RTK

I have looked at pension plan payments to nonresident aliens before in the context of a survivor annuity payable under a joint and survivor annuity to a (surviving spouse) nonresident alien individual residing in the Cayman Islands. The deceased participant was a U.S. citizen who participated in a U.S. pension plan. My basic conclusions then were: A foreign person nonresident alien is subject to U.S. income tax on U.S. source income. The survivor annuity is U.S. source income (it was derived from a pension attributable to contributions made to and held in a U.S. trust for services performed by the participant in the U.S). The survivor annuity is subject to Chapter 3 withholding at a 30% rate (no tax treaty, nonresident alien individual did not engage in a trade or business in the U.S., payments not exempt under 871(f) because survivor annuity is derived from a pension earned by a U.S. individual). The pension plan is required to report the payments to the IRS and the nonresident alien individual on Form 1042-S and to file a tax return with the IRS on Form 1042. The same basic facts apply in this instance, except that the (surviving spouse) nonresident alien individual is a resident of Kenya (no tax treaty). Thus, I think my prior basic conclusions would apply to monthly QPSA payments made to the nonresident alien individual. The wrinkle here is that the pension plan allows a surviving spouse eligible for a QPSA to elect a lump sum payment in lieu of monthly payments. This raises issues for which there are no apparent answers: Is the lump sum payment an eligible rollover distribution for which the pension plan must offer the nonresident alien individual a direct rollover/direct payment election. The clearest guidance for a yes answer may be the 402(f) notice providing that "If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or U.S. employer plan, ... the plan is generally required to withhold 30% of the taxable amount...." No need for this statement if a nonresident alien individual is not required to be provided with a direct rollover/direct payment election. If the nonresident alien individual elects a direct rollover to a traditional IRA, questions include (i) is the direct rollover subject to any withholding, (ii) is the direct rollover reported on Form 1099-R, and (iii) if reported on Form 1099-R, is the direct rollover also required to be reported Form 1042-S. Form 1042-S provides only for reporting of "gross income." It is not clear if 'gross income" is "taxable income." A concern here is what tax rules would apply to the IRA if the amount of the direct rollover is reported on Form 1042 as subject to 30% withholding. A factor here may be that the direct rollover is not taxable income (at least for U.S. residents) and the dollars remain in the U.S. in a U.S. IRA and presumably would be subject to withholding when paid by the IRA custodian to the nonresident alien individual. If the nonresident alien individual elects a direct rollover to a Roth IRA, same type of questions. However, the direct rollover would generate taxable income. This argues for the application of 30% withholding and reporting on Form 1042-S. I would appreciate any input you may have Rich Kennedy

ERISA should not be overlooked. As a preliminary comment, a plan sponsor for a single employer plan is defined as the employer. A plan administrator is defined as the person designated as administrator by the document, and if none is designated, the administrator is the plan sponsor. Unless designated as the administrator by the document or by default, the plan sponsor (typically) would not have the discretionary authority to administer a plan and would not be considered a fiduciary for that reason. In this instance, I assume that the plan sponsor is the administrator. All administrators are fiduciaries. ERISA requires (among other things) that a fiduciary follow the terms of the document as written unless contrary to Title I or Title IV of ERISA. Failure to follow the terms of the plan document is a fiduciary breach exposing the fiduciary to personal liability. On the Code side, the IRS considers the failure to follow plan terms to be a qualification defect requiring correction. I don't believe that a failure to follow plan terms by itself results in no plan.

You may want to start your review with the 2001 U.S. Supreme Court case of Egelhoff v. Egelhoff (121 S. Ct. 1322) and the 2009 U.S. Supreme Court case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (129 S. Ct. 865) generally holding that death benefits under an ERISA plan are payable only in accordance with its terms. I add that I have seen disclaimers used after death to allow a different person to receive aN ERISA plan death benefit, but likely would not be useful in this instance. Under a disclaimer, the designated beneficiary disclaims his or her right to receive the death benefit. The effect of a disclaimer is that the beneficiary will be treated as dying before the participant, and the resulting beneficiary determined in accordance with the applicable plan terms. A disclaimer cannot designate a beneficiary for the death benefit or otherwise direct its payment.

Don't forget to check the plan documents. The ones I draft typically provide that the participant must elect to resume the deferrals.

Does the DOL regulation at 2510.3-3(d) defining "a participant covered under the plan" help?

jpod, maybe I am not clearest poster on a Friday, but my intended point was that the plan terms providing for a required distribution to the participant are relevant and need to be followed.

If you want another vote, the RMD was due to the participant, and is now the estate. The fact that plan failed to pay the RMD in accordance with plan terms or the IRC does not change that. The executor is right to be concerned about marshaling the assets of the estate. But also the plan administrator should be concerned about liability for its failure to make the distributions required by the plan terms.

Just a note that taxation of qualified plan benefits since ERTA in 1981 has been based solely on an actual distribution of benefits. Don't think that changes the taxation conclusion here though.

My vote is that the Plan would have to accept a QDRO allowing the AP to elect a form of payment available to the Participant (other than a spouse J&S). This is based on ERISA 206(d)(3)(E)(i)(III) noted above. Also, I would argue that the "otherwise provided" language in ERISA 206(d)(3)(D) refers to the forms of payment available to the Participant whose benefit is being assigned, and would not provide a grounds for rejection. Depending upon your jurisdiction, the Plan could end arguing this issue in the state court.

Some quick comments. Consent of a beneficiary is not required for a death distribution under the 411(a)(11) regulations. If a spouse, 401(a)(9) would not require distribution within one year of participant's death for application of the life expectancy rule, so an annuity would remain a viable option. It is unlikely that the record keeper has the authority to control distributions under the plan. Also, not sure sure why they opine on such issues. It can be interesting to ask service providers generally if they think exercising control over plan assets makes them a fiduciary. Take a look at RR 89-87 before waiting five years to distribute. There may not be a terminated plan. FAB 2014-1 is useful guidance for a defined contribution plan. (If a PBGC defined benefit plan, the PBGC missing participant program would be available.) Not sure an annuity purchase should be used absent applicable plan provisions. Note that the automatic rollover rules do not apply to spouse distributions. In the way distant past, saw money orders purchased for very small termination distributions to clear the trust check register.

I have interpreted ERISA and the IRC as not restricting the right of the bargaining parties to agree to cease all contributions to the pension plan. Since no contributions would be required under the CBA, there would be nothing for the Board of Trustees of the pension plan to accept or reject. As noted, the cessation of contributions could trigger W/L.

My 2 cents. I think the individual who satisfies the age 21 requirement after satisfying the service requirement must begin participation within 6 months of satisfying the age requirement. Thus, I think the single (prospective) entry date requires an age 20-1/2 eligibility requirement, regardless of whether 0, 6 or 18 months of service would be used.

Locust, that type of restriction is old and harks back to Rev. Rul. 72-275 as modified by Rev. Rul. 74-55. Have not seen its application in a while.

Prior to ERTA in 1981, distributees (participants and beneficiaries) were subject to tax on plan amounts actually distributed or "made available" (i.e., distributees were taxed at actual and constructive receipt.) ERTA eliminated the taxation of amounts "made available" to distributees. Without tracking the date(s) of the regulatory language at issue, I suspect that the language was issued before (and does not reflect) the ERTA change.

A question revisited in the context of WRERA. Plan uses 5 year rule (only) for RMDs to nonspouse beneficiaries. Q&A 17©(2) of IRS Notice 2007-7 provides that the nonspouse beneficiary may determine the RMD "under" the plan using the LE rule if distribution is made before the end of the year following the year of participant's death. Kinda sounded like the plan had to use the LE rule if the nonspouse beneficiary applied for distribution in year 1 following the death, but not in year 0 or years 2-4. If so, notwithstanding the plan terms providing for the 5 year rule, the plan would have to implement procedures to calculate a RMD in year 1 (only) under the LE rule and offer a direct rollover only for the balance of the distribution in excess of RMD. IRS 2-13-07 employee plan news special edition explains this stating that the nonspouse beneficiary may "treat" the plan as using the LE rule for determining the amount eligible for rollover and the IRA RMD. Kinda sounded like the plan did not have to apply the LE rule, but nonspouse beneficiary would. The example did not help clarify this by noting "the amount eligible for rollover" must be reduced by the RMD calculated using the LE rule. A tad bit awkward, since a nonspouse beneficiary can only do a direct rollover. Thus, the plan would be offering a direct rollover for an amount the nonspouse beneficiary is not eligible to rollover, and the beneficiary would have to either elect a direct rollover for only the eligible portion of the distribution or take the correct RMD from the IRA after rollover of the entire amount. This requires a pretty savvy beneficiary. I guess you could boil this down to whether in year 1 the RMD had to be paid by the plan or taken from the IRA (if the nonspouse beneficiary applied for distribution). A number of commentators seemed to lean towards payment of the RMD from the plan. But that was troubling, because the 401(a)(9) regs allow a plan to use only the 5-year rule, and the special LE rule would apply to the plan only if the nonspouse beneficiary actually elected a distribution in year 1 (not the easiest thing to explain to a plan administrator). I can't remember seeing any straight forward guidance on this from the IRS. The one paragraph in the new 402(f) notice is not very useful, noting only that the nonspouse beneficiary will have to receive RMDs from an inherited IRA. Somehow, I (and a number of my employee benefit friends) generally managed to dance around this issue. In a number of cases, the plans simply did not offer the rollover. In other cases, the nonspouse beneficiaries elected direct payments with the amount eligible for rollover then not at issue. Other cases involved some pretty intensive communication and hand holding or the plan used the LE rule. Now WRERA makes nonspouse direct rollovers mandatory and requires 20% withholding for direct payments. As a result, it seems that all plans will have to directly answer the basic issue of whether the RMD required by the special rule has to be paid by the plan or taken from the IRA, if for no other reason so as to get the withholding right. If the RMD is to be paid from the plan, in year 1, the 20% mandatory withholding applies only to amount of the direct payment in excess of the RMD. Conversely, if the RMD is to be taken from the IRA, the 20% mandatory withholding applies to the entire direct payment. Comments (other than are you are insane).

Some comments: 1. Until repaid (by actual repayment or offset), the loan is considered outstanding with interest accruing for purposes of applying the IRC loan limits to a second loan. 2. The application of the IRC loan limits to multiple loans and refinanced loans can be tricky. Reading the IRS regulations is a must. 3. The plan document (or loan policy) should dictate whether a second loan is allowed. But in any case, note that under IRS regulations, until the first is loan is repaid, the second loan will not be treated as a 72(p) loan unless the second loan is repaid by legally enforceable payroll withholding or additional security is provided for the second loan. 4. Don't lose track of plan asset/fiduciary duty issues (i.e., duty to collect and hold money owed to a trust) -- more of a DOL perspective (assuming a bona fide loan in the first place). 5. Bankruptcy adds its own layer of complexity (regarding automatic stays and discharge of the loan as debt).

There were many effective dates covering many years.

I now feel compelled to finally follow up on issues that I raised and then rudely moved on, but first I throw in my comments on today's issues: 1. I am now convinced that there is no consensus in this area among employee benefit practitioners (pity the family law bar). 2. As far as I know, the terms "separate interest" and "shared payment" are not found in the statutes and regulations. However, the DOL and PBGC publications use those terms in their explanatory booklets (and the PBGC has model separate interest and shared payment qdros). Also, the distinction is (at least somewhat) recognized in IRS Regs. 1.401(a)-13(g) & 1.401(a)(9)-8, Q&A-6. In this regard, the a9 regulations permit payment over a period measured by the alternate payee's life, but still tie the required beginning date to the participant's age. 3. My basic take on the two types of qdros is basically the same as the IRS, DOL and PBGC. I explained the same as follows in a recent letter: Separate Interest – A separate interest order assigns all or part of a participant's accrued benefit to the alternate payee (i.e., it divides the participant's accrued benefit between the participant and alternate payee). Under this type of order, the alternate payee may elect a time and form for payment of the assigned benefit to the alternate payee that is different than that elected by the participant for the payment of the participant's remaining accrued benefit. Also, the assigned benefit is paid to the alternate payee over the alternate payee's life (independent of the participant's survival). Shared Payment – A shared payment order assigns to the alternate payee the right to receive all or part of the participant's benefit if, as and when the benefit is paid to the participant (i.e., it divides the payment of benefits between the participant and the alternate payee, instead of the accrued benefit). Under this type of order, the alternate payee may not elect the time and form for the payment of the assigned benefit, and the alternate payee cannot receive payment of the assigned benefit over the alternate payee's life. Instead, the alternate payee will receive the assigned benefit if, as and when benefits are paid to the participant under the Pension Fund. 4. I distinguish the types of the qdros not so much on the language used in the qdro, but on whether the terms for payment fit the separate interest type or the shared payment type (as noted above). If the terms are not clear enough to tell, the qdro is not approved (and should not be). 5. I do encounter qdros with mixed characteristics, but they are usually drafted by counsel with limited knowledge of qdros, in which case the language is usually incomprehensible and not capable of being approved. A key exception is that I have seen well drafted mixed qdros for plans with auxiliary disability benefits where the qdro assigns the alternate payee (1) a separate interest award with respect to the accrued payment and (2) a shared payment award with respect to the disability benefit. (I'll leave it to the state court and counsel for the parties to determine whether a disability benefit is a marital asset under state law. If the judge and counsel like it, I'm ok with it.) 6. IMHO, a shared payment qdro can be accepted before payment of the participant's pension begins, because at the most basic level, I view the qdro as ordering the plan to deduct the alternate payee's assigned benefit from the participant's pension payment, which I see not as a form of payment, but as a deduction from the pension payable to the participant (like any other deduction such as income tax withholding or an IRS attachment for unpaid income tax). 7. My plan documents do not address the types of qdros, but my qdro procedures do. Circling back to my prior issues -- Thanks to all of your input, I have sorted out some of my thoughts and reached (at least some tentative) conclusions. I note them for what they are worth. 1. Yes, a condition precedent and condition subsequent are different. 2. A separate interest award to an alternate payee that is subject to the condition subsequent of survival to the alternate payee's payment date (with reversion to the participant) should not be approved. In my mind, the assignment of accrued benefit to the alternate payee occurs in such case when the qdro is approved, and the reversion provided by the condition subsequent just seems too much like a type or form of benefit or option not otherwise provided by the plan. 3. On the other hand, it seems that a separate interest qdro that is subject to the condition precedent of survival to the alternate payee's payment date can be approved. In essence, the accrued benefit is not assigned to the alternate payee until the alternate payee's payment date when the condition for the assignment is satisfied. However, in such case, it would seem to follow that if the participant dies before the alternate payee's payment date, there is no accrued benefit that could be assigned to the alternate payee, and the alternate payee would not have any right to payment of any part of the participant's accrued benefit. Of course, the alternate payee could be designated as the surviving spouse for qpsa purposes, but that would be different than an assignment of an accrued benefit (and normally would result in a different $ amount to the alternate payee). Also, back in my prior example of a $500 total accrued benefit with $100 assigned to the alternate payee, if payment to the participant began before payment to the alternate payee, it would seem that the participant should be paid $500 until the alternate payee's payment date when the condition for the assignment to the alternate payee is satisfied. 4 The above seems too complicated to me. Mike's comments are simpler. Inspired then, I'm going back to where I was for a basic approach. There is a $500 accrued benefit in the marital estate. If $100 is assigned to the alternate payee under a separate interest qdro, the $100 is an outright award to the alternate payee. The death of the participant has no effect on the alternate payee's $100 assigned benefit, and the death of the alternate payee has no effect on the participant's remaining $400 accrued benefit. Each elects a separate time and form of payment. (These truly are separate interests, and the participant and alternate payee can go their own way.) 5. If the parties really really want a reversion to the participant under a separate interest qdro upon the alternate payee's death before the payment date, this can be done only under the condition precedent approach of #3. That said, my experience has been that most alternate payee's counsel like the basic approach of #4, and not so much #3. Glad I got that out of my system.

A delayed follow up (been a couple of busy weeks). You make good comments John, and I am back to mulling over whether a separate interest QDRO subjecting the assigned benefit to the condition subsequent of survival to the payment date would be acceptable under ERISA. One specific question I am contemplating is whether a reversion would comply with the requirement that the QDRO not provide increased benefits determined on the basis of actuarial value (or not result in increased costs to the Plan). If you recall, under my "standard" separate interest QDRO, the alternate payee's assigned benefit is forfeited upon the alternate payee's death. Under the "reversion" separate interest QDRO, the assigned benefit would revert to the participant if the alternate payee died before the payment date. (Presumably, there would be no reversion if the alternate payee died after the payment date. Note Szydlowski v. PBGC, 37 EBC 2643.) Taking the example of a $500 accrued benefit with $100 assigned to the alternate payee under a separate interest QDRO, my question arises as follows (disregarding ancillary and spouse death benefits): 1. Before the QDRO, the participant's death would result in the forfeiture of the entire $500 accrued benefit. 2. Under my standard approach, $100 of the $500 accrued benefit is assigned outright to the alternate payee. If the alternate payee dies, the assigned benefit is forfeited. I view this as cost neutral to the Plan. 3. Under the reversion approach, $100 of the $500 accrued benefit is also assigned to the alternate payee, subject to the condition subsequent of survival to the payment date. If the alternate payee dies before the payment date, the $100 reverts to the participant, and is not forfeited unless the participant is then deceased or later dies before the payment date. 4. The nagging part of this is that under the reversion approach, after the QDRO, the $100 assigned benefit is forfeited only upon the death of two persons (i.e., the alternate payee and the participant), whereas before the issuance of the QDRO, it would have been forfeited upon the death of one person (i.e., the participant). Note that under my standard approach, the $100 assigned benefit would also be forfeited upon the death of one person (i.e., the alternate payee), but the focus probably should be on whether the reversion approach results in increased benefits (or cost) relative to no QDRO. I don't know the answer at this point, but I have asked a smart actuary for comments.

A follow up. I think that a shared payment qdro can and should provide for reversion of the assigned benefit to the participant upon an alternate payee's death. My view is that a shared payment qdro assigns the alternate payee the right to receive part (or all) of the benefit payment (rather than part of the accrued benefit). It follows then that if the alternate payee is dead (so there is no alternate payee entitled to payment), the participant should be paid the entire benefit. This would be the case if the alternate payee died before or after payment of the benefit began. The participants' attorneys like this, but not so much the attorneys for the alternate payees. The alternate payees' attorneys don't seem to object so much to the reversion, as they do to linking payment to the alternate payee to payment to the participant -- and thus, not allowing for an independent payment to the alternate payee measured by the alternate payee's life and making payments to the alternate payee contingent upon the participant's survival. I guess I'm just not sure that a separate interest qdro assigning an alternate payee part of an accrued benefit can provide for reversion (or payment) of the accrued benefit to the participant at the alternate payee's death. Even if the qdro is written so that the assignment is a contingent award (conditioned upon the survival of the alternate payee), if the qdro otherwise assigns the alternate payee the right to receive payment measured by the alternate payee's life at a time and in a form elected by the alternate payee, my concern is that the contingency is an attempt to provide a death benefit not otherwise provided by the plan for an accrued benefit. Also, I'm not sure how such a contingent award would work. For example, assume a $500 total accrued benefit with $100 assigned to the alternate payee contingent upon the alternate payee's survival to the payment date. If payment to the participant begins before payment to the alternate payee and before the alternate payee's death, does the participant receive $400 with that amount subsequently increased to $500 if the alternate payee dies before beginning to receive payment? Or does the participant receive $500 with that amount subsequently decreased to $400 if the alternate payee begins to receive payment before death. There would likely be additional issues if the payment was not contingent upon the alternate payee's survival to the payment date, but simply upon survival, so that the assigned benefit would revert to the participant if the alternate payee died after payment began. Maybe I'll figure this all out someday. Heck REA was only enacted some 24 years ago.

QDROphile: The Plan will provide participant statements, and generally has good enough records to do so. Kevin: Yes, the order is rejected. The obvious question is on what grounds. I've had that conversation with the family law attorneys - basically something like this: (1) the Plan doesn't have a record of the amount; (2) the Plan does not have the staff to calculate the amount; and (3) why should the Plan use plan assets to pay someone to do your work in dividing marital assets. As noted, the Plan will provide statements for the parties to calculate the amount. If push came to shove ERISA wise, I guess I would argue (and I have not had to yet) that the order is asking for a type or form of benefit not provided by the daily valued plan. That said, I work with some daily value plans that have a procedure (I believe a spreadsheet) to calculate this amount depending upon the period covered. This same paragraph from their qdro procedures reads as follows: "Because the Plan provides for participant direction of the investment of account balances, daily valuation of account balances, periodic contributions and periodic distributions, the Plan cannot precisely calculate past earnings and losses on an individual participant's account balance. For example, the Plan does not have records that would precisely state how much a portion of the participant's account as of December 31, 1997 would be today if adjusted for proportional earnings and losses from December 31, 1997 to date. Thus, if such an amount is requested, an approximate amount will be provided but only if it can be readily calculated. If it cannot be readily calculated, the amount will have to be determined by the participant and/or alternate payee using the participant's account statements."

How about this from one of my qdro procedures: "Because the Plan provides for participant-directed investments, daily valuation of account balances, periodic contributions and periodic distributions, the Plan cannot readily determine or provide a statement of past earnings and losses on an individual participant's account balances. For example, the Plan does not have any records that would indicate how much a portion of the participant's account as of December 31, 1997 would be today if adjusted for proportional earnings and losses from December 31, 1997 to date. This amount can be calculated by the participant and/or alternate payee using the participant's account statements." The family law attorneys are not pleased, but the plan administrator is happy.

Although I have only a passing familiarity with labor law, I do recall that the NLRA prohibits discrimination in a term or condition of employment to encourage or discourage union membership. However, the other thing I recall is that the prohibition applies to employers and agents of the employer and union, and it was not clear if a multiemployer plan would be an agent. Nonetheless, this may be something worthwhile to review. Also, the Taft-Hartley "sole and exclusive benefit" rule could be at issue and worth reviewing.

Couple of comments (and perhaps my biases): I view a separate interest QDRO as an outright assignment of benefits to the alternate payee at the time the QDRO is approved. Thus, the alternate payee has his or her own benefit and may elect a time and form for payment of the assigned benefit that is different than the time and form of payment elected by the participant for his or her remaining accrued benefit. It follows then, in my view, that the participant's death has no effect on the alternate payee's right to payment of the assigned benefit at a time and in a form elected by the alternate payee. Assuming a typical defined benefit plan without ancillary death benefits, other than amounts payable under a form of payment elected by the alternate payee, the alternate payee's assigned benefit under a separate interest qdro should not be payable to anyone upon death, including a reversion to the participant, since that would provide a type or form of benefit or option not otherwise provided by the plan. I know that there are those who disagree and allow a reversion of the assigned benefit to the participant upon the alternate payee's death, but I'm not sure on what theory - perhaps on the basis that the assignment to the alternate payee is contingent upon the survival of the alternate payee. But that raises additional questions, e.g., how much should be paid to the participant if payment to the participant begins (say at early retirement or disability) before payment to the alternate payee begins. If a "reversion" is desired, I say a shared payment QDRO can be used.

My quick take assuming payment to a nonspouse beneficiary. 1. 402©(11) provides for nonspouse beneficiary direct rollovers. The IRS's position at this time appears to be that these are optional. Thus, the plan document needs to be consulted to determine whether or not direct rollover must be offered. 2. No requirement to provide nonspouse beneficiary with a life annuity form of payment. But plan can provide for this form of payment in the document. 3. 30-day notice required for 411(a)(11) consent notice, 401(a)(11)/417 qjsa/qpsa notice, and 402(f) rollover notice. 411(a)(11) does not apply to death benefits. 401(a)(11)/417 qjsa/qpsa does not apply to nonspouse beneficiaries. 402(f) notice (currently) not required for nonspouse beneficiary rollover. But plan should be able to provide for a "wait period" for such payment in the document.