QDROphile

Kevin C's observations are a pointer to the probablility that the provision is not legitimate. You might consider that analysis as a way to eliminate the provision rather than treat it as subject to the protected benefit benefit rules. The suggestion is not for amateurs or the faint-hearted.

Reverse everthing to the extent funds are available. Do not recognize the legitimacy of what happened by taking any action (such as a subsequent rollover). Treat this as a correction, not as a plan B recovery. File amended reports and tax returns. Report the broker to the appropriate regulatory body.

The participant gets to include the amount distributed to the child AP in the participant's income. The after tax economics are not 50/50, and don't forget to take withholding into account. The withholding is credited to the participant.

Section 125 requires that salary reduction elections be determined before the coverage period, which appears to be June 1. The earlier deadline was probably determined based on administrative needs. The deadline may be included in plan terms. Exception to the deadline or change depends on policy and plan terms. "Corporate" is telling you that that "corporate" does not want to do what it needs to do to accommodate. The accommodation may involve formal requirements (such as plan amendment) and implications (such as opening the door to accommodate every flake in the company) that are not obvious to you. If "corporate" is the policy decision maker for administration and plan terms, then you cannot gainsay, whether or not you think "corporate" is being reasonable. You can try to change someone's mind.

If you think the beneficiary issue trumps the 401(a)(13) restrictions, then you might determine that the domestic relations order was not qualified because the order requires the plan to not provide an option that the plan is designed to provide. That does not really square with section 414(p)(3)(A), but who is going to press the plan? It is no skin off the participant as long as the the participant's remaining account is not involved, such as for security for the alternate payee's loan. You had better work out the loan details in advance because an alternate payee is not like other beneficiaires. The alternate payee's benefit is derivative of the participant's benefit and the participant is still around with full rights for part of the original benefit. That may be a problem or not. I do not think alternate payee benefits are separate from participant benefits, but you might be able to distinguish enough for purposes of the loan rules. What would you do if if a participant had a loan and the alternate payee was awarded part of the loan as part of the alternate payee's award? Think about the implications and how that might inform what you decide about alternate payee loans generally. I am not going to comment further on the point becuase it requires too much thinking. GMK might like the exercise.

It would be interesting if the plan document enumerated rights of an alternate payee, but I think such an attempt would be ill-advised. (I think extending loan rights is ill-advised in and of itself.) The plan would be interfering with the divorce court's authority and ability to assign property, including a dispostion that includes balancing various assets. Perhaps a loan right does not seem so offensive, but where do you stop? How about a plan that says that an alternate payee is entitled to half of the participant's benefit? Remember that this all starts with section 401(a) (13) that says no right or benefit can be assigned except though a domestic relations order that is qualified. Section 414(p) says what a domestic relations order must do (mostly formalities and clarity) and what the order may not do (require the plan to do anything the plan does not otherwise do) to be qualified. My perspective stems in part from the premise that a plan would want to do anything for an alternate payee because of the needless administrative burden. Loans are terrible enough if you can get them paid through payroll deduction. For defined contribution plans other than ESOPs, the various interests are best reconciled by allowing alternate payees to receive payment immediately. Any extraordinary benefits from staying in the plan are generally not desired by alternate payees -- most take distributions ASAP -- and they are privileges that the alternate payee did not have before the divorce, as you observed. I am not arguing against tax deferral or investment elements of staying in the plan. You get credit for asking if the emperor has any clothes, but I think you are looking through the wrong end of the telescope, aided by a questionable plan design. If my take on QDROs is too superficial, I propose that it is an appropriate reaction to a bad plan feature and an antidote to an inappropriate extension of implications of a bad plan feature.

Where does an alternate payee first get any rights that might be said to be taken away?

But seriously, you need to recognize that the employee coverage is not part of the cafeteria plan. Only the part that that involves a choice between a nontaxable benefit and the cash is subject to section 125 and its discrimination rules. It would be difficult to make sense of the arrangement if the employee coverage is not mentioned in documents, and the employee coverage is a health plan that needs documentation. How you configure the documents does not change the substance or character of the benefits. A well-drafted document will make the proper distinctions.

The baseball reference would be strucknine.

I am so amazed at your question that I can only respond to a question that you did not ask. ERISA requires loans to be made available only to parties in interest. An alternate payee is usually not a party in interest.

The rub is the requirement to provide adequate security. The installment payment option is only available for lump sum distributions. You might do just as well with distributions in the form of installments.

Please describe the benefits of nonqualified deferred compensation to the sole shareholder of an S corporation. I fail to see how any income tax is deferred and that is the essential benefit.

Assembling a list is very difficult because circumstances vary. How can you measure the hardship relating to an auto? Does it have to be necessary to get to work, or is it a general need? Does it matter if the participant has children? How young? Is public transportation available? Should it matter where the person chooses to live? When is it better to get a new car rather than repair? If a car is being replaced, does the plan administrator have to judge the purchase?

The annuity notice rules apply. I don't know if that is included in what you mean by options. If the beneficiary has the option of deferring the start of payment, a notice about the consequences of failing to defer is required. The notice is in addition to the 402(f) notice and is a product of the PPA. The IRS has issued a model notice of sorts, but it is better to follow the proposed regulations.

Whoever made the decision about the design of the plan should have given the design feature some thought and made at least general decisons about the criteria that can be applied to particular circumstances. Laughable, to be sure. The IRS manual states (or stated, the last time I looked years ago) that the hardship criteria must be objective. That is difficult to understand at the edges, so most plans have a list either in the plan document or a formal written policy and just stick with the list. The list is usually the safe harbor list, sometimes with embellishements. Case-by-case decisons are really tough on the plan administrator, so many administrators insist on a list.

See section 408(d)(6) of the IRC.

The answer is always EPCRS, Rev. Proc. 2008-50.

Not for amounts accrued under a money purchase pension plan, including restricted transfers.

I am suggesting one way to look at the circumstances and alerting you to some elements that need to be reconciled. To the extent possible, mistakes should be corrected in line with applicable guidance.

What if the plan said something to the effect that contributions to the plan on account of elective deferrals shall be in accordance with participant elections? Would that mean the plan failed to operate in accordance with its terms and had an operational failure that would need correction under EPCRS? Make sure you take into account that there was a payroll failure. The employer underpaid the employee if the employee's pay was supposed to be determined in accordance with elections.

Could you be a bit more specific and expansive about the statement that a self-insured health plan cannot increase rates for section 125 plan participants? The statement is followed by another statement that suggests rates can be increased, but the difference is not eligible for salary reduction. There are regulations that deal with mid-year rate increases. One of the possibilities is that a rate increase would not be included in the 125 plan until the next year. There are circumstances that allow a mid-year change of salary reduction election and it is possible to have an automatic salary reduction adjustment to match the health plan rate increase. I was not aware that self-insured plans are treated any differently than third-party insurance under the regulations.

You might want to consider whether or not this is an egregious failure as you determine eligibility for SCP. I suppose theft might be more egregious. Or you could use the Steve Martin defense.

More fee revenue?

I would expect a terminated plan to be in the business of liquidating, not merging with a plan from a company outside of its control group, especially an ESOP. I think the idea is penny wise and pound foolish.

Your use of 401(k) funds to pay the exercise price would start with a distribution from the IRA, with the attendant tax consequences. The IRA cannot in any way "buy" the options or the stock, if that is what you are getting at. If you try that, the entire IRA balance will be included in your taxable income because the transaction would be a prohibited transaction that destroys the IRA.