Diversification Requirements under a QDRO

[Guest RMM]

Has anyone ever thought about how to apply the diversification rules applicable to qualified participants (defined as those employees with 10 years of participation and age 55) to an alternate payee? Whose age matters? In counting "years of paricipation" with respect to the AP, does the employee's participation count? My feeling is that you should treat the AP as stepping into the shoes of the employee. However, I don't know if from a policy standpoint (i.e., allowing diversification for those close to retirement) that makes sense. I can't find anything at all on this topic. Thanks.

[david rigby]

Interesting question.

Just guessing, but it seems that your "stepping into the shoes" logic is a good start, assuming you mean that the AP gets the same diversification rights as the participant. However, it may be that the plan can also be more generous than this.

[QDROphile]

If the ESOP allows alternate payees to receive distributions on demand, does it comply with the diversification requirements because the alternate payee can take a distribution, which is an acceptable method of diversification?

Consider that the alternate payee has a right to distributions at the participant's age 50. Does that mean the ESOP is OK as to the alternate payee unless the QDRO forgot to include the early retirement age distribution rights?

Another way to look at it would be to treat the AP's interest interest as a subaccount of the participant's account. Whatever the participant does, the same thing happens pro rata in the subaccount. The law does not give an alternate payee separate right to chose investments. ERISA says an AP is a beneficiary. You are not doing anything else for the ESOP's other beneficiaries. The tax code doesn't say.

Make sure you think about the effect on the participant's aco**** and rights, whatever you do for the altenate payee. Depending on your choice, you may need to coordinate

Nothing precludes approaching it your way. I think most persons would start their thinking along those lines.

Be reasonable, be true, put the key provisions in the plan document and get a determination letter.