Did somebody goof? What triggers a stop?

[Guest JackPoint]

Participant tells plan administrator that he is separating and planning a divorce. Plan administrator knows nothing about QDRO's. Subsequently, participant comes to plan administrator, explains that pursuant to a separation agreement, he had to make a large payment to his spouse, and has been strapped for cash and needs to tap his 401(k) to avoid eviction. He takes the max loan, comes back with an eviction notice, requests a hardship distribution, gets it. Plan makes and has no communication from or to spouse/AP.

Should the plan have permitted the loan and the hardship distribution? Do they have an obligation to put a stop on loan issue and distribution from the plan in the absence of a proposed DRO, even though they know about the separation and possible divorce? Does the plan have potential liability vis-a-vis the spouse/AP's interest in his account? Everyone involved is in California, a community property state.

Thanks -

JP

[J Simmons]

Participant tells plan administrator that he is separating and planning a divorce. Plan administrator knows nothing about QDRO's.

Quite the plan administrator--knowing nothing about QDROs!

Subsequently, participant comes to plan administrator, explains that pursuant to a separation agreement, he had to make a large payment to his spouse, and has been strapped for cash and needs to tap his 401(k) to avoid eviction. He takes the max loan, comes back with an eviction notice, requests a hardship distribution, gets it. Plan makes and has no communication from or to spouse/AP.

Should the plan have permitted the loan and the hardship distribution?

Yes, provided the plan permits such, and the employee met the criteria for the hardship. It would be problematic for the plan administrator to communicate with the spouse (not an AP if there's no QDRO) about what the employee may be withdrawing, unless and until presented an order--barring QJSA being the normal form of benefit under the plan and the benefits exceeding $5,000 in which case the spouse's consent would have been necessary for the employee to take the loan or the hardship withdrawal.

Do they have an obligation to put a stop on loan issue and distribution from the plan in the absence of a proposed DRO, even though they know about the separation and possible divorce?

No, and may violate the employee's rights if a stop is put on under such circumstances.

Does the plan have potential liability vis-a-vis the spouse/AP's interest in his account? Everyone involved is in California, a community property state.

See above. It might come as a surprise to the California courts, but ERISA is a federal law that defines the rights under an employee retirement plan, trumping state law. See the Boggs case.

[QDROphile]

Somebody should read Schoonmaker v. Employees Savings Plan of Amoco Corp, 987 F2d. 410 (7th Cir. 1993), even though the DOL has not read the case. The DOL thinks a whiff of QDRO should cause constipation. The DOL's position is not only legally wrong, based on an inability to read the statute, and oblivious to practicalities of plan administration, it disregards obligations of fiduciaries to respect the rights of participants.

More direct answer: What do the QDRO procedures say? The QDRO procedures should say that the plan administrator will take no action until receipt of a domestic relations order. Until receipt of a domestic relations order, it is business as usual under the plan.

If the plan does not have QDRO procedures that deal properly with such typical issues, the plan administrator deserves all the grief that can come its way, especially if the plan administrator know nothing aobut QDROS. So much the better that being in the sovereign nation of California makes things tougher.

[Guest JackPoint]

Somebody should read Schoonmaker v. Employees Savings Plan of Amoco Corp, 987 F2d. 410 (7th Cir. 1993), even though the DOL has not read the case. The DOL thinks a whiff of QDRO should cause constipation. The DOL's position is not only legally wrong, based on an inability to read the statute, and oblivious to practicalities of plan administration, it disregards obligations of fiduciaries to respect the rights of participants.

More direct answer: What do the QDRO procedures say? The QDRO procedures should say that the plan administrator will take no action until receipt of a domestic relations order. Until receipt of a domestic relations order, it is business as usual under the plan.

If the plan does not have QDRO procedures that deal properly with such typical issues, the plan administrator deserves all the grief that can come its way, especially if the plan administrator know nothing aobut QDROS. So much the better that being in the sovereign nation of California makes things tougher.

Many thanks, QP and Mr. Simmons. I'll read the cases, too.

As for the less-than-stellar plan administrator - not a big surprise, right?

JP

[J Simmons]

QDROphile's response was more precise than mine in that he mentioned that it is when the plan administrator is in receipt of a DRO (even before it is determined to be a QDRO) that the plan should put the hold on--which would include loan and hardship withdrawals--except to the extent such could be accommodated out of the portion of benefits that the DRO would not award to the putative alternate payee.