Payment of benefits into court fund pending interpleader

[Guest Jose Rosario]

A Qualified Plan participant dies.

Her ex-husband had a post-death qdro entered awarding him the benefits under the plan. Post-death qdros seem to be OK in some jurisdictions under certain circumstances.

The deceased's children from another marriage claim the benefits under the Plan's default beneficiary procedures, as no beneficiary is on file with the Plan Administrator.

The Plan Administrator decides to file an interpleader action to have a court determine who gets the plan benefits.

So far, so bad, but here is the question I really need answered:

Specifically, may the Trustee of the Plan, at the direction of the Plan Administrator, pay the plan benefits into an "interpleader fund", i.e. into the Court, pending the outcome of the interpleader litigation without running afoul of ERISA's anti-alienation requirements?

I found proposed IRS Reg. 1.468B-9, that I think says the answer is yes, the distribution does not take place until it leaves the Plan, in this case upon distribution from the court to the winner of the interpleader action.

[pmacduff]

Weren't the assets segregated within the plan when the QDRO was initially processed? If not, can't you just segregate the assets within the Plan itself? I'm no QRDO expert, just some "food for thought".

[Guest Jose Rosario]

Thanks for the feedback, Pmacduff. The benefits are indeed segregated, as the Plan in question is a DC plan with individual account balances, but the Plan Administrator basically wants the litigating parties to go away, and figures that depositing the benefits with the court will accomplish that goal.

[Guest BenefitsLawyer]

Yes, the plan may use interpleader to get itself out of the way of flying claims. Whether you can do it in federal court, or have to go to state court, depends on the law in your particular federal circuit.

[Guest Jose Rosario]

Thanks, BenefitsLawyer.

[mbozek]

The procedure is for the plan administrator / fiduciary to file a complaint of interpleader in federal ct and serve the contending parties with a copy of the complaint requesting the ct to decide the rights to plan benefits. The Plan admin will then petition the ct to pay the benefits into the ct and be removed from the case. Upon payment of the funds into the ct the plan is dismissed as a party. The ct will decide who is entitled to the benefits. By the way the parties may be induced to settle the claims by the threat of filing the interpleader action.

[Guest Jose Rosario]

Thanks, Mbozek:

Would I be correct to assume that distribution does not occur from the Plan until the $$ is paid to the winner, thereby preserving the taxable nature (and rollover-ability, if necc) of the benefits? Also, my guess is that at the point of distribution from the court, the Plan Administrator is back on the hook for the corresponding 1099, as I cannot imagine the ct getting into tax reporting?

[mbozek]

see reg. 35.3405-1T E-1 - Its the PA's responsibility to prepare returns and reports required under IRC 6047.