Domestic Relations Orders

[Guest benefitsanalyst]

In a non-qualified deferred compensation plan, can the cost of legal review and establishing an account for an Alternate Payee in a domestic relations order be passed along to the employee/alternate payee? How about ongoing administration costs that are typcially payed for by the employer - i.e the company pays $300 a year for each account in the plan.

[Mike Preston]

In a non-qualified plan you can do just about anything you want to do, as long as it isn't inconsistent with the plan, of course.

[GBurns]

Isn't there an Agreement with the employee or a Plan Document that spells out what can and cannot be done?

[Guest benefitsanalyst]

There is nothing in the Plan Document about domestic relations orders at all.

[Mike Preston]

There is usually a good reason for that. DRO's rarely influence non-qualfied plans. Why? Because there is no IRC Section 414(p) to enable taxation to the alternate payee. If a non-qualified plan were to segregate a benefit on behalf of a spouse, the benefit would still be taxable to the participant. Hence, most non-qualified plans "dont' even go there."

If the employee is supposed to turn something over to the spouse, they can do so from their benefits. The plan doesn't have to be the one paying the spouse. And usually, it won't.

[Everett Moreland]

Revenue Ruling 2002-22 taxes the alternate payee

[Mike Preston]

Ah, yes. Good citation. However, I'm not sure its applicability is universal. It includes the following:

"This ruling also does not apply to transfers of nonstatutory stock options, unfunded deferred compensation rights, or other future income rights to the extent such options or rights are unvested at the time of transfer or to the extent that the transferor's rights to such income are subject to substantial contingencies at the time of the transfer. "

I'm not sure whether the "substantial contingencies" referenced above is the same as the "substantial risk of forfeiture" provision which precludes immediate taxation to the participant in the non-qualified plan.

Because of the uncertainty, I have heard that non-qualified plans are reluctant to incorporate the equivalent of QDRO procedures.

[GBurns]

I read the original post to be re "the cost of legal review and establishing an account" and "ongoing administration costs " rather than the eventual distribution etc.

Even if "most non-qualified plans "dont' even go there."" there is still the issue of the costs to make that decision. Who pays?

[david rigby]

Good comments all.

A possible answer to the original question is found Mike's first comment. For example, the employer could make an administrative decision regarding "who pays" as long as that practice does not conflict with the plan.

[mbozek]

Whether or not the plan has a QDRO language, there is precedent in applying a QDRO to enforce benefit rights in a Top Hat Plan. See Bass v. Mid-America, 1995 U.S. dist. LEXIS 15719. Since a Non qual def. comp plan is a contract between the employer and employee, the plan could charge for costs of legal review and setting up an account provided such costs arre reasonable. (E.g., the plan could charge the employee's account for annual admin costs in a non divorce situation.)