Interest Payable on QDRO Amount??

[chris]

Plan received a DRO in mid-December, 2002. DRO identified plan (which is a PSP) as the "XYZ, Inc. Defined Benefit Plan". DRO was returned citing the error and noting the correct name of the plan. Amended DRO was received and all correct thereon as of 1/20/03. Is interest normally payable from the date the DRO was submitted until the date actually paid? Or is the start date the date the DRO is determined to be "qualified"? Thanks for the help....

[mbozek]

I dont understand your question. A DRO that meets the requirements for a QDRO will have instructions as to what the rights of the alternate payee are. In A DC plan the ct order will provide the amount of the benefit that is transferred from the part. acount to an account of the AP as of a specific date. The AP will then be entitled to all gains and losses on the investments in the AP account from that date. Sometime the Plan admin has to go back and reconstruct gains and losses in the account to the date of the transfer in order to properly divide the benefits between the parties. The AP would only be entitled to interest if the ct order provided for it or the AP's interest was invested in a fund that provided for crediting of interest after the date the account for the AP was established, e.g., in a stable value fund.

[QDROphile]

I agree with the response from mbozek, but I will focus in a different way.

The terms of the order determine what the alternate payee gets. If the order says that the alternate payee gets something as of a particular date, the presumption for interpretation of the order is that some time value of the "something" must be computed form that date until distribution or actual creation of an account for the alternate payee (upon creation of the account, the time value take care of itself accrding to the investment of the account) . Generally, that computation is bsed on the investment returns of the account (probably prorated to account for multiple investment funds) that will be charged to actually create the amount for the alternate payee. But the order may have other instructions, such as a prescribed interest rate to apply from the "as of" date. The terms of the order control, and it is OK to disqualify if the terms are ambiguous or nonsense or perhaps even just missing. Good written QDRO Procedures are helpful in setting standard interpretations if the order lacks certain terms.

If the order simply specifies "pay alternant payee $15,000" and is silent about any earnings adjustments, then the plan pays the alternate payee $15,000 as soon as practicable (or when the order says) no matter when the order was written, entered or delivered. By the way, outfits like Fidelity can't follow an order like that if they are providing fully outsourced services to a plan. Violation of the rules does not seem to bother them.

If the order says "pay the alternate payee $15,000 on December 31, 2002" and the plan gets the order, or would determine that the order is qualified, on January 20, 2003, the order is not qualified. You don't try to fix it by imputing interest or a share of earnings.

[BFree]

Why can't Fidelity cut a check for a flat $15,000?

[QDROphile]

According to Fidelity, its system requires that they set up an account for the alternate payee before they can make a distribution. Evidently, this is so they can get things in line for Form 1099, etc. The account has to be invested in some way for some period of time. That time can be longer or shorter, depending. I have tried asking if the account could be set up with a money market investment, then be charged with the $15,000 distribution, and then return the earnings to the participant's account, but they declined. I worked very hard to get a different answer, but failed. This is not the only compliance probelm with the Fidelity system.

If a plan is not using full outsourcing to Fidelity, there are opportunities to get around the system.

One client tells me that T. Rowe Price will go through the process all in one day to get the desired result, if you are very careful with timing and instructions. But they had at least one instance where it did not all come together and ended up with earnings.

There is a practical solution, and I don't think anyone would get too ruffled about it, but from a rigid literal and technical perspective, it is a problem.

[mbozek]

I dont see how Fidelity's positon is out of line with ERISA or the QDRO since the ct order is being obeyed, e.g., 15k is being transferred from the employee's account to the spouse. Once the funds are in the acct of the spouse, the funds are owned by the spouse and are not the property of the ee. Therefore it is prudent under ERISA to pay interest since the spouse maintains an account under the plan even if only for a temporary period. The ee has no right to the interest earned on the account once it is segregated and placed in the spouse's name. Q would this procedure be any different if the spouse's interest was segregated under a plan that did not outsource their admin and the spouse did not request a distribution from the plan? Wouldn't the spouse be entitled to interest?

[Guest Jennifer Reid]

I agree with mbozek. A QDRO is not so much an order to pay but an order to segregate funds to be payable to an alternate payee at such time as the alternate payee becomes entitled to request a distribution.

[QDROphile]

When the terms of the order say "pay $15,000" I don't see how that means "segregate $15,000 and invest it and pay the net amount." "Pay $15,000" does not seem to be so difficult that we can be sure that another result is "pusuant to" the terms of the domestic relations order, as required by IRC section 401(a)(13)(B). I did not claim that anyone would take adverse action based on the literal reading, but it is an issue and I think it is silly for a system to be unable to pay a specified amount as instructed by the order. Conceptually, that is the simplest course of action.

We are not discussing a situation where the order assigns any time value to the distribution by specifying a date or otherwise, or gives the alternate payee any choice over timing of payment. An order that specifies an amount to be paid to an alternate paye and then gives the alternate payee a choice about when to take it should not be qualified. Among other things, if the account loses value, the plan may have insuffcient assets to pay the specified amount. Persons who draft domestic relations orders can easily provide for creation of an amount for an alternate payee that is segregated and invested and distributed at a particular time, including a time specified by an alternate payee. When they draft it differently, it must be presumed that they meant what the words say and it is not for the plan administrator to decide if it makes sense. Either follow the terms of the order or disqualify it because it asks the plan to do something that the plan cannnot.

With respect to the comment that the earnings do not belong to the participant, that may be exactly what the order was meant to deal with (however unintelligently). The order may intend that any delay in the actual distribution be completely at the risk of the participant. If the money is hanging around and invested, the participant can claim that every penny of gain or loss belongs to the participant when the order says "pay $15,000 to the Alternate Payee."

Faced with a Fidelity or a Microsoft, we all have to be practical and the world will not end. There are ways to protect the plan under these circumstances without disqualifying orders right and left. But we can recognize a 900 pound gorilla for what it is.

[mbozek]

Q: I dont share your views that pay 15k in a dc plan means no interest since many plans do either explicitly or implicitly grant the AP the rights of a participant and the TPA wants to make sure that the AP properly waives those rights as well receives all the notices required by tax reporting rules, 402(f), 1099-r, etc. Just sending the AP a check without the proper waivers, etc could result in a claim against the plan by the AP for because of a failure to provide information (eg., AP did not know that a benficary could be designated for AP's interest or that the distribution could be rolled over). Second, in response to a question of when the benefits can be paid to the AP, Q 3-9 of the DOL QDRO manual states that a plan may permit the AP to receive a lump sum payment of a separate interest at any time. This indicates that the QDRO award creates an interest of the AP in plan assets as of the date stated in the QDRO and that the AP has rights to a distribution under the plan.

[QDROphile]

mbozek:

I think you are both not reading what I posted and reading too much into what I posted at the same time.

I expressly limited my comments to a situation in which the order does not say anything about a date that is identified with the creation of an alternate payee's interest. It the order has a provision for time, then time value is presumed and that implies some sort of investment measure. Interpretaton of the terms of the order is still required to decide how to deal with the time value.

Nothing about what I posted suggests that a plan administrator would not observe proper formalities such as sending a rollover notice and collecting a social security number and the rollover election of the alternate payee as part of the distribution process.