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State Agency Order to Pay Child/Spouse Support from DC Plan


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The custodian of the assets of a 401k Plan recently received a letter from a State agency directing the Custodian to pay child/spousal support from the account of a terminated participant. The Custodian sent a letter back to the State agency (and copied the Plan Sponsor) saying they are not able to make a distribution of assets without the direction of the Plan Sponsor. The Plan Sponsor has asked what should be their response to their anticipated receipt of a letter from the State agency.

A couple of questions:

1) Does the state agency have the right to demand payment from a participant account which has not been distributed?

2) Does the request need to follow the rules of a DRO have the SSN, address of the participant, name of the Plan, signed by a Judge, etc. to be a valid order?

This is the first one of these I have seen and would greatly appreciate any advice which you could provide for how the client should respond. Thank you!

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First, this is a matter for the plan administrator, not the employer or sponsor. The employer might be the plan administrator if it is not well advised.

Second, the agency order might be a domestic relations order, so it might need to be treated with the appropriate formalities, and the order might be revised to cover all the qualification requirements and be effective as a QDRO. Hint: The definition of domestic relations order is not limited to court orders. The agency might not be savvy enough to work with all of its available tools, but the plan had better be receptive to appropriate extraordinary approaches.

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Thanks GMK - since the accrued benefit is not in pay status it doesn't look like the state can require the sponsor to issue a distribution to the requesting agency. I will advise the client - :D

If the claim is being made by a state child support agency, then the plan administrator has the obligation to pay the 401k benefits to the state agency under 42 USC 666(b) if benefits are in pay status. What needs to be reviewed is whether the benefits are in pay status and can be paid since the participant has terminated employment and distributions from a 401k are available after termination. It may also be possible that the state agency can impose a lien on the participant's benefit which will require payment to it when the participant requests a distribution.

Since the payment by the plan directly to the state agency is required under federal law, preemption of state law under ERISA is not available as a defense.

If the Plan administrator does not pay the benefits owed to the state agency under 42 USC 666(b), then the employer will be liable to the state agencey for the amount of child support.

mjb

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Guest bobolink

We've started to include provisions in DC plans that say reciept of a valid QDRO is a distribution event to the extent of the QDRO.

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