Child Support QDRO Paid to AP instead of Agency

[Guest ggbrock]

So I've got a doosy here...any help or thoughts would be much appreciated.

We have a QDRO and preliminary determination letter that permits a benefit payment to the AP on the PPT's early retirement age (which was reached as of 2008). It is a VERY large amount, payable in a lump sum. The Order (Texas famly court) and Letter specifically state that payment will be made to the AP, 'care of' the AP's account in the Texas Child Support Office stated in both the order and letter.

The AP called up plan and requested election forms on 1/1/08. She filled them out as payable directly to her in a lump sum. Do to an administrative error, the fact that the letter/order stated that the benefit was payable to the child support office was overlooked.

Now, last week, child support office contacts plan and says "What happened to that payment? We never received it."

How would you approach this? Obviously, we can request that AP repay the plan, but over a year later, this is in my opinion highly unlikely to happen. A second option would be to take the approach that only a former spouse can be the AP, the former spouse was the AP, she should take the responsiblity for filling out the election forms properly and let the child support agency sue her. However, my thinking is that they will be much more likely to sue the company/plan rather than this person, and they do have a letter and order directing payment to be made to them. The final alternative -- which unfortunately seems to be the only viable one - is that the company request payment from AP and to the extent payment is not made, it pays child support office outside of the plan.

I will add one thought: the check is made out to her, but "care of" the agency. Does this help the second alternative suggested above?

[QDROphile]

I would argue that the only way that the benefit could be delivered to the agency was if the AP has designated the agency as the AP's agent. The designation was accomplished under the terms of the order. It was not a good idea for the plan to qualify the order as written without at least some interpretive clarification, but that is in the past. I assume the terms of the order do not make the designation irrevocable. The AP subsequently revoked the agency and got the payment directly.

You need a lot deeper thinking about the entire situation before proceeding. And even if I am right, you will have a lot of fun teaching a judge about how anti-assignment rules trump the state's child support regime, whether or not you are in federal court.

Oh, I almost forgot. You are in the second worst possible state to get the technically correct outcome. Maybe the worst. At least the death penalty is not involved, yet.

[Guest ggbrock]

"I would argue that the only way that the benefit could be delivered to the agency was if the AP has designated the agency as the AP's agent. The designation was accomplished under the terms of the order. It was not a good idea for the plan to qualify the order as written without at least some interpretive clarification, but that is in the past."

I apologize if I wasn't clear. The Plan definitely did 'qualify' the order by way of an interpretive preliminary determination letter, in which it stated that the AP was the ex-spouse, and that benefits were payable on behalf of the ex-spouse to the child support agency. So I think there is a clear designation. I don't know whether or not this designation would be deemed 'irrevocable' but it seems to me with the Order and the letter stating the payment should go to the agency, this is pretty clear.

How does that change your thoughts, if you don't mind me digging? And what makes you state that it is one of the worst states?

This is one of the reasons why I wanted to post; curious as to what effect state law might have in this instance.

[QDROphile]

Nothing in your clarification is contrary to my message and nothing changes the thought. If you like the thought, you have to arrive at the characterizations by interpretation of the order. The order does not express a designation by the AP as a representative. You have to infer that. I think the order actually just improperly provided for delivery of payment to the agency and the plan did not pay attention to the apparent impropriety and get the issue cleaned up at the determination stage.

With respect to Texas, I will exercise unusual discretion for me and simply relay one fact among many that I could relay. Some years ago, some Texas bar association, in an apparent attempt to to assist its members who may have been incompetent to draft QDROs, published a model domestic relations order. Were it comprehensible, I would have declared it grossly misguided at best. But since it was incomprehensible, orders submitted with its assistance were summarily rejected. The proponents of the unfortunate orders themselves did not know what it meant, so they could not justify the terms or made appropriate modifications to make the terms work according to intent (in case anybody really had any intent).

I am not competent to comment even infomally on Texas law. But I expect that the agency thinks it is owed at least some of the money because it had been supporting the child to some degree and wants to recoup under the QDRO. I doubt that the agency thinks it is merely a conduit to get the child support funds to the former spouse from the participant. That expectation and doubt explains what I think the QDRO really meant and therefore has to be recharacterized.

[QDROphile]

Nothing in your clarification is contrary to my message and nothing changes the thought. If you like the thought, you have to arrive at the characterizations by interpretation of the order. The order does not express a designation by the AP as a representative. You have to infer that. I think the order actually just improperly provided for delivery of payment to the agency and the plan did not pay attention to the apparent impropriety and get the issue cleaned up at the determination stage.

With respect to Texas, I will exercise unusual discretion for me and simply relay one fact among many that I could relay. Some years ago, some Texas bar association, in an apparent attempt to to assist its members who may have been incompetent to draft QDROs, published a model domestic relations order. Were it comprehensible, I would have declared it grossly misguided at best. But since it was incomprehensible, orders submitted with its assistance were summarily rejected. The proponents of the unfortunate orders themselves did not know what it meant, so they could not justify the terms or made appropriate modifications to make the terms work according to intent (in case anybody really had any intent).

I am not competent to comment even infomally on Texas law. But I expect that the agency thinks it is owed at least some of the money because it had been supporting the child to some degree and wants to recoup under the QDRO. I doubt that the agency thinks it is merely a conduit to get the child support funds to the former spouse from the participant. That expectation and doubt explains what I think the QDRO really meant and therefore has to be recharacterized.

[Guest ggbrock]

Why do you think the Order "improperly" designated the child support agency for payment? Under what law is that improper? I do not think it is improper under ERISA; nothing in the statute or DOL guidance precludes assignment of benefits for child support to an Alternate Payee. (If you disagree please provide citation or rationale). Do you really think that an ERISA Plan can refuse to qualify a domestic relations order that states that the AP is the former spouse and the assignment of benefits is for child support arrearages and therefore payment should be made to the AP, care of the child support agency? This is very common. The plan did not overlook this in the order.

As for Texas, I don't know what your example has to do with this issue in particular. I was asking for your experience because you specifically stated that this was the 'worst state' that we could 'be in'. (Personally, I would not concede that we would ever end up 'in' Texas state court anyway; if there were ever to be an action, it would be removed to federal court, but that is the topic of an entirely separate post.)

But now that we are already way off the original question, given that fact that you appear to never have dealt with a QDRO drafted in this way, I'm curious as to what the experience of others is. I've been practicing ERISA in NYC with some of the best and after analyzing this issue no one has ever thought that it was impermissible or improper for a Plan to assign benefits in this manner. Can you provide any citations if in fact you do not think this is permissible?

[QDROphile]

I tend to be very careful with the anti-assignment provisions of the Code and ERISA, and that means not delivering a payment for a beneficiary to someone else without a very clear understanding of the circumstances and assurance of propriety. I suspect that all of the funds will not end up in the hands of the alternate payee. That may be an appropriate result, but not at the hands of the plan.

Anyway, that is not your issue, except that recognizing the ability of an alternate payee to designate a representative presents an opportunity to interpret that plan is a way that would allow the payment to be made as the plan did rather than as the QDRO said.

[Guest ggbrock]

I understand your concern. But when pressed by the other side -- what would you cite in ERISA that would preclude the Plan from qualifying an order that delivers benefits payable to the AP care of the child support agency to which she owes money, when ERISA/Code clearly specify that she can be an AP and that assignemnt of benefits can be for child support? What would you tell them other then it makes you nervous/you like to be cautious? In my world, they ask these questions. While we've never "liked" these orders, that doesn't mean that the Plan can refuse to qualify them under applciable law. Again, if you could provide any ERISA/Code or case citation for your rationale I would appreciate it.

[QDROphile]

Tax Code section 401(a) (13) and ERISA section 206(d), the anti-assignment provisions of the Code and ERISA. To save you the trouble of observing the the QDRO rules are an exception to those anti-assignment rules, I think the exception applies to the assignment from the participant to the alternate payee. The alternate payee then enjoys the protection of the rules with repect to creditors of the alternate payee. The related regulations and court cases are also informative.

[Guest ggbrock]

I agree with you for the most part. It is this sentence "The alternate payee then enjoys the protection of the rules with repect to creditors of the alternate payee." that I don't see in the law - anywhere. I don't see a provision of the QDRO exception to the anti-assignment rules that specifies that payment of child support pursuant to a valid QDRO must be paid directly to the Alternatre Payee - rather than to the child support agency to which teh Alternate Payee owes child support. If you know of any cases that address this, it would be much appreciated if you could pass the cite along.

[Guest Sieve]

I would agree with QDROphile. I don't think the Child Support Office is entitled to payment under a QDRO without a voluntary assignment by the alternate payee (under Treas. Reg. Section 1.401(a)-13(e)). Notice that the QDRO exception only permits "a payment to an alternate payee pursuant to a QDRO" (Treas. Reg. Section 1.401(a)-13(g).) On the other hand, based on the QDRO/letter, I would not permit the alternate payee to take a distribution without having that voluntary assignment in hand (assuming there was no distribution administrative error, as here).

By the way, the Child Support Office has not been supporting this child. It is probably the agency to which all child support payments must go before being disbursed to the alternate payee (minus a percentage directed to certain state social service agencies). This also is the way that the Court continues to monitor compliance with its order and determines who the deadbeats are, and probably is the rule in most, if not all, states. So, the ultimate liability (if there is any) for not sending the $$ to the State probably will be just the percentage of the payment that the state would have retained from the payment.

[Guest mjb]

Why do you think the Order "improperly" designated the child support agency for payment? Under what law is that improper? I do not think it is improper under ERISA; nothing in the statute or DOL guidance precludes assignment of benefits for child support to an Alternate Payee. (If you disagree please provide citation or rationale). Do you really think that an ERISA Plan can refuse to qualify a domestic relations order that states that the AP is the former spouse and the assignment of benefits is for child support arrearages and therefore payment should be made to the AP, care of the child support agency? This is very common. The plan did not overlook this in the order.

As for Texas, I don't know what your example has to do with this issue in particular. I was asking for your experience because you specifically stated that this was the 'worst state' that we could 'be in'. (Personally, I would not concede that we would ever end up 'in' Texas state court anyway; if there were ever to be an action, it would be removed to federal court, but that is the topic of an entirely separate post.)

But now that we are already way off the original question, given that fact that you appear to never have dealt with a QDRO drafted in this way, I'm curious as to what the experience of others is. I've been practicing ERISA in NYC with some of the best and after analyzing this issue no one has ever thought that it was impermissible or improper for a Plan to assign benefits in this manner. Can you provide any citations if in fact you do not think this is permissible?

You need to check with the TX court and find out why the court issued the order directing that payment be made to the AP c/o of the AP's account at the TX child support agency. This indicates that the proper payee is the TX child support agency stated in the order, not the AP herself. There is a federal statute, 42 USC 666, which requres that each state set up a state agency to collect unpaid child support payments from any payment source from which a deadbeat spouse is entitled to receive funds including specifically in 666(b)(8) retirement benefits in pay status as well as SS benefits. Payments required under this law are to be made to the state agency, not the child or the child's guardian in order to repay the agency for amounts paid out on behalf of the child. The statute specifically notes that ERISA preemption of state law does not prevent recovery of retirement funds by a state agency since the collection of the funds by the state agency is authorized under federal law. The DOL issued an opinion letter in 2001 (2001-11?) that authorizes the payment of the funds by a plan to a state agency if the rules for QDROs are followed other than the requirement for a QDRO that the order directing payment be issued by a court. However, nothing prohibits a state court from signing such an order directing payment by the plan to the state agency which complies with 42 USC 666(b).

If the payment made to the AP last year is a payment that was required to go to the child support agency under 42 USC 666(b)(8) I think the plan is still obligated to pay the state agency and its only recourse is try to recover the funds from the AP.

The only other possibility is that the court mistakenly issued a QDRO under IRC 414(p) directing the plan to make payment to the AP's account c/o the child support agency which should have been rejected by the plan administrator because it authorized payment to someone other than a spouse, former spouse or dependent. The employee may also have a claim against the plan for violation of the non alienation rules for improperly paying the AP as well as disqualification issues.

You need to consult with banking counsel to determine if the endorsement by the AP was fraudlent which may provide the right for the plan to recover the funds from the payee bank for improper payment.

[Guest Sieve]

Interesting post, mjb. I was unaware of much of what you discussed.

I think the advisory opinion you mention is here: http://www.dol.gov/ebsa/regs/aos/ao2001-06a.html It relates to an order directly from a child support agency, but still requires that the determination of a QDRO be completed properly. If the QDRO is proper, the DOL (at least) indicates that payment can be made to an agency if an order for payment is part of a QDRO. Any idea if the IRS agrees with that conclusion under IRC Sectin 401(a)(13)?

[Guest ggbrock]

Thank you! I did look at 42 USC 666 and the relevant Texas Family Code provision cited in the Order is in sync. The DOL Opinion letter you cited is also relevant; however, what that letter did not address is who is the proper Alternate Payee in the context of this type of order (bc under ERISA 206(d)(3)(K) the AP can only be spouse, former spouse, child, or dependent.) Although that letter says that a DRO issued by a state agency will not fail to be a QDRO, it does not state that the agency becomes the AP. The way we have dealt with these in the past would be to designate the agency as the guardian or representative of the child as AP. (Which I think is what should have been done in this case, alleviating any issue with respect to the former spouse). I would argue that under ERISA, if we could turn back time, the proper AP is the child; the payee is the child agency pursant to 42 USC 666; and the payment is an assignment of benefits for child support.

I agree with your conclusion - completely. The only recourse for the Plan at this point is to 1) demand funds back from the AP; 2) to the extent not paid, reimburse the state agnecy. What I'm thinking about now is whether or not the plan can sue her for fraud and not take any action with respect to reimbursing the state agency until that suit has been completed/settled. Counsel is being contacted with respect to the fraud issue.

Thanks very much for your analysis.

[Guest mjb]

I would agree with QDROphile. I don't think the Child Support Office is entitled to payment under a QDRO without a voluntary assignment by the alternate payee (under Treas. Reg. Section 1.401(a)-13(e)). Notice that the QDRO exception only permits "a payment to an alternate payee pursuant to a QDRO" (Treas. Reg. Section 1.401(a)-13(g).) On the other hand, based on the QDRO/letter, I would not permit the alternate payee to take a distribution without having that voluntary assignment in hand (assuming there was no distribution administrative error, as here).

By the way, the Child Support Office has not been supporting this child. It is probably the agency to which all child support payments must go before being disbursed to the alternate payee (minus a percentage directed to certain state social service agencies). This also is the way that the Court continues to monitor compliance with its order and determines who the deadbeats are, and probably is the rule in most, if not all, states. So, the ultimate liability (if there is any) for not sending the $$ to the State probably will be just the percentage of the payment that the state would have retained from the payment.

Under the federal Aid to Families of Dependent Children (AFDC) states receive funds from the US treasury which are paid to custodial parents if child support is not received by the parent. The rules for ADFC were changed 10 years ago because states were not actively attempting to collect overdue child support payments from deadbeat parents on their own which resulted in increased ADFC payments by the US government to the states. Congress enacted 42 USC 666 to force each state to set up an agency to track down all sources of income of the deadbeat to recover the payments made by the state to the custodial parent because of the failure of the non custoidal parent to pay child support to avoid having the state's ADFC payments reduced.

I dont think the IRS will hold another federal law to be invalid especially one that recovers money to the US government.

[Guest mjb]

Thank you! I did look at 42 USC 666 and the relevant Texas Family Code provision cited in the Order is in sync. The DOL Opinion letter you cited is also relevant; however, what that letter did not address is who is the proper Alternate Payee in the context of this type of order (bc under ERISA 206(d)(3)(K) the AP can only be spouse, former spouse, child, or dependent.) Although that letter says that a DRO issued by a state agency will not fail to be a QDRO, it does not state that the agency becomes the AP. The way we have dealt with these in the past would be to designate the agency as the guardian or representative of the child as AP. (Which I think is what should have been done in this case, alleviating any issue with respect to the former spouse). I would argue that under ERISA, if we could turn back time, the proper AP is the child; the payee is the child agency pursant to 42 USC 666; and the payment is an assignment of benefits for child support.

I agree with your conclusion - completely. The only recourse for the Plan at this point is to 1) demand funds back from the AP; 2) to the extent not paid, reimburse the state agnecy. What I'm thinking about now is whether or not the plan can sue her for fraud and not take any action with respect to reimbursing the state agency until that suit has been completed/settled. Counsel is being contacted with respect to the fraud issue.

Thanks very much for your analysis.

I think you need to check TX law to see who is the proper payee. In NY the state child support agency is the designated payee for all payments under 42 USC 666 and there is a specific provision in the CPLR as well as an official order that describes how the payments are to be made. As I understand it under 42 USC 666 each state can set up its own procedures and pass legislation to provide for collection of the payments. Under 666 there is no assignment of benefits for child support to the child support agency because the payments are owed to the CSA as reimbursement for payment it made previously on the child's behalf. Remember under 666 ERISA non alienation does not apply to payments to the CSA.

[Guest ggbrock]

"I think you need to check TX law to see who is the proper payee. In NY the state child support agency is the designated payee for all payments under 42 USC 666 and there is a specific provision in the CPLR as well as an official order that describes how the payments are to be made. As I understand it under 42 USC 666 each state can set up its own procedures and pass legislation to provide for collection of the payments. Under 666 there is no assignment of benefits for child support to the child support agency because the payments are owed to the CSA as reimbursement for payment it made previously on the child's behalf. Remember under 666 ERISA non alienation does not apply to payments to the CSA."

Texas Family Code Title F, Subtitle B, Subchapter A, Section 154.001© provides that the payee is the agency.

Where do you draw your conclusion that under 666 there is no assignment of benefits for child support? I see where 666 notes that preemption of state law doesn't prevent recovery by agency in the cross references but I don't see anything in 666 or in the DOL Opinion letter that states that this "payment" would not be required to be paid pursuant to a valid QDRO. The DOL Opinion letter appears to state that the agency may present a notice that is not technically a court order so long as it meets the other requirements of QDROs. So I don't necessarily think that the plan can just make this payment without either an income withholding notice that meets the requirements of ERISA/Code (except for requiremnt that it be an "order") or an order that qualifies as a QDRO.

[Guest mjb]

"I think you need to check TX law to see who is the proper payee. In NY the state child support agency is the designated payee for all payments under 42 USC 666 and there is a specific provision in the CPLR as well as an official order that describes how the payments are to be made. As I understand it under 42 USC 666 each state can set up its own procedures and pass legislation to provide for collection of the payments. Under 666 there is no assignment of benefits for child support to the child support agency because the payments are owed to the CSA as reimbursement for payment it made previously on the child's behalf. Remember under 666 ERISA non alienation does not apply to payments to the CSA."

Texas Family Code Title F, Subtitle B, Subchapter A, Section 154.001© provides that the payee is the agency.

Where do you draw your conclusion that under 666 there is no assignment of benefits for child support? I see where 666 notes that preemption of state law doesn't prevent recovery by agency in the cross references but I don't see anything in 666 or in the DOL Opinion letter that states that this "payment" would not be required to be paid pursuant to a valid QDRO. The DOL Opinion letter appears to state that the agency may present a notice that is not technically a court order so long as it meets the other requirements of QDROs. So I don't necessarily think that the plan can just make this payment without either an income withholding notice that meets the requirements of ERISA/Code (except for requiremnt that it be an "order") or an order that qualifies as a QDRO.

I am not not sure what your issue is. DOL opinion 2002-03A permitted the payments to be made directly to the state agency as the party to whom payments are to be made even though the state agency is not an alternate payee under ERISA, because the agency is the agent for the child in collecting the payments. According to the facts in the ruling the state agency receives the payments, deposits them in its own account and distributes any amount due after reduction for arrearages due the agency to the custodial parent.

For tax law purposes the employee is taxed on the amounts paid to the agency as an assignment of interest under Notice 89-25

[J Simmons]

Good info, mjb. Do you know if a state agency created per 42 USC 666 may not only be named the actual payee in a QDRO, but also require payment from the plan sooner rather than later? Or may the alternate payee postpone payout and the 666 agency's eventual receipt of it? (To number this provision 666, the codifier must have owed child support!)

[Guest mjb]

Good info, mjb. Do you know if a state agency created per 42 USC 666 may not only be named the actual payee in a QDRO, but also require payment from the plan sooner rather than later? Or may the alternate payee postpone payout and the 666 agency's eventual receipt of it? (To number this provision 666, the codifier must have owed child support!)

I dont think the AP (ex-spouse) can delay payment since the responsibility to collect the funds rests solely with the state agency and the AP is not a party to the order. The purpose of the statute is to permit the states to recover amounts paid out because of the failure of the employee to pay the legally required child support. The only restriction on payment is that the funds must be available for distribution to the participation or in pay status.

I agree with your analogy but it must have been multiple child support.

[K2retire]

I'm very confused. A couple of years ago at an ASPPA conference I heard Derrin Watson vehemently argue that a QDRO for child support could not be paid to ANYONE other than the former spouse -- even if the former spouse did not have custody of the child. How then does a state agency suddenly become a valid AP?

[Guest ggbrock]

I am not not sure what your issue is. DOL opinion 2002-03A permitted the payments to be made directly to the state agency as the party to whom payments are to be made even though the state agency is not an alternate payee under ERISA, because the agency is the agent for the child in collecting the payments. According to the facts in the ruling the state agency receives the payments, deposits them in its own account and distributes any amount due after reduction for arrearages due the agency to the custodial parent.

For tax law purposes the employee is taxed on the amounts paid to the agency as an assignment of interest under Notice 89-25

Thank you! No issue, you've been a great help, I was just trying to 'close the loop' on the issue of how you get around the fact that the statute requires the AP to be spouse, former spouse, child or dependent. 2002-03A clarifies this in great detail. Thank you again.

[Guest ggbrock]

I'm very confused. A couple of years ago at an ASPPA conference I heard Derrin Watson vehemently argue that a QDRO for child support could not be paid to ANYONE other than the former spouse -- even if the former spouse did not have custody of the child. How then does a state agency suddenly become a valid AP?

You are not alone. But ERISA always permitted payments to be made to a child or dependant through a child support QDRO. However, with respect to the state agency Mjb explained the history of this very well if you trace through this post. In particular, the DOL AO 2002-3A that he cited (which discusses a child support state agency getting QDRO payments on behalf of an AP) is helpful to read in connection with 42 USC 666, which is the federal statute permitting the creation of these types of child support state agencies and specifically permitting attachment of private retirement funds. Links to both below:

http://www.dol.gov/ebsa/regs/aos/ao2002-03a.html

http://www4.law.cornell.edu/uscode/42/666.html

[Guest Sieve]

Following up on K2's query -- Does anyone know if the IRS is in agreement with the DOL on this issue?

[Guest mjb]

I'm very confused. A couple of years ago at an ASPPA conference I heard Derrin Watson vehemently argue that a QDRO for child support could not be paid to ANYONE other than the former spouse -- even if the former spouse did not have custody of the child. How then does a state agency suddenly become a valid AP?

Maybe Derrin doesnt know everything about child support. Under 42 USC 666 the Child Support Agency is enforcing its own claim of right under federal law to recover the funds it paid to the child by seizing the retirement benefits of the plan participant as an exception to the rule that state garnishment laws are preempted by ERISA. For ERISA purposes the CSA is acting as the agent of the child in collecting funds owed to it from the plan (DOL opinion 2002-03A) which makes the child the AP. Its my understanding that a minor child cannot legally enforce their rights or act on their own behalf but need an agent or guardian to act on their behalf.