QDRO Group

The Plan refused to review a draft QDRO we submitted because we did not also include the review fee. We are currently working with a client who may be willing to challenge the Plan on this. To update/clarify the informal DOL guidance, it was a phone call with a regional office investigator. She appeared to indicate (but not clearly) that the Plan could charge the review fee because it is not paid with Plan assets and is different from the situation addressed in previous DOL guidance, but went on to say that the Plan is legally obligated to review/process the QDRO even if the parties do not pay the fee. The DOL opened cases on this matter (back in 2017) but has refused to further disclose to us anything related to those cases.

I am aware of a DB plan administrator that charges a QDRO review fee to the parties, but doesn't charge the fee from within the plan - avoiding the potential 411(d)(6) issue. Instead, the parties must write a check for the fee before the administrator will review or administer the QDRO. The DOL has informally addressed this specific plan/situation and decided this practice was OK.

RSmith, it sounds like you participate in a traditional defined benefit pension plan (i.e., one that calculates your benefit as a monthly annuity amount beginning at normal retirement age, using a formula that may be similar to 2% X Final Average Salary X Years of Service). Based on the requirements to be eligible for a lump sum distribution, I'm guessing it is not a cash balance pension plan (i.e., one that expresses your benefit as an account balance, kind of like a 401(k) plan, based on annual pay credits to your account for service/salary and adjusted by interest credits). Regarding whether your original attorney committed malpractice, I would need to know more details than we have room for here to render an opinion on that. However, it is my experience that the vast majority of domestic relations attorneys don't really understand how retirement plans work and how to value/divide them - especially defined benefit pension plans. Any DR attorney who handles these things internally, instead of farming it out to a benefits/QDRO expert, is risking malpractice. In fact, it is likely that your attorney should have known (by reviewing your plan's summary plan description and QDRO Procedures) that a flat dollar amount assignment would not work at that time. He/she should have addressed those issues in the settlement agreement or, if you did not reach agreement (and the judge awarded $80k after a hearing) - your attorney should have raised those issues to the judge (and maybe he/she did). Regarding how the QDRO should have been drafted in 2004, taking into account a flat dollar amount assignment that the plan would not accept, we would normally calculate the present value of your entire pension benefit as of the relevant date in 2004 (i.e., convert the monthly annuity you had earned up to that point into a lump sum dollar amount that, in the annuity market, would be sufficient to purchase an annuity that would pay the same monthly benefit), divide $80K by that present value amount to determine the percentage of your monthly annuity at divorce that should be assigned to your ex, then prepare a QDRO that awards to your ex that percentage of your benefit as of the date of divorce. For example, if you had earned a $500 monthly annuity (beginning at age 65) as of the date of your divorce, and if the present value of that annuity (as of the date of divorce) was $160,000, then the QDRO would assign 50% ($80K / $160K = 50%) or $250 (50% X $500 = $250) of your monthly annuity to your ex. This type of calculation and assignment can still be done, and the proper expert could explain the specifics to the judge/attorneys/etc. If this type of QDRO had been entered in 2004 (or today even), although your ex would still only be entitled to a $250 per month annuity today, the present value of that annuity today would be worth more than the $80K awarded to your ex due to the time value of money (i.e., a dollar in 2004, if invested, would be worth more than that today) - just like the present value of your half of that $500 annuity would be worth more today than it was in 2004. Think about it, if someone gives you a lump sum of cash in exchange for the promise to pay a lifetime annuity of $250 a month at age 65, the longer you have that lump sum the more you can earn through investments before having to pay the annuity. You might accept $80K when the person is 40 years old, but require $150K when the person is 50. It's important to understand that the increase in the present value of your ex's assigned benefit is an actuarial increase (based on mortality table and interest rate assumptions) that does not take away from your benefit. If your ex requested a lump sum distribution based on the QDRO I mentioned, the plan would convert the percentage award into a present value lump sum using actuarial assumptions, just like it converts your monthly accrued benefit into a lump sum for that purpose. So, if the judge in your case awards a larger lump sum to your ex that is effective 10 years after the divorce, and that includes some rate of interest for those 10 years, that does not necessarily mean your ex will get a greater percentage of the $500 per month annuity you had accrued at divorce. However, you would want a benefits/actuarial/QDRO expert to be involved to ensure the interest rate used does not result in a greater assignment than was intended. Hopes this helps you understand the issues a little more but, like the others mentioned, this is a complicated matter and you should hire competent counsel to represent you - and insist that he/she hire a qualified QDRO expert.

The doubt is the lack of clarity in the withholding Code sections and related regulations, and possible inconsistency with the actual taxation of distributions to child AP's. Code Section 402(a) provides that a qualified plan distribution is taxable to the "distributee." Section 402(c)(1) provides that a spouse or former spouse AP shall be the "distributee" for this purpose, but does not address child AP's. I don't know the definition for "distributee" that applies to this section, but it likely is the employee/participant, regardless of who receives the distribution, since an exception was needed to switch the "distributee" designation to a spouse AP who actually received the money. As a result, with no such exception for child AP's, the default rule that the participant is the distributee would apply and he/she would be taxed. The withholding rules under Section 3405, on the other hand, generally refer to "payee," and do not address child AP's. I believe some read "payee" to mean the actual recipient (a term used in the regs) of the distribution, which would be different from the "distributee" who is taxable in this case. If the participant/distributee is the "payee" for purposes of withholding, then it seems the Code requires withholding unless the payee waives it on Form W-4P. In this event, can a state court order serve as the participant/payee's waiver, or can it only be used to force the participant/payee to complete the waiver? Also, Form W-4P permits the payee to elect a greater amount of withholding, so what measures can be taken to prevent the payee from having more withheld than required by law? I've been told that an old IRS Notice (89-25 I believe - can't find it on the internet) appears to indicate the IRS believes the participant is the payee, but there still seems to be uncertainty surrounding this issue. If the child AP is the "payee" does he/she have to waive withholding, or is there no withholding by default because the regs provide there is no withholding if the distribution is not includible in the gross income of the payee/recipient? I have both reviewed QDROs for plans and have prepared QDROs for DR attorneys, so I'm interested in both sides of this issue.

Is no one willing to take a stab at Issue 2 in the original post?

My 2 Cents: Many domestic relations attorneys attempt to draft their own QDROs when they should have an expert do that. Their lack of understanding of pensions reveals itself in numerous ways, including the misapplication of tax law. We don't see this type of mistake on a daily basis, but we do see it enough that we are trying to develop a system of dealing with them without having to reject them. ESOP Guy: I don't believe they are trying to gross-up the AP, although that would put them in the same or a similar position as what they are telling us to do.

Issue 1: Do you believe that a plan administrator MUST reject a DRO if it contains tax language that is inconsistent with tax law? For example, a DRO provision that distributions to a spouse or former spouse AP shall be taxed to the Participant or, conversely, that distributions to a child or other dependent AP shall be taxed to the AP. Although most would say both provisions are inconsistent with federal tax law, can the plan administrator approve a DRO that contains one of them, then ignore the DRO tax provision and report/withhold based on applicable tax law? If your answer is no, would it change your mind if the plan's QDRO procedures provide (1) the plan administrator will not reject a DRO based on any tax language in it, but (2) the plan administrator will report/withhold taxes as required by law, regardless of any inconsistent provisions in the DRO? Issue 2: Although it is clear that a Participant is taxed on distributions to a child or other dependent AP, there is no consensus on tax withholding from such payments. Some TPA's do not withhold taxes from such distributions even without a withholding waiver on Form W-4P. Some TPA's do withhold in this situation unless the Participant waives withholding on Form W-4P. Earlier threads on this forum also don't produce agreement on this. If you believe tax withholding is appropriate (absent a waiver), and if you received a DRO that directed the plan administrator not to withhold taxes from the distribution, would you (1) reject the DRO as inconsistent with tax law, (2) approve the DRO, but still withhold because the DRO is not an effective waiver, or (3) approve the DRO and not withhold taxes, treating the DRO as an effective waiver? Does your answer change if the DRO also contained a provision, in the event the plan administrator requires a withholding waiver, that orders the Participant to fill out and return the appropriate tax waiver to the plan administrator?

Agree. Since the Alternate Payee's RMD calculation for 2017 is based on her account balance on 12/31/2016, there is no RMD for her for 2017. Her first RMD must be made by 12/31/2018 based on her account balance on 12/31/2017. Although a portion of the Participant's account balance was/will be transferred to the AP in 2017, IRS PLR 9011031 appears to require the Participant's RMD calculation for 2017 to be based on his entire account balance as of 12/31/2016 with no adjustment for the transfer to the AP.

I agree with those who say that, generally, ERISA section 206(d)(3)(E)(i)(III) requires a plan to permit an AP to elect any form of benefit that the P could elect, except for a J&S with a subsequent spouse. I'll leave for another discussion whether that section actually prohibits a plan from permitting an AP to elect a J&S with a subsequent spouse. The plan here may have excluded all J&S options for APs to comply with the required minimum distribution regulations, which are very complicated (especially as applied to an AP). The RMD rules generally prohibit the payment of benefits, even benefits assigned to an AP in a separate interest QDRO, over a period extending beyond the joint lives or life expectancies of the P and the AP. See Treas. Reg. Section 1.401(a)(9)-6 for RMD rules applicable to DB plans, and 1.401(a)(9)-8 Q&A-6 for special RMD rules for QDROs and APs. Only if the AP dies before the P can the life or life expectancy of the AP's beneficiary be used to comply with the RMD rules. As a result, if a plan permits an AP to elect a J&S, such election may (but not must) violate the RMD rules (e.g., if the AP's beneficiary's life expectancy extends beyond the P's and AP's joint life expectancies). It is an administrative nightmare to attempt to keep up with which AP J&S elections violate the RMD rules vs. those that don't. In fact, I would wager the vast majority of plans (if not all) that permit AP J&S elections violate the RMD rules at some point. This plan may have decided that prohibiting all AP J&S elections was the only administratively feasible method of complying with the RMD rules, which I believe is a legally defensible position. After all, the RMD rules require plan documents to provide that the RMD rules will override all benefit options that are inconsistent with the RMD rules.

Are you sure a "payee" under section 3405 can be different from the "distributee" under sections 402 and 72? I couldn't find a definition of "payee," but wouldn't the "payee" be the individual responsible for taxes, even if he did not receive the payment, much like the participant is the "distributee" for tax purposes under a QDRO with a child alternate payee, even though he did not receive the distribution? The few articles, etc. that I have seen that mentioned withholding in this context have referenced the participant making the withholding election, although they did so without really addressing the question. If the child AP is the "payee" under section 3405 (in a situation not involving a child support enforcement agency) shouldn't the "payor" provide a Form W-4P to the child AP, which would allow the child AP to waive tax withholding? If the participant is the "payee," (1) would a "payor" have to adhere to a QDRO provision that prohibits tax withholding from the distribution, or (2) could a QDRO order the participant to waive withholding by filing Form W-4P with the payor and, if so, is it realistic that courts would enforce this type of provision if the participant is not cooperative?