Effect of 10-year old Separation Agreement

[Guest ERISAphile]

The participant was divorced over 10 years ago. At that time the Separation Agreement stated that spouse was to get 50% of 401(k) balance (total balance was about $6,000 at time of divorce). Participant did not present a QDRO, and because he was still working, he did not qualify for a regular distribution at the time of the divorce (loans were not permitted at that time, but are now). Participant paid the ex-spouse $3,000 using non-plan assets and she signed a statement (not notarized and not dated) that he paid her in accordance with the Separation Agreement. Now participant is applying for a plan loan. The account has about $150,000 now and participant wants to borrow $50,000. As plan administrator, we think that the outstanding award in the old Settlement Agreement prevents us from making a loan. We think that the "release" by the ex-spouse is not valid (and wouldn't be even if it had been notarized and dated) and that the only way to validly make the loan would be for the participant to get a revised Separation Agreement that states that the ex-spouse has no rights in any amounts in the participant's 401(k) plan. HOWEVER, since the amount that was due to the ex-spouse was $3,000 and since even if the requested loan were made the account would still have about $100,000, we think that we can make the $50,000 loan but tell the participant that the $3,000 in question can't be loaned or distributed to him in the future until he gets a revised court-approved Settlement Agreement clearly stating that ex-spouse has no rights to the 401(k) plan. To complicate matters, the participant has no contact with the ex-spouse and doesn't know where she is, so it would be difficult to get her consent to a revised Settlement Agreement -- not to mention attorney fees for getting a revised Settlement Agreement. --- So the main question is whether an old Separation Agreement "hanging out there" awarding an ex-spouse part of the 401(k) account makes it impossible for the participant to get a subsequent loan or distribution.

[Guest Alonzo Church III]

The participant was divorced over 10 years ago. At that time the Separation Agreement stated that spouse was to get 50% of 401(k) balance (total balance was about $6,000 at time of divorce). Participant did not present a QDRO, and because he was still working, he did not qualify for a regular distribution at the time of the divorce (loans were not permitted at that time, but are now). Participant paid the ex-spouse $3,000 using non-plan assets and she signed a statement (not notarized and not dated) that he paid her in accordance with the Separation Agreement. Now participant is applying for a plan loan. The account has about $150,000 now and participant wants to borrow $50,000. As plan administrator, we think that the outstanding award in the old Settlement Agreement prevents us from making a loan. We think that the "release" by the ex-spouse is not valid (and wouldn't be even if it had been notarized and dated) and that the only way to validly make the loan would be for the participant to get a revised Separation Agreement that states that the ex-spouse has no rights in any amounts in the participant's 401(k) plan. HOWEVER, since the amount that was due to the ex-spouse was $3,000 and since even if the requested loan were made the account would still have about $100,000, we think that we can make the $50,000 loan but tell the participant that the $3,000 in question can't be loaned or distributed to him in the future until he gets a revised court-approved Settlement Agreement clearly stating that ex-spouse has no rights to the 401(k) plan. To complicate matters, the participant has no contact with the ex-spouse and doesn't know where she is, so it would be difficult to get her consent to a revised Settlement Agreement -- not to mention attorney fees for getting a revised Settlement Agreement. --- So the main question is whether an old Separation Agreement "hanging out there" awarding an ex-spouse part of the 401(k) account makes it impossible for the participant to get a subsequent loan or distribution.

If there is no QDRO is effect, why are you worrying about a 10-year old Separation Agreement?

[Guest ERISAphile]

The participant was divorced over 10 years ago. At that time the Separation Agreement stated that spouse was to get 50% of 401(k) balance (total balance was about $6,000 at time of divorce). Participant did not present a QDRO, and because he was still working, he did not qualify for a regular distribution at the time of the divorce (loans were not permitted at that time, but are now). Participant paid the ex-spouse $3,000 using non-plan assets and she signed a statement (not notarized and not dated) that he paid her in accordance with the Separation Agreement. Now participant is applying for a plan loan. The account has about $150,000 now and participant wants to borrow $50,000. As plan administrator, we think that the outstanding award in the old Settlement Agreement prevents us from making a loan. We think that the "release" by the ex-spouse is not valid (and wouldn't be even if it had been notarized and dated) and that the only way to validly make the loan would be for the participant to get a revised Separation Agreement that states that the ex-spouse has no rights in any amounts in the participant's 401(k) plan. HOWEVER, since the amount that was due to the ex-spouse was $3,000 and since even if the requested loan were made the account would still have about $100,000, we think that we can make the $50,000 loan but tell the participant that the $3,000 in question can't be loaned or distributed to him in the future until he gets a revised court-approved Settlement Agreement clearly stating that ex-spouse has no rights to the 401(k) plan. To complicate matters, the participant has no contact with the ex-spouse and doesn't know where she is, so it would be difficult to get her consent to a revised Settlement Agreement -- not to mention attorney fees for getting a revised Settlement Agreement. --- So the main question is whether an old Separation Agreement "hanging out there" awarding an ex-spouse part of the 401(k) account makes it impossible for the participant to get a subsequent loan or distribution.

If there is no QDRO is effect, why are you worrying about a 10-year old Separation Agreement?

That's really my question. As Plan Administrator, we know participant was divorced and that wife was awarded part of the 401k under the Separation Agreement. At what point does she lose her rights under that Agreement? I don't think there's a specific time period mentioned in the Code. The 18-month period for segregating assets under a QDRO doesn't apply here. Any pointers to information on this would be appreciated. Thank you.

[shERPA]

Absent a QDRO properly delivered to the plan, how can the plan place any restrictions on the participant's account balance?

[QDROphile]

The plan's written QDRO procedures should provide that the plan has no obligation to recognize anything, or take action with respect to anything, other than a domestic relations order. If the plan receives a domestic relations order, then the QDRO procedures should provide guidance about what to do. The Department of Labor's informal position about some vague obligation if the plan "knows" something about a domestic relations proceeding (past, present, or imminent) is not supported by law.

If the plan has received the separation agreement, the plan must determine if it is a domestic relations order. If it is a domestic relations order, the the order should be processed in accordance with the QDRO procedures.

If the plan adminstrator is in some dilemma becuase of inadequate QDRO procedures, this would be a propitious time to rectify.

[david rigby]

...we know participant was divorced and that wife was awarded part of the 401k under the Separation Agreement.

"We"?

"Know"?

As above answers state, the plan can "know" only via DRO, and can act only via QDRO.

[mbozek]

IRC 414(p)(6) provides that the Plan admin shall determine whether a DRO is a QDRO after receipt of such order and notify the parcicipant and AP. Until the DRO is received the Plan adm. cannot take any action against the participants account.

Under the Kennedy case and a Third circuit case, after the benefits have been paid out in accordance with the terms of the plan the AP can bring an action to recover benefits in state court.

Question: Under what authority can the plan refuse to pay the 3,000? I dont know how the plan can refuse to pay funds due the particpant if the AP refuses to submit a DRO.

As a practical matter the participant settled the AP's interest in the plan by using personal assets because the cost a QDRO would be not much less than the value of the AP's interest. And the AP accepted because the funds were paid sooner. Under the doctrine of unclean hands the AP could be barred from enforcing the DRO because she accepted an alternate form of payment in lieu of payment under the QDRO.

[CADMT]

So the main question is whether an old Separation Agreement "hanging out there" awarding an ex-spouse part of the 401(k) account makes it impossible for the participant to get a subsequent loan or distribution.

The Plan cannot legally assume anything. They can only act in accordance with facts that are not in question. If the Participant is not married and if the there is no order directing otherwise, the Plan must act in accordance with Plan procedures, which in this case is to issue a loan, with no spousal notification or concurrence (as long as the Participant is not married"). Since there apparently is no DRO that the Plan must be responsive to, then there is no obligation on the part of the Plan to do anything but follow its own rules. Plans are not bound by Stipulated Agreements. Participants are bound by such agreements, but that's not the Plan's business. Of course if the Plan rules say that they accept such agreements and can take action such as freezing the account while waiting for the DRO... Bottom line - follow the Plan rules.