Freezing a participant account before a DRO is given to the plan admin

[Guest Do]

Can a plan freeze a participant's account from making distributions, loans or hardship withdrawals when it is simply informed (either orally or in writing) that a participant is going through a divorce without a court order?

Obviously, a freeze is intended to protect the proposed alternate payee from the participant's use (or misuse) of account funds that will be ultimately granted to the alternate payee pursuant to a QDRO. It seems to me, however, from reading ERISA section 206 and Code section 414(p) that alternate payee is not entitled to segregation or this protection until a "domestic relations order" has been delivered to the plan administrator for approval as a QDRO.

An alternate payee's protection seems to stem from a DRO, nothing else. Without a DRO that is a judgment, decree or order, the alternate payee has no protection. If the plan administrator provides the alternate payee protection without a DRO, isn't the plan administrator alienating the participant from his or her account? I've seen plan's put freezes where there is no DRO and that seems wrong.

Thanks in advance for your thoughts.

[Guest [Pat M]]

The Plan's required written policies and procedures should address situations in which the Participant's account (or benefits in pay status) will be frozen versus segregated.

Some plans freeze (temporarily restrict loans/distributions) upon receiving acceptable notice that a Domestic Matter is pending, but then lift the freeze if no acceptable domestic relations order is forthcoming. Sometimes plan policies call for a freeze upon receiving a copy of a Child Support Enforcement Agency's computer-generated form naming the plan, or a joinder, or a divorce order or separation agreement that refers to the pending allocation of plan assets, for example. Typically, most of these documents do not qualify as a Domestic Relations Order on their own.

On the other hand, some plans do not freeze or segregate until a draft or court-executed order is received.

http://www.benefitslink.com/articles/qdro.txt http://www.dol.gov/dol/pwba/public/pubs/qdro.htm http://www.dol.gov/dol/pwba/public/pubs/qdrofact.htm http://www.pbgc.gov/divorce3.htm

[MWeddell]

If the freeze is done incorrectly, the employer might bear some liability. In the case of Schoonmaker v Employee Savings Plan of Amoco Corp., 987 F2d 410 (7th Cir 1993), the court found an employer liable for damages when the employer froze a participant's account after receiving notice that a QDRO was being prepared.

To differentiate your situation from the one described in that case, (1) the freeze should be authorized in your plan's written QDRO procedures and you should follow consistently what's written in those procedures, and (2) one should only freeze payments (loans and distributions) coming out of the participant's account and not prevent the participant from exercising whatever investment choice he or she normally has under the plan.

[Guest]

I don't think freezing is prudent but I admit that there's no clear answer on whether to freeze or not. If one doesn't freeze and the participant withdraws funds, there is always the good change that the alternate payee can go after the funds whereever they end up.

[Kirk Maldonado]

I've (unfortunately) faced this situation several times before, and I completely agree with MWeddel.

[This message has been edited by Kirk Maldonado (edited 02-07-2000).]

[Guest Do]

But, isn't even freezing distributions, loans and withdrawals a violation of ERISA 404(a). As the plan administrator, you would seem to be discharging your duties in the interest of someone who is neither a participant nor a beneficiary. The former spouse shouldn't be treated as a beneficiary (as an alternate payee) until there is a DRO or evidence that the former spouse has a property interest in the participant's account. I don't think plan administrator should conclude that the former spouse has a property interest based on community property law. I think an order or settlement agreement creates a property interest under state law.

Even if QDRO procedures required a freeze, the freeze would seem to also violate 404(a) because a fiduciary has a duty to discharge his duties in accordance with the plan document and instruments INSOFAR as they are consistent with Title I and IV. Section 206 of Title I refers to an order or settlement agreement, not a pending order or agreement.

Isn't the safest route for a plan to only segregate or freeze an account when it receives a DRO? I don't see how a plan could be liable to a former spouse for a participant's actions prior to the delivery of a DRO. Mweddel suggests that QDRO procedures should not freeze investments. Would the plan (a 404© plan) be liable if it allowed the participant to invest imprudently or maliciously and lose a significant portion of the account value. Probably not. If a plan would not be liable for a participant's malicious investing, why would it be liable for malicious receipt of a distribution, loan or withdrawal?

I think the plan lost in the Schoonmaker case because it didn't have written procedures. I think the case simply said you have to written procedures and if you don't you lose. It doesn't say if you have written procedures you win. So, the court avoided the issue about whether freezing investments was proper.

Please come back.

[Kirk Maldonado]

In a community property state, the court order does not create the right in the ex-spouse, it existed all along; the order just officially recognizes the existence of the ownership interest of the ex-spouse.

I think that a fiduciary that allows the employee spouse to take out the entire account balance when it is apparent that a divorce is impending is breaching his or her fiduciary duty to the non-employee spouse who owns one-half of the benefit.

If the plan gives the authority to follow such procedures, I think that the freezing of the account is proper.

[JWK]

I thought Boggs v. Boggs, 117 U.S. 1754 (1997), held that community property laws are preempted by ERISA. So, until there's a DRO, does the (former) spouse have a cognizable right to the participant's benefit? If not, I share the concerns expressed about freezing the account of the participant based on information that a divorce is pending. The decree may not divide the retirement plan benefits--many households have two working spouses who each have their own retirement accounts. You will have deprived the participant of access to his/her account for no reason.

On the other hand, I can't see how the participant spouse is damaged (in a way that is compensable under ERISA's remedial scheme) if withdrawals are frozen for a limited time. But, if withdrawals are not frozen, the damages to the alternate payee are easily measured and there may well be a sympathy factor as well.