Peter Gulia

There is a Ninth Circuit opinion that treated as both a DRO and a QDRO a court order that provided quasi-marital property to a person who never was the participant's spouse and could not be the participant's dependent within the meaning of IRC 152. Owens v. Automotive Machinists Pension Trust, 551 F.3d 1138 (9th Cir. 2009), aff’g 40 Employee Benefits Cas. (BNA) 2382, 2385–2386, 2007 U.S. Dist. LEXIS 7797 (W.D. Wash. Jan. 19, 2007). At least the second prong of the court's analysis (about the meaning of the word "dependent") was, if not wrongly decided, at least wrongly or incompletely reasoned. Nonetheless, a lawyer could develop an argument based on some statutory construction and interpretation ideas that the opinion did not consider. If the plan's administrator denies the nonparticipant's claim, perhaps the potential alternate payee can find a lawyer who would (without a fee) help pursue courts' reviews. The nonparticipant's action might pursue at least two arguments: (1) the proposed alternate payee is the participant's dependent under State law and ERISA 206(d)(3)(B)(ii)(I), even if he or she is not a dependent under IRC 152; (2) 1 U.S.C. 7 is unconstitutional. Matt Bozek's suggestion is practical if there are sufficient assets that can be so divided. Some couples lack $15,000 in savings outside of retirement plans. Again, how much a retirement plan's administrator should or shouldn't get involved in helping divorcing parties redo their divorce negotiation is a question for the administrator.

I apologize for anything that suggested cynicism about the employers or people involved in trying to seek a fair conclusion to what should be a straightforward divorce division. I too have observed that many people of employers, small and big, will extend themselves very far (within the law) to seek a fair result in the face of unfair law. My observation is that those well-intentioned efforts are unfair burdens for the employers and their people involved. At least sometimes, it ought to be okay for an employer not to feel burdened with finding a solution to an unfair law. For those who are seeking a creative solution, one possibility is in my earlier post's point that the text of a court order might support an administrator's finding that the same-sex alternate payee is the participant's dependent.

pmacduff, if your client is the plan's administrator (the employer), does it have a special reason to care that administering the plan according to its terms and ERISA might mean that the nonparticipant gets nothing from the retirement plan? Yes, failing to treat a State-law spouse as a Federal-law spouse might seem unfair, or at least inconvenient, but the United States' Congress chose that policy. Why should it become one employer's duty to resolve the law's incongruity? If an administrator decides that a court order is not a QDRO (because it is not a DRO) and sends appropriate writings to the participant, the nonparticipant, and each's attorney, a claimant would be on notice that he or she must pursue further reviews under the plan's procedures, and, after exhausting the plan's procedures, pursuing court proceedings.

Even if a plan's administrator assumes that 1 U.S.C. 7 makes a same-sex spouse not a spouse within the meaning of ERISA 206(d)(3)(B)(ii), it might further consider whether the proposed alternate payee might be a dependent of the participant. In doing so, a plan's administrator might look closely at the text of the domestic-relations court's order.

MSN and Kevin C, thank you for the helpful suggestions. Do you think that the IRS might use a non-amender route to resolve a situation in which even the first plan document never was done?

K2retire, thank you for confirming one of my suspicions: that, as we approach the five-year anniversary of the law change, some (perhaps many) bankruptcy trustees continue to resist a duty to administer employee-benefit plans. alexa, although a plan's sponsor or administrator might sign a Form 2848 or other power of attorney naming a representative authorized to communicate for the sponsor or administrator, a Form 5500 ordinarily requires the signature of the plan's administrator (not the administrator's agent), and a Form 5300 generally requires the signature of the person that applies for the IRS's determination (not the applicant's agent). Further, unless the plan already provides the desired agent power to amend the plan, it is the bankruptcy trustee that arguably has power to amend the plan to the extent that he or she acts for a successor to the plan sponsor or within the bankruptcy-law powers to administer the plan.

Although I don't here give advice to anyone, one guesses that a bankruptcy trustee's powers include those implied by his or her duties. So if amending an employee-benefit plan is an act that a bankruptcy trustee decides (with court approval, or an absence of disapproval) is necessary and prudent for an orderly administration (and termination) of the plan, one guesses that the bankruptcy trustee has power to amend the plan. BenefitsLink mavens, what's your experience?

Unless a bank or insurance company seeks more responsibility, it seems unlikely that it would seek an appointment as a qualified termination administrator. Rather, a bankruptcy trustee's duties include the employer/debtor's role as an employee-benefit plan's administrator (if the debtor or a person it appointed so served when the bankruptcy case began). 11 U.S.C. 704(a)(11). A bankruptcy's creditors might object to paying plan-administration expenses out of the bankruptcy estate, and instead might insist that these expenses be chargeable only against the plan. If the plan bears expenses, a plan fiduciary must consider whether an expense is "reasonable". Along with other facts and circumstances, whether incurring an expense to get the comfort of an IRS determination is "reasonable" might turn on the distribution amounts involved, how many or few distributees would choose a rollover, and what taxes might apply if an attempted rollover is not treated as a rollover.

Kjohnson, thank you for the helpful news. For those who feel that the employer's idea is out of place, recognize that it at least signals the importance of preserving retirement savings as retirement savings, and does so with no discretion in the plan's administration. For everyone who contributed information or an outlook, thank you.

Some participants have expressed an interest in Roth-izing existing accumulations under the plan's matching and nonelective accounts. The employer is okay with an in-service distribution that a participant chooses because she wants to make a rollover into an IRA. This view is based on the employer's belief that the Roth-izing some participants want can't be accomplished within the employment-based plan. But the employer doesn't want to allow an in-service distribution for someone who merely wants to take money. The employer is aware that a clever person could choose the rollover and take a distribution from the IRA a day later. Understanding this, the employer nonetheless believes that the plan provision I've described is a valuable symbol that communicates to the retirement plan's participants the employer's view on what is or isn't an appropriate use of a pre-retirement distribution.

A one-participant retirement plan intended as a 401-qualified plan has been in operation for 33 years. The employer filed a Form 5500 every year. Each year's contribution was within the 404 and 415© limits. No distribution. Every fact we can see shows that the employer operated the plan according to provisions that, had they been written, would have been a tax-qualified plan. But after a thorough search of the employer's records and the investment guy's records, we can find nothing that even suggests that the plan ever was committed to writing. What IRS correction program could one use to fix this? If none, is there any other hope?

Thanks, everyone, for the feedback, all of which is helpful. As I mentioned in the originating post, I’m aware that nothing precludes an IRA holder from taking a distribution from the IRA a day later. But some plan sponsors see value in a symbolic plan provision. Several practitioners have said that they believe that an extra condition to getting an in-service distribution (which a plan sponsor isn't required to provide) can't be done. The idea of an unusual condition seems unsettling, but no one has explained why it's not allowed. Any takers?

The plan provision would allow an in-service distribution as long as the claim specifies a direct rollover to any eligible retirement plan.

The plan sponsor would amend the plan and other documents, and would apply for an IRS determination. Also, the plan would provide that an in-service distribution is payable only as a single sum.

Hypothetical: A profit-sharing retirement plan has never before allowed an in-service distribution. The plan sponsor might like to add an in-service distribution (including before age 59½ from amounts not attributable to 401(k) deferrals) but only if the participant’s claim includes his or her instruction to pay the distribution as a direct rollover into an eligible retirement plan (including an IRA). The plan sponsor cares about this because it wants to permit an in-service distribution only if the participant will use it to preserve retirement savings. (Yes, I’m aware that nothing precludes an IRA holder from taking a distribution from the IRA a day later.) Can a plan provide this without violating any relevant ERISA or Internal Revenue Code provision? If this can’t be done, why not? If the plan provision is possible, is there another reason why a plan sponsor shouldn’t want to do this?

Thanks for the help!

rcline46, thanks for your nice help. How about the last question; if the lawyer is the employer's representative to ask for an determination, does any IRS rule require the practitioner to disclose to the IRS that the plan wasn't qualified in operation?

Hypothetical: Although furnished by a recordkeeper, a retirement plan’s document isn’t a prototype or volume-submitter document; it’s an “individually-designed” document. The plan changes to a new recordkeeper, which is unwilling to restate the plan’s document. The employer engages a lawyer to restate the retirement plan. The lawyer discovers that the employer never operated the plan according to the plan’s terms, and never tried to do so. The failures were operating the plan according to unwritten provisions that could have been consistent with the Internal Revenue Code and ERISA had the provisions been stated by, or at least not contrary to, the plan’s document. The lawyer tells the employer about opportunities to correct the plan’s tax disqualification, but the employer tells the lawyer that it won’t pursue correction and won’t amend or disaffirm any of the many writings that describe the plan as a tax-qualified plan. Instead, the employer’s chief executive and 100% shareholder instructs the lawyer to do only the task she was engaged for: restate the plan for proper and accurate provisions for the future. Assuming that the lawyer will not submit an application for an IRS determination, is there any professional-conduct rule that would preclude the lawyer, with her client’s informed consent, from limiting the scope of the lawyer’s work to a drafting job that deliberately sets asides all other issues? In the absence of an application for an IRS determination, is the drafting job “practice before the Internal Revenue Service” within the meaning of Circular 230? How might our thinking about professional conduct change if the lawyer is the employer’s representative to present an application for a determination letter? If the Form 5300 truthfully answers every question, does the practitioner have any duty to tell the IRS that the plan wasn’t tax-qualified in the past?

In the American Bar Association's annual "ask the government guys (unofficially)" last May, Question 14 was designed to illustrate an abuse situation and give the EBSA staff a reasoning for looking through plans that were designed to evade the requirement to engage an independent qualified public accountant. Faced with the invitation, the DoL answer said that an administrator may treat plans as separate. 2009_EBSA_answers.pdf

The U.S. Labor department's non-rule interpretation is Field Assistance Bulletin 2003-3. http://www.dol.gov/ebsa/regs/fab_2003-3.html Among other points, the FAB includes some discussion on how a fiduciary might consider which expenses should be allocated by balances, and which by the number of participant, beneficiary, or alternate-payee accounts (without regard to a balance).

Carol Calhoun's explanantion in chapter 14 about whether a Native American Indian tribe might or might not be a State government employer within IRC 457(e)(1)(A) describes some uncertainties because the law that Congress made is ambiguous or uncertain. Carol is one of a very small handful of governmental-plans experts; so if there were a published ruling, she'd likely know about it and write about it. Perhaps your client is a candidate for seeking an IRS ruling?

The available information on this question is discussed in chapters 2 and 14 in 457 Answer Book (WoltersKluwer).

If your client says it prefers to make available a 403(b) plan that's somehow a non-plan for ERISA, consider the following not-too-hypothetical: A participant dies in 2039. Just before her death, she had taken complete distributions of all of her 403(b) balances (about $600,000). Not too long after the death, the participant's surviving spouse files an ERISA lawsuit in Federal court. He alleges that what the employer pretended was a non-plan was really a plan established or maintained by the employer, and that this plan was and is governed by ERISA. He asserts that, in the absence of his consent, the plan should not have paid the participant any distribution other than as a qualified joint and survivior annuity. The employer submits its motions to dismiss, saying that it never established a plan and never maintained a plan. The court finds that a complaint need do no more than allege facts that, if later proven, could support finding the complaint's claim for relief. The court decides that the litigants' disputes about whether a plan was established or was maintained is a fact issue of a kind that can't be decided on a motion to dismiss. After losing the motions to dismiss, each defendant answers the complaint. Because the defendants' answers deny the existence of an ERISA-governed plan, the court decides that facts that a litigant could use to prove or disprove the establishment or maintenance of a plan are relevant and discoverable. The plaintiff demands all of the employer's writings (including e-mails) concerning the 403(b) plan for all time after 2008. Conversely, there isn't much discovery for the defendants to get from the participant's surviving spouse. How confident can one be that the employer will win this lawsuit? And if the employer wins, wouldn't it really have a loss because its discovery expenses and lawyers' fees won't be recoverable from the losing plaintiff (and won't be reimbursed by the ERISA fiduciary liability insurance that the employer didn't buy)?

Does the person who proposes that he serve as trustee understand that accepting this responsibility means bearing personal liability? By contrast, the directed trustee's indemnity letter might have limited its obligation to the directing plan administrator, which might be a business organization rather than a natural person.

John, thank you for telling us about this decision! It confirms a risk that many of us have explained to clients, and it's nice to have a quotable decision. A follow-up question: Do we have any information on whether the practitioner's malpractice insurer paid (or committed to pay) the difference between the plan-promised benefits and the lower benefits that the employer says it intended?