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QDRO's and annuity contracts


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Employee terminates employment with a vested deferred benefit, and the DB plan distributes an annuity contract to her. The employee and spouse later divorce. Is this annuity contract subject to the QDRO rules (and the plan administrator determines the validity of the QDRO)? Or is it subject to state domestic relations laws, and the insurer determines the validity of the DRO?

If, instead, the plan purchased annuities using a group annuity contract, I assume it is clear the QDRO rules apply.

Thanks-

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Assuming the annuity contract is in the name of the participant, and is not owned by the plan, then the person is no longer a participant in the plan and QDRO rules do not apply.

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Thanks. I think this is correct, based on 2510.3-3(d)(2)(ii). Having read that section again, however, it also states that an individual is not a participant if the benefit is fully guaranteed by an insurer, and a "contract, policy, or certificate" is issued to the individual. This seems to sweep group annuity contracts into this as well. One part that is not clear on its face is that the insurance benefit must be "legally enforceable by the _sole choice_ of the individual against the insurance company."

I assume the certificate would provide the employee with the right to sue the insurer for the benefit.

Has anyone thought this through? It seems unlikely all benefits represented by group annuity contracts are exempt from the QDRO rules...

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An annuity distributed to a married participant would be required to provide the J & S benefit under IRC 401(a)(11). ( Have your read the annuity certificate provided to the participant?). Since the spouse's rights arose under an ERISA plan the court could award ex spouse a right to the 50% survivor benefit under a QDRO as an alternate payee since the benefit arose under a plan subject to ERISA. See IRC 414(p)(1)(A)(i). You can bet that the Ins co that issued the annuity will send any ct order regarding a change in the spousal benefits to the DB plan administrator for a determination that the order does not violate ERISA because the ins. co is not paid to interpret the terms of the QDRO/ plan. There is also a separate issue of whether the spouse's has a vested right to the survivor annuity upon the issue of the annuity contract. The dol reg that you cite was written before QDROS were permitted.

mjb

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If I were a plan administrator that had distributed an annuity contract, I would not consider any subsequent request by anyone to take any position on how to divide the annuity. Proper distribution of the benefit ends the plan's responsibilities, whether or not some judge thinks a QDRO is the means for the division.

Separate point: If section 414(p) of the Internal Revenue Code applies, the better view is that the S in a J&S benefit does not have a "vested" right if one means by "vested" that the survivor benefit cannot be invaded by an alternate payee's interest awarded under a QDRO.

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Q : I dont know if that is good advice to give a plan admin who could be faced with contempt of ct for failing to follow a DRO (regardless of whether you believe that such an order is legal). I think if you were to read the terms of the gp annuity k the insurance co will defer/avoid any responsibility regarding division on account of divorce to the plan admin--. Before giving such advice counsel should review all of the pertinent documents to confirm that there is no potential liability to the Plan admin.

mjb

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"Read all the documents" is good advice. So is "get advice on all the documents before they become a problem."

I did not see any suggestion that the annuity provider had contracted for the plan administrator to be responsible for property division issues. Woe to the plan administrator who agrees to such a contract. After the distribution form the plan, the issues multiply and state law is more of a factor, if not completely controlling. What about annuity contracts issued on plan termination? What plan administrator retains responsibility?

I am afraid that I don't see the contempt issue if the domestic relations order applies after the plan has distributed the benefit. Perhaps the annuity company advises the court that it would love to follow the order, but the plan administrator is breaching the contract to instruct the annuity company how/whether to comply with the order? The court holds a contract party in contempt for its breach of contract with the annuity company?

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Qphile-

I agree that the plan administrator should be out of the picture where an individual annuity contract is distributed from the plan to a former employee.

What's your feeling about a group annuity contract held by an ongoing plan where an employee receives a certificate describing his/her benefit? You think the result is the same?

Thanks-

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I have never encountered what you describe; pardon my ignorant assumptions. I don't understand why a participant gets a certificate, so I am missing something here. I assume the participant is in pay status. It seems to me that if the plan continues to hold the contract, the contract is simply a funding vehicle and is a plan asset. The plan is making the annuity distributions and is is no different position than a plan that makes annuity payments and takes the investment risk (defined contribution plans can't take investment risk on aanuity payments). The plan administrator has responsibility for determining the qualification of domestic relations orders and administration of them. The annuity company is nowhere in the process.

I assume that the annuity contract simply pays in accordance with its terms and the payments are set once the participant starts benefits. If the plan andministrator makes a decision that causes payment form the plan to diverge from the stream of paments under the contract, so be it. The contract is simply a plan asset and may not necessarily match the plan payment. It seems unlikely that a plan administrator would be in such a position if the annuity contract were designed to fit the benefit in the first place. The plan adminstrator would need appropriate QDRO procedures to make sure that the benefit could not be divided in a way that caused problems. For example, the only way to divide benefits in pay status would be to divide payments. The plan could not allow the value of the benefit to be divided and give each recipient an annuity based on the recipient's life.

If the particpant is not in pay status, I hope the annuity contract anticipates that the benefit can be split. The plan administrator is still responsible.

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Qphile-

The company amended and restated a DB plan into a cash balance plan in 1988. At the time of the restatement the company purchased a group annuity contract that covered all benefits accrued through 1988. The group annuity contractholder is the Plan's trustee. Certificates were issued reflecting the insured benefit.

The participant in question is a vested term. Benefits have not yet started.

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Q- Some db plan sponsors that converted to cb plans in late 80's /early 90's purchased participating annuities in separate accounts of Ins cos. for benefits accrued prior to CB plan effective date to reduce iplan liabilities. The plan trustee owns the annuity contract and the participants receive certificates stating their benefits which are guaranteed by the ins. co. However, the certificate is generally considered a benefit under an ERISA plan and is subject to all of the requirements for QDROS.

mjb

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