DRO terms preclude spousal rollover

[R. Butler]

Reviewing a DRO where the terms require that the check be made payable to the Alternate payee spouse & actually seems to prevent the possibililty of a rollover. 2 issues:

1. Although it seems odd that a DRO provision would preclude a rollover; the provision doesn't require that the Plan provide form of benefit not otherwise available, so in & of itself that particular clause doesn't prevent the DRO from being a QDRO. Any thoughts?

2. Assuming a QDRO, if the alternate payee spouse wants to rollover, I'm assuming that she can't. It seems to me that clause in the QDRO has to be followed. Thoughts?

Thanks in advance.

[mbozek]

I dont understand the Q. A lump sum payment made to the AP under a QDRO is the AP's property and can be rolled over to an IRA under the IRC. A QDRO cannot control the APs right to roll over the distribution once the payment leaves the Plan because a QDRO by its terms only pertains to payments by the plan to the AP,but cannot limit what the AP can do with the funds after receiving the payment from the plan.

Why cant the plan reject the DRO on the grounds that it conflicts with the rights of a spouse beneficiary to rollover a distribution under the IRC and require that the provision preventing rollover be eliminated?

[R. Butler]

The plan's QDRO procedures are pretty specific. I'm hesitant to advise the plan sponsor to reject the DRO on grounds not mentioned in the plan's procedures.

The more I consider the issue, I'm inclined to advise the sponsor that the clause can be ignored & that the spouse can be granted a rollover option if she chooses. First, I don't see really see any adverse consequences to that. Second, as you mention, I'm not sure a QDRO can restrict the alternate payees ability to rollover the distribution.

Thoughts?

[mbozek]

Plan Admin can reject if it is inconsisent with the terms of the plan e.g., spouse beneficary has right to rollover a distrbution to an IRA. Dont see a downside in rejecting DRO because participant has no recourse.Alternatively, plan can pay lump sum to participant which can be distributed to IRA.

[QDROphile]

I have seen this before. I disregard the "no rollover" provision, but I expressly say so in the notice of qualification. If they don't like the interpretation, they can appeal, at which time the administrator will rule that order fails to qualify. Rollover rights are stautory (or at least the plan's qualification hinges on them); an order can't take them away. A court can order the AP not to roll, but that is not a matter for the plan administrator to enforce. the AP gets the option as provided in the plan and the law.

[R. Butler]

I have seen this before. I disregard the "no rollover" provision, but I expressly say so in the notice of qualification. If they don't like the interpretation, they can appeal, at which time the administrator will rule that order fails to qualify. Rollover rights are stautory (or at least the plan's qualification hinges on them); an order can't take them away. A court can order the AP not to roll, but that is not a matter for the plan administrator to enforce. the AP gets the option as provided in the plan and the law.

Thanks. That is the route we will take. I hadn't seen one like that before & intially I was a little confused, but as I pondered it a little its fairly obvious thats the best way to handle it.

[Kirk Maldonado]

QDROphile:

I'm curious as to why you disregard the no-rollover provision rather than asking the parties if they really intended it to be in there or if it was inadvertently included in the order.

[Belgarath]

And I'm just being insatiably curious - (see nosy) - I wonder what the reason is for there being such a provision in a QDRO to start with? There must be a reason, but I can't think of one. If you ever find out, I'd love to hear what it is.

[QDROphile]

Mr. Maldonado:

Disregard of inapplicable or improprer provisions is based on a philosopy of review of orders. The primary objective is to determine that the order is qualified (which is ususally the goal of both parties as well as the plan). A close second is to do so efficiently. The efficiency criterion requires avoidance of unimportant correspondence. The evlaluation of what constitutes unimportant correspondence is based on a premise, or recognition, that the personsa who draft orders are usually not experts in the subject matter. Put that all together, and mix in some arrogance on my part, and you get a process that is aggressive about interpreting orders in a way that disposes of them in the first round. In other words, we fix mistakes without asking. The process involves a clear articulation of the interpretation of the points that may be controversial or subject to mistaken interpretation. The articulation allow the parties to understand exactly what is going to happen so they can dispute the interpretation if it is mistaken or not what was intended. The determination and interpretation are not final until after a period that allows for dispute, and dispute suspends implementation. I find that disputes are rare, I hope because the outcomes are correct. If there is a dispute, it usually leads to a determination that the order is not qualified and they have to rewrite.

Applied to your question, what good would it do to ask? What answer could be given? If they did not intend that the plan enforce the provision, then disregarding was correct and efficient. The plan will not require the AP to elect a rollover, either. If they intended that the plan block the AP's election for a direct rollover in accordance with plan terms, then they could dispute the blatant misinterpretation and the plan administrator would rule that the order fails to qualify under that interpretation. Just about the same amount of work for the plan administrator in the second case and less work in the first. I would take that bet.

Belgarth:

Would you like a sinister explanation? This could be a variation on another improper provision that it sometimes in the order, a direction to distribute to the alternate payee's lawyer or jointly to the AP and someone else (such as the lawyer). It is a sure source of funds for the lawyer or some other creditor to get paid. Not legally binding, but it can is effective as a pressure tactic against well-intentioned but impecunious litigants.

A less sinister explanation is that it is misguided attempt to make the distribution election in the order rather than in accordance with distribution procedures. I get the idea that some drafters of orders think that they need to address the issue, even if only to say that the AP has the option, which is what the plan provides anyway. Now let me slam plan adminstrators just to be even handed with criticism and justify the paranoia of the drafters. Would you believe that some plan administrators do not allow the AP to choose? Ignorant and stupid plan behavior is responsible for both overkill on the part of drafters and misguided informal DOL positions on QDRO issues.

[Kirk Maldonado]

QDROphile:

Thanks for taking the time to write such a thorough and thoughtful response.

I think that your dual goals of (1) being focused on being efficient and (2) not wasting time on what are probably non-issues make eminent good sense in this situation. As you mentioned, in all likelihood, nothing will come of that provision, so why waste any time on it?

One of the virtues of BenefitsLink is that there are respondents like you and MBozek that help to put things into perspective, and serve as the perfect foil for people like myself who, at times, get so focused on the trivia that we miss the "big picture."

[QDROphile]

Maybe, but the trivia is where we get to strut our stuff.

You can also see that my "stuff" is not typing skills.

Displays of gratitude are always welcome, and I appreciate your contributions to the board as well.

[Guest Kevin Wiggins]

I would say don't reject the order solely due to the order's prohibition of a rollover. What if the order required the AP to take a lump sum when the plan offers other forms of distributions? Would you reject that order because the AP has a statutory right to elect other forms of distributions?

You are focusing too much on ERISA and not enough on what a QDRO really is: a state divorce decree. State divorce decrees and other "domestic relations orders" often impose conditions on one spouse or the other. The order is not an order againt the plan; it is an order against the AP. The plan can, and must, still offer the rollover but the AP cannot accept the rollover. If the AP does, the P can bring an enforcement action for contempt of court or other applicable, state law enforcement proceeding.

You have a hypertechnical risk that the P would argue the plan aided and abetted the AP's contempt of court, but I think that argument would lose given the plan's requirement to offer the rollover.

This type of language is often in the QDRO so the AP will use the money to pay a community debt, attorneys' fees, or something like that. I've seen it used in child support QDROs to make sure the money is actually used for the children, not the AP's retirement. I wouldn't put the language in the QDRO; I would put in a side agreement or a separate court order so the plan never sees it.

[R. Butler]

QDROphile:

I'm curious as to why you disregard the no-rollover provision rather than asking the parties if they really intended it to be in there or if it was inadvertently included in the order.

Although I agree with QDROphile's response to this, we had a little different take. We did consider calling the AP's attorney. However, even if the AP's intention at the time the DRO was drafted was to take the money & not rollover, what if the AP later changes her mind? The clear wording of the DRO eliminated a rollover possibility. We wanted the plan sponsor to have a clear course of action based on all possible alternatives.

[mbozek]

I dont see the need to request clarification from the attorney who drafted the DRO. The AP can inform the parties that the no rollover provision must be removed because it is conflicts with the plan which requires that the AP be given the right to rollover. I dont agree that the a DRO can eliminate rights that the AP has under the plan and there is no reason for the plan to risk adverse action from the IRS or the AP by accepting a DRO that refused to allow a rollover. I dont see any basis for contempt of ct because the plan is not a party to the divorce acton and the ct has no jurisdiction over the plan. The ct could force a withdrawal of the rollover by the AP in violaton of the divorce decree because the ct would retain jurisdiction over the AP.

[Guest Kevin Wiggins]

Mbozek, you stated, "I dont agree that the a DRO can eliminate rights that the AP has under the plan and there is no reason for the plan to risk adverse action from the IRS or the AP by accepting a DRO that refused to allow a rollover."

QDROs eliminate rights under the plan all the time when they require one particular form of distribution, e.g., a lump sum, and thereby eliminate all other forms of distributions available under the plan. I don't see that this is any different.

Unless I'm mistaken about what the QDRO says, it doesn't prevent the plan from offering a rollover, it simply prevents the AP from accepting that rollover. The two are quite distinguishable.

The AP could later change his or her mind and rollover his or her own money, and that would be an interesting contempt of court action. My guess is, as long as the P got the money he or she expected to get, he or she would not care. Another guess is that the AP does not have his or her own money to roll it over; otherwise the QDRO would not have this provision.

If nothing else disqualifies the order, you might want to accept the QDRO and explain to the P and AP that the order does not, and cannot, prevent the plan from offering the rollover because the plan is required by law to offer it; it is up to the AP to follow the order and refuse the rollover, and the P to enforce it.

The questions becomes what happens if the AP accepts the rollover? That is where the aiding and abetting a contempt of court is a possibility. That potential might be a good reason to disqualify the order.

[Locust]

I suppose I'll have to be the technical geek and say that the order should be rejected as not qualified. It is asking the plan to do something that it isn't allowed to do, and I think that is sufficient basis for the rejection. Also, don't forget that this is an order signed by the judge. Who knows why the restriction is in the order? Would you want to explain to the judge that the Plan disregarded his order because you think it exceeded the judge's authority or she didn't know what the rules are?

Also I think the tendency to disregard certain technicalities in favor of efficiency and cost may come back to bite the one with the tendency.

[Guest Kevin Wiggins]

I guess the big question is what exactly does the order require. Does it order the plan not to offer a rollover or does it order the AP not to accept the rollover?

[Kirk Maldonado]

Section 414(p)(3) provides:

A domestic relations order meets the requirements of this paragraph only if such order—

(A) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan * * *.

[QDROphile]

Kevin Wiggins is asking the right question. If the order tells the AP not to elect a rollover, that has nothing to do with the plan and will not affect qualfication of the order. The plan administrator disregards it as irrelevant and offers the rollover as required by the plan. The AP elects a rollover at risk of contempt of court, but the plan will honor the election.

If the order says the plan cannot allow a rollover at the election of the AP, the order does not qualify. Orders require interpretation and similar statements can have completely different legal effect. It may be difficult to decide exactly what the order is saying by way of restriction. So my solution is to interpret the order as not intended to disqualify itself -- the learned counsel and learned judge would not be so foolish. The plan administrator will say that the plan administrator will disregard the provision. That does not mean that the AP may disregard the provision.

[Guest Kevin A. Wiggins]

I agree with QDROphile, though being hyper-conservative the way I am, I would have some concern about aiding and abetting a contempt of court. I think the concern may be more academic than real, and may not properly exist at all, but if you have other reasons to reject the order, then I would have the parties clear this issue up as well.

[Kirk Maldonado]

I posted the statutory language in the hope that someone would pick up on what I think is an important issue.

The statute says that the QDRO can't require the plan to offer an option it does not otherwise provide.

The statute does NOT say that the QDRO can't state that an option otherwise available under the plan cannot be offerred to the alternate payee.

I'm not saying that you might not have a qualification issue for not allowing a direct rollover option for the alternate payee. I'm just saying that I don't think that the order fails to satisfy the QDRO requirements simply because of that restriction.

That is one reason why it would make sense to ask the parties if that's what they really want. I don't see a reason for rejecting the order under the QDRO rules, but complying with it might jeopardize the plan's qualified status. If that language was inadvertently included in the order, it might not be a big deal to get it revised.