Expenses for pre-QDRO issues??

[chris]

Employer/sponsor of PSP was caught in the middle of dealing with former e/ee and ex-spouse of former e/ee where former e/ee directed plan to distribute $x of his balance to the ex-spouse as part of their divorce settlement. Former e/ee as well as ex-spouse was adamant that no decree was needed and failed to see the tax benefits of obtaining a decree or incorporating the PSP balance within the decree. Plan had to obtain counsel to communicate to former e/ee and ex's counsel regarding the tax issues involved and re obtaining a QDRO, etc..... E/er/sponsor now wants former e/ee and e/ee's ex to split the fees and expenses involved. I saw prior recent post re DOL Opinion re QDRO expenses w/r/t def. cont. plans... Would it be matter of allocating a portion of the expenses to his account and sucking it out of his account balance? Also, how would the ex-spouse be handled? Bill her for her portion and hope you can collect? Also...., how do you allocated among the three involved -- plan, former e/ee, ex-spouse....? Thanks for any help on this.

[david rigby]

No doubt you will get more thoughtful opinions here, but the sponsor may have some problem trying to "charge" these fees unless there are existing QDRO administrative procedures that address it. Also, your question touches on two techniques: charge the account vs. send invoice to the participant or alternate payee. If both techniques are "in play", then the sponsor will want some clear procedures about priority and enforceability.

[mbozek]

Maybe I am missing something but why was it necessary to pay counsel to write a letter to these bozos? The PA could have written a one page letter citing the non alienation provisons of the plan with the exception for QDROS and enclose a copy of the plan as the justification for requiring a QDRO. I once had a lawyer threaten to take me ct because I told him that a QDRO could not be used to divide up an IRA account because the custodian has no discretion to make decisions but only follows directions. He never followed up.

[chris]

From what I understand no one at the PA level knew enough about the Plan to write that letter. Thus, counsel was needed to handle it. Counsel ended up dealing with attorneys for the ex-spouse and the former employee b/c they had no clue about the QDRO process. Given that it was a plan expense the simplest thing to do would be for the PA to pay and then attempt to collect from the former e/ee and the ex-spouse.

[mbozek]

I think the plan would have to permit such a charge before it could be billed. Second, I am not sure it can be taken from the particpant's account if there was no disclosure of the charge in the SPD.

[Guest Kevin A. Wiggins]

Can I assume the former ee had a right to receive a distribution? If so, the former ee is correct that no QDRO is needed because he can take the distribution and then transfer the distribution to the wife (though a QDRO would clearly have tax advantages). The former ee would be taxed on the distribution. As far as whether the expenses can be allocated to the specific account, I doubt the plan provides for such an allocation as you propose and I'm not sure you can go back and amend it retroactively now.

I'm not sure if I have the facts correct, but if my assumptions are right, you may want to re-think this.

[chris]

The ex-spouse was also supposedly going to roll the distribution she received from former e/ee ex-spouse into her employer's plan. Both of the ex-spouses believed that there would be no tax owing to either one of them and that the distribution to the former e/ee who turns the amount over to the ex-spouse to roll into her plan scenario was getting them to the same place without all of the plan admin./legal hoops.

I would think there may be potential liability for the plan if it knows there's a current divorce action and the former e/ee calls up and says I want a distribution of $X.....

[mbozek]

This is why both parties need counsel in divorce. If they skimp on advice then the plan will incur unnecessary expenses in correcting their mistakes. (It is one good reason why plans should charge for QDROs.) Under the assignment of interest rule retirement benefits are taxed to the person who earns the benefits unless there is a statutory exception, e.g., QDRO. A Qdro permits the plan to transfer the retirement benefits to the ex-spouse which can be rolled over to the spouse's retirement plan. Alternatively, the employee can receive a distribution from the plan after reduction for income taxes, pay the balance of the distribution to the ex spouse and save on the cost of legal advice on the QDRO. But the ex-spouse cannot roll over amounts paid by the plan to the participant.

[Guest Kevin A. Wiggins]

I don't see how the spouse can roll it over without a QDRO. The plan should report it as a taxable distribution to the participant on a 1099-R.