SERP

[Guest jigpsu100]

We have an employee who participates in our "Top-Hat" SERP. He is in the process of a divorce. Are nonqualified plans subject to the QDRO requirements? If anyone has dealt wiht this situation, please let me know. Thanks.

[QDROphile]

See Rev Ruls 2002-22 and 2004-60, Notice 2002-31 and several threads on this board. The tax materials won't address you question about ERISA. The usual answer is that top hat plans are not subject to ERISA section 206(d). I think it is a trifle more complex than that.

[mbozek]

While SERPS are not subject to the non alienation rules, many Plan Admin will accept a DRO dividing the SERP benefits in a manner similar to a QDRO. Under the above rev rulings the SERP benefits will be taxed as income to the AP and not the employee.

[Ron Snyder]

Administrators accept DROs and treat them as QDROs because ERISA does not pre-empt state law, including state court judgments, in such cases. Therefore the state court's holding is binding on the parties, including the nonvested participant.

The ruling is technically not binding on the Administrator (or Employer) in most states. However, most Administrators don't wish to go to court to defend themselves as to why they ignored a order that was served upon them when it's not their money at risk. And the participant (who is a party to the case) cannot object because the court's order was binding upon him or her.

[JDuns]

You always need to look at the terms of the SERP plan document. I have seen some documents that would prohibit all alienation and are not divisible by an domestic relations order. As mentioned by other posters, SERPs are not subject to the anti-alienation rules of the Code or ERISA (although some courts ignore that fact). Therefore, you are looking generally at state contract law and the terms of the SERP (as the applicable contract).

[Ron Snyder]

This thread began with the stipulation that the employee "participates in our "Top-Hat" SERP".

There is an article here BNA Tax Management that discusses the issue.

I stand by my statement that "ERISA does not pre-empt state law" with respect to benefits provided under such nonqualified deferred compensation plans.

Stuart M. Lewis of Buchanan Ingersoll, P.C. apparently agrees with me, since he is published in BNA Tax Management as stating: "Specifically, the QDRO rules do not apply to nonqualified deferred compensation plans, nor is there definitive guidance that practitioners and plan administrators may rely upon when dividing and transferring nonqualified deferred compensation in connection with divorce." Quoted in the November 5, 2004, issue of the Tax Management Compensation Planning Journal.

[mbozek]

Top hat plans are retirement plans subject to ERISA in which state laws are preempted. While not subject to the vesting, participation, fid provisions, etc, rights under top hat plans are enforced under the claims procedures of ERISA and the rights of participants under Top hat plans are determined in accordance with federal common law. Fasco Ind. v. Mack, 843 FSupp 1252.

[Ron Snyder]

Did it not occur to you as you were posting that your story is inconsistent.

First you assert that (1) "Top hat plans are retirement plans subject to ERISA".

Next, you acknowledge that (2) certain portions of ERISA do not apply.

Finally, you assert that (3) participants rights are determined under Federal common law.

Which is it? Are QDROs (1) ERISA? (2) A portion of ERISA that does not apply? or (3) Something to be determined under Federal common law?

In fact, QDROs are determined by state court judges applying state law. No state court will ever reach a result based on nonexistent "Federal common law" (since that term is reserved to activist Federal judges who desire to achieve a particular result in a case with no statutory authority to do so).

Apparently you are suggesting that the husband or wife should remove the divorce to Federal district court for adjudication of the QDRO issue, but that will never happen.

The case you cited is not a QDRO case and is not applicable to any other court.

[Guest jigpsu100]

I began this topic with a question that I thought would be easy for one to answer. The Plan has no antialienation provision specifically addressing DROs. Please correct me if I'm wrong, but by piecing everything together from everyone's responses this is how I will proceed. Please correct me if I'm wrong.....Regardless of other provisions in ERISA, the SERP is not subject to the strict requirements to satisfy the QDRO standards. If/when the DRO is recieved, the best thing to do is to abide by it. There doesn't seem to be any liability on the employer's part and to not follow the order and we may be opening ourselves to further hassle by having to appear in court. Thanks to everyone for their help.

[david rigby]

Earlier related discussion

http://benefitslink.com/boards/index.php?showtopic=28656

[mbozek]

JIG: I think you have come up with an appropriate solution to the problem. Just make sure tht the DRO does not have any language in it stating that it is intended to be a QDRO under ERISA. Under applicable IRS rulings the AP will be taxed for income tax purposes and the employee for FICA wages on the payments. There is precedent for your approach in cases involving group life ins policies which are subject to ERISA but not the non alienation rules. See Brandon v. Travelers, 187 F3d 1321 and Fox Valley Pension Fund v. Brown, 897 F2d 275, where the dro was construed as a waiver of LI benefits by the employee.

[Kirk Maldonado]

jigpsu100:

As a practical matter, it makes no economic sense for the employer to fight the DRO because there is generally no impact on the plan if the amounts are paid to the employee or to the former spouse.

Although the DOL got involved in some of the court cases involving tax-qualified retirement plans that lead to the enactment of the QDRO rules as part of the Retirement Equity Act of 1984, my impression is that the DOL has not been involved in any of the recent DRO cases involving plans other than tax-qualified retirement plans. However, I've not researched this issue, so I could be wrong.

Also, I doubt that the IRS would want to stir up this hornet's nest, so I can't imagine it trying to impose adverse tax consequences on a welfare plan that complied with a DRO.

In summary, I think you solution has little risk of any real downside exposure, so I agree with mbozek's assessment of the situation.

[Guest jigpsu100]

Thanks. Too bad there aren't more clear-cut answers.

[JDuns]

If paying an ex a portion of the plan benefit where the plan terms do not address the situation, I would send a claim determination letter (to the employee and the ex and both of their counsel) setting out the plan's decision on the ex's claim for benefits, and the plan's appeal procedure.

Then don't pay the benefit until the appeal period has run. This puts the employee on notice of the plan's interpretation and protects the employer from a later duplicate claim from the employee.

[mbozek]

I dont know why this this would be necessary if the participant and spouse sign off on the DRO. Using claim procedure to divide benfits could conflict with vesting or other distribution provisions in plan.

[Kirk Maldonado]

If my memory is right (which is always an iffy proposition), the DOL stated in the preamble to the claims procedure regs that those rules don't apply for purposes of determining the qualified status of a DRO.

Whether that statement carries any force is an interesting question. A nonqualified plan is subject to Part 5 of Title I of ERISA, which contains the claims procedure rules. But it is not subject to Part 2 of Title I of ERISA, which contains the QDRO rules.

But it is instructive as to what the DOL thinks about whether the claims procedure rules should apply to QDRO determinations.

[JDuns]

I am curious why you would recommend against applying the claims and appeals process to the QDRO determination process.

In my opinion, the plan is protected in providing a letter stating that the order has been found to be qualified and is being interpreted as follows: *** (or that the order is not qualifed and needs the following changes) and then setting forth the appeals process. It gives both parties a chance to correct anything that is different from their expectation and prevents the plan from being put in the position of defending its interpretation later.

I recall a DOL reference but I always interpreted it that the claims and appeals time periods did not shorten the time periods described in the QDRO regs. I did not read it to imply that no claims or appeals process should apply in QDRO review.

[Kirk Maldonado]

JDuns:

First, I did not make any recommendation. All I stated was what is the DOL position.

Second, do you remember where you saw that DOL reference to the interplay between the claims procedure rules and the QDRO rules? I'm not aware of it. Furthermore, it is inconsistent with their formal position I mention below.

Third, here is the DOL language that I'm referring to:

Sections 206(d)(3) and 609(a)(5) of the Act mandate certain specific plan procedures for determining the qualified status of domestic relations orders and medical child support orders, respectively, and for administering qualified domestic relations orders (QDROs) and qualified medical child support orders (QMCSOs). It is the view of the Department that issues pertaining to such orders must be resolved pursuant to the procedures described in section 206(d)(3) or 609(a)(5) of the Act, as appropriate, and not the claims procedures governed by section 503 of the Act and the current regulation. Preamble to §2560.503-1, 65 FR 70246, 70255 (Nov. 21, 2000), footnote 39.

[JDuns]

Kirk,

206(d)(3)(G) requires a plan to establish "reasonable procedures" to determine the qualified status of orders and to administer distributions made pursuant to a QDRO.

Consistent with the preamble, all of the plans I have worked on have incorporated the claims and appeals process (but not the timeframes) in their QDRO evaluation process.

mbozek,

Because not all courts require the alternate payee and participant to countersign the order (and some orders are obtained on an ex parte basis), I am hesitant to rely on the order alone (especially if there is ANY grey area being interpreted). I had an unfortunate situation where a ex obtained an order without her former spouse's knowledge (I never got an answer about the service of process) and the decision letter was the first time that the participant had heard that their spouse had claimed part of the benefit (with an order that was more expansive than the divorce decree).

[mbozek]

Since a plan administrator cannot issue a QDRO for a top hat benefit because it is not subject to the nonalienation rules, a state court could not issue a enforceable ex parte DRO to the administrator of a top hat plan which is not subject to preemption under ERISA 514(b)(7). This leaves the AP with the choice of obtaining the consent of the participant in order to get a portion of the Top hat benefit or foregoing the benefit.

[Kirk Maldonado]

JDuns:

I've never seen a plan document that referenced the claims procedure rules for determining the qualified status of DROs, and my private practice experience pre-dates the enactment of the QDRO rules.

[QDROphile]

We commonly refer to the plan's claims procedures for challenges to the determination of qualification or interpretation of the order. The determination of qualification and interpretation are handled under the written QDRO procedures. The plan's claims procedures provide a convenient and familiar process for dealing with subsequent disagreements or misunderstandings. I don't really understand why the DOL has its knickers twisted about claims procedures. Some administrative dispute resolution procedure is necessary or desirable. If not the plan's claims procedure, then something similar would have to be written into the QDRO procedures. I doubt that the DOL wants evey little issue to go directly to court withot some formal attempt to resolve the issue, and the courts would not like it either. I understand that the plan's claims procedures do not substitute for QDRO procedures, but to preclude use of the plan's claims procedures in the proper context seems to go too far. After all, an alternate payee who believes that he or she is entitled to benefits despite the determination is making a claim for benefits under the plan.

[Kirk Maldonado]

QDROphile:

I don't disagree with you from a policy perspective.

I posted that information about the DOL's position solely so that people would know about it, not as an indication that I was in agreement with it.

[QDROphile]

As with other apparently bone-headed positions of the DOL in the QDRO area, I don't really know what the DOL means by what is says (and I doubt that the DOL knows what the DOL means sometimes). I was hoping that you or someone would elucidate. For example, does the DOL simply mean that the plan's claims procedures do not substiture for QDRO procedures? Does it mean that the exhaustion of remedies and standard of judical review features of regular ERISA claims procedures do not apply? Does it mean that any connection in any context with the plan's claims procedures is improper?

[Kirk Maldonado]

You raise good points. Somebody should ask the DOL to reconsider their position on this issue, because it creates a void of guidance on some important issues.

[mbozek]

Isnt the unstated intent of the DOL position to allow plans to avoid having to use the cumbersome claim procedures for resolving issues pertaining to division of benefit in divorce since the plan is not disputing whether a benefit is to be paid but only how it is to be divided. Requiring that plans use the claim procedures and the formalistic notification requirements under ERISA 503 to resolve a proposed DRO is like using a shot gun to kill an ant. There may be appropriate reasons to use the claims procedures in a divorce situation such as when there are no benefits payable to the employee under the plan to which DRO has been issued. The plan Admin could treat the AP as a beneficary with a colorable claim for benefits and issue a denial as an alternative to rejecting the DRO.