Court Order Directs Most Money Be Used for Attorney's Fees

[rocknrolls2]

A participant's former spouse has obtained a court order directing the employer's 401(k) plan to pay a specific sum of money, the vast majority of which will be applied toward attorney's fees for the parties and a small portion of which would be applied to the former spouse for rent, security and moving expenses. While the very small portion of the amount of money could be considered to relate to alimony, can the order qualify if a vast majority of the money is applied toward attorney's fees?

[david rigby]

Is how the money will be spent one of the qualifications of a QDRO?

[rocknrolls2]

Is how the money will be spent one of the qualifications of a QDRO?

No, but the definition of a domestic relaitons order is one which "relates to the provision of child support, alimony payments,or marital property rights to a spouse, former spouse, child or other dependent of a participant," Code Section 414(p)(1)(B)(i).

[QDROphile]

The plan does not care how money is ultimately used. The plan only cares that it is a domestic relations order (e.g. issued in connection with divorce) and meets qualification requirements. The plan can pay only an alternate payee. If the order provides for payment to a lawyer, or joint payment to a lawyer and alternate payee, then the order does not qualify. If the alternate payee pays to the lawyer all of the distribution from the plan to the alternate payee, that is not an issue for the plan. Otherwise the plan would be concerned with liquor and cigarettes. It does not matter if the court orders the alternate payee to pay the lawyer, but the order cannot give the lawyer an interest under the plan.

[mbozek]

Is how the money will be spent one of the qualifications of a QDRO?

No, but the definition of a domestic relaitons order is one which "relates to the provision of child support, alimony payments,or marital property rights to a spouse, former spouse, child or other dependent of a participant," Code Section 414(p)(1)(B)(i).

A QDRO can only order a payment from the plan to a party designated as an alternate payee under 414(p). Lawyers are not designated as APs who can receive payment from the plan. There was recent federal court case which rejected payment to an attorney for the AP under a DRO. What is usually done is that the QDRO provides for payment to the AP who then endorses the check over to counsel.

[lrc14]

I am dealing with a similar situation except that the Court ordered the plan to distribute the participant's interest to the participant to pay various attorneys' fees and the participant is in jail and refused to do so, so the court then appointed someone attorney-in-fact for the participant and is now ordering the plan to distribute to this attorney-in-fact. Thoughts on this?

Is how the money will be spent one of the qualifications of a QDRO?

No, but the definition of a domestic relaitons order is one which "relates to the provision of child support, alimony payments,or marital property rights to a spouse, former spouse, child or other dependent of a participant," Code Section 414(p)(1)(B)(i).

A QDRO can only order a payment from the plan to a party designated as an alternate payee under 414(p). Lawyers are not designated as APs who can receive payment from the plan. There was recent federal court case which rejected payment to an attorney for the AP under a DRO. What is usually done is that the QDRO provides for payment to the AP who then endorses the check over to counsel.

[Kevin C]

Can you provide more information?

What kind of plan? Defined contribution or defined benefit?

Is the participant's vested benefit worth more than $5,000?

Are the attorney's fees more or less than the value of vested benefits?

What kind of Court?

Do the plan provisions require the participant to receive a distribution now?

Is the participant eligible to receive a distribution now?

[lrc14]

401(k) plan

Yes, the vested benefit is greater than $5,000

The attorneys' fees will eat up almost all of the benefits; any left over amounts are to go to the AP

State Family Court

Distribution not required now, but the participant is eligible to receive one because he terminated employment (will be in jail for 20+ years)

The Family Court appointed an attorney in fact for the participant against his will (or at least without his consent), and the attorney in fact has requested distribution.

Thanks for any input you may have!

Can you provide more information?

What kind of plan? Defined contribution or defined benefit?

Is the participant's vested benefit worth more than $5,000?

Are the attorney's fees more or less than the value of vested benefits?

What kind of Court?

Do the plan provisions require the participant to receive a distribution now?

Is the participant eligible to receive a distribution now?

[Ron Snyder]

Sounds like an appropriate time for the Plan Administrator to take advantage of the interpleader statute.

[QDROphile]

Same answer from me as above and from mbozek. A plan can pay only an alternate payee or an approppriate custodian for an alternate payee. If the orer provides for payment by the plan to someone else, it is not qualified and ineffective.

[mbozek]

401(k) plan

Yes, the vested benefit is greater than $5,000

The attorneys' fees will eat up almost all of the benefits; any left over amounts are to go to the AP

State Family Court

Distribution not required now, but the participant is eligible to receive one because he terminated employment (will be in jail for 20+ years)

The Family Court appointed an attorney in fact for the participant against his will (or at least without his consent), and the attorney in fact has requested distribution.

Thanks for any input you may have!

I think the first question is whether the plan permits distributions to be requested by a personal representative of the participant when a participant is able to make decisions and secondly whether the appointment of an attorney in fact by the court without the participant's consent is permiitted under state law. If the answer to either question is no then the plan should deny the request for benefits under the claims procedure rules because payment is not allowed under the plan.

If the answer to both questions is yes then I would consider interpleader or outright denial of the claim on the grounds that the payment to the attorney in fact would be a breach of fiduciary duty because it is not for the exclusive benefit of the participant. If the plan pays the attorney the participant could request a payment when released from prison because he is entitled to a vested benefit The better alternative for the plan would be to pay the benefits to the participant and let the court appointed attorney sue the participant under under a state law claim such as restitution.