Placing a hold on participant's account

[Guest uberzete]

First time poster here.

I am curious if anyone knows where to find any information about best practices for QDRO procedures related to placing hold on the participant's account. Specifically, how long should a participant's account be frozen once the administrator receives notice that a QDRO is forthcoming but has not yet received a DRO.

The statute is no help in this area (there's only legislative history indicating that the time should be "reasonable"), there are no court cases on ths point (only one that I found that discusses it in dicta), and I can't seem to find any administrative guidance.

I'm new to the ERISA/Benefits Law area, are there any suggestions for where I should look for guidance? Did I miss something (i.e., a DOL advisory opinion)?

[ETA Consulting LLC]

I think it is typically 18 months. Just shooting from the hip. It should never get to that point, but the objective is to ensure two principles are maintained:

1) You don't want to distribute funds to the participant that his spouse or child may be entitled to once the DRO is delivered and qualified. Basicially, you're preventing the participant from raiding the account in anticipation of the pending QDRO.

2) You do not want to, indefinitely, deny the participant his right to a distribution that he would otherwise be entitled to under the written terms of the plan. 18 months may be excessive, but you cannot arbitrarily delay a distribution for an indefinite period of time. What you could do is determine the amount at risk, and place a hold on only those amounts (create a sub account FBO the same participant) in order to allow him access to other funds he would normally be entitled to (only after ascertaining the QDRO isn't being vetted at 100% of his account).

I don't believe you'll find a hard-fast number as it is more of the Plan Administrator's judgement with respect to these two principles.

Good Luck!

[GMK]

After the plan receives a DRO (in writing, signed by the judge, and like that), the plan has 18 months to determine if the DRO is qualified (but it shouldn't take that long). For reference, the divorce decree may be DRO, although it is usually missing some of the information required to make it Qualified.

If the plan receives WRITTEN notice that a DRO is coming at a time when the participant's benefit is not in pay status, the Plan Administrator can take actions to prevent distributions to the participant that would leave too little for the eventual alternate payee. Actions may include suspending distributions.

If the account is in pay status, however, then the participant cannot be denied distributions until the Plan Administrator receives a DRO.

The plan should have a written QDRO procedure.

Previous discussions that might be of interest:

http://benefitslink.com/boards/index.php?showtopic=48999

http://benefitslink.com/boards/index.php?showtopic=48385

Good luck.

[ETA Consulting LLC]

Correct, but I think uberzete was referring to the hold placed prior to the actual written DRO (prior to the 18 month determination period). That makes the equation more flexible since no 'substantive' action was taken but to merely advise the plan that something is in the works. But, you are correct for actions once the written DRO is received.

Hope this helps.

[GMK]

If the account is in pay status, however, then the participant cannot be denied distributions until the Plan Administrator receives a DRO.

I think there can't be a hold if the account is in pay status, not until the DRO arrives.

[ETA Consulting LLC]

Sure they can, upon written notice that one would be forthcoming. It can't be done in an arbitrary fashion, but assets can be frozen by court order during a pending DRO. It happens all the time. Ultimately, it would be up to the Admistrator's judgement with respect to the time that is most appropriate.

Good Luck!

[GMK]

uberzete - Here's what our procedure does:

If, prior to receiving a DRO, the Plan Administrator receives written notice that a DRO is in the works:

1. Notify the participant and each potential alternate payee specified in the notice of receipt of the notice. We also send a copy of the QDRO procedure, so they know what we will and will not do.

2. If the benefit is NOT in pay status, take such actions as necessary to maintain the benefit, including possibly suspending distributions.

3. If the benefit is in pay status, take no actions to maintain the benefit, until the Plan receives a DRO.

4. Define "in pay status"

5. Address what happens to distributed dividends, if any.

6. Set a 90-day limit. If the Plan does not receive a DRO within 90 days after receiving the notice, revoke all actions. If a second notice of a pending DRO arrives, the Plan Administrator may repeat item 2, above, if the benefit is not in pay status at that time.

Others may do things differently, but this gives you an example. Keep in mind that the benefit belongs to the Participant. Until there's a QDRO, the benefit cannot be assigned or alienated, voluntarily or involuntarily. Of course, you take into account what a divorce decree says (to the extent they'll tell you), and plan accordingly to the extent you can.

[ETA Consulting LLC]

GMK,

You are correct. We got hung up on the semantics of what it means to be 'in pay status'. I was basically stating that if the participant is eligible for a distribution (thinking DC plan), then it would be frozen. Otherwise, there would be no reason to put a hold on the benefit. However, if the participant is already receiving distributions, then they will definitely continue as his stream of payments would not be interrupted until the DRO is received.

Do we agree that "in pay status" does not mean merely "eligible for distribution"?

[GMK]

Do we agree that "in pay status" does not mean merely "eligible for distribution"?

Yes, we do.

Because of the possible confusion about what the phrase could mean, we specify how the Plan interprets it in our QDRO procedures, for the people working on the QDRO, for the next person who sits in my chair, and most importantly, for me.

[mbozek]

Sure they can, upon written notice that one would be forthcoming. It can't be done in an arbitrary fashion, but assets can be frozen by court order during a pending DRO. It happens all the time. Ultimately, it would be up to the Admistrator's judgement with respect to the time that is most appropriate.

Good Luck!

Where is there authority under ERISA for a plan administrator to enforce state court orders that a participants assets to be frozen? Freezing a participant's benefits in the absence of a QDRO violates the participant's rights to vested benefits. ERISA only recognizes QDROs which divide a participant's benefits as an exception to the nonalienation rule. If plan procedures permit Plan admin can segregate plan benefits in anticipation of a DRO to be issued in a reasonable period of no more than 60 days. Plan admin cannot withhold payment of benefits which are not subject to AP claims because withholding payment would violate participant's right to plan benefits. Plan Admin must receive written notice from AP's attorney that DRO has been submitted to state court or copy of order filed with court.

Plan administrator should not allow QDRO process to be manipulated by AP to delay benefits payable to participants as a means to gain leverage over participant. Participant is entitled to receive benefits not subject to QDRO claim by AP.

[ETA Consulting LLC]

It's item #2 in GMK's post.

[GMK]

If there was any doubt, be assured that GMK is not ERISA.

After further review, item 4 in our procedures, defining "in pay status," pretty much says that item 2 applies at times when the participant couldn't receive a distribution anyway (so it's pretty easy to maintain the status of the benefit).

We have made distributions to participants while we knew that a DRO was being developed. Generally, the DRO was going to take 50% as of a given date, and the distribution was much less than 50% (not that that would have mattered).

As I understand it, if the plan doesn't receive the DRO soon enough to prevent distribution of plan benefits to the participant, the ex has to go back to court to get the 50% or whatever percentage from the participant another way.

[ETA Consulting LLC]

If there was any doubt, be assured that GMK is not ERISA.

LOL! This language is directly from the DOL's literature on QDROs. They have additional language explaining why the position is. It would be totally irrelevant to say "suspend distributions" when there is no opportunity under the plan for the participant to receive a distribution.

Good Luck!

[Guest uberzete]

Sure they can, upon written notice that one would be forthcoming. It can't be done in an arbitrary fashion, but assets can be frozen by court order during a pending DRO. It happens all the time. Ultimately, it would be up to the Admistrator's judgement with respect to the time that is most appropriate.

Good Luck!

Where is there authority under ERISA for a plan administrator to enforce state court orders that a participants assets to be frozen? Freezing a participant's benefits in the absence of a QDRO violates the participant's rights to vested benefits. ERISA only recognizes QDROs which divide a participant's benefits as an exception to the nonalienation rule. If plan procedures permit Plan admin can segregate plan benefits in anticipation of a DRO to be issued in a reasonable period of no more than 60 days. Plan admin cannot withhold payment of benefits which are not subject to AP claims because withholding payment would violate participant's right to plan benefits. Plan Admin must receive written notice from AP's attorney that DRO has been submitted to state court or copy of order filed with court.

Plan administrator should not allow QDRO process to be manipulated by AP to delay benefits payable to participants as a means to gain leverage over participant. Participant is entitled to receive benefits not subject to QDRO claim by AP.

Mbozek, there is no statutory language in ERISA that states that an account must be frozen. The legislative history for the bill that created QDROs states that the plan administrator can freeze the account for a reasonable amount of time once the PA receives notice of a forthcoming QDRO. It's in H.R. Rep. No. 99-841 at pg. 4945 (conference report from 1986) and the Joint Committee on Taxation's Explantion of Technical Corrections to the Tax Reform Act of 1987 (at pg. 225). The problem is defining reasonable period of time. You're right that the assets belong to the participant until a DRO is qualified, but there's a tension with a policy of protecting the future rights of an alternate payee.

Also, I appreciate all of the input on this thread!

[mbozek]

Uber:

Qdros were created two years earlier as part of the Retirement Equity Act of 1984.The Tax Reform Act of 1986 amended some of the tax provisions for QDROs. The legislative history of REA does not authorize a plan administrator to suspend benefits before a DRO is received by the plan administrator. Also the DOL publication on QDROs published in 1997 does not mention either of the two cites in your post even though other legislative history from the 1986 tax reform act is referenced.

The prevailing precedent to allow suspension of benefit payment in advance of a QDRO is Shoonmaker v. Amoco 987 F2 410, where the court allowed a plan to place a hold on trading in a participant's 401k plan account when notified of the divorce decree approved by a court even though the plan's QDRO procedure only permitted the plan to place a hold on the account after a DRO was received by the plan.

As far as ERISA is concerned, a plans Qdro procedure could limit holds on a participants benefit only after a DRO is received. There is no need to restrict distributions upon notice of a divorce decree because the participant is subject to a state court order to freeze the benefit after it is in the possession of the participant.

In any event the amount subject to restriction in the Qdro procedure cannot exceed the amount payable to the Alternate payee.

[BG5150]

What entails "freezing" an account?  I've done a few QDROs over the years, but never gave it much thought what happens at the record-keeper.

My (semi-educated) guesses:

Contributions continue

Distributions & loans are suspended

What about exchanges between investments?  Are they suspended?  

[Teresa Johnson]

My retirement plan was frozen 3 months before qdro was signed by a judge. Is this legal? Also, it's been 3 years since I've been able to access my retirement plan. Still have no access.

[Effen]

What does the Plan Administrator say is the reason you don't have access?

Yes, once the PA knows a QDRO is coming it is fairly common to freeze the account to prohibit the participant from taking money that belongs to the Alternate Payee.  If it has been 3 years, has the QDRO been finalized?  If so, there should be no reason for you to not be able to access your piece of the account.

[Teresa Johnson]

The plan was in pay status and a dro.. was not signed 

[Teresa Johnson]

Plan administrator froze account with a phone call only

[david rigby]

The Plan is required to have QDRO procedures, and procedures must be "reasonable".  Maybe it's just me, but 3 years does not seem reasonable. 

The DOL has 3 different FAQ documents about QDROs here.  The Pension Rights Center has some information and links here.

You probably need an attorney who is well-versed in QDROs.

[Effen]

Thank you.  You said "the plan was in pay status".  Does that mean:

1) you were receiving monthly benefits when the PA was notified that a DRO was coming

2) Once they were notified, they froze your monthly payments.  

3) Your payments have been frozen for over 3 years waiting for the DRO to get finalized?

I agree with David.  Most QDRO procedures have a time limit (6 -12 months) to finalize the DRO.  If the DRO isn't finalized, benefits should recommence until it is finalized, but at that point it would only impact future payments.  Ask the PA for a copy of the DRO procedures, then contact an attorney to get things rolling.

Why hasn't the DRO been finalized?  You should also be pushing to get that done.

[char Nahashon]

So if the plan has agreed to it being a good QDRO and sends for Judges signature but the Judge does not sign because now the ex does not agree how long should one wait for a QDRO? I'm going on 4 years of delay and they are getting gains and or losses during this time right?

 

[QDROphile]

Unless the plan has screwed up and adopted provisions that the law does not require, the plan does not have to do anything without a domestic relations order, and should not do anything, including “put a hold” on the account, which easily means no messing with investment instructions and, more difficult, following instructions about distributions.

[char Nahashon]

Well mine has been frozen and the the admin said until the QDRO is signed by the Judge it will not be touched. Oh and she said I have to wait. Just wondering if they continue the game of entering a new QDRO every 10 months will keep me from my funds as it has for the past 4 years now. Thank you for your reply.