Automatic Payout and MRD rules impact on QDROs

[J Simmons]

Suppose that in a DC plan, EE divorces and ex-spouse is awarded $100,000 of benefits. The plan provides, and thus ex-spouse can take withdraw the $100,000 (as adjusted by any subsequent investment experience) at any time. Ex-spouse chooses to leave the money in the plan.

The plan calls for default payout, as a lump sum, at the time participant's reach the later of normal retirement age or age 62. The plan also requires payout by December 31 of the year in which the participant reaches age 70 1/2.

Question 1: If there has been no withdrawal or election by the ex-spouse by the time the employee reaches the later of normal retirement age or age 62, does the plan automatically pay the ex-spouse a lump sum? What if the QDRO, as many do, simply provides that the payout of the awarded portion is at any time the ex-spouse elects?

Question 2: If the ex-spouse affirmatively elected to postpone payout beyond the time that the employee reaches the later of normal retirement age or age 62, must the plan the plan payout the awarded benefits to the ex-spouse by December 31 of the year in which the employee reaches age 70 1/2?

Question 3: If the employee dies earlier than reaching age 70 1/2 and the QDRO did not specify the ex-spouse as the "spouse" of the awarded portion, is the ex-spouse considered a non-spouse death beneficiary as to the awarded portion with MRD either 5th year post death, or over ex-spouse's lifetime beginning the year after death?

[QDROphile]

Treas. Reg. section 1.401(a)(9) Q&A(6) should answer #3, will help with the other questions, and suggests that the plan and the written QDRO procedures should have provisions for mandatory distributions to an alternate payee that will assure compliance with 401(a)(9). I go for sure compliance rather than allowing anyone to achieve maximum deferral under the plan, which means the alternate payee must start benefits at the earliest of participant's start of benefits, death or age 70 1/2. If the prototype document does not serve, don't buy it. Oh, I forgot. Prototypes are free.

Is your provision for distribution at NRA/62 a provision applicable to former employee participants? If so, I would not apply it to an alternate payee if the participant is still employed.

This is one of the best examples of why there is no such thing as a completely separate "separate interest" QDRO.

[Guest mjb]

Since the AP is a beneficiary for all purposes under the Plan, the APs right to defer benefit commencement will be the same as any other bene under the plan in the absence of any special provision in the QDRO to the contrary. What does the plan provide?