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Model DRO Input - Take 2.


Guest Kevin Wiggins

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Guest Kevin Wiggins

Here is some model langauage I have drafted to award benefits, allocate, and take vesting into account. Assume all terms are properly defined. Also assume that all other matters, e.g., time and form of distribution, are dealt with elsewhere. Much of this language may be taken from other QDROs I have seen or from other books and articles, but much of it I know is my own. If you recognize your work and I don't give you credit, I apologize. I am not able to differ between what are my own creations and what is something I've read from someone else.

"Award of Benefits.

Alternate Payee is awarded as her sole and separate property, and shall be entitled to receive directly from the Plan, fifty percent (50%) of Participant’s benefits under the Plan determined as of the Valuation Date, adjusted for all gains, earnings, dividends, interest, losses, and other similar investment returns and losses attributable to such amount from the Valuation Date to the date of distribution to Alternate Payee. Participant’s benefits under the Plan for purposes of this Paragraph shall include all of Participant’s benefits under the Plan as of the Valuation Date, whether vested or unvested, including any amounts allocated to Participant after the Valuation Date that are attributable to Participant’s services on or prior to the Valuation Date, [and shall further include] [but shall not include], if applicable, the principal outstanding balance, measured as of the Valuation Date, on any loans to Participant from the Plan. The Participant shall be obligated to repay any loans from the Plan that are outstanding as of the Valuation Date.

Allocation; Vesting.

The amounts awarded to Alternate Payee hereunder shall be taken pro rata from all of Participant’s accounts or subaccounts in the Plan as of the Valuation Date. The Plan shall establish separate accounts or subaccounts for Alternate Payee’s benefits awarded hereunder in accordance with the Plan’s normal procedures. In the event Participant is not fully vested as of the Valuation Date, the amounts awarded to Alternate Payee above shall be taken pro rata by account balances from Participant’s vested and unvested benefits. Alternate Payee shall be, and shall become, vested in each account or subaccount to the same extent Participant is or becomes vested in his corresponding accounts or subaccounts. All distributions to Alternate Payee shall first be taken from the portion of Alternate Payee’s vested benefits to permit Alternate Payee to continue to vest as Participant receives vesting credit under the Plan. Alternate Payee shall forfeit her benefits at the time, and to the same extent, that Participant forfeits his benefits."

I'm guessing most of you won't like it. I'm guessing most will want AP to take a lump sum and if she is not vested then she forfeits and the forfeiture reverts to the Participant.

Any thoughts?

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I would advise a plan administrator to refuse to accept the following language: "including any amounts allocated to Participant after the Valuation Date that are attributable to Participant’s services on or prior to the Valuation Date." Despite its fair and logical intent, that language is unreasonably burdensome, probably ambiguous, and perhaps impossible to implement within the time required under other terms of the order. I think refusal is justified under section 414(p) (3)(A). An alternate payee who wants some benefits that have not been credited as of the valuation date will have to determine or estimate the amount with greater specificity, such as by dollar amount.

With respect to the vesting language, you have to be careful about distributions. For example, if the plan only offers a lump sum distribution, the alternate payee might not be able to take a vested amount and come back later to get the amounts that vest subsequently. The plan should have worked how it will deal with these details, e.g. no distribution to an AP who is not fully vested until the participant is eligible for a distribution.

If the AP is agressive, the AP can try to get the 50% out of the vested portion.

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You are right, Kevin, there are parts I don't like. But before 4/15 I'm not likely to "have at it".

But I will say this to QDROphile, I have no problem with the language that allocates additional funds to participants after the DRO date but on behalf of services performed before the DRO date. This is common in the context of a DC plan that has a single annual contribution and that contribution has not yet been made. It isn't in the plan as of the DRO date, but it will be there "soon". and the Plan has very little trouble recognizing the amount, once it is contributed.

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Guest Kevin Wiggins

"including any amounts allocated to Participant after the Valuation Date that are attributable to Participant’s services on or prior to the Valuation Date."

It is quite common for profit sharing contributions, matching contributions, and forfeiture allocations to be made retroactively. How would you draft to allow the PA to reach those? FYI, I have never had a PA reject that language.

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If a participant's account (or subaccount) is invested in several different investment funds, do you want to provide that the money will be withdrawn on a pro-rata basis from each such investment?

What if the some of the assets consist of unregistered employer stock that hasn't been held for the requisite period under SEC Rule 144? How would you deal with that situation?

Kirk Maldonado

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Guest Kevin Wiggins

At some point it becomes ridiculous. How do plans handle that now with QDROs that don't have that detail?

QDROphile:

Would you accept this (see language in quotes)

Participant’s benefits under the Plan for purposes of this Paragraph shall include all of Participant’s benefits under the Plan as of the Valuation Date, "including any amounts contributed to the Plan after the Valuation Date that are allocated to Participant’s accounts as of a date that is on or prior to the Valuation Date"?

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Guest Kevin Wiggins

Kirk:

What about this?

The amounts awarded to Alternate Payee hereunder shall be taken pro rata from all of Participant’s accounts or subaccounts in the Plan as of the Valuation Date and pro rata from such investments within such accounts or subaccounts as of the Valuation Date that, in the discretion of the Plan Administrator, would be legally permissible for, and reasonably susceptible to, liquidation or a transfer.

I can't even get people to give me the plan name. There is no way I'm going to get a list of their different investments and which ones they want to transfer or liqudate.

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I don't object to the revised language, but I would hope you don't need it. Anything that is allocated to the account as of a date before the Valuation Date will show up on the valuation date if the terms "allocated as of" and "valuation date" mean what I think they should mean.

Mike Preston:

A domestic relations order comes in March 2004 to a discretionary profit sharing plan. The contribution is determined and delivered to the trust August 1, 2005. What do you tell the plan administrator in March 2004? What do you tell the plan administrator in September 2005? When can the AP take a distribution? More than one? How much? Do you prorate and how? Do you take into account a 1000 hour of service or year end employment requirement? Remember that the order does not give you any instructions on these subjects. You are inventing fiduciary answers, so they had better be good. And make sure that the parties got what they "intended."

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I am a little confused about what is be allocated by the DRO. Are we talking about allocations of contributions that have not been made to a plan? Under state laws where I practice only property owned by the parties as of the date the divorce is filed is subject to division in divorce. Property acquired by either party after that date is not subject to division in divorce. A DRO can only divide property that is subject to a state domestic relations law. The PA can only distribute property that is held in the plan for a participant. If an allocation of a contribution to be made at a future date is subject to a DRO then the AP will have to wait until the contribution is made to the plan to receive a distribution.

mjb

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Guest Kevin Wiggins

We're talking about the allocation of contributions to the participant's account.

It is quite common for participants who terminate near the end of the year to receive two distributions. The first is the account balance at the end of the year and the second is for contributions made to the plan after the end of the year but allocated to the plan effective as of the end of the year. This happens quite often. I don't think it should be any different for alternate payees.

As for the division of community property, the amount allocated to the participant's account is for services rendered prior to the date of divorce (which is what Valuation Date generally means), even though the contribution is made after the date of divorce, i.e., after the valuation date. That is why my original language used the term "services," but QDROphile didn't like that and I can see why. I thought the revised language would address his concerns.

Here is another question. I just had a PA reject a QDRO because it awards the AP a flat amount without adjustment (actually, it says the AP gets the lesser of the flat amount or 100% participant's vested benefits on the date of distribution).

Would you all reject that?

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Kevin:

I think your language about pro-rata withdrawals from all investments is fine.

What would be the ground on which you would deny the DRO that provided for a payment equal to the lesser of a fixed dollar amount or 100% of the participant's vested account balance at the time of distribution?

Kirk Maldonado

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I don't object to the revised language, but I would hope you don't need it. Anything that is allocated to the account as of a date before the Valuation Date will show up on the valuation date if the terms "allocated as of" and "valuation date" mean what I think they should mean.

Mike Preston:

A domestic relations order comes in March 2004 to a discretionary profit sharing plan. The contribution is determined and delivered to the trust August 1, 2005. What do you tell the plan administrator in March 2004? What do you tell the plan administrator in September 2005? When can the AP take a distribution? More than one? How much? Do you prorate and how? Do you take into account a 1000 hour of service or year end employment requirement? Remember that the order does not give you any instructions on these subjects. You are inventing fiduciary answers, so they had better be good. And make sure that the parties got what they "intended."

I think it is better to be clear about the valuation date thing. So any contributions on account of service before a specific date that fall within the boundaries of the calculation should be identified.

As far as a DRO coming in during March, 2004, I generally treat the AP as the P would be treated in the same circumstances, given that the AP's account is a portion of the P's. In plans that have annual discretionary contributions if the P would get 2 distributions, so will the AP. If the P wouldn't, neither would the AP. If the P can take multiple distributions, so can the AP (unless the DRO scales back the AP's alternatives). I think that should take care of the fiduciary concerns.

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Kevin:

You wrote, "Here is another question. I just had a PA reject a QDRO because it awards the AP a flat amount without adjustment (actually, it says the AP gets the lesser of the flat amount or 100% participant's vested benefits on the date of distribution)."

This could be a problem with the record keeper, for example, Fidelity. As crazy as it seems, the Fidelity system cannot pay a fixed amount without adjustment. I think this is illegal, but who is the 900 pound Gorilla?

Fidelity creates an account for the AP when instructed, but the AP can't get a distribution until after the account is set up and the AP gets a PIN and all the rest. Meanwhile, the account has to be invested. Therefore, the AP's amount has to get investment earnings (and perhaps losses, but in this situation the plan administrator has to provide for investment in the money market fund). Will Fidelity solve the problem by not investing the amount? No (Does this make Fidelity a fiduciary? Yes, but they don't believe it). How about sweeping the earnings and returning them to the the participant's account? No. How about not creating the account for the AP until the instant before the distribution? No.

My solution to the problem is to have the QDRO procedures say that the order won't be disqualified, but that the AP's account will be invested in the money market fund and the AP will get earnings despite the terms of the order. Too bad for the AP. The procedures also say the the AP has to get out as soon as practicable and will be forced out. Is this all legal? Not quite, but it is usually unobjectionable to the parties.

If the AP balks at getting out quickly (why?), the administrator can delay setting up the account and force the AP to communicate initially about desire for distribtuion with the adminstrator rather than Fidelity. The administrator will then instruct Fidelity to set up the account. That will minimize the earnings, but not eliminate them. Your language about the "lesser" is critical to make this approach work. This is extra work for the administrator and I would consider imposing charges for it.

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Guest FormsRmylife

When I have been asked to review a QDRO draft that did not award investment income to the AP, I have asked that the order either award investment return from some date or state affirmatively that there is to be no investment adjustment (gain or loss).

Sometimes orders sit a while; I handled one that had sat for 4 years due to a change in TPA. The order said investment return from date award was partitioned. Four years later we were going to partition. Did the parties intend investment return from a date shortly after the judge signed the order? Probably, but that was not going to be the effect.

I do not want the plan in the middle of a fight as to the intention of the parties. This is a particularly sensitive issue with ESOPs.

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