401(k) QDRO Procedure Change

[Guest cole stevenson]

I've been trying to discover a way to streamline our 401(k)'s QDRO procedures. In particular, I want to amend our policy to specifically include a limitation on "lookback" language in proposed QDROs such that the Plan will not "qualify" any that requires historical account valuations more than twelve months prior to the actual benefit division date. The rationale for this tack is described below.

As you probably know, QDROs on DC plan participant accounts will often establish the "base" award to the alternate payee as of a certain point in time and may require that such account value be adjusted for (a) gains or losses from that point to the actual benefit "division date" and (B) exclude any investment exchanges, loans or withdrawal activity that transacted in that same period.

Unfortunately due to frequent recordkeeper changes in the past and limited access to historical data, we frequently faces three challenges along the above lines:

1. The point in time for the base award is as of a date other than a quarter-end. We have historical quarterly statement data, but very limited access to post-October 1997 daily valuation data.

2. The point in time for the base award is as of a date prior to the start of the IP's current recordkeeper's tenure - roughly October 1997. This requires we access old records at a significant cost with virtually no access to nonquarter-end valuations.

3. Because of the often heavy transaction volume on participant accounts, constructing gains or losses from the base award date to the actual division date can require a large expenses of time and money. In some cases that require gain-loss contruction from a base award date prior to October 1997, the work becomes very imprecise.

Given that ERISA and the Code charge plan administrators with establishing clear, cost-effective and reasonable procedures for determining if a domestic relations order is a QDRO, it would seem that my proposed change should not be a problem.

Any reactions or comments will be appreciated

[rcline46]

I think you are confusing the qualification of a DRO as a QDRO (names, plan names, plan benefits, etc) with the calculation of QDRO amounts. What you are proposing has nothing to do with determining if a DRO is QDRO.

The other part is benefit calculation. If it will be difficult, then you must disclose that to the parties and have them reach a reasonable conclusion on how to proceed. I believe the calculation part can be charged to the participant / alternate payee, but not the determination part.

[Guest cole stevenson]

I hear what you're saying, but I didn't think you can completely remove the DRO's requested calc from the qualification process.

Rational: If Plan can't (accurately or reasonably) calculate the portion due to the AP per the terms of the DRO, then it in essence can't be administered. And if it can't be administered, then practically speaking it should't be a QDRO.

Are you suggesting that it's possible for a plan to "declare" a DRO a QDRO because it contains the specific items required by the Code & ERISA, but in the same breath tell the interested parties that it can't be administered because of the calc method set forth in the order? This seems counter-intuitive, but perhaps that is in fact the tack we should be taking.

[rcline46]

That is what I am saying - it meets the legal requirements of a QDRO but the information available prevents the calculation of the requested distribution amount.

[Guest F1fan]

I respectfully do not agree. Calculating the amount that is to be assigned to an alternate payee is a major component of determining whether a DRO is QDRO. Under IRC section 414(q)(2)(B), if the plan administrator cannot determine the amount to be assigned to the alternate payee, then the DRO is not a QDRO. Therefore, if the methodology specified in the DRO cannot be administered, then the DRO fails.

As for the original question, I think the idea of limiting the period that the plan will go back to calculate account balances has merit. Particularly if the procedure is intended to confirm that the administrator cannot perform calculations when the necessary data does not exist.

[rcline46]

ERISA 206(d)(3)©(ii) relates that a QDRO must specify the percent or how to calculate the percent due to alternate payee.

If the calculation METHOD is not faulty but the lack of information prevents the use of the method, does the DRO fail to be a QDRO?

In cases similar, we have responded (before accepting as QDRO) with the information we have and asked for guidance on how to comply should we accept. Usually this all comes out when the court is gathering evidence about the values in the plan, well before the DRO is prepared.

I still believe the DRO does not fail if the methodolgy is precise. That does not mean it can be implemented.

As to arbitrarily stating some cut off point, I think the plan sponsor has enormous responsibility for the dearth of information and should be either acquiring it or getting some indemnity insurance. THey are required to have the records necessary to detemine a participant's benefits.

[Guest F1fan]

If the administrator cannot implement the terms of the DRO because it cannot calculate the amount to be assigned, I maintain that the DRO is not a QDRO. It cannot be argued that the DRO meets the technical requirements of being a QDRO yet the amount to be assignefd cannot be determined.

I have often seen DROs that attempt to have a plan administrator use data that the administrator does not have. For example, specifying that the the alternate payee should receive 50% of the participant's account balance as of date that is not a plan valuation date. In that case, what choice is there but to reject the DRO? The value to be assigned is not determinable, ergo the DRO is not a QDRO.

As for the procedures, I did not advocate any arbitrary. I simply maintain that a plan may adopt reasonable QDRO procedures. What is reasonable can vary.

[Guest Tom Geer]

I would like to agree that the failure to give a calculation methodolgy that fits neatly with the plan's actual operations makes it not a QDRO. However, I would be inclined to rely more heavilty on 414(p)(3)(A), and say that a benefit calculation that is not ordinarily provided is a type or form of benefit, or a benefit option, not otherwise provided under the plan.

Assuming you lose that argument, base on my cite or Tom Gorman's, there are still steps you can take. With a non-daily plan, my clients have routinely, and successfully, taken the position that the accrued benefit is not adjusted for earnings until the next actual valuation date, which means you end up with prior valuation plus contributions accrued. We have also had little trouble in complying with prorating earnings based on numbers of days.

If the problem is not the nature of the calculation but the lack of good records reflecting the actual operations of the plan, I agree somebody is in trouble.