Owner/Trustee/sole officer of Corp. is served a DRO

[John Feldt ERPA CPC QPA]

The 100% owner of a corporation (50 employees) is also the Plan Administrator and the only Trustee of the plan. They are also the only officer of the company.

A DRO is served regarding this owner's benefits in the 401(k) plan (account is about $60,000).

The QDRO procedure would have the Plan Administrator review the order to determine if it is qualified. The Plan administrator is the Employer. Thus, the detemination of the qualified status of the order would be done by the participant to whom the order concerns.

Any problems with that? or guidance you may want to provide?

-Thanks!

[JanetM]

HMMM, I guess I would ask if this is in connection with an actural divorce or is this some kind of way to get funds out of the plan without 10% penalty.

If this is an actual divorce and noted in property settlement then I don't see an big issue.

[John Feldt ERPA CPC QPA]

It's an actual divorce. I don't think it's a problem either, but since we had never come across exactly this scenario over the last few hundred QDROs that we've seen, well, asking extra experts is best. A local ERISA attorney agrees that this is probably not an issue as long as both parties have agreed to the terms of the order anyhow...

[Kimberly S]

It might be prudent to have the plan sponsor's attorney assist with the determination of whether the DRO is a QDRO.

[Peter Gulia]

Although not necessarily required by ERISA’s Part 4, the better practice is for a sole fiduciary who also has a personal interest in a decision to recuse himself or herself from that particular decision, handing it off to a temporary fiduciary who is not a subordinate of, and free of any material conflicting interest concerning, the conflicted person and the decision.

Some employee-benefits lawyers and other practitioners are comfortable serving in this plan-fiduciary role. Avoiding a conflict that could affect a fiduciary’s exercise of his or her best judgment solely in the interests of the plan can be a “necessary” service in the sense of one that’s “appropriate and helpful to the plan” within the meaning of 29 C.F.R. § 2550.408b-2(b). Thus, the reasonably incurred expense for this service can be a proper plan expense. It may be allocated among all individuals’ accounts if that’s what the plan, or a prudently-decided expense-allocation procedure, provides.

A second-best way is Kim Sheek’s idea of enabling the conflicted person to defend his or her decision by saying that he or she relied on what he or she assumed to be objective advice from an expert lawyer. (This is second-best because rendering advice is not the same thing as making the decision.) The terms of the engagement or task should make clear that the lawyer advises the decision-maker as plan administrator, not personally. The lawyer should be one who is unassociated with any lawyer who advises the participant regarding divorce or domestic relations. Further, the terms should seek to remove conflicting interests by, among other things, paying the lawyer his or her full fee before he or she begins work. The plan’s expense may be allocated as generally described above.

That said, a conflicted decision (using neither of these methods) to approve a court order as a QDRO is unlikely to draw an objection from the alternate payee (even if the order is not a QDRO).

But if a participant who also acts as the sole fiduciary decides that a submitted court order is not a QDRO, it’s much more likely that the alternate payee might raise objections.

In facing such a challenge, the conflicted person should fare much better if he or she:

(1) was correct in the decision;

(2) sent a denial letter that cited the relevant plan or ERISA provision concerning each defect, and explained how the submitted order failed to meet the requirement; and

(3) made his or her decision following an expert lawyer’s advice.

Some people might think that it’s somehow unfair for a plan’s other participants to bear their pro rata share of an expense for a situation like this. But remember, those participants have generally enjoyed the reduced expense (perhaps with some disadvantages too) of having an unpaid volunteer serve as the plan’s administrator: from inception or at any time, the business owner could have named a paid plan administrator.

If the fee for a temporary fiduciary’s service is less than, or not significantly more than, the fee for an expert lawyer’s advice, acting in the plan’s best interests might mean that the conflicted fiduciary should prefer the temporary fiduciary. Further, some lawyers who are available to serve in either role sometimes have lower rates for serving as a plan fiduciary.

[John Feldt ERPA CPC QPA]

That's very good advice. The plan discloses in it's SPD that expenses for QDRO reviews will be charged directly to the affected participant's account.

[Peter Gulia]

The plan administrator (likely with your help) might want to review the SPD, other expense-allocation procedure (if any), QDRO-determination procedure, and any other documents that relate to this expense allocation to consider whether they're clear or ambiguous concerning whether the QDRO-review expense is charged before or after the segregation of the participant's and alternate payee's portions, and what portion of the expense is allocated to the alternate payee.