. Better yet that there be a solid expectation that he would not be working again. I would still worry about stated intent and expectation compared to the contrary inference from the pattern of working.

Yes, you are correct. But the IRS has issued guidance that allows a rollover of a plan loan, which is usually how it is accomplished since the guidance was issued. Whether or not the rollover is a direct rollover, a rollover is still a distribution. The rules on direct rollovers change the consequences that attend to a regular rollover (before direct rollovers were conceived), and, as announced by the IRS later than other changes, one of those changes is the ability to roll over loans. If the IRS says so, I will not gainsay even if the IRS disregarded general legal principles in the making of the rules. The whole system is artificial.

The plan will respond to the receipt of a domestic relations order and implement the terms of a domestic relations order that the plan determines to be a qualified domestic relations order (QDRO). Can a domestic relations order that modifies an existing QDRO to reverse essentially reverse the QDRO out of existence? It seems like one should be able to do this if the state court will issue the modifying order. I do not know if this has ever been adjudicated, but a negative answer would be based on the text of the statute: The term "qualified domestic relations order" means a domestic relations order— (i) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, *** The modifying order does not do any of that. The modifying order would either (1) strip the alternate payee of an interest in the benefits that the alternate payee has under QDRO #1, or (2) recognize the participant's right to or assign to the participant an interest in the plan that the alternate payee has/owns under the plan pursuant to the QDRO #1. But to paraphrase a lyric from Fiddler on the Roof, "Would it spoil some vast eternal plan to implement such an order?" Who is going to complain? If the plan keeps appropriate boundaries on how it engages, it won't be part of the conspiracy to defraud Medicaid. 🤐

I wonder if a loan policy document can create a protected form of distribution benefit. What does the plan document say about distributions? For example, does the plan document provide for in-kind distribution? Does absence of an in-kind distribution provision preclude sneaking in a form of benefit under a loan policy? Does the loan policy controvert, or supplement, the distribution provisions? Similar question with respect to the language in the core plan document regarding loans. Does the core plan document enable or restrict what may be in a loan policy? By the way, the IRS position on loan rollover is mistaken. A loan cannot be rolled over because under traditional loan rules a loan is extinguished when it is delivered to the borrower. That is what happens when the loan is distributed. But I am not going to argue against a gift from the IRS, and I believe it to be a good policy even if it lacks legal foundation. And maybe the IRS was within its power to make up new law and make exception to the fundamental concepts.

I think Effen pretty much nailed it based on the available information provided. One must sift and conjecture a bit to frame the story around the benefits you were awarded. Embellishment: to change the order would require going back to the court that issued it, absent extremely unusual circumstances. And, absent compelling reasons, the court that issued the order is very unlikely to entertain changing it. One reason might be fraud, but confusion and misunderstanding about the division of the benefit does not “rise to the level of fraud” as lawyers would say.

401 Chaos indicated a path that could provide some tax advantage, but given the way the CBA describes the financing, it might difficult to make it understandable and fit expectations and the language on the table. Among other things, what I am imagining, without thinking through all the details, would appear to affect compensation as opposed to just provide tax benefits. That could could get sticky, especially when a union is involved. In my experience, unions do not have much capability or tolerance for nuance, such as pareto optimality/efficiency. To illustrate, assuming single coverage is a fixed amount, the employer would decrease nominal taxable wage compensation by that amount across the board (might be impossible with hourly employees) and then increase tax free compensation by covering that amount of healthcare premium for everyone. Anyone wishing to buy up to extra family coverage would have to do that after tax. Does anyone want to reopen bargaining to that end?

Stop there. Refer him to the SPD, which should in turn refer to, or include, written QDRO procedures and claims procedures. He is making a claim for benefits. Make him follow the claims procedures. Stop trying to explain or coach.

Assuming that neither has started benefits: Ideally, the participant would submit a claim against the determination that the order is qualified. That would freeze the benefit pending resolution. Meanwhile the the participant and former spouse need to get their acts together to submit an order modifying the original one to provide what "should now" be the correct outcome. This would be done in the context of a friendly proceeding under the plan's claims procedures. The administrator needs to tread carefully because the administrator cannot push a resolution based on what the participant now says is desired by both. The administrator must be neutral in the process, but can be accommodating to the parties' reversal of the original filing under the claims procedures while carefully observing the formalities as long as the resolution is consensual. The problem is that the parties are not going to be able to pull it off the easy way and are unlikely to find a lawyer who can navigate the route described. And the state court will not be amused.

True. If there is a conflict with what the plan provides and what a non fiduciary service provider is engaged to do, the fiduciary plan administrator is going to be in a real bind, especially if the participant understands the participant's rights and benefits and wishes to exercise them. That is unlikely in the circumstances described. The service provider system driven arrangements will be imposed on the participant, and no one will be the wiser. So ask the service provider what is going to happen (notwithstanding whatever the plan terms are).

1. That depends on the plan terms and the written loan policy terms, if the plan has a separate loan policy. I presume that the actual loan documents are consistent with the plan terms and loan policy terms, but the loan documents also must be considered. I think most plans accelerate the loan when the participant's employment ends because most loans are paid only by payroll deduction. 2. If the participant takes "all the money" the participant takes the loan as well, which should terminate the loan (with resulting taxation for actual distribution, not deemed distribution), leaving nothing to repay. If you mean the participant receives a distribution of the balance other than the loan, see #1. 3. Not always. See #1 and #2. Timing of taxation should be covered by the plan/loan policy terms. Plans may differ in default and acceleration terms, which are also covered by the loan documents. The loan documents usually do not speak to taxation, but the Summary Plan Description or loan disclosure documents should.

Good on ESOP Guy for understanding that the question might relate to holding assets other than employer securities in the plan for the purpose of the ESOP‘s option to repurchase securities, which is otherwise the sponsor‘s obligation. I would not describe this as a sinking fund, although it is effectively similar. It is a decision about what portion of plan assets to hold in other than employer securities, keeping in mind, the requirement that the plan must invest primarily in employer securities. Those assets would be accumulated by contributions over time, which means the ESOP is mature, probably not leveraged, and the employer is also opting not to feed the plan with stock contributions. I doubt that it means the employer is increasing the contribution rate with additional cash contributions.

Setting aside money for repurchase obligations or future contributions is a separate corporate financial matter and relates to corporate accounts. Because it is not an obligation related to the plan, or legally connected with the plan, ERISA and tax qualification rules do not apply, other than standard corporate tax rules having to do with accumulation and disposition of corporate assets. The ESOP’s interest is that of a corporate shareholder. The corporation and its Board of Directors have corporate fiduciary duties to shareholders with respect to operation of the corporation and management of corporate assets. Also, if the corporation is majority or 100% owned by the ESOP, those circumstances are considered in determining the corporate fiduciary to the ESOP as shareholder. Investing in crypto currency may be a breach of corporate fiduciary duty to shareholders — I have no views to share on that point. Your post implies at one point that it is an ESOP trustee that is funding or managing the sinking account for the sake of the ESOP. A sinking fund may be prudent for ESOP maintenance, but it is not a plan asset concern that would be the responsibility of a plan fiduciary. It is a corporate financing concern. The repurchase obligation is a corporate obligation.

If termination were the magic uncancellable ticket that allowed a distribution at any time thereafter, we wouldn’t have all the historical fuss about whether or not a termination is a valid termination because of the prospect of re-employment and whether the prospect of an expected rehire prevents the distribution. The point is that if the participant is employed at the time of distribution (or is expected to be re-employed within some “who knows what time” shortly after the distribution) a distribution can only be made under whatever in-service distribution rules apply. As I suggested in my earlier post, the burden should be on the participant in this situation, not the initial administrative functionary. If the participant is entitled to a distribution, the participant can make the case under the claims procedure with all of the reasoning and legal authority that the participant can muster, spelled out for consideration.

Lest there be doubt about what I posted, I think the distribution should be denied whether or not you are cautious, absent clear written administrative policies to the contrary.