Restricted Benefits and Alternate Payees

[davef]

If an HCE is subject to the restricted benefits provisions under Reg. Sec. 1.401(a)(4)-5(b), and then gets divorced, is the alternate payee under a QDRO also subject to the restrictions? Or can the AP get a lump sum payment, if permitted under the plan? The regs seem to say that the restrictions only apply to the HCE.

[Andy the Actuary]

This is not a definitive answer but if the divorced spouse were not subject to the restrictions, a lovely couple could subterfuge around the restrictions simply by getting a divorce and assigning 100% to the alternate payee (e.g., the participant's loving ex-spouse). This, of course, is hardly worth the trouble unless the lump sum were say about $2 million.

[tymesup]

An alternate payee can't get something the participant can't get.

[Andy the Actuary]

An alternate payee can't get something the participant can't get.

Wrong -- the alternate payee gets freedom from the participant!

[davef]

I'm not sure I agree that the AP can't get something the participant can't get. A QDRO can't "require a plan to provide any type or form of benefit, or any option, not otherwise provided by the plan." But I don't see anything that ties an AP's form of payment to the participant's form of payment. If the plan's restricted benefits provisions apply only to HCEs and former HCEs, that could be interpreted to say that all other with rights under the plan can receive any form of payment allowed under the plan, including a lump sum.

[QDROphile]

Consider that an alternate payee's benefit is aggregated with the participant's benefits for purposes of section 415 and 401(a)(9). I would extend the principle.

[davef]

Absent any subterfuge mentioned by Andy the Actuary, I'd still have a hard time explaining to an AP that we were denying him/her a lump sum based on the principles in 415 or 401(a)(9), considering the benefit restrictions are under the 401(a)(4) nondiscrimination regs. If the AP says "Show me where the rules say I can't get a lump sum", I'd be hard pressed to come up with a definitive citation.

[jpod]

davef: I am leaning towards what I think is your interpretation: the limitations apply only to the persons specified in the regulation, which would not appear to include an AP who is not, independently, an HCE or former HCE. I did not go beyond the 401a4 reg and carefully review 414q and guidance under 414q, and I certainly did not look for PLRs and other less official guidance. But assuming you have done that and come out clean, I don't see a problem. I think the bogus divorce argument is ineffective. Analogizing to other Code requirements that specifically address the issue is the wrong approach, I believe. The fact that the issue is specifically addressed for other Code purposes suggests that you don't trap the AP for this purpose.

[jpod]

davef: I forgot one thing. Beware of the language in the reg that says you must restrict payments to OR ON BEHALF OF a restricted employee. Does that language merely mean you can't get around the restrictions by paying an amount to which the restricted employee is entitled to someone else (per a voluntary assignment under the 401a13 regs)? Or, could it trap a payment to the AP with respect to the restricted employee? I favor the former, but I admit it creates an issue to explore further.

[davef]

jpod, you make a good point about the ON BEHALF OF language. And I'm tending to agree that its purpose to to prevent "end around" type arrangements that are intended to skirt the restricted benefits rules. I don't think that an AP could be viewed as taking a benefit "on behalf of" the participant, since that would imply the AP is acting as sort of an "agent" for the participant, which certainly is not the case.

[Everett Moreland]

Q&A 14 of ASPPA's 2001 IRS Q&A gives the IRS view that the restrictions apply to payments to alternate payees

[davef]

Any easy way to see IRS's response from 2001?

[david rigby]

See Gray Book Q&A 2003-25.

"The high-25 restriction applies to the combination of the benefit paid to the participant and the spouse."

(sorry, my copy does not allow me to copy and paste)

[davef]

Thanks. Was the question phrased in terms of a current or former spouse?

[david rigby]

"current or former"?

Does not matter. It refers to a QDRO.

[jpod]

I for one would be curious to see the reasoning behind the IRS' answer. On the one hand I could justify the result, assuming we were operating on a clean slate. On the other hand the IRS can't just make up a rule that is not a reasonable interpretation of its own regulation covering the subject matter.

[davef]

"current or former"?

Does not matter. It refers to a QDRO.

The reason I asked was because I didn't have a copy of the Gray Book or the question. The answer by itself would not necessarily lead one to conclude that the question related to a former spouse under a QDRO. What was the original question?