Significant Detriment?

[J. Bringhurst]

We have a client whose QDRO procedures (for their DB plan) specify that alternate payees can elect to receive a lump sum distribution of their assigned benefit but only if they make the election for the lump sum within 30 days of the date the DRO is determined to be qualified. A lump sum distribution is not otherwise provided under the terms of the plan (other than for a cash out). Does anyone see any issues with this? Could this be considered a significant detriment issue (although the lump sum availability could simiply be removed and A.P.s forced to wait until earliest retirement age)?

[david rigby]

Perhaps I misunderstand, but it seems you have a lump sum option in the QDRO procedures, but not in the plan document. Is that correct? Can QDRO procedures amend the plan?

What do you mean by "... other than a cash out..."? (What else is a lump sum distribution?) Does this refer to "under $5000", or does every terminating participant get a lump sum option?

[J. Bringhurst]

We take the position that QDRO procedures are part of the plan. Accordingly, the inclusion of a lump sum distribution for alternate payees would not fall under the category of a QDRO providing something not otherwise provided for under the plan's terms. Many of our DB's do not provide for lump sum distributions for amounts in excess of the cash out limit (i.e., the only lump sum is the cash out). Some DB plans do, however, provide for lump sum distribution options (i.e., in addition to annuities).

My question really just concerns the requirement that an alternate payee elect the lump sum option within 30 days or lose it...

[Effen]

Wouldn't the requirement to pay any lump sum would almost definitely require the plan to pay out more than it otherwise would have. This seems like a clear reason to reject the DRO, unless you take the extra liability the spouse received from the participants' benefit. Lump sums are generally worth significantly more than an annuity, therefore the plan will suffer a loss when the lump sum is paid, which the DRO should not require.

If the plan doesn't currently provide for lump sums, why wouldn't you reject any DRO that permitted a lump sum distribution?

[J. Bringhurst]

The issue is not that amount of the benefit paid but the 30 day restriction. I.e., would it be considered a significant detriment if an AP only had 30 days to elect the immediate lump sum option?

[Guest zora]

I don't see why it wouldn't be. Of course, you can force a cash out if the QDRO doesn't say the consent rules apply. But short of that, the consent rules are the consent rules. Many plans ignore the consent rule for QDROs. But the rules are still there.

[J. Bringhurst]

Okay...there is obviously some confusion regarding my post....the question doesn't have anything to do with cash outs. For example, an alternate payee is awarded $50,000 under the terms of a QDRO. Under this particular DB plan's procedures, she can elect an immediate lump sum distribution of this amount. If she does not make this election within 30 days, however, then she can no longer get an immediate distribution...she must wait until the participant's earliest retirement age. Does anyone have a problem with the plan forcing her to make her election within 30 days or to wait until earliest retirement age?

[Guest zora]

A significant detriment question is a cash out question. It all boils down to 411(a)(11), which requires consent to a distribution in excess of $5K and prevents a plan from imposing a significant detriment to that consent.

But if you can cash it out, you don't need consent, and you don't worry about significant detriment. I

If the QDRO does not say 411(a)(11) applies, then you can cash it out (regardless of the amount) and you don't worry about significant detriment.

If the QDRO says 411(a)(11) applies, then you can't cash it out, you need consent, and you can't impose a significant detriment to that consent.

Got it?

[J. Bringhurst]

I removed the term "significant detriment" from my last post as I realize that it applies only in the context of cash outs and this is not a cash out question. I'm only worried about the imposition of the 30 day deadline to enable her to get an immediate distribution. For example, the AP wants to elect an immediate distribution of her $50,000, but she gets deployed to Iraq and makes this election within 45 days (i.e., late)...now she must wait until the participant's earliest retirement age (which is seven years away). This is the issue. Sorry for the confusion caused by my use of the incorrect term.

[Effen]

Since it appears you are comfortable allowing the plan to pay the lump sum even though it wasn't an optional form of payment prior to the QDRO, who pays for the difference in value between the annuity and the lump sum? Does it come out of the participant's share, the AP's share or does the Plan absorb it?

I'm not arguing; I would like to learn how this type of payment is handled.

[J. Bringhurst]

See questions 3-8 and 3-9 from the DOL site: http://www.dol.gov/ebsa/publications/qdros.html

Although this is the first client with whom I've worked that permits a form of benefit to an AP not otherwise provided under the plan to a participant, the DOL appears to contemplate this very issue.

I've only just started working with this client on their QDRO procedures, so I have no idea at this point how they determine the lump sum amount.

[Effen]

What am I missing? This seems to agree with my position that the lump sum should not be paid at all, unless the plan document permits AP's to receive one.

You said before that you treat the QDRO like a plan amendment. Did you mean you treat it like a plan amendment that only applies to one person or would it apply to all future APs? What if that one person was an HCE and the DRO awarded the AP 100% of the participant's benefit to be paid as a lump sum. Seems like a nice way to get a lump sum out of a plan that otherwise can't pay one. May be worth the cost of getting a sham divorce.

3-8: May the QDRO specify the form in which the alternate payee's benefits will be paid?

A QDRO that provides for a separate interest may specify the form in which the alternate payee's benefits will be paid subject to the following limitations:

The order may not provide the alternate payee with a type or form of payment, or any option, not otherwise provided under the plan

...

...

...

Alternatively, a QDRO may (subject to the limitations described above) give the alternate payee the right that the participant would have had under the plan to elect the form of benefit payment. For example, if a participant would have the right to elect a life annuity, the alternate payee may exercise that right and choose to have the assigned benefit paid over the alternate payee's life. However, the QDRO must permit the plan to determine the amount payable to the alternate payee under any form of payment in a manner that does not require the plan to pay increased benefits (determined on an actuarial basis).

A plan may by its own terms provide alternate payees with additional types or forms of benefit, or options, not otherwise provided to participants, such as a lump-sum payment option, but the plan cannot prevent a QDRO from assigning to an alternate payee any type or form of benefit, or option, provided generally under the plan to the participant.

Reference: ERISA §§ 206(d)(3)(A), 206(d)(3)(D), 206(d)(3)(E)(i)(III); IRC §§ 401(a)(9), 401(a)(13)(B), 414(p)(3), 414(p)(4)(A)(iii)

[J. Bringhurst]

What I said in my original post is that we consider the Plan's QDRO procedures to be part of the Plan document. Hence, if the procedures provide for an immediate lump sum distribution option to APs, then the Plan document provides for them (because the procedures are part of the Plan). The availability for an immediate lump sum distribution is available to any and all APs per the QDRO procedures.

In any event, the issue is the 30 day election period for the lump sum option.

[Guest zora]

The answer to your question is you cannot do this if the consent rules apply to the QDRO distribution. This is a significant detriment and, thus, the consent to the distribution is invalid. It makes no difference whether you try to force the distribution (which, I know, you are not) or the AP begs you for the distribution and signs whatever you ask him/her to sign. You still need his/her "consent," which you don't have because you have imposed a significant detriment.