Distribution to Atty-in-Fact During Divorce

[chris]

Profit sharing plan participant is in poor health. Plan participant was involved in lengthy divorce proceedings prior to health issue. Participant's atty-in-fact is afraid that hospital will attach plan benefits. In that regard, atty-in-fact and participant spouse (soon to be ex) have agreed to move $x out of the plan and into participant spouse's name to shield $x for the spouse and kids. Talk about issues...

From the plan administrator perspective, a QDRO would be helpful, but according to all involved there's no time to go that route. It appears that the PSP balance would be exempt from creditors. Thus the plan administrator's first option would be to just wait for a QDRO to be presented. The atty-in-fact and the ex-spouse to be offered the following.... Have the ex-spouse to be sign off on the appropriate waivers/consents, etc. Then the plan could distribute the $x to the atty-in-fact FBO the participant and let the atty-in-fact in turn transfer $x to the ex-spouse to be.

Clearly going the QDRO route would avoid the front-end tax to the participant on the initial distribution as well as provide maximum protection to the plan administrator. The drawbacks of the proposed scenario appear to be: 1) tax to the plan participant upon distribution 2) limited protection to the plan administrator re making the distribution (although the to be ex-spouse would have signed off on it) 3) turning assets exempt from creditors into assets available to creditors.

Anyone see anything else? Thanks for any suggestions...

[Guest b2kates]

I do not understand the concern about attaching benefits. A creditor may not attach benefits prior to distribuition. Still time to obtain a QDRO prior to any distributions.

State law issue: I would be concerned that the hospital, absent the QDRO might try to argue a fraudulent transfer and overturn the payment by the participant to the ex-spouse.

[chris]

Agree on both counts. Atty-in-fact believed that distribution to him FBO participant, then transferred to ex-spouse to be and then into ex- spouse to be's employer's PSP would be a rollover. After some choice words about attys in general I believe he finally understood that a QDRO was in everyone's best interests.

[david rigby]

Asuming I understand the original post correctly, the plan participant is still an employee, so there has not yet been a distributable event?

If there were "lengthy divorce proceedings" is the plan administrator already on notice of a pending QDRO?

Pardon my ignorance, but since there is no way for hospital to attach plan benefits, how is moving $X to the ex-spouse going to protect $X any better?

[chris]

He's a former employee. As far as I know, other than this initial contact the plan administrator had no knowledge of divorce action. Agreed as to your third point. Now that the administrator is aware of the divorce action attys for both participant and spouse will be notified that the plan will only make a distribution to someone other than the participant pursuant to a QDRO. Also, participant's account would be held until qdro received or until participant's atty certifies that no qdro will be obtained and that the psp acct balance will remain the participant's sole property by providing a copy of a signed property settlement agreement....

[Kirk Maldonado]

Chris:

I don't understand why you or anybody else has to do anything. No creditor can attach the benefits under a qualified plan, so why take any effort? Anything that can be done will only hurt those people, not help them.

[chris]

Kirk:

I agree as to the creditor protection issue. From the plan perspective, letting all parties know that a distribution will only take place pursuant to a qdro takes the heat off of the plan administrator as the atty-in-fact had been calling left and right re getting something transferred. A distribution to the ex-spouse-to-be pursuant to a qdro (if one is ever obtained) would allow her to roll it over into her employer's plan and name kids as ben's. Going that route would not seem to jeopardize the exempt status of the rolled funds.