Domestic Relations Orders - Property Settlement Agreement

[Guest Karen, PA]

My company recently acquired another company and assumed the pension administration for the acquired company. The files were transferred to us and we have found many problems:

1. Copy of property settlement agreement in the file which awards an interest in the DB pension plan to the non-employee ex-spouse. The one I found this morning is from a dissolution in 1994. EE claims to have no knowledge of ex-spouse's address. Attorney who handled divorce advised me "I will not draft a DRO". Participant applied for benefit for 9/1/04 commencement.

What do you think we should do? Should we put ourselves in the position of hunting for the ex-spouse/attorney? If we segregate an amount for the ex-spouse for 18-months, then pay it to the employee, have we fulfilled our obligation?

2. Many DROs with defects not corrected. AP is missing in action, attorneys who won't reopen files.

Same questions as above.

[QDROphile]

1. If the property settlement document is a domestic relations order, the plan had an obligation to acknowledge receipt and determine qualification within a reasonable time. If it did not, the plan is probably on the hook for the consequences of failure of timely response (disappearance of the would-be alternate poayee) and probably has the duty to find the AP.

Because of this complication, the time frame for dealing with the situation is not as simple as literal compliance with the 18 month rule (and be careful, there is a lot of confusion about how that rule works). The AP must be given a reasonable time to cure qualification defects. Because of the passage of time, "reasonable" may be quite a while.

If the property settlement agreement is not a domestic relations order, the outcome depends on the plan's procedures for dealing with notice of potential interest of a former spouse. It would be nice if the written QDRO procedures said that receipt of anything but a domestic relations order has no effect. The plan would still be at odds with the DOL, but the DOL is at odds with the law. However, I assume that plan had inadequate procedures for the situation, so you are left with uncertainty about the effect of receipt of the property settlement.

In either event, the plan ought to engage competent legal counsel for this one if it does not want to pay both the participant and former spouse.

2. If the plan timely followed it notice and determination obligations, the plan does not have to worry about AWOL alternate payees. If the qualification defect is not cured within a reasonable period, the order is disqualified and the alternate payee has no interest. If the alternate payee gets religion after the distribution, the common law rule of "tough" applies. The AP will have to be consoled with a malpractice action aginst the lawyer. However, if the plan did not have exemplary response behavior, see number 1. Get competent legal counsel anyway.

[Guest Karen, PA]

Thanks for your input!

We, the acquiring company have written procedures. You guessed it right, we have a rule in our procedures that receipt of anything other than a DRO has no effect. But we are just finding how 'willy nilly' the acquired company processed DROs.

It appears that our only recourse when we stumble upon these is to send certified letters to the participant employee, ex-spouse, attorneys and give them a timeframe to cure defects, draft and submit an Order or advise that a DRO will not be forthcoming (up to 90 days since we can verify that contact was made).

If we can't find the non-employee spouse/attorney, we'll use our locator service to find them, if we have enough information to conduct the search. We'll also put pressure on the participant to make an effort to help resolve the issue as well.

It has been recommended that we not pay the participant anything while we go through this process, but I'm having a hard time with this as it's placing a hardship on these hourly workers. I'd like to pay the participant the benefit offset by the share granted to the ex-spouse in the marital property settlement agreement at 90 days.

Any thoughts on the above?

[QDROphile]

As a general matter, your approach looks reasonable, but different circumstances may require different reactions. If it fits, section 414(p)(7) says you can pay the participant amounts that would not be paid to the alternate payee if the order were qualfied.

[Guest Kevin A. Wiggins]

There is a lot more to this than meets the eye. If the prior plan's QDROs were mismanaged, there is a possibility the prior plan was disqualified as a result of the mismanagement. If you accept a transfer of assets and liabilities into your plan, that could taint your plan. You also have an ERISA fiduciary somewhere making a fiduciary decision to accept assets that could be tainted into your trust. You may wind up having to look at the stock or asset purchase agreement to see what kind of reps and remedies you have on benefits issues. I recommned you speak with ERISA counsel on this one.