Payout prior to receipt of QDRO.

[Guest jmlumpkin]

I have an alternate payee who provided an executed QDRO with instruction to pay out approximately $2,000. The Order was executed and dated for April, 2004, but delivered to our office during April, 2005. This was the first notification of a potential QDRO we received.

However, during January, 2005, the participant requested a hardship distribution representing virtually his entire balance (only earnings remain).

The end result is a QDRO requesting distribution of an amount greater then the participant's account balance.

Pursuant to the terms of the Plan QDRO Procedure, this disqulaifies the Order from being Qualified.

Does the alternate payee have any recourse in this instance? And to what extent can the employer be held repsonsible for approving a hardship even though they were never informed of the potential Order?

[QDROphile]

The plan has nothing to worry about if it has proper written QDRO procedures and the procedures were followed. The employer has nothing to do with anything unless its advisors are so incompetent that the employer is the plan administrator or other active fiduciary with responsibility for the matter. Evidently that is the case if the employer approved the hardship distribution. Shame.

"Proper written QDRO procedures" assumes more than most plans have.

The Department of Labor takes the position that the plan administrator or the employer should have taken precautionary action relative to the distribution if it knew or had reason to believe that a domestic relations order was coming. The DOL's position is contrary to law if the plan has proper QDRO procedures, and is probably contrary to law in any event. To illustrate how impractical the DOL position is, would knowledge of the divorce, by itself, be reason to believe an order is coming? How long does one have to believe in a theoretical possibility before the belief can be abandoned?

[E as in ERISA]

Well courts of law and legislative history also agree with the premise that distributions should be put on hold once an order has been received -- and or possibly even if one is coming in.

See subsection III.D. of http://www.benefitslink.com/articles/qdro.txt

[QDROphile]

Receipt of an order requires attention and action with respect to distributions thereafter. The statute says that, so you don't need to resort to legislative history for support, and consistent court decisions are no surprise.

Other than Schoonmaker v. Employees Savings Plan of Amoco Corp., 987 F2d 410 (7th Cir. 1993), what court decisions speak to the issue of orders "coming in"?

The legislative history quoted in the article says that the administrator "may" act on an anticipated order, not that the administrator must. The Schoonmaker decision makes it risky for a plan administrator to take elective action, especially if the QDRO procedures simply parrot the statute. If a plan adminstrator wants to go out on a limb in anticipation of receipt of an order, the QDRO procedures had better have provisions that permit it and set standards. The article does not say that a plan administrator is responsible for taking extraordinary action in anticipation of receipt of an order, and cautions about Schoonmaker.

I am not aware of any solid authority that says a plan administrator has to take into account foreshadowing of possible future receipt of a domestic relations order unless the plan terms or the written QDRO procedures provide otherwise, and some do. Schoonmaker is solid authority that says the plan administrator has no duty before receipt of an order, absent a formal written policy to do otherwise.

[Guest Pensions in Paradise]

QDROphile - you stated "The employer has nothing to do with anything unless its advisors are so incompetent that the employer is the plan administrator or other active fiduciary with responsibility for the matter."

So exactly who do you recommend be appointed as plan administrator?

[QDROphile]

A committee of persons who are capable of understanding and doing the job. A typical configuration is the head of HR, the CFO and another person to have an odd number.

[mbozek]

JM: Who is "we" you referred to? Is it the TPA, plan administrator, HR? I dont know what the liability is for the plan if the AP's lawyer failed to notify the plan or delayed sending the QDRO. The APwould have recourse against the employee if the divorce decree restricted removal of the plan assets or awarded the assets to the AP pending issue of the QDRO.

[Kirk Maldonado]

While I am in general agreement with QDROphile, I would take a bit more conservative position than him on two issues; one of which I'll discuss in this post and the other one I'll discuss in a subsequent post.

Specifically, I think that if the plan administrator wants to hold back the benefit payments pending receipt of the anticipated QDRO, I think that enabling language needs to be in the plan document. That is because of the position that the IRS takes that a plan has to be operated in accordance with its terms. (There is also a similar requirement in ERISA.)

It may be that if the QDRO procedures authorize a hold, that would suffice even if there was no enabling language in the plan document; I've never researched that issue. To avoid that issue, I've always taken the conservative (and pragmatic) approach of making sure that the plan contains language authorizing holdbacks.

Does anybody know of any authority stating whether or not you can satisfy the qualification requirements by reference to an external document in this or some other analogous situation?

[GBurns]

So that still leaves unanswered, the question of what can/should this alternate payee now do as recourse?

I would think that the only recourse is to have an attorney pursue this as possibly a fraudulent transfer by the participant. The participant must have know of the QDRO.

Is a writ of replevin to the participant, by the Court, a posibility in this case?

[Kirk Maldonado]

I think that QDROphile's is right that the fiduciaries of the plan should not incur any liability for failing to put a hold on the participant's account as soon as they became aware of facts indicating that a QDRO may be forthcoming soon with respect to the participant’s soon to be ex-spouse (“Alternate Payee”).

Nevertheless, I reach a different conclusion as to whether or not the fiduciaries should impose such a hold. Specifically, I believe that they should impose one.

The reason for that is, even though the fiduciaries should ultimately prevail if they get sued (for paying out the entire account balance to the participant after learning that a QDRO may be forthcoming), my goal is to keep my clients from getting sued in the first place. My clients find it very distasteful to get sued on employee benefit plan matters, particularly where they don’t care how the issue is resolved (in this case, whether the money ultimately goes to the participant or to the Alternate Payee).

Here are two examples that illustrate this point. I will admit that the facts in the second case are unusual, but they still represent a real possibility where there is bitter animosity between the spouses.

Hold Imposed. Assume the fiduciaries placed a hold on the participant's account after learning that the participant was getting divorced but before a QDRO was received and the participant later brought suit against the fiduciaries for delaying the payment of his or her benefit. What would the amount of damages that the participant suffered as a result of this allegedly improper hold? In almost all cases, there would be no damages. What is the likelihood of the fiduciaries getting sued in this scenario? Pretty unlikely, unless the participant had a lot of money and was willing to burn a bunch of it paying attorney’s fees for bringing a lawsuit that would probably be unsuccessful.

Hold Not Imposed. Assume that the fiduciaries did not place a hold on the account, rather they paid out the entire account balance to the participant after hearing that the participant was getting divorced. As a result of that distribution, there was nothing left in the participant's account in the plan to satisfy the QDRO when it was ultimately issued. Assume further that it is not feasible for the Alternate Payee to recover that amount from the participant (e.g., because the participant has already spent the money, moved away, there are no other assets in the marital estate, or for some other reason).

In this case, the Alternate Payee has been damaged in the amount that would have otherwise been paid to him or her pursuant to the QDRO. What’s the likelihood of the fiduciaries getting sued in this scenario? I’d say pretty likely.

If the attorney for the Alternate Payee is savvy, he or she should realize that there is a possibility of getting sued for malpractice for not getting the QDRO issued sooner and/or for not giving formal notice to the plan that a QDRO will be forthcoming.

To avoid that lawsuit, the attorney may approach the Alternate Payee and propose suing the fiduciaries for paying out the full account balance to the participant. That way, if enough money is recovered from the fiduciaries to fund the QDRO, then the attorney no longer has to worry about being sued for malpractice.

In fact, that attorney may not even charge the alternate payee for bringing that lawsuit, because he or she realizes that the lawsuit would not have been necessary if he or she had gotten the QDRO has issued sooner or if he or she had given formal notice to the plan that the Alternate Payee was seeking a QDRO.

In this case, the Alternate Payee has nothing to lose by allowing the divorce attorney to bring that lawsuit against the plan, because the Alternate Payee can always sue the attorney for malpractice later if the lawsuit against the fiduciaries is unsuccessful.

Practical Problems Relating to Holds. But implementing a hold in this situation does give rise to the two practical problems that QDROphile mentioned, which are:

How much information do the fiduciaries need before they should impose a hold? I think that a hold generally shouldn't be imposed unless and until a divorce action is filed. On the other hand, imposing a hold would be prudent if (i) the spouses are separated and (ii) the participant requests a distribution.

How long should the hold be imposed if the plan doesn't receive the QDRO?

A cheap and pragmatic way would be to give written notice to the participant and to the Alternate Payee that the hold will be lifted in 30 days (or whatever period seems appropriate taking into account the time needed to get a QDRO issued in the local domestic relations courts) if the plan does not receive a QDRO by then. This gives a strong incentive to the attorney for the Alternate Payee to get the QDRO issued before that deadline.

Perhaps the best approach is for the fiduciaries to issue that written notice to the spouses as soon as it places a hold on the account, to minimize the time period during which this hold is in place (should no QDRO ever be issued).

A more expensive approach would be to file an interpleader action. (For those of you who are not attorneys, that is a type of lawsuit that is filed by a party who is holding funds that are claimed by two or more other parties (in this case the participant and the Alternate Payee). The party filing the lawsuit (in this case the plan) deposits those funds to the court and essentially walks away, saying that it has no interest in the funds and asking the court to decide which one of the competing parties (in this case the spouses) should get the money.)

As a practical matter, filing an interpleader action will prevent the fiduciaries from having any liability relating to this matter. But the costs of filing the interpleader action would make this strategy too expensive to consider in most cases, unless the client is well-funded and very risk-adverse. Because filing an interpleader action will probably result in both spouses to have to be represented by counsel in the matter, it should not be done if the result as to which person should receive the funds is fairly clear.

[Belgarath]

"A committee of persons who are capable of understanding and doing the job. A typical configuration is the head of HR, the CFO and another person to have an odd number."

I fully agree with this approach for larger employers, and I assume this is what you are talking about.

What would be your recommendation for a small employer - say 15 employees or less? These functions are generally all rolled into one person - the sole owner - or the 2 or 3 owners/partners in most such businesses. I think over the years I've seen maybe 4 plans in this size range where there has been an independent Plan Administrator appointed.

[QDROphile]

I have no quarrel with Kirk Maldonado's approach or the reasons for it, and I have set up QDRO procedures along those lines for various clients. However, if a plan takes this approach it needs detailed QDRO procedures to set the standards, and timely and thoughtful attention to those details in execution. Both of those elements are missing from most plans. I offer one more thought in support of the more active approach. The plan does not need receive an order that looks like it could be a QDRO in order to push over into the clear light of the statute. It only needs a domestic relations order. Then it can sit back and take a reasonable time to determine qualification while complying with the statutory requirements for protection, keeping in mind that an alternate payee is given a reasonable time to cure defects. It should be easy to inspire or threaten the alternate payee to come up with some sort of domestic relations order that meets the minimal standard.

Belgarth: I think small employers need to hire $50,000+ per year instituitional fiduciaries to administer their plans. ;-) While there is less reason to have a separate plan administrator when the economic interests of the employer and all the owners/officers are essentially identical, it is still a good mental discipline to have a formal separation to remind the persons involved that they are dealing with separate functions that are subject to different standards and that the interests of the employer can be different than the interests of the plan. It is helpful to have people remember to take the company hat off when dealing with plan administration. It can also be helpful when jousting with the DOL.

[Belgarath]

Amen to that!

And I try to avoid jousting with the DOL - their lances are keener, their armor is stronger, and their horses are heavier. Their eyesight is poorer, due to an optical ailment which I shall not name, but that's another issue altogether.

[Kirk Maldonado]

Belgarath: Is that truly an optical ailment that you are referring to, or the inability to see because the cranium is situated in an interior location? I'm just looking (pun intended) for clarification.

QDROPhile: Your point is well-taken about the need for detailed procedures to deal with this situation. But my guess is that few plan participants would be willing to pay the legal fees associated with challenging the plan's actions because the chance of prevailing is minuscule. While I'm not advocating failing to prepare those procedures, I believe that it is unlikely that the participant would be willing to incur the legal fees to even get to the stage of asking whether or not the plan has adopted the requisite procedures.

I think that the following statement you made is something that benefits professionals, particularly those advising small business, should heed:

While there is less reason to have a separate plan administrator when the economic interests of the employer and all the owners/officers are essentially identical, it is still a good mental discipline to have a formal separation to remind the persons involved that they are dealing with separate functions that are subject to different standards and that the interests of the employer can be different than the interests of the plan. It is helpful to have people remember to take the company hat off when dealing with plan administration. It can also be helpful when jousting with the DOL.

Perhaps the best example of a situation that confirms the wisdom of that quotation is Stephen Allen Lynn, P.C. Employee Profit Sharing Plan and Trust v. Lynn, 25 F.3d 280 (5th Cir. 1994), where the employer/administrator was extraordinarily vindictive towards his ex-spouse that was seeking to enforce a QDRO against the plan. I thought that the employer's conduct was particularly reprehensible.

I was personally involved in a situation like that, in which I represented the non-employee spouse. It was the ugliest fight imaginable regarding a QDRO. It took 18 months to get the terms of the QDRO worked out causing my fees to total over $50,000, and that was over 15 years ago when my hourly rate was much less than it is today. While that is a substantial sum for my services, if I knew how nasty it was going to get when the person sought to retain me, I have turned down the assignment without any hesitation

[Belgarath]

Kirk - yes, as you have correctly surmised, the technical term would be "optical rectitis." I just didn't want to get too graphic during family viewing hours.

Honesty compels me to admit that I suffer from temporary attacks of this dreaded disease myself. But at least it isn't permanent, yet.

[Kirk Maldonado]

I believe that all of us suffer from it, the question is only how often the attacks come and how long they last.

[Guest slb1113]

I have an interesting situation opposite of JMLUMPKINS problem. I am the Plan Administrator for a private DB Pension Plan. I have only been here 5 months. In reviewing retiree files, I discovered a retiree who has had $300 witheld from his monthly pension benefit, due to a QDRO, since 2001. Our legal Department kicked back the initial QDRO to the AP's attorney because it didn't 'qualify', however the Plan continued to hold the $300 anticipating receipt of a Qualifed court-ordered DRO from AP's attorney. To this date, it has not been received despite a couple of letters to AP's lawyer, cc'ed to AP, requesting receipt of QDRO or the Plan would stop the withholding of money from pensioner's check and return the accumulated balance (in excess of $14,000) to pensioner if QDRO 'not received within 30 days".

After receipt of letters, AP contacted this office, several times in the last couple of years, with promise of court-ordered QDRO but it was not forthcoming. Last contact was 11/04, which promised QDRO 'next week' . Well it has been an exceptinally long week.....

My question is How long do we continue 'docking' this guy's pension with no QDRO?

I do have a copy of the divorce decree which makes provisions for the mutual exchange of retirement assets (she gets part of his pension, he gets part of her 401k) but NO QDRO!

[QDROphile]

Look at section 414(p)(7) of the tax code. The case law must be considered when applying the statute, but the effect should not be significant. Why isn't your legal department answering your question?

Here's is another question for you and your legal department. When you ultimately pay the reserved amount to somebody, are you going to take into account the time value of the money? If so, how?

[david rigby]

That payment will look like a lump sum. But not eligible for rollover, right?

[Guest slb1113]

I work for a large transportation company. For those out there who know what it is like to work for a Public Authority, you will understand my frustrating attempts to get clarification from my 'legal department' on this matter. I was just wondering if there were any concrete regulations I could look at regarding a matter such as this; if I release the money back to the pensioner, and subsequently receive a QDRO, can it be retroactive and then make me liable for the released amount? It doesn't look like an amicable divorce, I don't forsee him turning around and 'giving' back the money. BUt wouldn't a QDRO be effective going forward date it is signed?

You know, I didn't even consider the interest lost on this money which has just been sitting there undistributed, or the taxes it will get nailed with when released.

[mbozek]

Is your employer a governmental entity exempt from ERISA?

[Guest slb1113]

Yes it is.

[mbozek]

Your lawyers need to check state laws relating to withholding payments without a DRO and procedures for correcting the mistakes because ERISA does not preempt state laws which may require that payments withheld until a QDRO has been issued. State law may be different that the federal laws govering ERISA plans. The problem may be that the AP is no longer represented by counsel and cant submit the QDRO to the court.

[Guest slb1113]

Unfortunately, I think you are right about that and she is not represented by her lawyer anymore. If so, I expect to get a frantic phone call from her, which seems to be her M.O. perhaps she can submit it on her own? thanks for the input re looking into state laws considering we are exempt from ERISA

[QDROphile]

Good luck with state law. When you don't find anything helpful, go back to your plan terms and see what they say. You may be able to reconnect with federal standards for purposes of interpretation.

[Guest jmlumpkin]

Thanks for the input, everyone. The QDRO Procedure, in this instance, is not in question. The Plan has in place an effective procedure for "freezing" accounts in anticipation of potential QDRO's. It is our duty, as the "competent" TPA, to advise the Plan Administrator when and how to implement those Procedures.

However, neither the Plan Administrator nor its TPA were advised of a Divorce Decree in this instance. The Order that was provided to us during April 2005 was already signed by a judge and all parties involved, dated APRIL 2004. In essence, we had no reason to "freeze" distributions from the participant's account until April, 2005 (upon delivery of DRO).

Unfortunately, the participant requested a hardship distribution that effectively liquidated the account during January, 2005, some nine months after execution of the QDRO and 3 months prior to notifying the Plan Administration of the QDRO.

I am simply curious as to the Alternate Payee's options for resolution. I've informed her of the issues and the distribution history and suggested that she contact an attorney. As far as the Plan is concerned, it received a domestic relations order that does not meet the requirements of a QDRO as defined under the Plan/414(p).

[mbozek]

The AP's only remedy is against the employee for cashing out the account. The Court could hold the employee in contempt of ct for electing a distribution and order him to turn the proceeds over to the AP.

[Kirk Maldonado]

I think that the AP has a pretty good case against his or her divorce attorney for not sendin the QDRO to the plan shortly after it was issued.

[mbozek]

I dont think you can draw that conclusion from the facts. The AP may not have been able to pay counsel to submit the QDRO. Many lawyers treat the QDRO submission as a seperate fee. A client of mine received a DRO 15 years after the divorce was issued because the AP didnt want to pay a lawyer to prepare it. Also the divorce decree may have prohibited the employee from withdrawing funds in which case the ee is subject to sanctions or return of the money which would mitigate liability of the attorney.

[Kirk Maldonado]

How could the AP not have the funds to pay for the QDRO? I thought that the purpose of the QDRO was supposed to provide funds to the AP? Maybe it might take a while for the attorney to get paid, but that is better than getting sued for malpractice.

Also, it is inconceivable to me that the client would not want a QDRO if the attorney had properly advised the client. The attorney should have been looking out for the AP, because if there is no QDRO and the participant withdraws the funds and dissipates them, the attorney should realize that the risk of getting sued for malpractice case is very, very high.

Although I would want to learn more facts, I think that the divorce attorney would get sued and would lose. How can the attorney justify letting the client not have a QDRO prepared because of the lack of funds, when the QDRO would provide the necessary funds? Also, I doubt that the attorney adequately advised the AP that by not getting a QDRO on a timely basis, the AP stands the risk of losing all of the amounts that he or she would have received, if the participant withdraws the funds and dissipates them.

It is hard to imagine that a properly advised client would elect not to get a QDRO in these circumstances.

The right to sue the participant-spouse is of little or no value if that person is judgment proof.

[mbozek]

? Not all benefits from retirement plans are payable immediately under a QDRO, e.g, AP retirement benefits may be deferred 10- 20 yrs until participant reaches early retirement age or commences retirement benefits. Many APs have more pressing expenses to pay for after divorce such as rent, furniture, food, clothing, gas, auto ins. Paying for a QDRO which will not provide income for 10-20 yrs is a luxury they cannot afford. The attorney cant force a client to authorize a QDRO if the client refuses to pay for it and the attorney can protect himself by advising the client in writing that a QDRO should be obtained. I have seen many clients reject sound advice to their detriment because of a reluctance to pay for the cost of document preparation. I have talked to APs who admitted that they did not get a QDRO because they didnt have the money or were so emotionally drained after the divorce that they did not want to deal with other legal issues.

[Kirk Maldonado]

You brought up some very good points.

I was only thinking about defined contribution plans when I posted that remark about the QDRO generating fees, and you are right, if the plan delays any payments until retirement, then the AP wouldn't get anything right away.

Of course, if the AP wouldn't get paid right away, that means that the participant probably couldn't withdraw amounts from the plan either (absent a termination of employment), so maybe the AP isn't really at risk to that great of a degree.

[david rigby]

Kirk and mbozek both raise valid points. But from this layman's point of view, the attorney was still "deficient", primarily because the QDRO is an immediate negotiating tool as much as it is an effort to obtain a portion of the participant's benefits.