QDROphile

I advise clients that the only way the plan should allow division of an annuity stream of payments is to divide each payment to the participant in some way (e.g. 50% goes to the participant and 50% goes to the alternate payee). I advise not to allow division of the benefit (i.e. the actuarial value of the benefit) or allow the alternate payee to be paid in a life annuity form. A plan could take this approach, but it is not advisable. An order cannot require a plan to do anything the plan is not designed to do. In other words, the order you describe should not be qualified. Assuming that in these circumstances the plan is designed only to pay certain periodic payments to the participant, the only thing the order can do is to assign some amount of each of those payments to the alternate payee for some time, not extending beyond when the payments to the participant would stop (probably death of the participant). That division might get fancy, but it has to adhere to the principle. If the order does not say so, if the alternate payee dies before the participant, the alternate payee's portion of the payment should be restored to the participant prospectively. The payments should not continue to a non-alternate payee under most DB plan designs.

What is your relationship to the plan?

Your 401(k) administrator owes you a much better explanation of how the administrator reached a conclusion that appears to be wrong at an ERISA 101 level. The explanation should start with why the arrangement appears to be a problem, and then provide legitimate support for the conclusion that it is not. Once that explanation is given, the administrator might then have to give an explanation about why you should not be looking for a replacement. Maybe not. Let us know what happens.

As AndyH points out, the questions relate to whether or not the order is qualified, which is why the plan administrator should be asking for assistance with the actuarial matters. The Plan adminstrator can't make a determination about qualification without resolving the questions.

You do what the plan administrator asks you to do, but you may need to explain the actuarial issues to the plan administrator so you can get proper instructions. The plan administrator needs to be sure that the amount provided by domestic relations order does not exceed the amount (value) that the plan would pay to the participant, taking into account wneh the benefit is paid to the alternate payee. That could mean the the value of the accrued benefit is less than $300,000 now, but could be sufficient at the time of distribution. If that is the case, then the determination of qualification would have to be conditional and subject to contingencies. The plan adminsistrator has to resolve any conflict between the $300,000 and 50% of the benefit (if there is a conflict), so you need to point out if the order has inconsistent descriptions of the alternate payee's benefit.

A government entity cannot maintain a 401(k) plan unless it is a grandfathered plan. For federal tax purposes a governmental plan can calculate benefits pretty much however it chooses, so it can exclude whatever compensation it chooses. Rather than worry about interpretations, amend the plan to be clear about what is excluded. For section 415 compliance, special terms are required for plans that allow cash in lieu of nontaxable benefits only for employees who can show alternate covereage. A government plan must comply with applicable state law, so the federal tax law is not the only concern.

The distribution from the plan cuts the connection with the plan and the participant. The IRA stands on its own.

One reason not to reform the benefit is adverse selection. If a participant with a single life annuity gets a diagnosis, the plan does not want a QDRO giving 100 percent of the benefit value to the soon to be former spouse.

I advise plans against allowing the benefit to be reformed. The order must split the payments in some way

Not to distract you from considerations about correct health coverage, but the employer must have a lot of leased employees or other exclusions to require coverage under a 401(k) plan. I would explore that proposition a bit more if the employer does not want to cover the leased employees.

Since I perceive an interpretation problem, I suggest that the plan's notice of detetermination state what the plan is going to do in a better way than what the QDRO says the plan should do, and invite dispute over the interpretation for some reasonable time (30 - 60 days) before paying. If the plan overpays based on a mistaken interpretation, remediation may require a lot of effort or expense.

If you are asking a question about how much of an account an alternate payee might be entitled to legally, the plan does not ask such questions. If you are asking how to interpret some QDRO provision to determine what an alternate payee gets, you have to post the provision. What you posted makes no sense to me.

I don't think the problem is terms of the order and the terms of the order cannot fix the problem. The problem is that the plan distributed funds (presumably to a nonparticipant and a nonbeneficiary) not in accordance with plan terms and not pursuant to a QDRO. The plan has an operational error. The plan needs to fix the error in accordance with EPCRS. Part of the fix will be getting a QDRO. As long as the terms of the QDRO describe the amount distributed and meet other qualification requirements, it will fit with the fix, but the fix will involve more than just qualifying the domestic relations order. Any provisions in the order relating to retroactivity can't save the plan from the premature distribution.

There is nothing wrong on the face of what you describe (the term "randomly" is disregarded), but without knowing a lot more, no conclusions can be drawn. You are entitled to know what assets are owned by the plan, but why fuss over which money market fund? Both the Department of Labor and the IRS regulate ESOPs, with differences in focus and subject, but some overlap. If you are looking for help, the Department of Labor is probably your best bet, but your concerns appear to be misplaced, at least as far as technical matters go.

Specifying the amount that may be reduced per pay periond is not the same as providing for coverage periods of less than 12 months. An employer can chooses provide $2900 of benefits for $1500 of salary reduction. While it might frustrate the funding intention for a salary reduction agreement to conflict with the intention for an annual amount to be reduced, that does not mean the plan and salary reduction agreement are necessarily well drafted. The tax and contract realities of section 125 arrangements are not well understood. Otherwise, why would people talk about pre-tax contributions to the account when there are no such things for tax purposes? Is it that everyone speaks only ERISA?

Depends on the terms of the salary reduction agreement. Was the agreement to reduce salary for the year or a certain amount per pay period? If the agreement was to reduce a certain amount per pay period, the employer has no right to reduce the employee's pay by a greater amount for the purpose. Also remember that contracts can include implicit terms, including terms that can be inferred from regular adminstrative practices. The agreement had better be pretty clear that the "make-up" amounts can be taken from the few remaining pay periods in the year if that is what is contemplated. The employer should give a lot to thought about whether the amount is worth the risk of violating one of the most fundamental rules under section 125.

The trustee can purchase the shares by complying with the PT exemption for purchases and sales of employer securities. The ususual rub is the need for a contemporaneous valuation. The cost of the valuation increases the effective purchase price, although the trust does not have to bear the cost of the appraisal. The trustee also has to determine that the purchase is in the best interests of participants. Covering for the employer is not necessarily in the best interests of the participants.

And then the lawyer would sue the plan document provider?

Yes. The facts and the document/services bundle might get in the way.

The IRS has ruled that a commission is essentially part of the stock price, so it cannot be paid outside of the plan. Investment management fees are different, but you have to watch the detials of how the fee works to see if commissions can be identified. If amounts are added to the plan to cover the commision amounts paid by the plan, the additions would be contributions. I am amazed at stories of brokers who provide correct information about plan administration technical details.

Just for fun, read 18 USC 1954 and trust that the feds will use appropriate discretion.

Your interpretation is not necessarily the correct application of a Roth deferral election. I would guess that most plans apply the amount elected the same way as regular deferrals with respect to FICA -- the employee portion is taken from other compensation. Check the plan document or communications about withholding. I am sure whoever decided to add the feature considered all of the implications and communicated clearly to participants about the effects of the elections.

First, align the plan with the law and disregard the information about a forthcoming order. A plan is not required to act until it receives a domestic relations order. The plan terms and written QDRO procedures should be consistent often they are not because the plan has adopted a policy that is aligned with the Department of Labor informal position. That may solve the problem if the order does not arrive before distribution. Next, be diligent in anticipation of receipt of the order and process it immediately if the order arrives before distribution. If the order arrives too late for reasonable processing or correction of any qualification defects, the order is disqualified because it would require the plan to do something that the plan is not designed to do -- hold up the termination process. Best practice is to notify the person who advised of the expected QDRO that the plan waits for no order. That avoids any criticism of deception and it allows the individuals to gear the property division to what will be available when the division is determined.

A rollover is to an IRA, not an LLC in which the IRA invests. Perhaps the disregarded entity rules allow cutting corners on observing the formalities relating to the distinction, but I would prefer a two-step process, and a plan administrator executing a direct rollover would be more comfortable with sending funds to a designated IRA rather than an LLC.

"Get real." I have great sympathy for those who are real enough worry too much about compliance issues. A plan administrator does not have to look behind a domestic relations order that looks good on its face, especially if the concern relates to local court procedures. Courts can take care of themeselves, and if a plan qualifies an order that comes out of some state court irregularity, it is up to the participant or alternate payee to object, explain to the plan, and, take corrective action. The plan should accommodate contests, but is not the arbiter of state court matters.