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Segregation of account


Guest cjthornton

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Guest cjthornton

When is a plan administrator allowed to segregate a participant's account to provide for an alternate payee's interest prior to the determination that a DRO is a QDRO? My client has learned from a participant that a marital dissoluation agreement has been entered in his divorce but not DRO has been submitted to the plan for determination. My client believes that it will be some time (if ever) before the divorce attorneys prepare a DRO, most likely because the parties to the divorce don't have the money to pay the attorneys to do this. My client wants to ensure that the alternate payee does not come back at a later time after a QDRO is approved and argue that her interest was impacted because of a delay in segregating her interest in the plan from that of her ex-husband. I have reviewed Section 414(p) and it only requires the plan administrator to segregate the interests "during any period in which ht iessue of whether a domestic lreations order is a qualified domestic relations order is being determined". In my case, there is no domestic relations order yet. Any assistance would be greatly appreciated.

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The plan really can't do much until it gets a DRO. The only possible exception has to do with freezing of investment/distribution options once the Plan Administrator is informed that a DRO may be forthcoming. However, that is a sticky subject. Basically, the Plan Administrator should be ok as long as the QDRO procedures are followed. If the Plan Administrator doesn't follow its own QDRO procedures, there may be some difficult times ahead. So, what do your QDRO procedures say?

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I agree that the QDRO Procedures should be followed. If the QDRO Procedures don't address the issue sufficiently (that's my bet), you should be aware that the Department of Labor's position is that the plan administrator should protect the would-be alternate payee's interest if the administrator is aware that a domestic relations order is coming. The statutes do not say that, although some legislative history supports the DOL. The DOL's position has some other problems, such as how does plan administrator know with enough confidence that a DRO is coming that a limitation on the participant's rights is warranted? And how long must the plan administrator hold it its position withou receipt of a DRO before having second thoughts?

Subject to what the QDRO Procedures say, consider the following:

1. The adminstrator should not decide unilaterally that it would just be a good idea to take some restrictive action. For example, I don't think that mere knowledge of a divorce is enough to project a receipt of a domestic relations order. Receipt of a divorce decree is another matter, because that is a domestic relations order.

2. What would the administrator "segregate"? The restrictive action, if any, should not go beyond limitations on distributions and loans. Restricting investment directions by the participant (if the participant has the right) is an invitation to disaster. See Schoomaker v. Employee Savings Plan of Amoco Corp., 987 F2d 410 (7th Cir. 1993).

As Mike Preston wrote, the situation is sticky. Legal advice would be a good idea. I am of the school that believes that nothing is done to compromise rights of a participant until receipt of a domestic relations order.

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If the plan is silent and you do something to protect the alternate payee before you get the DRO, then the participant can sue you claiming that there is nothing in the plan or the policies that allows you to restrict his account. See Schoonmaker v. Employee Savings Plan of Amoco Corp., 987 F.2d 410 (7th Cir. 1993).

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There is a difference between the PA knowing that a DRO has been issued and not segregating the account before it is served on the PA and the PA knowing only that a divorce has been issued but no dro has been prepared. Under 414(p) the PA cant take any action until a DRO has been prepared. The failure of the AP to prepare a DRO cannot be used as the basis for a claim against the Plan Admin since it is the responsibility of the AP to serve the plan with a DRO under 414(p) before the plan account can be segregated. The court opinion has more weight than the DOL position which has no presumption of legitimacy.

mjb

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