QDRO Lump sum

[Tom Poje]

lump sum on the QDRO is $$$$$$$$$$$$$$$$$$$$$$$$$$$. well, certainly more than I will see in my lifetime.

since the owner is in the top 25 HCEs, is the lump sum under the QDRO restricted because the owner couldn't get a lump sum?

[QDROphile]

Cheap response: Take the position that it is restricted, then you should get your answer when the position is disputed. Sounds like both of them can afford to hire someone to get you the right answer and support the conclusion.

[mbozek]

Q- who is asking? the plan, the participant, the AP? If the AP's benefit is a separate interest, the AP will claim the right to receive the LS as a beneficiary under ERISA. If the AP has a shared interest in the LS with the exec then the high 25 restriction will apply. If plan refuses to pay LS AP can file claim for benefits.

[Blinky the 3-eyed Fish]

Logically, in thinking about the intent of the restriction, it is to not leave NHCE's in a lurch should the plan discontinue and be underfunded. Paying out a portion of the restricted HCE's benefit in excess of the restricted amount for any reason would serve to violate the intent of the rule.

So there's the logical answer. I have no experience to whether it is correct or not.

[Tom Poje]

my 'hidden' sources reveal that Q and A ASPPA conference 2001 #14 said they are restricted.

also 1995 Grey Book #45.

good enough for me. well, plus a fish said it was logical.

[mbozek]

Is the restriction you refer to under the IRS rules or ERISA? Beneficary rights under ERISA are separate from restrictions imposed by the IRS especially where there is no parallel provison under Title I to an IRS regulation. With the amount of $ at stake the AP can sue for a lump sum after plan denies claim for benefits or Plan could ask Fed ct for declatory judgment. Only risk to plan is liability for AP's legal expenses if AP prevails.

[david rigby]

Gray Book 95-45

QDROs -- Impact on Pre-termination Restrictions

What is the impact of a QDRO on the pre-termination restrictions of regulation section 1.401(a)(4)-5(b)?

RESPONSE:

The restrictions on distributions is applied on a pro-rata basis to the benefit of the restricted employee and alternate payee.

Gray Book 2003-25

Restricted Employees: QDRO and Restricted Payments to High 25

What restrictions apply to the payment of benefits to an alternate payee under a QDRO where the participant is one of the "high-25" restricted HCEs and the payment of a current benefit does not escape the restriction using the 110% or 1% rules. In the specific case, the spouse has been awarded 70% of the participant's 12/31/01 accrued benefit and the spouse would like to choose the lump sum option.

RESPONSE

The high-25 restriction applies to the combination of the benefit paid to the participant and the spouse. Thus the limit must be used and, assuming the spouse is limited to 70% of what the participant could have received, a lump sum distribution cannot be made unless an arrangement for repayment is in place (see Rev. Rul. 92-76). The spouse can be paid up to 70% of the life annuity amount (plus SS supplement if there is one) without restriction.

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[mbozek]

That is not even authorative precedent under IRS rules, and cant be used to determine the AP's rights under ERISA especially if the AP has a separate benefit. The plan would need to get a declatory judgement if the AP requests payment.

[QDROphile]

Given that for purposes of section 415 and 401(a)(9), the benefit divided by a QDRO is essentially treated as a single benefit (which is why there no such thing a a true "separate interest," especially in DB plans), I think it is reasonable, and perhaps even necessary, for the plan to take the position that the alternate payee's share of the benefit is not independent for purposes of the restriction. As a plan fiduciary, I would rather be proven wrong in an action by the alternate payee than give away the store without some authority.

[JDuns]

This restriction has no basis in the code. It is based solely on 1.401(a)(4)-5(b) that requires "A plan must provide that, in any year, the payment of benefits to or on behalf of a restricted employee shall not exceed an amount equal to the payments that would be made to or on behalf of the restricted employee in that year under a [straight life annuity and SS supplement]"

To me at least, it is clear that an Alternate Payee's benefit is on behalf of a restricted employee and therefore should be subject to the same payment restrictions as the participant's payment would have been.

I would refer the AP to RR 92-76 for alternatives that would enable a lump sum (if the plan is amended to accomodate them).

[mbozek]

Statements on the nature of the benefits under the IRC have no merit on the only issue that a court will review: is the AP a beneficary who has the right to withdraw the funds under the conditions applicable to other beneficaries? Under DOL rules the AP is a beneficiary with all of the rights of other beneficaries including the right to withdraw the funds. I dont think that the plan can impute the restrictions applicable to high 25 participants under the IRC to the APs interest which has been separated under a QDRO.

Further IRS reg. 1.401(a)-13(g)(3) contradicts the Grey Book statements- "a plan shall not be treated as failing to satisfy the requirements of Section 401(a) solely because of a payment to an alternate payee pursuant to a QDRO... even though the plan provides for payment under a QDRO to the AP prior to the time it may make payments to a participant. For example a plan may pay an AP even though the participant may not receive a distribution...." A regulation is more authorative than informal statements.

The plan can go to court as long at it willing to pay for the cost of its attorneys and the AP's attorneys.

[Blinky the 3-eyed Fish]

What requirement is there that all beneficiaries must be treated equally? A beneficiary of an NHCE may be able to withdraw funds, while a beneficiary of a restricted HCE may not. A death benefit to the beneficiary of restricted HCE would be subject to the same restrictions.

A QDRO cannot force a plan to operate outside of it's terms. As the IRS has stated, the restrictions apply, therefore a failure to comply would both be a violation of 401(a)(4) and also a failure to follow the plan document. I do think the plan most assuredly can and must impute the restrictions.

I think your cite more applies to the ability to distribute 401(k) or pension monies prior to their otherwise availability. I think it's a stretch to apply that to QDRO's in this case considering the intent of the rule, an intent that the IRS confirms with the answers given.

[mbozek]

The problem with your conclusion is that there is no legal authority either under ERISA or the IRC for restricting the APs benefits because of the High 25 restriction but there is contrary authority for paying the AP even though the participant's benefits cannot be paid. The -13 reg applies to all Q plans without limitation. Informal statements by IRS officials cannot be attributed as a position of the IRS so I dont know what IRS statements you are referring to.

There is another issue that has been overlooked: Why did the plan approve payments to the AP under a QDRO if it intended to apply the high 25 rule to the AP?

[Blinky the 3-eyed Fish]

So the cite provided by JDuns means exactly what? To take -13 which says ,"A plan shall not be treated as failing to satisfy the requirements..." and take that to mean the plan must distribute the QDRO to a restricted employee is a streeeeeeeeeetch. And to boot it contradicts the (a)(4) cite, the IRS' consistent interpretation and the INTENT of the rule in the first place.

I know I can't convince you otherwise, but that island must be lonely.

[mbozek]

The -13 reg expressly states that it is an exception to the requirements of 401(a) which includes the provisions of 401(a)(4). Since the -13 reg was issued before the high 25 restriction was added, the IRS was aware of this exception when it issued the high 25 reg yet made no change to the -13 reg to prevent distribution to the AP. Therefore the IRS agreed that a distribution to the AP could be made to the AP even though the employee was restricted by the high 25 rule. Under your analysis one has to assume that the (a)(4) reg impliclty overrides the -13 reg (for which there is no authority). I guess I put more confidence in the express language of the regulations than meaningless statements that have less authority than an IRS press release. Sometimes you have to rely on an anlaysis of the applicable authority and not on off the cuff statements of talking heads.

The on behalf of language applies to an assignment of benefits payable to the top 25 participant to another person but not to the separate rights of another beneficary to receive benefits under the plan.

[Blinky the 3-eyed Fish]

I couldn't disagree more with that last sentence. I mean, I really really couldn't possibly take a more polar opposite view.

I guess I can sum up your position as saying that first, the alternate payee is not who they are talking about in the (a)(4) reg, second, it wouldn't matter anyway because of -13 because the (a)(4) reg is the equivalent of a talking head.

You take some odd positions sometimes.

This horse is beat. We can agree to disagree. I need to move on now.

[mbozek]

B: you really need to come for air sometimes. The IRS -13 reg is consistent with Q 3-9 of the DOL QDRO book which allows the AP in a separate account to receive payment at an earlier time or under different circumstances than the participant could receive the benefit. We have a difference of opinion on the purpose of a separate interest QDRO- I dont see any authority for imposing restrictions on payments to a participant on the AP who has negotiated a separate interest under the plan.

[Mike Preston]

414(p)(3)(A) states that a plan can't pay something to an alternate payee in a form not otherwise payable under the terms of the plan. In the case of a restricted HCE, the only form allowed is a single life annuity. Any other form isn't allowed.

What's to argue?

[WDIK]

It's nice to see you posting again, Mike. I hope your return is permanent.

[Blinky the 3-eyed Fish]

Mike's back!!! I thought you were dead.

I took you 15 months to get out of that Chinese prison huh?

[could be me maybe not]

identity theft? Look what happened to me.

[Mike Preston]

Unfortunately, for all intents and purposes I probably am dead.

In a perfect world I would have enough time to visit frequently. Not likely to be a perfect world for the balance of this year, anyway.

I guess being busy is better than the alternative, though.

Appreciate the sentiment.

Anybody who sees a post that they want to forward to me through the message board, feel free to do so (or directly at mike.preston@prestonactuarial.com). No promises on timing of response, if any, though.

While I appreciate mbozek's propensity to look at issues from the more legalistic viewpoint, it is dangerous to reject IRS statements without a rather thorough vetting.

Most of the time (although certainly not 100% of the time) the IRS gets it right.

[mbozek]

Mike: The problem with your analysis is that it ignores the rights of the AP under ERISA. APs are beneficaries who are eligible for all the options available to other beneficaries under the plan. (I am assuming that the neither the plan nor the QDRO specificially restricts the right of the AP to a Lump sum outside of the general restriction on the payment of benefits to the high 25 participant.) 414p3 prevents the payment of an option which is not available to other benes under the plan, e.g., J & S is only available to married participant.

The refusal to pay a LS to the AP who has a separate interest in the plan without restictions on the LS payment in the QDRO would be discrimination under ERISA 510 if a LS is available to other beneficaries.

[Mike Preston]

mbozek, I'm not convinced that 510 enters into this at all. Before one can be accused of an ERISA 510 violation one must establish that there exists a "right to which he is entitled under the provisions of an employee benefit plan."

I think the order of things is pretty well established. The participant's benefit is restricted. The QDRO can't order the plan to pay a benefit that is not payable. Therefore there does not exist any right for the beneficiary to argue exists under ERISA 510.

I don't have time to do a research project on this, as I've just dropped back in because I was asked to provide the cites that Tom posted earlier on this thread.

But there are a bunch of cases that hold along these lines, aren't there? I'm thinking of cases where a participant is entitled to a benefit predicated on a contingency, and the alternate payee comes in and asks that since that contingency doesn't apply to them, they should be able to receive the benefit. The courts have held, pretty universally IIRC, that the contingency applicable to the participant is a contingency applicable to the spouse.

An example is the early retirement subsidy that an active participant is entitled to take should the participant actually retire. No retirement? No subsidy. And the QDRO can't be interpreted in light of the contingency being satisfied.

In this case, we have an even more difficult contingency to waive. In this case the contingency is predicated upon the operation of the plan (investment performance) and actions of the plan sponsor (contributions) rather than action of the participant (actually retiring).

But since I'm here, let's parse 414p3 a bit.

(A) is what I think you are referring to. You are reading it to apply to the general forms of benefit available to other beneficiaries. I am reading it to say that any specific option available to the participant must be available to the beneficiary. [We know there is an exception for J&S benefits. That is, a plan does not need to provide the beneficiary with an option to take the benefit in the form of a J&S, even if a J&S benefit is available under the plan to the participant. I forget where that exception is made, but it makes perfect sense to me.] I think I'd need a Supreme Court case to convince me that the proper interpretation of (A) is that which you posit.

Until then if it isn't payable to the participant it can never get to the point of being protected by ERISA 510 because it never becomes a right of the beneficiary to receive a form of benefit not otherwise payable to the participant.

[Blinky the 3-eyed Fish]

I don't understand Mbozek's argument.

Here is ERISA 510

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of anemployee benefit plan...

Note that it says a participant or beneficiary. A LS is available to other participants, so why is it not discriminatory to deny participants the LS if they are restricted HCE's? Or is your argument that it is discriminatory and that the nondiscrimination requirements of 401(a)(4) are in of itself discriminatory?

(Mike beat me.)

(Then I couldn't stand the typo and bad English.)

[Mike Preston]

Did it hurt?

[Blinky the 3-eyed Fish]

There is weeping and gnashing of teeth.

[Tom Poje]

the good news is the individual will take the annuity.

for better or worse, this whole thing gave me an excuse to get a hold of Mike.

Go Wolverines!

[Linda Wilkins]

I have a different but related question for the group.  Is an Alternate Payee’s right to get an immediate distribution under a QDRO a protected benefit (i.e., could a plan be amended to provide for payment at the earliest retirement age for QDROS)?

[QDROphile]

And the practical reason for contemplating such a change is ... ? 

[RatherBeGolfing]

4 hours ago, QDROphile said:

And the practical reason for contemplating such a change is ... ? 

Yea I dont see a practical reason either, but I have seen people do some weird things for weird reasons.  

[david rigby]

Well.... the reason might be the anticipation of a QDRO.  BTW, I think the answer is that such a change would apply to future accruals only.  However, more detailed analysis might be appropriate, esp. to review the current conditions.

[QDROphile]

With the benefit of sleeping on it and the intervention of an actuary, I can see a DB plan that had improvidently allowed lump sum pre-retirement QDRO distributions would want to correct the error in judgment.  Can you say “airline pilots” and “sham divorce” in the same breath.

[jpod]

Interesting question.  I haven't researched the 411 regs, so this is off the seat of the pants.   Don't know what an AP is for 411 purposes, but certainly an AP is not a participant.  An AP is a beneficiary for purposes of Title I.  So, perhaps an AP's interest is comparable to a beneficiary's death benefit interest, and aren't death benefits carved out from protected benefits?