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QDRO amount without loss of earnings


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Have a QDRO that calls for a specific amount to be segragated to the AP as of the valuation date of the plan. It also says to include earnings up to the time of segregation, but the segregated amount can't be less than the specific amount.

This plan is pooled and not participant directed. The plan is valued every 6 months. The plan has experienced losses, so the amount the AP would get is less than what was specified. Again, the DRO spells out that the amount being segregated can't be less than the specified amount. Can this be done? Seems like the plan will suffer by not allocating the losses to the AP.

Thanks

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This is a defined contribution plan, right?

I say reject the DRO as not meeting the definition of a QDRO. It calls for you to provide a feature that is not available to similarly situated participants. If the parties or court really intend to have no investment gains or losses on the amount given to the AP, then have them submit a QDRO and distribution request form simultaneously so that they are executed by the recordkeeper on the same day.

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Whether or not to reject the DRO is up to the plan's counsel. However, nothing that you have stated bothers me too much in a pooled fund. In that case, the term segregation is typically used to establish the AP's account on the books of the plan, not to establish a separate asset pool that can be directed by the AP.

If that is the case, the interest through date of segregation is, by definition, zero, since no interest is allocated between valuation dates.

I would be tempted to write a letter to the lawyers involved and give them a numeric example of how your interpretation of the DRO will affect each individual's benefits under the plan and that if they don't like it, they can go get the DRO modified.

I just don't see any reason to punish the DRO drafter for not having a complete understanding of the connotation associated with the word "segregated".

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I think the answer depends on who is effected by the order. If the segregaton only affects the participant's balance in the account then it is permissible, however, the ct order cannot insulate the AP acount fronm adverse investment experience by reducing the account balances of other participants since that would violate IRC 414(p)(3). In other words if the participants account is $10,000 as the date of the segregation and the DRO says that the AP is entitled to 6,000 as of the date of the segregaton and the participants account has declined to 8,000 the the AP would be entitled to $6,000 and the participant's balance would be 2,000 k. However, I dont think the DRO could guarantee that the AP balance would not decline after segregation becuase it would violate the terms of the plan since the AP has the rights of the participant and cannot not have rights greater than the other participants under the plan ( e.g., not subject to losses allocated to other particpants) because this would violate ERISA. You really need to read the DRO and track the account for the AP in comparaison to the plan provisions to prevent a reduction in the aco**** balances of other participants because of the guarantee in the DRO.

mjb

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I agree with Mike Preston and mbozek. Unless the participant's account does not have enough money, you can do (and must do) what the order says. The order simply divides the account between the AP and the participant and specifies a minimum for the AP. The order can insulate the AP from loss to the extent of the participant's account total balance. In the notice of determination, you should explain and illustrate how the AP's interest is calculated.

I assume that you don't segregate until the valuation date unless you have a very sophisticated system for apportionment and true up of accounts. Perhaps that is what is gnawing at you. You can require the order to work within the plan's valuation dates and system. In that sense, I can agree with MWeddell if the order insists on some timing of the division that the plan (e.g. a particular segregation date that is not a valuation date) cannot accommodate, but I would try to interpret the order in a way to fit the system and then rely on the explantion. If they don't like your result, they can amend the order. Your written QDRO procedures should spell out any restrictions on timing of valuation and division of account.

If you are simply looking at a draft rather than an order, you can be tougher on them and insist that the order fit better with the timing of the plan's valuation and accounting system.

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I will be more specific. AP gets 100 k as of the date of divorce, plus any earnings or losses thereon, from that date of divorce through the date of transfer(pro rata). It concludes with, "Regardless of investment experience, the amount transfered shall be no less than 100K.

Participant accounts are valued every 6 months and everyone shares in the same gains or losses pro rata as a pooled account. No daily val. or participant direction. Balance forward accounting.

My opinion is the participant will be the one that gets hurt with the loss and not the rest of the plan participants. Maybe it should just read 100k with not interest. Sounds like the same thing.

Lastly, who decides the date of transfer?

Thanks!

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IMO, the date of transfer is the effective date of the establishment of the Alternate Payee's separate entitlement under the records of the plan. That is, it is whenever the Plan Administrator sets up the AP as an individual with an account balance.

I agree that the participant is being hurt by this.

I would only reject it was felt that the Participant's account would need to be negative in order to retain the AP's account at $100,000. Even then I would interpret it as providing for 100% to the AP.

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