Alternate Payee QDRO Question

[Guest Grumpy456]

I need help with a question. A QDRO assigned 50% of a participant's vested accrued benefit to an alternate payee (the "AP") using the separate interest approach. The participant ("P") retired a few years ago and took his 50% as a lump sum payment. The AP has decided to leave her 50% in the plan.

The AP is quickly approaching age 70-1/2. The P doesn't turn 70-1/2 for another few years. The AP wants to leave her benefit in the plan as long as possible and only begin drawing it out as required under the MINDI rules.

Does the AP have to commence distribution of her benefit by April 1st of the CY following the CY in which (1) SHE turns age 70-1/2 or (2) P turns age 70-1/2?

P is very sick and likely will die before he turns 70-1/2. If he dies before he turns 70-1/2, does the AP have to commence distribution of her benefit by April 1st of the CY following the CY in which (1) SHE turns age 70-1/2 or (2) P would have turned 70-1/2 had he survived?

Thanks in advance for your help.

[QDROphile]

The plan got a stupid start by allowing the AP to postpone start of benefits after the participant started benefits. This is something that Fidelity foists on unsuspecting customers, by the way. Shame on Fidelity for setting up a potential violation. I don't know if you can fix the plan with respect to the AP at this point.

Second, there is no such thing a a separate interest. The 401(a)(9) rules do not divide the benefit and apply the rules to each separately. It is all the participant's benefit, but treated as a separate account with the AP as the spouse. Comply accordingly and see section 1.401(a)(9)-8, Q&A(6) of the regulations.

You have a right to be Grumpy.

[Guest mjb]

A separate benefit is based on the attained age of the employee. 1.409(a)(9)-8 Q/A-6(b)(2).

Q: I dont understand your comment that there is no such thing as a separate interest when the MRD regs recognize that the a separate account can be allocated to the AP. What is the violation where the AP has a separate interest?

[QDROphile]

As your post notes, the separate account is still based on the participant with the AP treated as the spouse, not independent of the participant. I guess we could discuss degrees of separation, but it is not a completely separate interest if the status of the participant still affects the AP's benefit.

[Guest mjb]

But what prevents the plan from allowing the AP to defer her separate share until the ee attains 70 1/2? All the reg says is that the AP can defer until the ee attains 70 1/2. The point of separate shares is to allow the parties to make different elections regarding their separate interests. How does the participant 's status affect the AP's interest? I dont see the evil.

[Guest Grumpy456]

It seems that the answer to my first question:

Does the AP have to commence distribution of her benefit by April 1st of the CY following the CY in which (1) SHE turns age 70-1/2 or (2) P turns age 70-1/2?

is that the AP has to commence distribution of her benefit based on P's age, not her own.

The answer to my second question:

If P dies before he turns 70-1/2, does the AP have to commence distribution of her benefit by April 1st of the CY following the CY in which (1) SHE turns age 70-1/2 or (2) P would have turned 70-1/2 had he survived?

is that the AP has to commence distribution of her benefit based on P's age assuming P survived.

Do I have these two answers right so far?

Now, however, I have the same question as mjb--that is, what legal rule says the AP must commence payment of her benefit no later than the date P commences payment of his benefit (as QDROphile suggests)? We are all familiar with the rules that dictate how soon an AP must be permitted to elect distribution of his benefit, but I am not familiar with the rules that dictate how late an AP can wait to elect distribution of his benefit. When QDROphile writes, "I don't know if you can fix the plan with respect to the AP at this point" I get the sense that something is in need of "fixing", but don't know what or why.

Let's change the facts somewhat. Suppose the QDRO says that the AP shall commence payment of her benefit no later than the date P commences payment of his benefit, but when that time comes the AP refuses to complete the distribution forms.

I get the sense, based on QDROphile's statements, that the plan has a duty to file an action with the domestic relations court that issued the QDRO--which could be in another state--or some court with jurisdiction over the matter to force the AP to complete the distribution forms? Does that seem practical? Isn't the rationale behind the separate interest approach to literally take P's pre-QDRO benefit liability and actuarially convert it into two separate benefit liabilities--one with respect to P and one with respect to the AP (even if the AP can defer payment of her separate interest only until P's RBD)?

If the 401(a)(9) rules say that the plan must commence payment to the AP no later than P's required beginning date (assuming P survived to that date), that's OK with me.

What if a QDRO says the AP may commence payment at P's earliest retirement age (regardless of whether P is employed at that time), but not later than the latest time permitted by law. What is "the latest time permitted by law"? A cite would be perfect.

Thanks so much for the discussion. Interesting stuff.

[masteff]

Basic code sections touching on QDROs are 401(a)(13) and 414(p).

Basic regulation touching on QDROs is Sec. 1.401(a)-13(g).

As for how long pmt to AP can be deferred, reg Sec 1.401(a)(9)-8, Q&A-6, seems to explicitly address it.

I do know some companies take the point of view that they don't want non-employees remaining in their plan any longer than they have to because of fees, etc. Otherwise, I don't get what the potential violation is either. I could see an argument under pre-2002 MRD rules that AP might have to start when EE emptied account. But w/ the 2002 regs (Q&A-6, cited above), I think that argument became invalid. To me, that was the point of the 2002 regs, to allow reasonable continued deferral of pmts.

I guess the other place to look (sorry if I'm stating the obvious) is in the plan itself, since of course the plan can sometimes be less generous than the regs permit on certain aspects. Does the plan provide anything on this w/ respect to the AP?

[QDROphile]

I did not state that allowing the AP to wait until 401(a) (9) requires distribution is a violation or is evil. I think it is not the best way to run a plan because of the administrative complexity. It is simply easier to require the AP to start when the participant starts, which will reduce the chances of violation 401(a) (9) almost to zero. There is nothing to prevent such a plan design because a domestic relations order cannot require a plan to do something that the plan is not designed to do. The plan starts benefits when the participant starts benefits; it does not reserve a portion of the benefit for a later start.

Compare Fidelity (talk about evil!). If Fidelity sets up a separate account that is completely under the AP's control, without regard for the age of the participant (which is what Fidelity does), compliance with 401(a)(9) happens only by chance. Lucky for the 900 pound gorilla that most APs do not have the luxury of postponing payments to the point of violation.

[Guest Grumpy456]

QDROphile makes a good point. I think the following argument is reasonable: The plan contains provisions which control when distribution of benefits may or must begin. The separate interest approach merely allows part of P's benefit to be paid to the AP using actuarial computations based on the AP's age. The part of P's benefit assigned to an AP through a QDRO is still part of P's benefit, right? As such, it is subject to the rules contained in the plan document. If a plan document does not permit P to take part of his benefit at time t and the remainder of his benefit at time t+1, then what is the justification for allowing P to take part of his benefit at time t and the AP to take the remainder of his benefit at time t+1? I think this is what QDROphile meant in "The plan starts benefits when the participant starts benefits; it does not reserve a portion of the benefit for a later start."

So maybe I'm changing my mind. Maybe the answer should always be that the AP must commence distribution of his/her benefit no later than the date P commences distribution of his/her benefit. But what do you do if the AP refuses to complete distribution forms and the value of the benefit exceeds the cash-out limit? File a costly legal claim?

What do others think?

A reasonable counterargument, it seems to me, is that once a QDRO assigns a portion of P's benefit to an AP, the AP payee stands on his/her own as a beneficiary of the trust (not as a participant), i.e., as a beneficiary separate and apart from P and from every other participant. Consequently, other than for the application of the minimum required distribution rules, nothing P does with respect to his benefit (form of benefit, beneficiary designation, commencement date, etc.) matters to the AP. In some ways this approach seems to make more practical sense given the oftentimes contentious nature of divorces.