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QDRO vs. Restricted Benefit Payment to HCE


Guest merlin

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Guest merlin

The 100% owner of a business has reached age 65 and must pay his ex-wife the amount due from his defined benefit plan pursuant to a QDRO issued 5 years ago. The plan is underfunded,and if Mr. Owner were to want his benefit today he would be subject to the restriction of 1.401(a)(4)-5(b). Does the restriction carry through to the QDRO distribution as well? Or does the QDRO amount stand on it's own for purposes of determining if the restriction applies? Or does the restriction not apply at all?

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Two Questions:1. What does the QDRO provide regarding the spouse's right to commence benefits at the ee's retirement age? If the QDRO provides that the spouse has the right to commence benefits at 65 then the spouse's benefit can be enforced against the plan regardless of the IRS restrictions.

2. How is the pension interest divided? If the plan benefit was divided into separate interests (instead of a shared interest) then the spouse's interest should not be subject to the restrictions of the reg. because the employee has no interest in the ex's-pension rights.

mjb

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My understanding is that the restricted employee rules apply to an alternate payee of a restricted employee (including an alternate payee with a separate interest) and that a QDRO cannot grant an alternate payee a right not granted by the plan and so cannot avoid the restricted employee rules. See the following IRS Q&A from 2001 ASPA Annual Conference:

"14. Are payments under a QDRO 'on behalf of' a restricted employee for purposes of the limitations on distributions under 1.401(a)(4)-5(b)(3).

"Yes; you cannot get out of the restrictions by obtaining a QDRO."

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I am not sure where the IRS gets the authority to make such a statement if the spouse has a separate interest in the pension with the rights of a beneficary under ERISA. See Dol QDRO Answer Book Q 2-16. Second, If the plan accepted the QDRO authorizing the payment to the spouse at 65 the spouse has a legally enforceable right to commence the benefits under ERISA. It would be up to the plan admin to get the QDRO modified by petitioning the state divorce court.

mjb

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Gray Book 2003-25

What restrictions apply to the payment of benefits to an alternate payee under a QDRO where the participant is one of the "high-25" restricted HCEs and the payment of a current benefit does not escape the restriction using the 110% or 1% rules. In the specific case, the spouse has been awarded 70% of the participant's 12/31/01 accrued benefit and the spouse would like to choose the lump sum option.

RESPONSE

The high-25 restriction applies to the combination of the benefit paid to the participant and the spouse. Thus the limit must be used and, assuming the spouse is limited to 70% of what the participant could have received, a lump sum distribution cannot be made unless an arrangement for repayment is in place (see Rev. Rul. 92-76). The spouse can be paid up to 70% of the life annuity amount (plus SS supplement if there is one) without restriction.

Copyright © 2003, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest P A Weick

Given the problems here, would the plan administrator not be best advised to go to court for a declaratory judgment?

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Guest oxdoug

I have somewhat of a similar situation with a DC plan. The earliest distribution date is six years following termination of employment.

Can an alternate payee receive his/her distribution any earlier? And if no, when does their six year clock start?

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The plan document should indicate if distributions to an alternate payee under a QDRO can be paid earlier than the date the participant is entitled to his/her distribution.

The document should also address the timing issue of your other question.

...but then again, What Do I Know?

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Guest oxdoug

Our prototype PPD document has some conflicting language. In one paragraph is states that the plan permits distribution to an alternate payee at any time.

Then later on it says that nothing in this Section gives a participant a right to receive distribution at a time the Plan otherwise does not permit.

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