415 correction after QDRO split

[Guest jae3207]

If a participant had 100% of his account transferred to his former spouse, pursuant to a QDRO, and it was later discovered that a corrective distribution needs to be applied to some of the transferred $'s (e.g. - adp/acp, 415 failure, etc.), does anyone view a transfer from the AP's account back to the participant for distribution, as a violation of the QDRO? I don't think it is, because the monies associated with the corrective distribution are not qualified retirement plan assets and need to be taxed to the participant (not the alternate payee).

Thoughts?

[Guest mjb]

How do you transfer funds back to the participant that were transferred to the spouse under a QDRO who now has a vested interest in the funds? The funds would have be transferred by a court order since the benefits are the property of the AP.

[Guest jae3207]

mjb,

Thanks for the reply. The assets that were transferred, ultimately, contained $'s which were not qualified under 401(a). As such, how can the AP keep these assets under the plan, without causing an operational issue within the plan? I understand that the AP now has a vested interest in the plan, but does this extend to $'s which represent an operational failure, that is taxable to the participant and not the AP?

[QDROphile]

An alternate payee cannot get anything under a QDRO that the plan can't provide to a participant. QDRO accounts can be adjusted for compliance the same as any other account. The trick is to adjust properly, but it is much easier when the QDRO account is 100%.

[Guest mjb]

The problem is that the funds were part of the particpant's account at the time the QDRO was approved which made it the participant's benefit when it was transferred to the AP. Reducing the AP's account to refund the money to the Participant can be seen as a violation of the ct order. (The property settlement may have been predicated on the entire amount in the 401k being paid to the AP in which case the AP should get the excess.) The participant needs to go back to ct to get permission to receive the funds (and the ct may order the money to be turned over to the AP). The only other alternative is to get a waiver from the AP to transfer the excess back to the participant. What is the amount of the excess benefit?

[QDROphile]

I agree that it would be best to get direction/agreement concerning the disposition of the excess because it will help the plan administrator avoid a controversy in a forum that does not understand or respect rules relating to qualified plans, including QDRO rules. Relying on pre-emption is not the best first line of defense. I won't agree that the measures are necessary under the law as it should be applied. Also, the terms of the QDRO will play a significant role, and we know nothing of the terms.

[Guest jae3207]

mjb,

Even if the court order does stipulate that 100% of his account is to be transferred to an AP, how can it remain a QDRO if part of the transfer included nonqualified assets that the participant cannot retain in a qualified retirement plan (415 excess)? Doesn't this violate the requirement that the AP cannot receive a "type" or "form" of benefit that the participant would not be otherwise entitled to receive as a qualified retirement benefit? I don't see how you are violating the court order.

[JDuns]

Assume that one spouse got all of the 401(k) plan and the other got everything else. If the 401(k) balance had not existed, the rest of the stuff would have been divided. Going back to the court allows the court to decide if the property award would need to be adjusted.

If the employee is not a high level executive and the order was a straight 50% of the account balance, I could probably get comfortable just doing the adjustment.

[Guest mjb]

jae: At the time the QDRO was approved there was an expectation by the ct and the parties that the spouse would get X dollars in the account since under the property settlement the spouse received the $ value of the account. I dont think the QDRO provided that the spouse would get 100% of the account balance subject to a refund of excess contributions at a later date. Second, at this time under ERISA the spouse has a vested interest in her account as a beneficiary which is not subject to a refund of excess contributions which can only be made against the participant's account balance. The ex spouse should be held harmless by the plan for the failure to refund the excess benefits to the employee before the QDRO was issued by having the plan admin contribute the excess amount to the participant's account and then refunding it to the participant since the spouse is an innocent party.

[Guest jae3207]

mjb,

QDRO's by definition assign a portion of a participant's qualified retirement benefit to an AP. Corrections due to operational failures are nonqualified benefits, which is why they must be distributed back to the participant. As such, how can the spouse receive a nonqualified benefit that the participant would not have been otherwise entitled to retain, on a tax deferred basis, under the plan ? Even though the court order stipulates that the spouse receive x dollar amount or % of the participant's account, it is still the plan administrator's responsibility to make sure that the DRO remains qualified under the plan terms. I would think that this evaluation would continue until all IRS mandated testing has been performed.

[Guest mjb]

jae: I dont see how that plan can remove funds from the APs account after it approved the transfer as a valid QDRO under 414(p(6)(A). There is nothing in the QDRO rules that makes the AP's interest under the QDRO contingent on some future mandated testing. The spouse can file a claim for benefits based upon the QDRO that was approved by the Plan admin which case the plan admin will have to cite plan provisions that permit a reduction of a bene's account balance to facilitate a refund to a participant.