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DC plan enjoined from making distribution to a terminated employee


Guest QDRO Question

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Guest QDRO Question

A DC plan has been enjoined by a state family court from making any distributions to a participant pending resolution of the participant's divorce. The plan received the transcript of the family court proceedings and therefore is aware that the purpose of the injunction is to prevent the participant from using the money take his children out of the country.

The participant has terminated employment and is otherwise entitled to a distribution of his account (which consists of employee contributions only). The participant has requested a distribution.

In addition to the injunction, the plan administrator received a draft domestic relations order which entitles the soon to be ex-spouse to 50% of the participant's account.

Does anyone have any ideas on whether the plan is bound by the state court injunction? In other words, the state court has indicated that only 50% of the account will be subject to the ex-spouse's separate interest. We are comfortable with the plan doing a separate accounting and protecting the ex-spouses 50% interest (since there is a pending QDRO). However, can this ERISA plan refuse to make a distribution to the participant of his remainder based on a state court injunction?

Thanks in advance for your responses.

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Guest b2kates

with great trepidation, it appears that the order deals with the administration of the plan. That would be a violation of ERISA. Likely the order would be unenforceable. However, that would not stop the local court initially from trying to hold the responsible person at the plan in contempt.

Advice, you retain erisa counsel. If you wish to fight, then remove to federal court. IF you do not wish to fight, suggest slowing down the process for any distribution. In particular it would be acceptable to withhold distribution while the plan determines if the restraining order qualifies as a qdro.

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I agree with B2kates. Our ERISA counsel has approved out policy. When we become aware of a possible QDRO, either from the employee, attorney or soon to be ex, we ask for a statement from the attorney drafting the QDRO saying "a QDRO is pending and to place holds on the accounts".

The will prevent loans, hardships and distributions.

Since the percentage awarded could easily change from the 50% stated in the draft you have - you should consider B2kates advice - stall until you have a final QDRO.

We use a model QRDO - fill in the blanks - approved by ERISA counsel.

JanetM CPA, MBA

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Apart from the draft domestic relations order and where that might go, the injuction is most likely a domestic relations order. The plan needs to send a notice of receipt promptly. The plan needs to determine qualification within a reasonable time. What amounts to a reasonable time depends on the circumstances. I suggest that under these circumstances a reasonable time might be a while, especially if the participant does not actualy request a distribution.

Meanwhile, the plan adminstrator needs competent legal advice about what to do and when to do it. The plan is in a difficult position and needs very sophisticated help to navigate. As the plan navigates, the circumstances can change and the changes will require appropriate response.

This is an interesting situation and there is lots to say about it and various court cases that have a bearing on it. But don't waste any more time with the thought that you can deal with this without direct expert help.

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There are several legal issues that need to be reviewed by counsel:

1. Validity of the injunction. Injunctions can be issued only against a party to a law suit which generally means the spouses in a divorce. In most states the retirement plan is not a party and therefore is not represented by counsel before the court--So an injunction cannot be issued against a non party to the suit under applicable st. law without violating the due process clause. The only way this could legally work is if the participant was enjoined by the court from requesting a distribution from the plan.

2. If the injunction is against the participant then the plan could honor the distribution request and the participant could be held in contempt for violating the injunction-- but the Plan admin would not be liabile for turning over the funds to the part. ( ther could be a separate issue if the court orders impoundment of the funds or order the PA to turn the funds over to the ct.)

3. Normally all issues against a plan are resolved in federal ct. including the question of paying benefits. The plan could refuse to pay the participant's benefits pursuant to the injunction and wait for the participant to sue the plan in federal ct and defend on the grounds of the injunction. The plan could pay benefits to the spouse under a valid QDRO.

4. The plan could take the offensive and file its own action in State court asserting that the injunction against making the distribution is invalid under ERISA . ( The plan may not be able to use this method in Fed ct because of the anit-injunction act which prevents litigants from going to fed ct to prevent enforcement of state court decisions-- this is why the Plan ad. needs counsel). There is one possible way to go to federal ct-- the plan could file a complaint of interpleader as a stakeholder and make both H & W parties to the action and ask the ct to decide who is entitled to the benefits. But the Fed ct. could refuse to take jurisdiction over the case because of the pending st. ct action. Obviously going to court is expensive and time consuming and the question is who will pay for the cost of representing the plan.

mjb

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