Qdro

[doombuggy]

I have a client who is in the process of doing a QDRO for one of her employees and the alternate payee is requesting that an account be set up for her and maintained by the plan (she apparently likes the fund selection & performance). The trustee does not want to do this - she wants the alternate payee to take a distribuiton now. Is the company required to set up an account for a non-employee?

Thanks!

[QDROphile]

The law is not perfectly clear, but most likely the plan cannot require an alternate payee to take a distribution until the participant is paid or the order says to distribute. This may also be true for amounts less than $5000, although the IRS issues determinatioon letters on plans with provisions for forcing out amounts less than $5000.

[Appleby]

QDROphile,

My understanding is that the alternate payee is not eligible to take a distribution until the participant who is giving up the assets is experiences a triggering event… unless QDRO is a triggering event under the plan.

If QDRO is a triggering event, then the plan administrator can issue a check for the amount, even without any instructions from the alternate payee ( involuntary cash-out).

[QDROphile]

Please tell me more.

[mbozek]

If the account balance is $5000 or less than the a/payee can be cashed out involuntairly. If the balance is over $5000 there is a uncertainty of what can be done. Some practitioners believe that an ap can be terminated even if the account balance is over $5k because only the participant's consent is need for cash outs prior to 65 under 1.411(a)-11©. Reg. 1.411(a)-11©(6) states that the consent requirements do not apply to an ap defined in section 414(p)(8) except as provided in a QDRO pursuant to section 414(p). This appears to permit the involuntary distribution of the ap interest unless the QDRO requires consent. Other practitioners believe that the ap acquires the rights of beneficary under the plan and cannot be cashed out without the ap's consent. However cashouts are not usually a problem because the ap always wants the money (usually to pay the lawyer or to take a vacation) I have never heard of an ap who did not want the $ if it was offerred.

[QDROphile]

Let us assume for discussion that the terms of the QDRO do not make it easy for us.

I have not been able to find a clear path to the conclusion that an alternate payee can be forced out if the alternate payee's interest is not above the $5000 limit. The legislative history (always a dicey environment) of the Retirement Equity Act is a bit troubling. Treas Reg section 1.411(a)-11© (6)is ambiguous. Even if it means that you can distribute to an alternate payee without anyone's consent, a well drafted order will say that the alternate payee elects when to get a distribution.

The cashout would be practical and consistent with the principles behind the rule. The IRS issues determination letters to plans that expressly provide for cashout of small amount to alternate payees. So maybe we just get practical and quit fussing about little stuff. It is unlikely that a regulatory agency would get excited about it and an alternate payee does not have enough at stake to sue. But I cannot connect the dots in the analysis with the same confidence as I would like.

[MWeddell]

Let's at least state the easy case: if the DRO is clearly drafted to give the alternate payee to right to defer distribution until such point in time as the participant would be required to receive a distribution, then the plan must honor that provision of the DRO. Such a provision does not give the alternate payee greater rights than what are enjoyed by other participants so the order cannot be rejected as failing to be a QDRO because of such a provision.

[doombuggy]

I have processed quite a few QDROs over the years too and have never encountered a situation like this!

I did pull the document (old one, as has not been updated for GUST/EGTRRA yet - we are getting there) and found that hardships are permitted; other triggering events are seperation from service, death and disability. Also, a participant who has not seperated from service may not obtain a distribution of his/her vested employer contributions. Distribution can only be made if the participant is 100% vested. A participant who has obtained the plan's NRA and who has not seperated from service may not receive a distribuiton of his/her vested account balance.

I found a definition of early retirement age in relation to QDROs: Payments under a QDRO may be paid at any time on or after the participant attains earliest retirement age. Further, a plan may allow for payments to be made even before the participant attains earliest retirement age. However, a domestic relations order is not a QDRO if it requires payment before the participant's ERA and the plan does not allow for early payments to alternate payees. The statute [i am not sure which statute they mean here, as I am missing some pages]defines ERA as the earlier of the date on which the participant is entitled to a distribution under the plan; or the later of the date the participant attains age 50 or the earliest date on which the participant could begin receiving benefits under the plan if the participant seperated from service. The article goes on to say that generally, if the participant is actevely employed, ERA is the earliest age at which the participant could receive benefits under the plan if the participant seperated from service, but not earlier that age 50. This article is from 1992, so it may be out dated.

[mbozek]

Just to clarify what has been said: A plan can always cashout an a/p if the a/p benefit value is no more than $5,000, if the a/p has reached the nra of the plan or if the QDRO provides for a cashout out anytime after the divorce. The issue is whether a/p consent is required if the value is >$5,000 and nra is not attained. Most QDROs allow the a/p to elect benefits after the divorce is issued if the a/p consents to a distribution as provided in the 1/411(a)-11 regs. But what if the QDRO provides for immediate distribution after divorce with no mention of an election by the A/p. But is this possible if a/p has the right to elect a benefit option, e.g., cash or an annuity under the terms of the plan. If QDRO does not specify the form of the payment then I don't think there can be a payout w/out the a/p's consent unless plan has provison specifying the default payment option for a QDRO distribution.

[QDROphile]

I agree with the summaries of MWeddell and mbozek, with the following qualifications:

1. I have yet to see a fully supported analysis that concludes that you can always cash out an alternate payee if the alternate payee's benefit is not over the section 411 limit. Practicality and general principles lead most people to do it without splitting hairs on the analysis.

2. No distribution can be made to an alternate payee, regardless of the terms of the order, before the particpant is eligible for a distribution unless the plan terms allow for an earlier distribution to an alternate payee. The plan MUST say so. The exception to the requirement for a plan provision to allow early out for an alternate payee is the "earliest retirement age" provision of section 414(p)(4).

[mbozek]

Q not completely true: under nonalienation regs, subsection g ,QDRO provisions are not required to be in plan document.

[QDROphile]

Correct. But the same regulation tells you that the distribution cannot be made under a QDRO until the participant is eligible unless the plan has a distribution provision that allows for the earlier distribution. Generally a plan cannot make a distribution earlier than the plan terms allow. I realize that you can interpret the poorly worded regulation differently, but I read the regulation consistent with that rule rather than as an exeption to that rule. Otherwise, why would the regulation talk about a plan term that provides for an earlier distribution? If the exception was to be broad, the regulation should say "even if the plan does NOT provide for payments ... prior to the time it may make payment to the participant."

[mbozek]

QDRO: some employers prefer to state the rights under the QDRO including the right to take a immediate payout in the qudro procedures without putting lauguage in the plan document. QDRO procedure is incorporated in plan by reference.

[QDROphile]

I agree that is a defensible approach, but when it comes to a sensitive and fundamental feature of a plan -- distribution provisions -- a plan term is preferable and perhaps required. A plan administrator cannot have discretion over distribution form or timing. Isn't the design of QDRO procedures an exercise of discretion when the plan administrator decides whether the procedures will provide for distribution to alternate payees before the plan says the participant is eligible? An if you say that the sponsor adopts the QDRO procedures, I will say the the QDRO procedures are a plan document and thus satisfy the need to have the plan state distribution terms.

Do you think think the initial question would have been asked if the QDRO procedures had terms that disposed of the question? At very least the QDRO Procedures have to make the statement about the timing and the plan has to provide for the opportunity by stating that distributions pursuant to a QDRO will be in accordance with QDRO Procedures.

Your approach is very elegant, and I use a variation on it. But how many plans out there are sophisticated enough live up to it?

[doombuggy]

Thanks everyone for your help. I still have not gotten the QDRO, but I will tell this client that if she has to set up an account for the alt. payee, she will do so. I imagine that she can require this non-employee to pay her share of the recordkeeping fee for the upkeep of the account.

Again, thanks for your assistance!