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Does AP only get 50% of vested portion of acct or does Adm only use vested funds to satisfy QDRO award of 50% of account?


Guest Callan

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Guest Callan

We received a QDRO that says Alt Payee gets 50% of a participant's plan account balance as of 12/31/03. Participant's total account balance as of 12/31/03 was 10,000, including $5,000 of vested 401(k) deferrals and $5,000 of a 50% vested match, so that his vested balance is $7,500.

Do we give the Alt Payee $5,000 and pull it from the participant's vested amounts (the $7500 vested pool) or do we give her $3,750 (50% of his vested balance)?

I know the Alt Payee's amounts must be 100% vested and I know we can't give her more than he had by giving her any of his unvested amounts and just vesting them.

If we give the Alt Payee $5,000 (50% of total account, vested and unvested), where do we pull it from? All from his 401(k) deferrals or do we pull a portion from his vested match?

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I can't interpret the QDRO provisions, but it would seem you could carry the scenario too far. For example, what if the participant was only 20% vested in a total benefit of $10,000. The QDRO says the alternate payee gets 50% of a participant's plan account balance. Can you pay the AP $5,000? What if the particpant terminated before becoming entitled to over $5,000?

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

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Was does "get" mean, at least in the terms of the QDRO? That is, does it specify (and plan permit) immediate payment? Or is it merely requiring the segregation of the account? One possible result is that the QDRO is not specific enough for the PA to interpret it.

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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I agree with QDROphile. There should be nothing in a QDRO left to your interpretation (keep in mind that your interpretretation will affect someone positively and the other party negatively, so you are doomed to tick off someone.) Let the plan administrator make that determination or have it sent back to the attorneys for clarification.

/JPQ

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Guest Callan

Thanks for all the responses. We decided to kick it back for lack of clarity to avoid exercise of our discretion. We are also going to add to our QDRO procedures that if a participant is less than 100% vested, we are going to kick back QDROs to make them specify vested balance. Thanks for all yor responses! Callan

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I had one Plan Administrator who reasoned that since the QDRO gave the Alternate Payee investment gain/loss from the date of the split to the date of segregation of assets, the calculation for the Alternate Payee's share would also take into account any additional Participant vesting up to the date of segregation. A creative concept.

[Thankfully, some QDROs specifically spell out how to handle the vesting issue]

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Harwood and QDROphile,

I would be interested in your opinions on some of the preferred or best-practices methods for handling such vesting issues in QDRO procedures. Do you find there are particular approaches that work best from a longer-term adminstrative perspective?

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Personally, I don't like to dictate vesting in a QDRO Procedure. However, the issue should be dealt with in every QDRO where the Participant is not 100% vested.

Three options for when vesting is calculated:

1. The date of separation/divorce.

2. The date the assets are actually segregated and/or the date Alternate Payee takes a distribution.

3. [rarely seen but useful]: Vesting is not calculated until the Participant becomes 100% vested or has terminated employment.

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My preference is for a default that gives each the same vesting percentage determined as of the date the AP's interest is defined. Wouldn't that provide the same result as determination as of the date of actual segregation? The order can provide that the AP's award is 100% vested, assuming enough vested dollars to cover. I hedge on whether the order can provide for disproportionate vesting. I can imagine allowing it under some conditions and circumstances and not others, depending on distribution provisions, among other things. The awards are seldom so exotic, so one can probably duck the issue and resort to section 414(p)(3)(A) in a pinch..

The procedures should deal with distributions, when they are allowed if the account is partially vested, and what happens to the unvested amount. The procedures have to fit with plan terms. For example, if the plan allows lump sum distributions only, I would not allow the AP to take a distribution of the vested portion and then get another distribution later when the remainder becomes vested.

I agree that the procedures should not dictate vesting, but reasonable default terms can save time and trouble when dealing with thoughtless persons. The default and other terms have to fit the plan and the administrative goals and philosophies of the plan. It is difficult to state definitive "best practices" because the plan designs and administrative goals and philosophies vary.

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